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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
( X )ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the twelve months ended OCTOBER 31, 2001
( )TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
Commission file number: 1-8551
Hovnanian Enterprises, Inc.
(Exact name of registrant as specified in its charter)
Delaware 22-1851059
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
10 Highway 35, P.O. Box 500, Red Bank, N. J. 07701
(Address of principal executive offices)
732-747-7800
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
- -------------------- ------------------------
Class A Common Stock, $.01 par value New York Stock Exchange
per share
Securities registered pursuant to Section 12(g) of the Act - None
Indicate by check mark whether the registrant (l) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
( X )Yes ( ) 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.
As of the close of business on January 4, 2002, there were outstanding
20,607,178 shares of the Registrant's Class A Common Stock and
7,471,640 shares of its Class B Common Stock. The approximate
aggregate market value (based upon the closing price on the New York
Stock Exchange) of these shares held by non-affiliates of the
Registrant as of January 4, 2002 was $254,417,000. (The value of a
share of Class A Common Stock is used as the value for a share of
Class B Common Stock as there is no established market for Class
B Common Stock and it is convertible into Class A Common Stock on
a share-for-share basis.)
Documents Incorporated by Reference:
Part III - Those portions of registrant's definitive proxy statement
to be filed pursuant to Regulation l4A in connection with registrant's
annual meeting of shareholders to be held on March 8, 2002 which are
responsive to Items l0, ll, l2 and l3.
HOVNANIAN ENTERPRISES, INC.
FORM 10-K
TABLE OF CONTENTS
Item Page
PART I
1 and 2 Business and Properties...................... 4
3 Legal Proceedings............................ 15
4 Submission of Matters to a Vote of
Security Holders........................... 15
Executive Officers of the Registrant......... 15
PART II
5 Market for the Registrant's Common Equity
and Related Stockholder Matters............ 15
6 Selected Consolidated Financial Data......... 16
7 Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................. 18
8 Financial Statements and Supplementary
Data....................................... 36
9 Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure................................. 36
PART III
10 Directors and Executive Officers of the
Registrant................................. 37
Executive Officers of the Registrant......... 37
11 Executive Compensation....................... 38
12 Security Ownership of Certain Beneficial
Owners and Management...................... 38
13 Certain Relationships and Related
Transactions............................... 38
PART IV
14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K....................... 39
SIGNATURES................................... 41
PART I
ITEMS 1 AND 2 - BUSINESS AND PROPERTIES
BUSINESS OVERVIEW
We design, construct and market high quality single-family detached
homes and attached condominium apartments and townhouses in planned
residential developments in the Northeast (New Jersey, southern New
York state, and eastern Pennsylvania), North Carolina, Metro D.C.
(northern Virginia and Maryland), southern California, Texas, and
the Mid South (Tennessee, Alabama, and Mississippi). We market
our homes to first-time buyers, first-time and second-time move-up
buyers, luxury buyers, active adult buyers and empty nesters.
We offer a variety of homestyles in the United States at prices
ranging from $43,000 to $950,000 with an average sales price
in fiscal 2001 of $255,000. We are currently offering homes
for sale in 172 communities. Since the incorporation of our
predecessor company in 1959, we have delivered in excess of
106,000 homes, including 6,791 homes in fiscal 2001.
In addition, we provide financial services (mortgage loans
and title insurance) to our homebuilding customers.
We employed approximately 1,945 full-time associates as of
October 31, 2001. We were incorporated in New Jersey in 1967 and
we reincorporated in Delaware in 1982.
BUSINESS STRATEGIES, OPERATING POLICIES AND PROCEDURES
Over the past few years, our strategies have included several
initiatives to fundamentally transform our traditional practices used
to design, build and sell homes and focus on "building better." We
believe that the adoption and implementation of processes and
systems successfully used in other manufacturing industries, such
as rapid cycle times, vendor consolidation, vendor partnering and
just-in-time material procurement, will dramatically improve our
business and give us a clear advantage over our competitors.
Our concentration in selected markets is a key factor that enables
us to achieve powers and economies of scale and differentiate
ourselves from most of our competitors. These performance enhancing
strategies are designed to achieve operational excellence through
the implementation of standardized and streamlined "best practice
processes."
Strategic Initiatives - To improve our homebuilding gross
profit margins, we have introduced a number of strategic initiatives,
including: Partners In Excellence, Process Redesign and Training.
Partners In Excellence, our total quality management
initiative, is intended to focus on improving the way operations
are performed. It involves all of our associates through a
systematic, team-oriented approach to improvement. It increases
our profits by streamlining processes and by reducing costly errors.
We were recognized for our efforts by receiving the 1997 Gold
National Housing Quality Award from Professional Builder magazine
and the NAHB Research Center.
Process Redesign is the fundamental rethinking and radical
redesign of our processes to achieve dramatic improvements in
performance. Our Process Redesign efforts are currently focused
on streamlining and standardizing all of our key business processes.
In addition, we are working to streamline our processes and
implement SAP's enterprise-wide "Enterprise Resource Package"
computer software system throughout our organization.
Training is designed to provide our associates with the
knowledge, attitudes, skill and habits necessary to succeed at
their jobs. Our Training Department regularly conducts training
classes in sales, construction, administration, and managerial
skills. In addition, as Process Redesign develops new processes,
the Training Department is responsible for educating our
associates on the processes, procedures and operations.
Land Acquisition, Planning and Development - Before entering
into a contract to acquire land, we complete extensive comparative
studies and analyses which assist us in evaluating the economic
feasibility of such land acquisition. We generally follow a policy
of acquiring options to purchase land for future community developments.
We attempt to acquire land with a minimum cash investment and negotiate
takedown options, thereby limiting the financial exposure to the
amounts invested in property and predevelopment costs. This policy
significantly reduces the risk and generally allows us to obtain
necessary development approvals before acquisition of the land, thereby
enhancing the value of the options and the land eventually acquired.
Our option and purchase agreements are typically subject to
numerous conditions, including, but not limited to, our ability to
obtain necessary governmental approvals for the proposed community.
Generally, the deposit on the agreement will be returned to us if all
approvals are not obtained, although predevelopment costs may not be
recoverable. By paying an additional, nonrefundable deposit, we have
the right to extend a significant number of our options for varying
periods of time. In most instances, we have the right to cancel any
of our land option agreements by forfeiture of our deposit on the
agreement. In such instances, we generally are not able to recover
any predevelopment costs.
Our development activities include site planning and
engineering, obtaining environmental and other regulatory approvals
and constructing roads, sewer, water and drainage facilities, and
for our residential developments, recreational facilities and other
amenities. These activities are performed by our staff, together
with independent architects, consultants and contractors. Our staff
also carries out long-term planning of communities.
Design - Our residential communities are generally located in
suburban areas near major highways. The communities are designed as
neighborhoods that fit existing land characteristics. We strive to
create diversity within the overall planned community by offering a
mix of homes with differing architecture, textures and colors.
Recreational amenities such as swimming pools, tennis courts, club
houses and tot lots are often included.
Construction - We design and supervise the development and
building of our communities. Our homes are constructed according
to standardized prototypes which are designed and engineered to
provide innovative product design while attempting to minimize costs
of construction. We employ subcontractors for the installation of
site improvements and construction of homes. Agreements with
subcontractors are generally short term and provide for a fixed price
for labor and materials. We rigorously control costs through the
use of a computerized monitoring system. Because of the risks
involved in speculative building, our general policy is to construct
an attached condominium or townhouse building only after signing
contracts for the sale of at least 50% of the homes in that building.
A majority of our single family detached homes are constructed after
the signing of a contract and mortgage approval has been obtained.
Materials and Subcontractors - We attempt to maintain
efficient operations by utilizing standardized materials available
from a variety of sources. In addition, we contract with
subcontractors to construct our homes. Hovnanian has reduced
construction and administrative costs by consolidating
the number of vendors serving our Northeast market and by executing
national purchasing contracts with select vendors. Hovnanian plans
to implement this strategy throughout all of our markets. In recent
years, Hovnanian has experienced no significant construction delays
due to shortages of materials or labor. Hovnanian cannot predict,
however, the extent to which shortages in necessary materials or
labor may occur in the future.
Marketing and Sales - Our residential communities are sold
principally through on-site sales offices. In order to respond to
our customers' needs and trends in housing design, we rely upon our
internal market research group to analyze information gathered from,
among other sources, buyer profiles, exit interviews at model sites,
focus groups and demographic data bases. We make use of newspaper,
radio, magazine, our website, billboard, video and direct mail
advertising, special promotional events, illustrated brochures,
full-sized and scale model homes in our comprehensive marketing
program. In addition, we have opened home design galleries in our
Northeast region, Virginia, Maryland, Texas, North Carolina, and
California, which have increased option sales and profitability in
these markets. We plan to open similar galleries in each of
our markets.
Customer Service and Quality Control - Associates responsible
for customer service participate in pre-closing quality control
inspections as well as responding to post-closing customer needs.
Prior to closing, each home is inspected and any necessary completion
work is undertaken by us. In some of our markets, we are enrolled in
a standard limited warranty program which, in general, provides a
homebuyer with a one-year warranty for the home's materials and
workmanship, a two-year warranty for the home's heating, cooling,
ventilating, electrical and plumbing systems and a ten-year warranty
for major structural defects. All of the warranties contain standard
exceptions, including, but not limited to, damage caused by the customer.
Customer Financing - We sell our homes to customers who
generally finance their purchases through mortgages. During the year
ended October 31, 2001, over 57% of our non-cash customers obtained
mortgages originated by our wholly-owned mortgage banking subsidiaries.
Mortgages originated by our wholly-owned mortgage banking subsidiaries
are sold in the secondary market.
RESIDENTIAL DEVELOPMENT ACTIVITIES
Our residential development activities include evaluating and
purchasing properties, master planning, obtaining governmental
approvals and constructing, marketing and selling homes. A
residential development generally includes a number of residential
buildings containing from two to twenty-four individual homes per
building and/or single family detached homes, together with amenities
such as recreational buildings, swimming pools, tennis courts and
open areas.
We attempt to reduce the effect of certain risks inherent
in thehousing industry through the following policies and procedures:
- Through our presence in multiple geographic markets, our goal is
to reduce the effects that housing industry cycles, seasonality and
local conditions in any one area may have on our business. In
addition, we plan to achieve a significant market presence in each
of our markets in order to obtain powers and economies of scale.
- We typically acquire land for future development principally
through the use of land options which need not be exercised before
the completion of the regulatory approval process. We structure
these options in most cases with flexible takedown schedules rather
than with an obligation to takedown the entire parcel upon approval.
Additionally, we purchase improved lots in certain markets by
acquiring a small number of improved lots with an option on
additional lots. This allows us to minimize the economic costs
and risks of carrying a large land inventory, while maintaining
our ability to commence new developments during favorable
market periods.
- - We generally begin construction on an attached condominium or
townhouse building only after entering into contracts for the sale
of at least 50% of the homes in that building. A majority of our
single family detached homes are started after a contract is signed
and mortgage approvals obtained. This limits the build-up of
inventory of unsold homes and the costs of maintaining and carrying
that inventory.
- We offer a broad product array to provide housing to a wide range
of customers. Our customers consist of first-time buyers, first-
and second-time move-up buyers, luxury buyers, active adult buyers
and empty nesters.
- We offer a wide range of customer options to satisfy individual
customer tastes. We have large regional home design galleries in New
Jersey, Virginia, Maryland, North Carolina, Texas, and California.
Current base prices for our homes in contract backlog at
October 31, 2001 (exclusive of upgrades and options) range from
$43,000 to $950,000 in our Northeast Region, from $245,000 to
$344,000 in Metro D.C., from $148,000 to $216,000 in North Carolina,
from $124,000 to $195,000 in the Mid South, from $123,000 to
$680,000 in Texas, and from $194,000 to $877,000 in California.
Closings generally occur and are typically reflected in revenues from
two to nine months after sales contracts are signed.
Information on homes delivered by market area is set forth
below:
Year Ended
----------------------------------
October October October
31, 2001 31, 2000 31, 1999
---------- -------- --------
(Housing Revenue in Thousands)
Northeast Region:
Housing Revenues........$ 570,647 $ 561,422 $560,586
Homes Delivered......... 1,860 1,939 2,063
Average Price...........$ 306,799 $ 289,542 $271,733
North Carolina:
Housing Revenues........$ 255,390 $ 126,596 $145,153
Homes Delivered......... 1,449 653 756
Average Price...........$ 176,253 $ 193,868 $192,001
Metro D.C.:
Housing Revenues........$ 310,815 $ 66,137 $ 45,493
Homes Delivered......... 1,294 263 198
Average Price...........$ 240,197 $ 251,471 $229,762
California:
Housing Revenues........$ 280,582 $ 143,729 $105,941
Homes Delivered......... 760 480 514
Average Price...........$ 369,187 $ 299,435 $206,110
Texas:
Housing Revenues........$ 215,045 $ 186,294 $ 13,184
Homes Delivered......... 1,003 914 66
Average Price........... 214,402 $ 203,823 $199,757
Mid South:
Housing Revenues........$ 44,372 -- --
Homes Delivered......... 290 -- --
Average Price........... 153,007 -- --
Other:
Housing Revenues........$ 16,866 $ 21,288 $ 38,196
Homes Delivered......... 135 118 171
Average Price...........$ 124,933 $ 180,407 $223,368
Combined Total:
Housing Revenues........$1,693,717 $1,105,466 $908,553
Homes Delivered........ 6,791 4,367 3,768
Average Price...........$ 249,406 $ 253,141 $241,123
The value of our net sales contracts increased 46.9% to
$1,619,000 for the year ended October 31, 2001 from $1,102,000 for
the year ended October 31, 2000. This increase was the net result
of a 48.0% increase in the number of homes contracted to 6,722 in
2001 from 4,542 in 2000. By United States market, on a dollar
basis, Metro D. C. increased 292.7%, North Carolina increased
117.1%, Texas increased 9.4%, and California increased 61.2%. The
increase in Metro D. C. and North Carolina was primarily due to the
merger with Washington Homes, Inc. The increase in Texas was due
to slight increases in sales and average home prices. The increase
in California was primarily the result of increased sales.
These increases were slightly offset by a 2.0% decrease in sales
in the Northeast Region due to fewer active selling communities.
The following table summarizes our active communities under
development as of October 31, 2001. The contracted not delivered
and remaining home sites available in our active communities under
development are included in the 36,805 total home lots under the
total residential real estate chart in Item 7 Management's
Discussion and Analysis of Financial Condition and Results of
Operations.
(1) (2)
Contracted Remaining
Commun- Approved Homes Not Home Sites
ities Lots Delivered Delivered Available
------- -------- --------- --------- ----------
Northeast Region...... 23 8,599 3,038 1,136 4,425
North Carolina........ 54 7,963 3,699 534 3,730
Metro D.C............. 34 5,959 3,337 779 1,843
California............ 8 2,696 1,197 172 1,327
Texas................. 35 4,040 2,252 263 1,525
Mid South............. 18 2,057 778 122 1,157
Other................. -- 147 130 3 14
------- -------- --------- --------- ----------
Total 172 31,461 14,431 3,009 14,021
======= ======== ========= ========= ==========
(1) Includes 484 lots under option.
(2) Of the total home sites available, 801 were under construction
or completed (including 164 models and sales offices), 9,628
were under option, and 157 were financed through purchase
money mortgages.
The following table summarizes our total started or completed
unsold homes as of October 31, 2001:
Unsold
Homes Models Total
------ ------ -----
Northeast Region.................. 69 48 117
North Carolina.................... 205 41 246
Metro D.C......................... 27 27 54
California........................ 60 11 71
Texas............................. 215 15 230
Mid South......................... 54 22 76
Other............................. 7 -- 7
------ ------ -----
Total 637 164 801
====== ====== =====
BACKLOG
At October 31, 2001 and October 31, 2000, we had a backlog of
signed contracts for 3,033 homes and 2,096 homes, respectively, with
sales values aggregating $773,074,000 and $538,546,000, respectively.
Substantially all of our backlog at October 31, 2001 is expected to
be completed and closed within the next twelve months. At
November 30, 2001 and 2000, our backlog of signed contracts was
3,025 homes and 2,190 homes, respectively, with sales values
aggregating $770,930,000 and $572,452,000, respectively.
Sales of our homes typically are made pursuant to a standard
sales contract and provides the customer with a statutorily mandated
right of rescission for a period ranging up to 15 days after
execution. This contract requires a nominal customer deposit at the
time of signing. In addition, in the Northeast Region and Metro
D. C. we typically obtain an additional 5% to 10% down payment due
30 to 60 days after signing. The contract may include a
financing contingency, which permits the customer to cancel his
obligation in the event mortgage financing at prevailing interest
rates (including financing arranged or provided by us) is
unobtainable within the period specified in the contract.
This contingency period typically is four to eight weeks following
the date of execution.
RESIDENTIAL LAND INVENTORY
It is our objective to control a supply of land, primarily
through options, consistent with anticipated homebuilding
requirements in each of our housing markets. Controlled land as of
October 31, 2001, exclusive of communities under development
described under "Business and Properties -- Residential Development
Activities," is summarized in the following table. The proposed
developable lots in communities under development are included in
the 36,805 total home lots under the total residential real estate
chart in Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Number
of Proposed Total Land
Proposed Developable Option Book
Communities Lots Price Value(1)(2)
----------- ----------- ----------- -----------
(In Thousands)
Northeast Region:
Under Option........ 60 9,603 $ 354,246 53,193
Owned............... 6 711 31,757
--------- ----------- -----------
Total............ 66 10,314 84,950
--------- ----------- -----------
North Carolina:
Under Option........ 29 2,312 $ 72,619 4,430
--------- ----------- -----------
Metro D.C.:
Under Option........ 22 2,614 $ 115,104 7,993
Owned............... 14 2,332 36,767
-------- ----------- -----------
Total............ 36 4,946 44,760
-------- ----------- -----------
California:
Under Option........ 5 171 $ 36,370 4,662
-------- ----------- -----------
Texas:
Under Option........ 13 1,040 $ 38,962 1,999
-------- ----------- -----------
Other:
Owned............... 2 992 1,496
-------- ----------- -----------
Totals:
Under Option........ 129 15,740 72,277
Owned............... 22 4,035 70,020
--------- ----------- -----------
Combined Total........ 151 19,775 142,297
======== =========== ===========
(1) Properties under option also includes costs incurred on properties
not under option but which are under investigation. For properties
under option, we paid, as of October 31, 2001, option fees and
deposits aggregating approximately $33,739,000. As of October 31,
2001, we spent an additional $38,538,000 in non-refundable
predevelopment costs on such properties.
(2) The book value of $142,297,000 is identified on the balance sheet
as "Inventories - land, land options, and cost of projects in
planning", and does not include inventory in Poland amounting to
$4,668,000.
In our Northeast Region, our objective is to control a supply
of land sufficient to meet anticipated building requirements for at
least three to five years. We typically option parcels of unimproved
land for development.
In North Carolina, Metro D.C., and the Mid South, a portion of
the land we acquired was from land developers on a lot takedown basis.
In Texas, we primarily acquire improved lots from land developers.
Under a typical agreement with the lot developer, we purchase a minimal
number of lots. The balance of the lots to be purchased are covered
under an option agreement or a non-recourse purchase agreement. Due
to the dwindling supply of improved lots in these markets, we are
currently optioning parcels of unimproved land for development.
In California, historically we have focused our development
efforts in the southern portion of the state. Where possible, we
plan to option developed or partially developed lots. With a
limited supply of developed lots in California, we are currently
optioning parcels of unimproved land for development.
CUSTOMER FINANCING
At our communities, on-site personnel facilitate sales by
offering to arrange financing for prospective customers through our
mortgage subsidiaries. We believe that the ability to offer
financing to customers on competitive terms as a part of the sales
process is an important factor in completing sales.
Our business consists of providing our customers with
competitive financing and coordinating and expediting the loan
origination transaction through the steps of loan application, loan
approval and closing. We originate loans in New Jersey, New York,
Pennsylvania, Maryland, Virginia, North Carolina, Mississippi,
Alabama, Tennessee, Texas, and California.
Like other mortgage bankers, we customarily sell nearly all
of the loans that we originate. Additionally, we sell virtually
all of the loan servicing rights to loans we originate. Loans are
sold either individually or in pools to GNMA, FNMA, or FHLMC or
against forward commitments to institutional investors, including
banks, mortgage banking firms, and savings and loan associations.
We plan to grow our mortgage banking operations. Our
objective is to increase the capture rate of non-cash homebuyers
from the 57% rate achieved in fiscal 2001 to 70% over the next
several years.
COMPETITION
Our residential business is highly competitive. We compete
with numerous real estate developers in each of the geographic areas
in which we operate. Our competition range from small local builders
to larger regional and national builders and developers, some of
which have greater sales and financial resources than us.
Previously owned homes and the availability of rental housing
provide additional competition. We compete primarily on the basis
of reputation, price, location, design, quality, service and
amenities.
REGULATION AND ENVIRONMENTAL MATTERS
General. We are subject to various local, state and federal
statutes, ordinances, rules and regulations concerning zoning,
building design, construction and similar matters, including local
regulations which impose restrictive zoning and density requirements
in order to limit the number of homes that can eventually be built
within the boundaries of a particular locality. In addition, we
are subject to registration and filing requirements in connection
with the construction, advertisement and sale of our communities
in certain states and localities in which we operate even if all
necessary government approvals have been obtained. We may also be
subject to periodic delays or may be precluded entirely from
developing communities due to building moratoriums that could be
implemented in the future in the states in which we operate.
Generally, such moratoriums relate to insufficient water or
sewerage facilities or inadequate road capacity.
Environmental. We are also subject to a variety of local,
state and federal statutes, ordinances, rules and regulations
concerning protection of health and the environment ("environmental
laws"). The particular environmental laws which apply to any given
community vary greatly according to the community site, the site's
environmental conditions and the present and former uses of the
site. These environmental laws may result in delays, may cause us
to incur substantial compliance and other costs, and prohibit or
severely restrict development in certain environmentally sensitive
regions or areas.
Fair Housing Act. In July 1985, New Jersey adopted the Fair
Housing Act which established an administrative agency to adopt
criteria by which municipalities will determine and provide for their
fair share of low and moderate income housing. This agency adopted
such criteria in May 1986. Its implementation thus far has caused
some delay in approvals for some of our New Jersey communities and
may result in a reduction in the number of homes planned for some
properties.
Both prior to the enactment of the Fair Housing Act and in
its implementation thus far, municipal approvals in some of the
New Jersey municipalities in which we own land or land options
required us to set aside up to 22% of the approved homes for sale
at prices affordable to persons of low and moderate income. In
order to comply with such requirements, we must sell these homes
at a loss. We attempt to reduce some of these losses through
increased density, certain cost saving construction measures and
reduced land prices from the sellers of property. Such losses are
absorbed by the market priced homes in the same developments.
State Planning Act. Pursuant to the 1985 State Planning Act,
the New Jersey State Planning Commission has adopted a State
Development and Redevelopment Plan ("State Plan"). The State Plan,
if fully implemented, would designate large portions of the state
as unavailable for development or as available for development only
at low densities, and other portions of the state for more intense
development. State government agencies would be required to make
permitting decisions in accordance with the State Plan, if it
is fully implemented. The state government agencies have not yet
adopted policies and regulations to fully implement the State Plan.
The Governor has issued an Executive Order to all state agencies
requiring compliance with the State Plan. It is unclear what
effect this Executive Order may have on our ability to develop
our land.
The California Environmental Quality Act (CEQA) requires
that every community comply with the CEQA. Compliance with CEQA
may result in delay in obtaining the necessary approvals for
commencement of the community, a reduction in the density permitted
in the community, additional costs in developing the community, or
denial of the permits necessary to construct the community.
Conclusion. Despite our past ability to obtain necessary
permits and approvals for our communities, it can be anticipated
that increasingly stringent requirements will be imposed on
developers and homebuilders in the future. Although we cannot
predict the effect of these requirements, they could result in
time-consuming and expensive compliance programs and substantial
expenditures for pollution and water quality control, which could
have a material adverse effect on us. In addition, the continued
effectiveness of permits already granted or approvals already
obtained is dependent upon many factors, some of which are beyond
our control, such as changes in policies, rules and regulations and
their interpretation and application.
Company Offices. We own our corporate headquarters, a
four-story, 24,000 square feet office building located in Red Bank,
New Jersey and 19,992 square feet in a Middletown, New Jersey
condominium office building. We lease office space consisting of
106,549 square feet in various New Jersey and Pennsylvania locations,
59,216 square feet in the Metro D. C. area, 51,094 square feet in
various North Carolina locations, 11,448 square feet in various
Mid South locations, 13,505 square feet in West Palm Beach, Florida,
17,359 square feet in southern California, and 25,025 square feet
in various Texas locations.
ITEM 3 - LEGAL PROCEEDINGS
We are involved from time to time in litigation arising in the
ordinary course of business, none of which is expected to have a
material adverse effect on us.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the year ended October 31, 2001
nomatters were submitted to a vote of security holders.
EXECUTIVE OFFICERS OF THE REGISTRANT
Information on executive officers of the registrant is
incorporated herein from Part III, Item 10.
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDERS MATTERS
Our Class A Common Stock is traded on the New York Stock
Exchange and was held by 620 shareholders of record at January 4,
2002. There is no established public trading market for our
Class B Common Stock, which was held by 450 shareholders of record
at January 4, 2002. In order to trade Class B Common Stock, the
shares must be converted into Class A Common Stock on a one-for-one
basis. The high and low sales prices for our Class A Common Stock
were as follows for each fiscal quarter during the years ended
October 31, 2001, 2000, and 1999:
Class A Common Stock
------------------------------------------------
Oct. 31, 2001 Oct. 31, 2000 Oct. 31, 1999
-------------- -------------- --------------
Quarter High Low High Low High Low
- ------- ------ ------ ------ ------ ------ ------
First........ $ 9.99 $ 7.19 $ 6.88 $ 5.25 $ 9.25 $ 7.75
Second....... $18.75 $ 8.75 $ 6.62 $ 5.44 $ 8.94 $ 6.81
Third........ $19.34 $13.00 $ 6.38 $ 5.44 $ 9.50 $ 7.88
Fourth....... $15.00 $ 9.71 $ 7.94 $ 5.88 $ 8.88 $ 6.00
On August 7, 1999 and October 1, 1999 we acquired two
homebuilding companies. As part of the purchase price 1,845,359
shares of unregistered Class A Common Stock were issued to the
sellers. At October 31, 2001, 241,651 of these shares are being
held in escrow (and thus not reported as issued and outstanding).
There were no underwriters associated with these transactions.
These shares were issued in private transactions in reliance upon
Section 4(2) of the Securities Act of 1933.
Certain debt instruments to which we are a party contain
restrictions on the payment of cash dividends. As a result of the
most restrictive of these provisions, approximately $66,013,000 was
free of such restrictions at October 31, 2001. We have never paid
a cash dividend nor do we currently intend to pay dividends.
ITEM 6 - SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected financial data and
should be read in conjunction with the financial statements included
elsewhere in thisForm 10-K. Per common share data and weighted
average number of common shares outstanding reflect all stock
splits.
Year Ended
----------------------------------------------------
Summary Consolidated October October October October October
Income Statement Data 31, 2001 31, 2000 31, 1999 31, 1998 31, 1997
- ------------------------------- ---------- ---------- -------- -------- --------
(In Thousands Except Per Share Data)
Revenues....................... $1,741,963 $1,135,559 $946,414 $937,729 $770,379
Expenses....................... 1,635,609 1,083,741 895,797 896,437 782,503
---------- ---------- -------- -------- --------
Income(loss) before income
taxes and extraordinary loss. $ 106,354 51,818 50,617 41,292 (12,124)
State and Federal income taxes. 42,668 18,655 19,674 15,141 (5,154)
Extraordinary loss............. (868) (748) --
---------- ---------- -------- -------- --------
Net income (loss).............. $ 63,686 $ 33,163 $ 30,075 $ 25,403 $ (6,970)
========== ========== ======== ======== ========
Per Share Data:
Basic:
Income (loss) before
extraordinary loss......... $ 2.38 $ 1.51 $ 1.45 $ 1.20 $ (0.31)
Extraordinary loss........... (.04) (0.03) --
---------- ---------- -------- -------- --------
Net income (loss)............ $ 2.38 $ 1.51 $ 1.41 $ 1.17 $ (0.31)
========== ========== ======== ======== ========
Weighted average number of
common shares outstanding.. 26,810 21,933 21,404 21,781 22,409
Assuming Dilution:
Income (loss) before
extraordinary loss......... $ 2.29 $ 1.50 $ 1.43 $ 1.19 $ (0.31)
Extraordinary loss........... (.04) (0.03)
---------- ---------- -------- -------- --------
Net income (loss)............ $ 2.29 $ 1.50 $ 1.39 $ 1.16 $ (0.31)
========== ========== ======== ======== ========
Weighted average number of
common shares outstanding.. 27,792 22,043 21,612 22,016 22,506
Summary Consolidated October October October October October
Balance Sheet Data 31, 2001 31, 2000 31, 1999 31, 1998 31, 1997
- ------------------------------- ---------- ---------- -------- -------- --------
Total assets................... $1,064,258 $ 873,541 $712,861 $589,102 $637,082
Mortgages and notes payable.... $ 111,795 $ 78,206 $110,228 $150,282 $184,519
Senior notes, participating
senior subordinated
debentures and subordinated
notes........................ $ 396,544 $ 396,430 $250,000 $145,449 $190,000
Stockholders' equity........... $ 375,646 $ 263,359 $236,426 $201,392 $178,762
Note: See Item 7 "Results of Operations" for impact of our 1999 and 2001
acquisitions in our operating results.
RATIOS OF EARNINGS TO FIXED CHARGES AND EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
For purposes of computing the ratios of earnings to fixed
charges and earnings to combined fixed charges and preferred
dividends, earnings consist of earnings (loss) from continuing
operations before income taxes, minority interest, extraordinary
items and cumulative effect of accounting changes, plus fixed
charges (interest charges and preferred share dividend requirements
of subsidiaries, adjusted to a pretax basis), less interest
capitalized, less preferred share dividend requirements of
subsidiaries adjusted to a pretax basis and less undistributed
earnings of affiliates whose debt is not guaranteed by us.
The following table sets forth the ratios of earnings to fixed
charges and earnings to combined fixed charges and preferred dividends
for the periods indicated:
Years Ended October 31,
-------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- ---------
Ratio of earnings to
fixed charges............ 3.1 2.2 3.0 2.5 (a)
Ratio of earnings to
combined fixed charges
and preferred stock
dividends................. 3.1 2.2 3.0 2.5 (a)
(a) No ratio is presented for the year ended October 31, 1997 as the
earnings for such period were insufficient to cover fixed charges
by $9,197,000.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CAPITAL RESOURCES AND LIQUIDITY
Our cash uses during the twelve months ended October 31, 2001
were for operating expenses, seasonal increases in housing inventories,
construction, income taxes, interest, the repurchase of common stock,
and the merger with Washington Homes, Inc. We provided for our cash
requirements from housing and land sales, the revolving credit
facility, financial service revenues, and other revenues. We
believe that these sources of cash are sufficient to finance our
working capital requirements and other needs.
Our net income historically does not approximate cash flow
from operating activities. The difference between net income and
cash flow from operating activities is primarily caused by changes
in inventory levels, mortgage loans and liabilities, and non-cash
charges relating to depreciation, impairment losses and goodwill
amortization. When we are expanding our operations, which was the
case in fiscal 2001 and 2000, inventory levels increase causing
cash flow from operating activities to decrease. Liabilities
also increase as inventory levels increase. The increase in
liabilities partially offsets the negative effect on cash flow
from operations caused by the increase in inventory levels.
As our mortgage warehouse loan asset increases, cash flow from
operations decreases. Conversely, as such loans decrease, cash
flow from operations increases. Depreciation and impairment
losses always increase cash flow from operating activities since
they are non-cash charges to operations. We expect to be in an
expansion mode in fiscal 2002. As a result, we expect cash flow
from operations to be less than net income in fiscal 2002.
On December 31, 2000, our stock repurchase program to
purchase up to 4 million shares of Class A Common Stock expired.
As of December 31, 2000, 3,391,047 shares had been purchased under
this program. On July 3, 2001, our Board of Directors authorized
a revision to our stock repurchase program to purchase up to
2 million shares of Class A Common Stock. As of October 31, 2001,
458,700 have been purchased under this program.
Our homebuilding bank borrowings are made pursuant to a
revolving credit agreement (the "Agreement") that provides a
revolving credit line and letter of credit line of up to
$440,000,000 through July 2004. Interest is payable monthly
and at various rates of either the prime rate plus .40% or Libor
plus 1.85%. We believe that we will be able either to extend the
Agreement beyond July 2004 or negotiate a replacement facility,
but there can be no assurance of such extension or replacement
facility. We currently are in compliance and intend to maintain
compliance with the covenants under the Agreement. As of
October 31, 2001, borrowings under the Agreement were zero.
The subordinated indebtedness issued by us and outstanding
as of October 31, 2001 was $99,747,000 9 3/4% Subordinated Notes
due June 2005. In April 2001, we retired $253,000 of these
Subordinated Notes. On October 2, 2000, we issued $150,000,000
10 1/2% Senior Notes due October 2007. The proceeds were used
to repay outstanding debt under our "Revolving Credit Facility".
On May 4, 1999, we issued $150,000,000 9 1/8% Senior Notes due
April 2009. We believe that we will be able either to repay the
subordinated indebtedness and senior notes at their respective
maturity dates through cash flows generated from operations or
through subsequent debt issuances.
Our mortgage banking subsidiary borrows under a $110,000,000
bank warehousing arrangement which expires in July 2002. Interest
is payable monthly at the Federal Funds Rate plus 1.125%. We believe
that we will be able either to extend this agreement beyond July 2002
or negotiate a replacement facility, but there can be no assurance
of such extension or replacement facility. Other finance subsidiaries
formerly borrowed from a multi-builder owned financial corporation
and a builder owned financial corporation to finance mortgage backed
securities but in fiscal 1988 decided to cease further borrowing
from multi-builder and builder owned financial corporations. These
non-recourse borrowings have been generally secured by mortgage loans
originated by one of our subsidiaries. As of October 31, 2001, the
aggregate outstanding principal amount of such borrowings was
$100,704,000.
Total inventory increased $125,131,000 from October 31, 2000
to October 31, 2001. This increase was primarily due to the merger
with Washington Homes, Inc. and significant land purchases in the
Northeast Region. In addition, inventory increased in most of our
other markets except in California where inventory decreased due to
strong home deliveries. Substantially, all homes under construction
or completed and included in inventory at October 31, 2001 are
expected to be closed during the next twelve months. Most inventory
completed or under development is financed through our revolving
credit facility, senior notes, and subordinated indebtedness.
We usually option property for development prior to
acquisition. By optioning property, we are only subject to the
loss of a small option fee and predevelopment costs if we choose
not to exercise the option. As a result, our commitment for major
land acquisitions is reduced.
The following table summarizes housing lots included in our total
residential real estate:
Total Contracted Remaining
Home Not Lots
Lots Delivered Available
-------- ---------- ---------
October 31, 2001:
Northeast Region............. 15,875 1,136 14,739
North Carolina............... 6,576 534 6,042
Metro D. C................... 7,568 779 6,789
California................... 1,670 172 1,498
Texas........................ 2,828 263 2,565
Mid South.................... 1,279 122 1,157
Other........................ 1,009 3 1,006
-------- ---------- ---------
Total................... 36,805 3,009 33,796
======== ========== =========
Owned........................ 10,970 2,525 8,445
Optioned..................... 25,835 484 25,351
-------- ---------- ---------
Total................... 36,805 3,009 33,796
======== ========== =========
October 31, 2000:
Northeast Region............. 15,957 1,149 14,808
North Carolina............... 2,731 215 2,516
Metro D. C................... 5,583 215 5,368
California................... 2,591 151 2,440
Texas........................ 2,380 282 2,098
Other........................ 2,560 84 2,476
-------- ---------- ---------
Total................... 31,802 2,096 29,706
======== ========== =========
Owned........................ 10,012 1,963 8,049
Optioned..................... 21,790 133 21,657
-------- ---------- ---------
Total................... 31,802 2,096 29,706
======== ========== =========
We expect to fund future acquisitions of home lots contracted
not delivered and remaining lots available principally through cash
flows from operations and through our revolving credit agreement.
The following table summarizes our started or completed unsold
homes in active, substantially completed and suspended communities:
October 31, October 31,
2001 2000
---------------------- -----------------------
Unsold Unsold
Homes Models Total Homes Models Total
------ ------ ------ ------ ------ ------
Northeast Region.... 69 48 117 133 48 181
North Carolina...... 205 41 246 102 31 133
Metro D.C........... 27 27 54 6 7 13
California.......... 60 11 71 136 32 168
Texas............... 215 15 230 238 8 246
Mid South........... 54 22 76 -- -- --
Other............... 7 -- 7 58 -- 58
------ ------ ------ ------ ------ ------
Total 637 164 801 673 126 799
====== ====== ====== ====== ====== ======
Financial Services - mortgage loans held for sale consist of
residential mortgages receivable of which $105,174,000 and $61,549,000
at October 31, 2001 and October 31, 2000, respectively, are being
temporarily warehoused and awaiting sale in the secondary mortgage
market. The balance of mortgage loans held for sale are being held
as an investment. We may incur risk with respect to mortgages that
are delinquent, but only to the extent the losses are not covered by
mortgage insurance or resale value of the house. Historically, we
have incurred minimal credit losses.
RESULTS OF OPERATIONS
Our operations consist primarily of residential housing
development and sales in our Northeast Region (New Jersey, southern
New York state, and eastern Pennsylvania), North Carolina, Metro D. C.
(northern Virginia and Maryland), southern California, Texas, and
the Mid South (Tennessee, Alabama, and Mississippi). In addition,
we provide financial services to our homebuilding customers.
Total Revenues
Compared to the same prior period, revenues increased
(decreased) as follows:
Year Ended
-----------------------------
October October October
31, 2001 31, 2000 31, 1999
--------- --------- ---------
(Dollars in Thousands)
Homebuilding:
Sale of homes....................$ 588,251 $ 196,913 $ 12,909
Land sales and other revenues.... 6,049 (6,334) 1,692
Financial services................. 12,104 (1,434) 977
Other Operations................... (6,893)
--------- --------- ---------
Total change..................$ 606,404 $ 189,145 $ 8,685
========= ========= =========
Percent change.................. 53.4% 20.0% 1.0%
========= ========= =========
Homebuilding
Compared to the same prior period, housing revenues increased
$588.3 million or 53.2% for the year ended October 31, 2001,
increased $196.9 million or 21.7% for the year ended October 31, 2000,
and increased $12.9 million or 1.4% for the year ended October 31,
1999. Housing revenues are recorded at the time each home is
delivered and title and possession have been transferred to the buyer.
Information on homes delivered by market area is set
forth below:
Year Ended
-----------------------------------
October October October
31, 2001 31, 2000 31, 1999
----------- --------- ---------
(Dollars in Thousands)
Northeast Region:
Housing Revenues............$ 570,647 $ 561,422 $560,586
Homes Delivered............. 1,860 1,939 2,063
North Carolina:
Housing Revenues............$ 255,390 $ 126,596 $145,153
Homes Delivered............. 1,449 653 756
Metro D.C.:
Housing Revenues............$ 310,815 $ 66,137 $ 45,493
Homes Delivered............. 1,294 263 198
California:
Housing Revenues............$ 280,582 $ 143,729 $ 105,941
Homes Delivered............. 760 480 514
Texas:
Housing Revenues............$ 215,045 $ 186,294 $ 13,184
Homes Delivered............. 1,003 914 66
Mid South:
Housing Revenues............$ 44,372 -- --
Homes Delivered............. 290 -- --
Other:
Housing Revenues............$ 16,866 $ 21,288 $ 38,196
Homes Delivered............. 135 118 171
Totals:
Housing Revenues............$1,693,717 $1,105,466 $ 908,553
Homes Delivered............. 6,791 4,367 3,768
The increase in housing revenues was primarily due to the
merger with Washington Homes, Inc. (comprising a portion of the
North Carolina and Metro D.C. markets and all of the Mid South
market), increased deliveries in California and Texas, and an
increase in average sales prices in the Northeast Region, California,
and Texas markets. Continued strong housing demand in our major
markets enables us to increase home prices and home sales.
Unaudited quarterly housing revenues and net sales contracts
using base sales prices by market area for the years ending October 31,
2001, 2000, and 1999 are set forth below:
Quarter Ended
------------------------------------------
October July April January
31, 2001 31, 2001 30, 2001 31, 2001
--------- --------- --------- ---------
(In Thousands)
Housing Revenues:
Northeast Region......... $163,955 $156,366 $126,700 $123,626
North Carolina........... 77,248 85,887 60,457 31,798
Metro D.C................ 89,472 109,535 74,263 36,691
California............... 109,099 61,830 65,339 44,314
Texas.................... 68,441 62,360 46,434 37,810
Mid South................ 10,675 18,774 11,846 3,077
Other.................... 830 2,539 8,262 6,089
--------- --------- --------- ---------
Total................ $519,720 $497,291 $393,301 $283,405
========= ========= ========= =========
Sales Contracts (Net of
Cancellations):
Northeast Region......... $109,585 $119,073 $155,693 $125,433
North Carolina........... 55,041 59,873 109,483 41,651
Metro D. C............... 75,384 77,253 138,957 32,009
California............... 38,350 66,794 88,620 65,547
Texas.................... 45,299 63,640 64,343 37,177
Mid South................ 11,801 12,394 20,299 3,806
Other.................... 287 279 442 857
--------- --------- --------- ---------
Total................ $335,747 $399,306 $577,837 $306,480
========= ========= ========= =========
Quarter Ended
------------------------------------------
October July April January
31, 2000 31, 2000 30, 2000 31, 2000
--------- --------- --------- ---------
(In Thousands)
Housing Revenues:
Northeast Region......... $188,770 $131,668 $113,732 $127,252
North Carolina........... 35,016 33,319 30,891 27,370
Metro D.C................ 18,932 13,901 17,459 15,845
California............... 39,725 48,055 30,313 25,636
Texas.................... 52,188 47,318 37,573 49,215
Other.................... 7,658 3,743 5,087 4,800
--------- --------- --------- ---------
Total................ $342,289 $278,004 $235,055 $250,118
========= ========= ========= =========
Sales Contracts (Net of
Cancellations):
Northeast Region......... $121,179 $115,649 $174,126 $109,040
North Carolina........... 29,317 32,338 33,980 26,892
Metro D. C............... 20,354 23,459 25,144 13,449
California............... 43,551 41,350 52,114 23,839
Texas.................... 51,251 54,708 46,671 39,830
Other.................... 4,571 4,412 10,685 4,193
--------- --------- --------- ---------
Total................ $270,223 $271,916 $342,720 $217,243
========= ========= ========= =========
Quarter Ended
------------------------------------------
October July April January
31, 1999 31, 1999 30, 1999 31, 1999
--------- --------- --------- ---------
(In Thousands)
Housing Revenues:
Northeast Region (1)..... $164,899 $142,503 $126,501 $126,683
North Carolina........... 47,251 38,269 30,553 29,080
Metro D.C................ 15,541 11,400 6,005 12,547
California............... 37,290 24,792 26,548 17,311
Texas.................... 13,184 -- -- --
Other.................... 9,294 10,107 9,531 9,264
--------- --------- --------- ---------
Total................ $287,459 $227,071 $199,138 $194,885
========= ========= ========= =========
Sales Contracts (Net of
Cancellations):
Northeast Region (1)..... $135,514 $111,083 $114,924 $ 90,163
North Carolina........... 25,757 33,078 50,673 31,111
Metro D.C................ 12,246 14,338 16,201 11,077
California............... 36,197 37,788 24,135 17,817
Texas.................... 5,416 -- -- --
Other.................... 3,230 4,643 9,050 12,012
--------- --------- --------- ---------
Total................ $218,360 $200,930 $214,983 $162,180
========= ========= ========= =========
(1) Includes $31,961,000 housing revenues and $12,922,000 sales
contracts in the quarter ended October 31, 1999 from a New
Jersey homebuilder acquired on August 7, 1999.
Our contract backlog using base sales prices by market area is
set forth below:
October October October
31, 2001 31, 2000 31, 1999
--------- --------- ---------
(Dollars in Thousands)
Northeast Region:
Total Contract Backlog........$322,100 $311,539 $286,149
Number of Homes............... 1,160 1,149 1,125
North Carolina:
Total Contract Backlog........$103,616 $ 40,635 $ 44,534
Number of Homes............... 534 215 207
Metro D.C.:
Total Contract Backlog........$208,888 $ 52,339 $ 34,484
Number of Homes............... 779 215 149
California:
Total Contract Backlog........$ 53,338 $ 58,089 $ 34,313
Number of Homes............... 172 151 129
Texas:
Total Contract Backlog........$ 64,961 $ 61,703 $ 51,610
Number of Homes............... 263 282 261
Mid South:
Total Contract Backlog........$ 19,734 -- --
Number of Homes............... 122 -- --
Other:
Total Contract Backlog........$ 437 $ 14,241 $ 9,570
Number of Homes............... 3 84 50
Totals:
Total Contract Backlog........$773,074 $538,546 $460,660
Number of Homes............... 3,033 2,096 1,921
We have written down or written off certain inventories
totaling $4.4, $1.8, and $2.1 million during the years ended
October 31, 2001, 2000, and 1999, respectively, to their estimated
fair value. See "Notes to Consolidated Financial Statements -
Note 11" for additional explanation. These writedowns and write-offs
were incurred primarily because of lower property values, a change
in the marketing strategy to liquidate a particular property, or the
decision not to exercise an option to purchase land.
During the years ended October 31, 2001 and 2000, we wrote off
residential land options including approval and engineering costs
amounting to $1.9 and $1.8 million, respectively. We did not
exercise those options because the communities' proforma profitability
did not produce adequate returns on investment commensurate with the
risk. Those communities were located in New Jersey, New York,
Metro D. C., North Carolina, and California.
During the year ended October 31, 2001, we wrote down two residential
communities in the Northeast Region, one community in North Carolina,
and two land parcels in Florida. The writedown in the Northeast
Region was attributed to two communities that were part of a large
land acquisition, which resulted in a loss. The writedowns in North
Carolina and Florida were based upon changes in market conditions.
The result of the above decisions was a reduction in inventory
carrying amounts to fair value, resulting in a $2.5 million
impairment loss.
During the year ended October 31, 1999 we wrote off one
residential land option including approval and engineering costs
amounting to $0.3 million. We did not exercise this option because
the community's proforma profitability did not produce an adequate
return on investment commensurate with the risk. In addition, we
wrote down one land parcel in Florida, one residential community
in New York and two residential communities in North Carolina.
The Florida land parcel was written down based on recent purchase
offers. The communities were written down based on our decision to
discontinue selling homes and offer the remaining lots for sale.
The result of the above decisions was a reduction in inventory
carrying amounts to fair value, resulting in a $1.8 million
impairment loss.
Cost of sales includes expenses for housing and land and lot
sales. A breakout of such expenses for housing sales and housing
gross margin is set forth below:
Year Ended
-----------------------------------
October October October
31, 2001 31, 2000 31, 1999
----------- --------- ---------
(Dollars In Thousands)
Sale of homes.............. $1,693,717 $1,105,466 $908,553
Cost of sales.............. 1,344,708 876,492 717,953
----------- --------- ---------
Housing gross margin....... $ 349,009 $ 228,974 $190,600
=========== ========= =========
Gross margin percentage.... 20.6% 20.7% 21.0%
=========== ========= =========
Cost of sales expenses as a percentage of home sales revenues
are presented below:
Year Ended
---------------------------------
October October October
31, 2001 31, 2000 31, 1999
--------- --------- ---------
Sale of homes.............. 100.0% 100.0% 100.0%
--------- --------- ---------
Cost of sales:
Housing, land and
development costs....... 71.5 71.1 71.0
Commissions.............. 2.3 2.2 2.0
Financing concessions.... 1.0 0.9 0.8
Overheads................ 4.6 5.1 5.2
--------- --------- ---------
Total cost of sales........ 79.4 79.3 79.0
--------- --------- ---------
Gross margin percentage.... 20.6% 20.7% 21.0%
========= ========= =========
We sell a variety of home types in various local communities,
each yielding a different gross margin. As a result, depending on the
mix of both the communities and of home types delivered, consolidated
gross margin will fluctuate up or down. During the year ended
October 31, 2001, our gross margin percentage decreased 0.1% from the
previous year. This decrease was due to the Washington Homes, Inc.
merger, which significantly increased our activity in Metro D. C.
and North Carolina and added markets in the Mid South region that
collectively have a lower average sales price and gross margin
than the averages for our other markets. On an individual market
basis all of our markets showed an increase in gross margin primarily
resulting from increased sales prices. During the year ended
October 31, 2000, our gross margin percentage decreased 0.3% from
the previous year. This decrease was primarily attributed to a full
year of operations from our Texas division where they report lower
margins (acquired in October 1999). During the year ended October 31,
1999, our gross margin percentage increased 3.6% from the previous
year. This can be attributed to higher gross margins being achieved
in each of our markets. The dollar increases for each of the three
years ended October 31, 2001, 2000, and 1999 was attributed to
increased sales, primarily resulting from the acquisition of
Washington Homes in 2001 and the Texas division at the end of 1999.
Selling and general administrative expenses as a percentage
of homebuilding revenues decreased to 8.2% for the year ended
October 31, 2001 and increased to 9.4% for the year ended October 31,
2000 from 8.8% for the year ended October 31, 1999. The dollar
amount of selling and general expenses has increased the last two
years to $140.1 million for the year ended October 31, 2001 from
$104.8 million for the year ended October 31, 2000 which increased
from $81.4 million for the previous year. The percentage decrease
during the year ended October 31, 2001 was due to increased deliveries
and the in market merger with Washington Homes, Inc., which resulted
in administrative efficiencies. The percentage increase in 2000 was
primarily attributable to a full year of operations from our Texas
division and increases in the number of active selling communities
in California. The percentage increase in 1999 was attributable
to increases in all our markets but primarily due to fewer
deliveries in our Northeast Region and due to Northeast Region and
California administrative cost increases.
Land Sales and Other Revenues
Land sales and other revenues consist primarily of land and
lot sales, interest income, contract deposit forfeitures, cash
discounts, and corporate owned life insurance benefits.
A breakout of land and lot sales is set forth below:
Year Ended
----------------------------
October October October
31, 2001 31, 2000 31, 1999
-------- -------- --------
(In Thousands)
Land and lot sales................... $11,356 $ 6,549 $12,077
Cost of sales........................ 10,646 3,971 11,766
-------- -------- --------
Land and lot sales gross margin...... $ 710 $ 2,578 $ 311
======== ======== ========
Land and lot sales are incidental to our residential housing
operations and are expected to continue in the future but may
significantly fluctuate up or down.
Year ended October 2000 land and lot sales gross margin
includes a legal settlement in California amounting to $1,924,000.
Financial Services
Financial services consists primarily of originating mortgages
from our homebuyers, selling such mortgages in the secondary market,
and title insurance activities. During the year ended October 31,
2001, financial services provided a $10.0 million pretax profit.
During the years ended 2000 and 1999, financial services resulted in
$0.5 million loss and a $1.0 million profit, respectively, before
income taxes. The increase from 2000 to 2001 was primarily due to a
change in management, reduced costs, increased mortgage loan amounts,
and the addition of a mortgage operation from the merger with
Washington Homes. In the market areas served by our wholly-owned
mortgage banking subsidiaries, approximately 57%, 54%, and 57% of
our non-cash homebuyers obtained mortgages originated by these
subsidiaries during the years ended October 31, 2001, 2000, and
1999, respectively. Our mortgage banking goals are to improve
profitability by increasing the capture rate of our homebuyers to
70%. Most servicing rights on new mortgages originated by us will
be sold as the loans are closed.
Corporate General and Administrative
Corporate general and administrative expenses includes the
operations at our headquarters in Red Bank, New Jersey. Such
expenses include our executive offices, information services, human
resources, corporate accounting, training, treasury, process redesign,
internal audit, and administration of insurance, quality, and safety.
As a percentage of total revenues, such expenses were 2.5%, 2.9%, and
3.0% for the years ended October 31, 2001, 2000, and 1999,
respectively. The percentage decrease during the year ended October 31,
2001 was due to increased housing revenues. The decrease in fiscal year
2000 was due to increased housing revenues and the adoption of SOP 98-1,
"Accounting For the Cost of Computer Software Development For or
Obtained For Internal Use." See "Notes to Consolidated Financial
Statements - Note 2" for additional explanation. Our long term
improvement initiatives include total quality, process redesign
(net of capitalized expenses), and training. Such initiatives
resulted in additional expenses for the years ended October 31,
2001, 2000, and 1999 which were not capitalized amounting to $7.2
million, $6.9 million, and $7.5 million, respectively.
Interest
Interest expense includes housing, and land and lot interest.
Interest expense is broken down as follows:
Year Ended
-------------------------------
October October October
31, 2001 31, 2000 31, 1999
--------- --------- ---------
(In Thousands)
Sale of homes.................. $ 51,046 $ 34,541 $29,261
Land and lot sales............. 400 415 1,082
--------- --------- ---------
Total.......................... $ 51,446 $ 34,956 $30,343
========= ========= =========
Housing interest as a percentage of sale of home revenues amounted to
3.0%, 3.1%, and 3.2% for the years ended October 31, 2001, 2000, and
1999, respectively.
Other Operations
Other operations consist primarily of miscellaneous senior
residential rental operations, amortization of senior and subordinated
note issuance expenses, amortization of goodwill, earnout payments
from homebuilding company acquisitions, corporate owned life insurance
loan interest, reserves for bad debts, and contributions to a
foundation for victims of the September 11, 2001 World Trade
Center attack.
Restructuring Charges
Restructurig charges are estimated expenses associated with
the integration of our operations with those of Washington Homes, Inc.
These expenses are salaries, severance and outplacement costs for the
termination of associates and costs to close and relocate existing
administrative offices, and lost rent and leasehold improvements.
At October 31, 2001, $1.5 million has been charged against the $2.0
million accrual for termination and related costs while $0.5 million
has been charged against the $1.2 million accrual established for
closing and relocation costs.
Total Taxes
Total taxes as a percentage of income before income taxes
amounted to 40.1%, 36.0%, and 38.9% for the years ended October 31,
2001, 2000, and 1999, respectively. The increased percentage is due
primarily to higher amounts of expenses in 2001 not deductible for
federal taxes and a reduced effect of our senior rental tax credits.
Although the credits are the same in 2001 and 2000, they reduce our
effective tax rate less when pretax profits are higher. Deferred
federal and state income tax assets primarily represent the deferred
tax benefits arising from temporary differences between book and tax
income which will be recognized in future years as an offset against
future taxable income. If for some reason the combination of future
years income (or loss) combined with the reversal of the timing
differences results in a loss, such losses can be carried back to
prior years to recover the deferred tax assets. As a result,
management is confident such deferred tax assets are recoverable
regardless of future income. (See "Notes to Consolidated Financial
Statements - Note 10" for an additional explanation of taxes.)
Extraordinary Loss
On June 7, 1999, we redeemed $45,449,000 of our outstanding
11 1/4% Subordinated Notes due 2002 at an average price of 101.875%
of par which resulted in an extraordinary loss of $868,000 net of
income taxes of $468,000.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards (SFAS) No. 141,
"Business Combinations," and No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 requires that the purchase method of accounting
be used for all business combinations initiated after June 30, 2001.
Use of the pooling-of-interests method is no longer permitted.
SFAS No. 141 also includes guidance on the initial recognition
and measurement of goodwill and other intangible assets acquired
in a business combination that is completed after June 30, 2001.
We adopted SFAS No. 141 for all future acquisitions.
SFAS No. 142 no longer permits the amortization of goodwill and
indefinite-lived intangible assets. Instead, these assets must be
reviewed annually (or more frequently under certain conditions) for
impairment in accordance with this statement. This impairment test
uses a fair value approach rather than the undiscounted cash flows
approach previously required by SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of." The amortization of goodwill included in other
expenses will also no longer be recorded upon adoption of the new
rules. Intangible assets that do not have indefinite lives will
continue to be amortized over their useful lives and reviewed for
impairment in accordance with SFAS No. 121. We adopted SFAS 142
on November 1, 2001. Upon adoption of SFAS No. 142, goodwill
amortization of $3,764,000, which was incurred in 2001
will no longer be incurred in the future. We do not anticipate
that the adoption of the new statement will have a material effect
on the financial position or results of operations of our Company.
In October 2001, the Financial Accounting Standards Board
issued Statements of Financial Accounting Standards (SFAS) No. 144
"Accounting for the Impairment or Disposal of Long-Lived Assets."
SFAS No. 144 provides accounting guidance for financial accounting
and reporting for impairment or disposal of long-lived assets.
SFAS 144 supersedes SFAS 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of."
It also supersedes the accounting and reporting of APB Opinion No. 50
"Reporting the Results of Operations - Reporting the Events and
Transactions" related to the disposal of a segment of a business.
SFAS No. 144 is effective for fiscal years beginning after December 15,
2001. We do not anticipate that the adoption of the new statement
will have a material effect on the financial position or results of
operations of our Company.
Inflation
Inflation has a long-term effect on us because increasing
costs of land, materials and labor result in increasing sales prices
of our homes. In general, these price increases have been commensurate
with the general rate of inflation in our housing markets and have not
had a significant adverse effect on the sale of our homes. A
significant inflationary risk faced by the housing industry generally
is that rising housing costs, including land and interest costs,
will substantially outpace increases in the income of potential
purchasers. In recent years, in the price ranges in which we sell
homes, we have not found this risk to be a significant problem.
Inflation has a lesser short-term effect on us because we
generally negotiate fixed price contracts with our subcontractors
and material suppliers for the construction of our homes. These
prices usually are applicable for a specified number of residential
buildings or for a time period of between four to twelve months.
Construction costs for residential buildings represent approximately
58% of our homebuilding cost of sales.
Merger with Washington Homes, Inc.
On January 23, 2001 we merged with Washington Homes, Inc. for
a total purchase price of $87.4 million, of which $38.5 was paid in
cash and 6,352,900 shares of our Class A common stock valued at
$44.9 million were issued and options issued to Washington Homes,
Inc. employees with an intrinsic value of $3.4 million were converted
to 738,785 of our options. (See "Notes To Consolidated Financial
Statements - Note 15" for an additional explanation of our merger
with Washington Homes, Inc.). The merger with Washington Homes,
Inc. did not result in a new segment.
Acquisition of a California Homebuilder
On January 10, 2002 we acquired certain homebuilding assets
and assumed related liabilities from The Forecast Group, L.P. ("TFG")
for an estimated purchase price of $176.0 million plus the
assumption of debt net of cash acquired. The final purchase
price is subject to adjustment based on financial performance
through January 31, 2002. Under the terms of the agreement the
partners in TFG received $45.5 million of Hovnanian restricted
Class A Common Stock and the balance in cash. To fund the
acquisition we are planning to raise $150 million through a five
year term loan. We believe our line of credit is adequate to
provide working capital for our new TFG operations. The addition
of the TFG operations for almost 10 months of fiscal 2002 is expected
to add approximately $0.50 per share to our net earnings. We expect
total revenues to increase more than 30% in fiscal 2002 from 2001
levels, largely as a result of the purchase of the TFG operations.
Safe Harbor Statement
Certain statements contained in this Form 10-K that are not
historical facts should be considered as "Forward-Looking
Statements" within the meaning of the Private Securities Litigation
Act of 1995. Such statements involve known and unknown risks,
uncertainties and other factors that may cause actual results to
differ materially. Such risks, uncertainties and other factors
include, but are not limited to:
. Changes in general economic and market conditions
. Changes in interest rates and the availability of mortgage
financing
. Changes in costs and availability of material, supplies
and labor
. General competitive conditions
. The availability of capital
. The ability to successfully effect acquisitions
These risks, uncertainties, and other factors are described in
detail in Item 1 and 2 Business and Properties in this Form 10-K for
the year ended October 31, 2001.
Item 7(A) - Quantitative and Qualitative Disclosures About
Market Risk.
The primary market risk facing us is interest rate risk on
our long term debt. In connection with our mortgage operations,
mortgage loans held for sale and the associated mortgage warehouse
line of credit are subject to interest rate risk; however, such
obligations reprice frequently and are short-term in duration.
In addition, we hedge the interest rate risk on mortgage loans by
obtaining forward commitments from FNMA, FHLMC, GNMA securities
and private investors. Accordingly the risk from mortgage loans is
not material. We do not hedge interest rate risk other than on
mortgage loans using financial instruments. We are also subject
to foreign currency risk but this risk is not material. The
following tables set forth as of October 31, 2001 and 2000, our
long term debt obligations, principal cash flows by scheduled
maturity, weighted average interest rates and estimated fair
market value ("FMV"). There have been no significant changes in
our market risk from October 31, 2000 to October 31, 2001.
As of October 31, 2001 for the
Year Ended October 31,
--------------------------------------
FMV @
2002 2003 2004 2005 2006 Thereafter Total 10/31/01
------ ------ ------ ------ ------ ---------- -------- ---------
(Dollars in Thousands)
Long Term Debt(1):
Fixed Rate.......$ 8,919 $2,577 $ 75 $ 81 $ 88 $ 400,193 $411,933 $406,192
Average interest
rate........... 6.65% 7.04% 8.38% 8.38% 8.38% 9.80% 9.71% --
As of October 31, 2000 for the
Year Ended October 31,
--------------------------------------
FMV @
2001 2002 2003 2004 2005 Thereafter Total 10/31/00
------ ------ ------ ------ ------ ---------- -------- ---------
(Dollars in Thousands)
Long Term Debt(1):
Fixed Rate.......$11,797 $ 138 $2,594 $ 74 $ 81 $400,534 $415,218 $379,629
Average interest
rate........... 4.63% 7.63% 7.04% 8.38% 8.38% 9.79% 9.63% --
(1) Does not include bonds collateralized by mortgages receivable.
Item 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements of Hovnanian Enterprises, Inc. and its
consolidated subsidiaries are set forth herein beginning on Page F-1.
Item 9 - CHANGES IN OR DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
During the years ended October 31, 2001, 2000, and 1999, there
have not been any changes in or disagreements with accountants on
accounting and financial disclosure.
PART III
Item 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by Item l0, except as set forth
below under the heading "Executive Officers of the Registrant", is
incorporated herein by reference to our definitive proxy statement
to be filed pursuant to Regulation l4A, in connection with the
Company's annual meeting of shareholders to be held on March 8,
2002, which will involve the election of directors.
Executive Officers of the Registrant
Our executive officers are listed below and brief summaries
of their business experience and certain other information with
respect to them are set forth following the table. Each executive
officer holds such office for a one year term.
Year Started
Name Age Position With Company
Kevork S. Hovnanian 78 Chairman of the Board and l967
Director of the Company.
Ara K. Hovnanian 44 Chief Executive Officer, President 1979
and Director of the Company.
Paul W. Buchanan 51 Senior Vice President-Corporate l981
Controller and Director of the
Company.
Geaton A. DeCesaris, Jr.46 President of Homebuilding Operations
And Chief Operating Officer and
Director of the Company 2001
Kevin C. Hake 42 Vice President, Finance and 2000
Treasurer
Peter S. Reinhart 51 Senior Vice President and General 1978
Counsel and Director of the
Company.
J. Larry Sorsby 46 Executive Vice President and 1988
Chief Financial Officer and
Director of the Company
Mr. K. Hovnanian founded the predecessor of the Company in
l959 (Hovnanian Brothers, Inc.) and has served as Chairman of the
Board of the Company since its incorporation in l967. Mr. K. Hovnanian
was also Chief Executive Officer of the Company from 1967 to July 1997.
Mr. A. Hovnanian was appointed President in April 1988, after
serving as Executive Vice President from March 1983. He has also
served as Chief Executive Officer since July 1997. Mr. A. Hovnanian
was elected a Director of the Company in December l98l. Mr. A. Hovnanian
is the son of Mr. K. Hovnanian.
Mr. Buchanan has been Senior Vice President-Corporate
Controller since May l990. Mr. Buchanan was elected a Director of the
Company in March l982.
Mr. DeCesaris was appoiinted President of Homebuilding Operations and
Chief Operating Officer in January 2001. From August 1988 to January
2001, he was President, Chief Executive Officer and a Director of
Washington Homes, Inc. ("WHI") and from April 1999 Chairman of the
Board of WHI.
Mr. Hake joined the Company in July 2000 as Vice President,
Finance and Treasurer. Prior to joining the Company, Mr. Hake was
Director, Real Estate Finance at BankBoston Corporation from 1994 to
June 2000.
Mr. Reinhart has been Senior Vice President and General Counsel since
April 1985. Mr. Reinhart was elected a Director of the Company in
December l98l.
Mr. Sorsby was appointed Executive Vice President and Chief
Financial Officer of the Company in October 2000 after serving as Senior
Vice President, Treasurer, and Chief Financial Officer from February
1996 and as Vice President-Finance/Treasurer of the Company since
March 1991.
Item 11 - EXECUTIVE COMPENSATION
The information called for by Item ll is incorporated herein
by reference to our definitive proxy statement to be filed pursuant to
Regulation l4A, in connection with our annual meeting of shareholders to
be held on March 8, 2002, which will involve the election of directors.
Item 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by Item l2 is incorporated herein
by reference to our definitive proxy statement to be filed pursuant to
Regulation l4A, in connection with our annual meeting of shareholders to
be held on March 8, 2002, which will involve the election of directors.
Item 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by Item l3 is incorporated herein
by reference to our definitive proxy statement with the exception of
the information regarding certain relationships as described below to
be filed pursuant to Regulation l4A, in connection with our annual
meeting of shareholders to be held on March 8, 2002, which will involve
the election of directors.
The weighted average interest rate on Mr. K. Hovnanian and
Mr. A. Hovnanian related party debt was 3.90%, 5.87%, and 4.62% for the
years ended October 31, 2001, 2000, and 1999, respectively. The
largest amount of debt outstanding held by Mr. K. Hovnanian for the
years ending October 31, 2001, 2000, and 1999 was $56,000, $386,000,
and $1,026.000, respectively. The largest amount of debt outstanding
held by Mr. A. Hovnanian for the years ending October 31, 2001, 2000,
and 1999 was $3,002,000, $3,124,000, and $2,407,000, respectively.
The interest rate on six month Treasury bills at October 31, 2001,
2000, and 1999 was 2.01%, 6.08%, and 5.12%. During the years ended
October 31, 2001, 2000, and 1999, we received $76,000, $85,000, and
$80,000, respectively, from our affected partnerships.
PART IV
Item 14 - EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT
SCHEDULES AND REPORTS ON FORM 8-K
Page
Financial Statements:
Index to Consolidated Financial Statements.................. F-1
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets at October 31, 2001 and 2000.... F-3
Consolidated Statements of Income for the years ended
October 31, 2001, 2000, and 1999......................... F-5
Consolidated Statements of Stockholders' Equity for the years
ended October 31, 2001, 2000, and 1999................... F-6
Consolidated Statements of Cash Flows for the years ended
October 31, 2001, 2000, and 1999......................... F-7
Notes to Consolidated Financial Statements.................. F-8
No schedules are applicable to us or have been omitted because
the required information is included in the financial statements or
notes thereto.
Exhibits:
2(a) Asset Purchase Agreement, dated as of January 4, 2002
between Hovnanian Enterprises, Inc. and The Forecast
Group.
2(b) Securities Purchase Agreement, dated as of January 4,
2002 between Hovnanian Enterprises, Inc. and The
Forecast Group.
3(a) Certificate of Incorporation of the Registrant.(1)
3(b) Certificate of Amendment of Certificate of Incorporation
of the Registrant.(5)
3(c) Bylaws of the Registrant.(5)
4(a) Specimen Class A Common Stock Certificate.(5)
4(b) Specimen Class B Common Stock Certificate.(5)
4(c) Indenture dated as of May 28, 1993, relating to 9 3/4%
Subordinated Notes between Registrant and First Fidelity
Bank, National Association, New Jersey, as Trustee,
including form of 9 3/4% Subordinated Note due 2005.(3)
4(d) Indenture dated as of May 4, 1999, relating to 9 1/8%
Senior Notes between the Registrant and First Fidelity
Bank, including form of 9 1/8% Senior Notes due May 1,
2009.(6)
4(e) Indenture dated as of October 2, 2000, relating to
10 1/2% Senior Notes between the Registrant and First
Union National Bank, including form of 10 1/2% Senior
Notes due October 1, 2007.(11)
10(a) $440,000,000 Revolving Credit Agreement dated August 28,
2001 among K. Hovnanian Enterprises, Inc., Hovnanian
Enterprises, Inc., certain subsidiaries Thereof, PNC
Bank, National Association, First Union National Bank,
Fleet National Bank, Bank of America, National
Association, Bank One, National Association, Comerica
Bank, Guaranty Bank, AmSouth Bank, Key Bank, National
Association, Credit Suisse First Boston, Washington
Mutual Bank FA, and Sun Trust Bank. (7)
10(b) Description of Management Bonus Arrangements.(5)
10(c) Description of Savings and Investment Retirement
Plan.(1)
10(d) 1999 Stock Incentive Plan.(8)
10(e) 1983 Stock Option Plan (as amended and restated May 4,
1990, and amended through May 14, 1998).(9)
10(f) Management Agreement dated August 12, 1983 for the
management of properties by K. Hovnanian Investment
Properties, Inc.(1)
10(g) Management Agreement dated December 15, 1985, for the
management of properties by K. Hovnanian Investment
Properties, Inc.(2)
10(h) Description of Deferred Compensation Plan.(4)
10(i) Senior Executive Short-Term Incentive Plan.(10)
12 Ratio of Earnings to Fixed Charges
21 Subsidiaries of the Registrant.
23 Consent of Independent Auditors
(1) Incorporated by reference to Exhibits to Registration
Statement (No. 2-85198) on Form S-1 of the Registrant.
(2) Incorporated by reference to Exhibits to Annual Report
on Form 10-K for the year ended February 28, 1986 of
the Registrant.
(3) Incorporated by reference to Exhibits to Registration
Statement (No. 33-61778) on Form S-3 of the Registrant.
(4) Incorporated by reference to Exhibits to Annual Report
on Form 10-K for the year ended February 28, 1990 of
the Registrant.
(5) Incorporated by reference to Exhibits to Annual Report
on Form 10-K for the year ended February 28, 1994 of
the Registrant.
(6) Incorporated by reference to Exhibits to Registration
Statement (No. 333-75939) on Form S-3 of the
Registrant.
(7) Incorporated by reference to Exhibits to Quarterly
Report on Form 10Q for the quarter ended July 31, 2001
of the Registrant.
(8) Incorporated by the Proxy Statement of the Registrant
Filed on Schedule 14A dated January 15, 1999.
(9) Incorporated by reference to Exhibit A of the Proxy
Statement of the Registrant filed on Schedule 14A
dated January 26, 2000.
(10) Incorporated by reference to Exhibit B of the Proxy
Statement of the Registrant filed on Schedule 14A
dated January 26, 2000.
(11) Incorporated by reference to Exhibits to Registration
Statement (No. 333-52836-01) on Form S-4 of the
Registrant.
Reports on Form 8-K
The Company did not file any reports on Form 8-K during the
quarter ended October 31, 2001.
SIGNATURES
Pursuant to the requirements of Section l3 or l5(d) of the Securities
Exchange Act of l934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Hovnanian Enterprises, Inc.
By:
/S/KEVORK S. HOVNANIAN
Kevork S. Hovnanian
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act
of l934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates
indicated.
/S/KEVORK S. HOVNANIAN Chairman of The Board 1/18/02
Kevork S. Hovnanian and Director
/S/ARA K. HOVNANIAN Chief Executive Officer, 1/18/02
Ara K. Hovnanian President and Director
/S/PAUL W. BUCHANAN Senior Vice President 1/18/02
Paul W. Buchanan Corporate Controller and
Director
/S/GEATON A. DECESARIS, JR. President of Homebuilding 1/18/02
Geaton A. DeCesaris, Jr. Operations and Chief Operating
Officer and Director
/S/KEVIN C. HAKE Vice President, Finance 1/18/02
Kevin C. Hake and Treasurer
/S/PETER S. RENHART Senior Vice President and 1/18/02
Peter S. Reinhart General Counsel and Director
/S/J.LARRY SORSBY Executive Vice President, 1/18/02
J. Larry Sorsby Chief Financial Officer
and Director
HOVNANIAN ENTERPRISES, INC.
Index to Consolidated Financial Statements
Page
Financial Statements:
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of October 31, 2001 and 2000. F-3
Consolidated Statements of Income for the Years Ended
October 31, 2001, 2000, and 1999............................ F-5
Consolidated Statements of Stockholders' Equity for the Years
Ended October 31, 2001, 2000, and 1999...................... F-6
Consolidated Statements of Cash Flows for the Years Ended
October 31, 2001, 2000, and 1999............................ F-7
Notes to Consolidated Financial Statements.................. F-8
No schedules have been prepared because the required information of
such schedules is not present, is not present in amounts sufficient
to require submission of the schedule or because the required
information is included in the financial statements and notes thereto.
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and
Board of Directors of
Hovnanian Enterprises, Inc.
We have audited the accompanying consolidated balance sheets of
Hovnanian Enterprises, Inc. and subsidiaries as of October 31,
2001 and 2000, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in
the period ended October 31, 2001. 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 auditing standards
generally accepted in the United States. 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 consolidated financial
position of Hovnanian Enterprises, Inc. and subsidiaries at
October 31, 2001 and 2000 and the consolidated results of their
operations and their cash flows for each of the three years in the
period ended October 31, 2001 in conformity with accounting
principles generally accepted in the United States.
/S/Ernst & Young LLP
New York, New York
December 11, 2001
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
October 31, October 31,
ASSETS 2001 2000
------------ ------------
Homebuilding:
Cash and cash equivalents(Note 5)............. $ 10,173 $ 40,131
------------ ------------
Inventories - At the lower of cost or fair
value (Notes 7, 11, and 12):
Sold and unsold homes and lots under
development............................... 593,149 525,116
Land and land options held for future
development or sale....................... 146,965 89,867
------------ ------------
Total Inventories......................... 740,114 614,983
------------ ------------
Receivables, deposits, and notes (Note 12).... 75,802 36,190
------------ ------------
Property, plant, and equipment - net (Note 4). 30,756 35,594
------------ ------------
Senior residential rental properties - net (Notes 4
and 7)..................................... 9,890 10,276
------------ ------------
Prepaid expenses and other assets (Note 15)... 78,796 64,897
------------ ------------
Total Homebuilding........................ 945,531 802,071
------------ ------------
Financial Services:
Cash.......................................... 5,976 3,122
Mortgage loans held for sale (Notes 6 and 7).. 105,567 61,860
Other assets.................................. 6,465 6,488
------------ ------------
Total Financial Services.................. 118,008 71,470
------------ ------------
Income Taxes Receivable - Including deferred tax
benefits (Note 10)............................ 719
------------ ------------
Total Assets.................................... $1,064,258 $873,541
============ ============
See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
October 31, October 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2001 2000
------------ ------------
Homebuilding:
Nonrecourse land mortgages (Note 7)................. $ 10,086 $ 18,166
Accounts payable and other liabilities (Note 16).... 124,125 82,205
Customers' deposits (Note 5)........................ 39,114 31,475
Nonrecourse mortgages secured by operating
properties (Note 7)............................... 3,404 3,554
------------ ------------
Total Homebuilding.............................. 176,729 135,400
------------ ------------
Financial Services:
Accounts payable and other liabilities.............. 5,264 5,085
Mortgage warehouse line of credit (Notes 6 and 7)... 98,305 56,486
------------ ------------
Total Financial Services........................ 103,569 61,571
------------ ------------
Notes Payable:
Revolving credit agreement (Note 7).................
Senior notes (Note 8)............................... 296,797 296,430
Subordinated notes (Note 8)......................... 99,747 100,000
Accrued interest (Notes 7 and 8).................... 11,770 12,709
------------ ------------
Total Notes Payable............................. 408,314 409,139
------------ ------------
Income Taxes Payable - Net of deferred tax benefits
(Note 10)........................................... 4,072
------------ ------------
Total Liabilities............................... 688,612 610,182
------------ ------------
Commitments and Contingent Liabilities (Notes 5, 9, 12,
14 and 15)
Stockholders' Equity (Notes 13 and 15):
Preferred Stock,$.01 par value-authorized 100,000
shares; none issued..............................
Common Stock,Class A,$.01 par value-authorized
87,000,000 shares; issued 24,599,379 shares in 2001
and 17,309,369 shares in 2000 (including 4,195,621
shares in 2001 and 3,736,921 shares in 2000 held
in Treasury)...................................... 246 173
Common Stock,Class B,$.01 par value
(convertible to Class A at time of sale)
-authorized 13,000,000 shares; issued 7,818,927
shares in 2001 and 7,978,903 shares in 2000
(both years include 345,874 shares held in
Treasury)......................................... 78 79
Paid in Capital..................................... 100,957 46,086
Retained Earnings (Note 8).......................... 310,106 246,420
Deferred Compensation............................... (127)
Treasury Stock - at cost............................ (35,614) (29,399)
------------ ------------
Total Stockholders' Equity...................... 375,646 263,359
------------ ------------
Total Liabilities and Stockholders' Equity............ $1,064,258 $873,541
============ ============
See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands Except Per Share Data)
Year Ended
-------------------------------------
October October October
31, 2001 31, 2000 31, 1999
----------- ----------- -----------
Revenues:
Homebuilding:
Sale of homes.............................$1,693,717 $1,105,466 $ 908,553
Land sales and other revenues (Notes 12
and 14)................................ 16,818 10,769 17,103
----------- ----------- -----------
Total Homebuilding...................... 1,710,535 1,116,235 925,656
Financial Services.......................... 31,428 19,324 20,758
----------- ----------- -----------
Total Revenues.......................... 1,741,963 1,135,559 946,414
----------- ----------- -----------
Expenses:
Homebuilding:
Cost of sales............................. 1,355,354 880,463 729,719
Selling, general and administrative....... 140,126 104,771 81,396
Inventory impairment loss (Note 11)....... 4,368 1,791 2,091
----------- ----------- -----------
Total Homebuilding...................... 1,499,848 987,025 813,206
----------- ----------- -----------
Financial Services.......................... 21,443 19,750 19,699
----------- ----------- -----------
Corporate General and Administrative(Note 3) 44,278 33,309 28,652
----------- ----------- -----------
Interest (Notes 7 and 8).................... 51,446 34,956 30,343
----------- ----------- -----------
Other operations (Note 15).................. 15,347 8,701 3,897
----------- ----------- -----------
Restructuring charges (Note 16)............. 3,247
----------- ----------- -----------
Total Expenses.......................... 1,635,609 1,083,741 895,797
----------- ----------- -----------
Income Before Income Taxes and
Extraordinary Loss.......................... 106,354 51,818 50,617
----------- ----------- -----------
State and Federal Income Taxes:
State (Note 10)............................. 4,024 2,495 5,093
Federal (Note 10)........................... 38,644 16,160 14,581
----------- ----------- -----------
Total Taxes............................... 42,668 18,655 19,674
----------- ----------- -----------
Extraordinary Loss From Extinguishment of
Debt, Net of Income Taxes (Note 8).......... (868)
----------- ----------- -----------
Net Income....................................$ 63,686 $ 33,163 $ 30,075
=========== =========== ===========
Per Share Data:
Basic:
Income Per Common Share Before
Extraordinary Loss......................$ 2.38 $ 1.51 $ 1.45
Extraordinary Loss........................ (.04)
----------- ----------- -----------
Income....................................$ 2.38 $ 1.51 $ 1.41
=========== =========== ===========
Weighted Average Number of Common Shares
Outstanding............................... 26,810 21,933 21,404
=========== =========== ===========
Assuming Dilution:
Income Per Common Share Before
Extraordinary Loss...................... $ 2.29 $ 1.50 $ 1.43
Extraordinary Loss........................ (.04)
----------- ----------- -----------
Income.................................... $ 2.29 $ 1.50 $ 1.39
=========== =========== ===========
Weighted Average Number of Common Shares
Outstanding............................... 27,792 22,043 21,612
=========== =========== ===========
See notes to consolidated financial statements
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in Thousands)
A Common Stock B Common Stock
------------------- -------------------
Shares Shares
Issued and Issued and Paid-In Retained Deferred Treasury
Outstanding Amount Outstanding Amount Capital Earnings Comp Stock Total
----------- ------ ----------- ------ ------- -------- --------- --------- ---------
Balance, October 31, 1998... 13,865,923 $ 157 7,694,297 $ 80 $34,561 $183,182 $ $(16,588) $ 201,392
Acquisitions................ 1,362,057 13 11,237 11,250
Sale of common stock under
employee stock option
plan...................... 10,000 1 58 59
Conversion of Class B to
Class A common stock...... 43,088 1 (43,088) (1)
Treasury stock purchases.... (772,900) (6,350) (6,350)
Net Income.................. 30,075 30,075
----------- ------ ----------- ------ ------- -------- --------- --------- ---------
Balance, October 31, 1999... 14,508,168 172 7,651,209 79 45,856 213,257 (22,938) 236,426
Acquisitions................ 47,619 1 (270) (269)
Sale of common stock under
employee stock option
plan...................... 346 346
Stock bonus plan............ 25,128 154 154
Conversion of Class B to
Class A common stock...... 18,180 (18,180)
Treasury stock purchases.... (1,026,647) (6,461) (6,461)
Net Income ................. 33,163 33,163
----------- ------ ----------- ------ ------- -------- --------- --------- ---------
Balance, October 31, 2000... 13,572,448 173 7,633,029 79 46,086 246,420 (29,399) 263,359
----------- ------ ----------- ------ ------- -------- --------- --------- ---------
Acquisitions................ 6,546,932 66 51,361 51,427
Sale of common stock under
employee stock option
plan...................... 519,673 5 2,885 2,890
Stock bonus plan............ 63,429 1 625 626
Conversion of Class B to
Class A common stock...... 159,976 1 (159,976) (1)
Deferred compensation....... (127) (127)
Treasury stock purchases.... (458,700) (6,215) (6,215)
Net Income ................. 63,686 63,686
----------- ------ ----------- ------ ------- -------- --------- --------- ---------
Balance, October 31, 2001... 20,403,758 $ 246 7,473,053 $ 78 $100,957 $310,106 $ (127) $(35,614) $ 375,646
=========== ====== =========== ====== ======= ======== ========= ========= =========
See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Year Ended
----------------------------------
October October October
31, 2001 31, 2000 31, 1999
---------- ---------- ----------
Cash Flows From Operating Activities:
Net Income...................................... $ 63,686 $ 33,163 $ 30,075
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation................................ 8,164 6,423 6,314
Amortization of Goodwill.................... 3,764 2,513 261
Loss (gain) on sale and retirement of
property and assets....................... 641 (728) 283
Extraordinary loss from extinguishment of
Debt net of income taxes.................. 868
Deferred income taxes....................... (6,265) 2,551 3,056
Impairment losses........................... 4,368 1,791 2,091
Decrease (increase) in assets:
Mortgage notes receivable................. (42,573) (27,703) 46,012
Receivables, prepaids and other assets.... (35,805) (13,256) (9,736)
Inventories............................... 12,540 (89,544) (53,592)
Increase (decrease) in liabilities:
State and Federal income taxes............ 7,004 3,244 3,020
Tax effect from exercise of stock options. (566)
Customers' deposits....................... 4,543 6,240 (1,269)
Interest and other accrued liabilities.... 15,466 8,222 9,203
Post development completion costs......... 5,120 (2,555) 3,293
Accounts payable.......................... (3,018) 8,994 (4,400)
Net cash provided by (used in) ---------- ---------- ----------
operating activities.................... 37,069 (60,645) 35,479
---------- ---------- ----------
Cash Flows From Investing Activities:
Net proceeds from sale of property and assets... 5,325 1,517 18,251
Purchase of property, equipment, and other
fixed assets.................................. (6,777) (15,607) (13,381)
Acquisition of homebuilding companies........... (37,905) (3,845) (12,249)
Investment in and advances to unconsolidated
affiliates.................................... (372) 249
Net cash (used in) ---------- ---------- ----------
investing activities.................... (39,729) (17,935) (7,130)
---------- ---------- ----------
Cash Flows From Financing Activities:
Proceeds from mortgages and notes............... 1,472,789 1,433,150 850,320
Proceeds from senior debt....................... 146,430 150,000
Principal payments on mortgages and notes.......(1,494,528) (1,470,805) (972,265)
Principal payments on subordinated debt......... (46,302)
Purchase of treasury stock...................... (6,215) (6,461) (6,350)
Proceeds from sale of stock and employee stock
plan.......................................... 3,510 154 59
Net cash (used in) provided by ---------- ---------- ----------
financing activities.................... (24,444) 102,468 (24,538)
---------- ---------- ----------
Net (Decrease) Increase In Cash................... (27,104) 23,888 3,811
Cash and Cash Equivalents Balance, Beginning
Of Year......................................... 43,253 19,365 15,554
---------- ---------- ----------
Cash and Cash Equivalents Balance, End Of Year.....$ 16,149 $ 43,253 $ 19,365
========== ========== ==========
Supplemental Disclosures Of Cash Flow:
Cash paid during the year for:
Interest...................................... $ 53,100 $ 33,814 $ 23,731
========== ========== ==========
Income Taxes.................................. $ 45,498 $ 12,858 $ 16,395
========== ========== ==========
Stock issued for acquisitions/extension of options
granted......................................... $ 50,530 $ 721 $ 11,250
========== ========== ==========
See notes to consolidated financial statements.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS FOR THE YEARS ENDED OCTOBER 31, 2001, 2000,
AND 1999.
1. BASIS OF PRESENTATION AND SEGMENT INFORMATION
Basis of Presentation - The accompanying consolidated financial
statements include our accounts and all wholly-owned subsidiaries
after elimination of all significant intercompany balances and
transactions.
Segment Information - Statement of Financial Accounting
Standards (SFAS) No. 131 "Disclosures About Segments of an Enterprise
and Related Information" established new standards for segment
reporting based on the way management organizes segments within a
company for making operating decisions and assessing performance.
Our financial reporting segments consist of homebuilding, financial
services, and corporate. Our homebuilding operations comprise the
most substantial part of our business, with approximately 97% of
consolidated revenues in years ended October 31, 2001 and 2000 and
approximately 96% in the year ended October 31, 1999 contributed
by the homebuilding operations. We are a Delaware corporation,
currently building and selling homes in more than 172 new home
communities in New Jersey, Pennsylvania, New York, Virginia,
Maryland, North Carolina, Tennessee, Alabama, Mississippi, Texas,
and California. We offer a wide variety of homes that are designed
to appeal to first time buyers, first and second time move up
buyers, luxury buyers, active adult buyers and empty nesters. Our
financial services operations provide mortgage banking and title
services to the homebuilding operations' customers. We do not
retain or service the mortgages that we originate but rather, sell
the mortgages and related servicing rights to investors.
Corporate primarily includes the operations of our corporate
office whose primary purpose is to provide executive services,
information services, human resources, management reporting,
training, cash management, internal audit, risk management, and
administration of process redesign, quality and safety. Assets,
liabilities, revenues and expenses of our reportable segments
are separately included in the consolidated balance sheets and
consolidated statements of income.
2. SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates - The preparation of financial statements in
conformity with accounting principles generally accepted in the United
Statesrequires 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. Actual results could differ from those
estimates and these differences could have a significant impact on
the financial statements.
Business Combinations - When we make an acquisition of another
company, we use the purchase method of accounting in accordance with
Accounting Principal Board Opinion 16 ("APB 16") "Business
Combinations". Under APB 16 we record as our cost the acquired assets
less liabilities assumed. Any difference between the cost of an
acquired company and the sum of the fair values of tangible and
identified intangible assets less liabilities is recorded as
goodwill. The reported income of an acquired company includes the
operations of the acquired company after acquisition, based on the
acquisition costs. See "Accounting Pronouncements Not Yet Adopted."
Income Recognition - Income from home sales is recorded when
title is conveyed to the buyer, subject to the buyer's financial
commitment being sufficient to provide economic substance to the
transaction.
Cash and Cash Equivalents - Cash and cash equivalents include
cash deposited in checking accounts, overnight repurchase agreements,
certificates of deposit, Treasury bills and government money market
funds with original maturities of 90 days or less when purchased.
Fair Value of Financial Instruments - The fair value of
financial instruments is determined by reference to various market
data and other valuation techniques as appropriate. Our financial
instruments consist of cash equivalents, mortgages and notes
receivable, mortgages and notes payable, and the senior and
subordinated notes payable. Unless otherwise disclosed, the fair
value of financial instruments approximates their recorded values.
Inventories - For inventories of communities under development,
a loss is recorded when events and circumstances indicate impairment
and the undiscounted future cash flows generated are less than the
related carrying amounts. The impairment loss is based on expected
revenue, cost to complete including interest, and selling costs.
Inventories and long-lived assets held for sale are recorded at the
lower of cost or fair value less selling costs. Fair value is defined
in Statement of Financial Accounting Standard (SFAS)No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" as the amount at which an asset could be
bought or sold in a current transaction between willing parties, that
is, other than in a forced or liquidation sale. See "Accounting
Pronouncements Not Yet Adopted." Construction costs are accumulated
during the period of construction and charged to cost of sales under
specific identification methods. Land, land development, and common
facility costs are allocated based on buildable acres to product
types within each community, then amortized equally based upon the
number of homes to be constructed in the community.
Interest costs related to properties under development are
capitalized during the land development and home construction period
and expensed along with the associated cost of sales as the related
inventories are sold (see Note 7).
The cost of land options is capitalized when incurred and
either included as part of the purchase price when the land is
acquired or charged to operations when we determine we will not
exercise the option.
Intangible Assets - Any intangible assets acquired by us are
amortized on a straight line basis over their useful life. Goodwill
resulting from company acquisitions during the years ended October 31,
2001 and October 31, 1999 is being amortized over 5 to 10 years and
reported in the consolidated statements of income as "Other
Operations". During the years ended October 31, 2001, 2000, and
1999, goodwill amortization amounted to $3,764,000, $2,513,000,
and $261,000, respectively. The carrying amount of goodwill is
reviewed if facts and circumstances suggest that it may be impaired.
If this review indicates that goodwill will not be recoverable, as
determined based on the estimated undiscounted cash flows of the
company acquired over the remaining amortization period, the carrying
amount of the goodwill is reduced by the estimated shortfall of cash
flows. In addition, we assess long-lived assets for impairment under
SFAS 121. Under those rules, goodwill associated with assets
acquired in a purchase business combination is included in
impairment evaluations when events or circumstances exist that
indicate the carrying amount of those assets may not be recoverable.
Total accumulated amortization at October 31, 2001 and 2000 was
$7,579,000 and $3,815,000, respectively. See "Accounting
Pronouncements Not Yet Adopted."
Deferred Bond Issuance Costs - Costs associated with the
issuance of our Senior and Subordinated Notes are capitalized and
amortized over the associated term of each note issuance into other
operations on the consolidated statements of income.
Debt Issued At a Discount - Debt issued at a discount to the
face amount is accredited back up to its face amount utilizing the
effective interest method over the term of the note and recorded as
a component of Interest on the consolidated statements of income.
Post Development Completion Costs - In those instances where
a development is substantially completed and sold and we have
additional construction work to be incurred, an estimated liability
is provided to cover the cost of such work.
Advertising Costs - Advertising costs are treated as period
costs and expensed as incurred. During the years ended October 31,
2001, 2000, and 1999, advertising costs expensed amounted to
$18,536,000, $14,418,000, and $11,995,000, respectively.
Deferred Income Tax - Deferred income taxes or income tax
benefits are provided for temporary differences between amounts
recorded for financial reporting and for income tax purposes.
Common Stock - Each share of Class A Common Stock entitles
its holder to one vote per share and each share of Class B Common
Stock entitles its holder to ten votes per share. The amount of any
regular cash dividend payable on a share of Class A Common Stock
will be an amount equal to 110% of the corresponding regular cash
dividend payable on a share of Class B Common Stock. If a
shareholder desires to sell shares of Class B Common Stock, such
stock must be converted into shares of Class A Common Stock.
On December 31, 2000, our stock repurchase program to
purchase up to 4 million shares of Class A Common Stock expired.
As of December 31, 2000 3,391,047 shares had been purchased under
this program. On July 3, 2001, our Board of Directors authorized
a revision to our stock repurchase program to purchase up to
2 million shares of Class A Common Stock. As of October 31,
2001, 458,700 have been purchased under this program.
Depreciation - The straight-line method is used for
financial reporting purposes and MACRS is used for tax
reporting purposes.
Prepaid Expenses - Prepaid expenses which relate to
specific housing communities (model setup, architectural fees,
homeowner warranty, etc.) are amortized to costs of sales as the
applicable inventories are sold. All other prepaid expenses are
amortized over a specific time period or as used and charged
to overhead expense.
Stock Options - Statement of Financial Accounting
Standards (SFAS) No. 123 "Accounting for Stock-Based Compensation"
establishes a fair value-based method of accounting for stock-based
compensation plans, including stock options. Registrants may elect
to continue accounting for stock option plans under Accounting
Principles Board Opinion No. 25 (APB 25), "Accounting for
Stock Issued to Employees," but are required to provide pro forma
net income and earnings per share information "as if" the new fair
value approach had been adopted. We intend to continue accounting
for our stock option plan under APB 25. Under APB 25, no
compensation expense is recognized when the exercise price of
our employee stock options equals the market price of the
underlying stock on the date of grant (see Note 13).
Per Share Calculations - Statement of Financial Accounting
Standards (SFAS) No. 128 "Earnings Per Share" requires the
presentation of basic earnings per share and diluted earnings
per share. Basic earnings per common share is computed using
the weighted average number of shares outstanding and is the same
calculation as reported in prior years. Basic weighted average
shares outstanding at October 31, 2001, 2000, and 1999 amounted
to 26,809,668 shares, 21,933,022 shares, and 21,404,473 shares,
respectively. Diluted earnings per common share is computed using
the weighted average number of shares outstanding adjusted for
the incremental shares attributed to outstanding options to purchase
common stock shares of 982,000, 110,000, and 208,000 for the years
ended October 31, 2001, 2000, and 1999, respectively.
Computer Software Development - On November 1, 1999 we
adopted SOP-98-1, Accounting For the Costs of Computer Software
Developed For or Obtained For Internal Use. The SOP-98-1 requires
the capitalization of certain costs incurred in connection with
developing or obtaining software for internal use. Prior to the
adoption of SOP-98-1, we expensed such internal use software
related costs as incurred. The effect of adopting SOP-98-1 was to
increase net income for the year ended October 31, 2000 by
$2,570,000 or $0.12 per share. Upon entering the application and
development phase, the capitalized costs are amortized over the
systems estimated useful life. For the year ended October 31, 2001
we recorded amortizatation expense in the amount of approximately
$2.0 million based on an estimated useful life of 10 years.
Accounting for Derivative Instruments and Hedging Activities - On
November 1, 2000, we adopted Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments
and Hedging Activities," as amended by Statement of Financial
Accounting Standards (SFAS) No. 138, which addresses the accounting
for and disclosure of derivative instruments, including derivative
instruments imbedded in other contracts, and hedging activities.
The statement requires us to recognize all derivatives on the
balance sheet at fair value. Derivatives that are not hedges must
be adjusted to fair value through income. If the derivative is a
hedge, depending on the nature of the hedge, changes in the fair
value of derivatives are either offset against the change in fair
value of assets, liabilities, or firm commitments through earnings
or recognized in other comprehensive income until the hedged item
is recognized in earnings. The ineffective portion of a
derivative's change is recognized in earnings.
We manage our interest rate risk on mortgage loans held for
sale and our estimated future commitments to originate and close
mortgage loans at fixed prices through the use of best-efforts
whole loan delivery commitments. These instruments are classified
as derivatives and generally have maturities of three months or
less. Accordingly, gains and losses are recognized in current
earnings during the period of change. The impact of the adoption
of the new statement as of November 1, 2000 did not have a
significant impact on our earnings or financial position. The
effect of SFAS 133 is immaterial to our financial statements.
Accounting Pronouncements Not Yet Adopted - In June 2001, the
Financial Accounting Standards Board issued Statements of Financial
Accounting Standards (SFAS) No. 141, "Business Combinations," and
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141
requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001. Use
of the pooling-of-interests method is no longer permitted. SFAS
No. 141 also includes guidance on the initial recognition and
measurement of goodwill and other intangible assets acquired in a
business combination that is completed after June 30, 2001. We
adopted SFAS No. 141 for all acquisitions subsequent to
June 30, 2001.
SFAS No. 142 no longer permits the amortization of goodwill and
indefinite-lived intangible assets. Instead, these assets must
be reviewed annually (or more frequently under certain conditions)
for impairment in accordance with this statement. This impairment
test uses a fair value approach rather than the undiscounted cash
flows approach previously required by SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of." The amortization of goodwill included
in other expenses will also no longer be recorded upon adoption
of the new rules. Intangible assets that do not have indefinite
lives will continue to be amortized over their useful lives and
reviewed for impairment in accordance with SFAS No. 121. We
adopted SFAS 142 on November 1, 2001. Upon adoption of SFAS No. 142,
goodwill amortization of $3,764,000, which was incurred in 2001,
will no longer be incurred in the future. We do not anticipate
that the adoption of the new statement will have a material effect
on the financial position or results of operations of our Company.
In October 2001, the Financial Accounting Standards Board
issued Statements of Financial Accounting Standards (SFAS) No. 144
"Accounting for the Impairment or Disposal of Long-Lived Assets."
SFAS No. 144 provides accounting guidance for financial accounting
and reporting for impairment or disposal of long-lived assets.
SFAS 144 supersedes SFAS 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of."
It also supersedes the accounting and reporting of APB Opinion
No. 50 "Reporting the Results of Operations - Reporting the
Events and Transactions" related to the disposal of a segment
of a business. We will adopt SFAS No. 144 effective for our
fiscal year beginning November 1, 2002. We do not anticipate
that the adoption of the new statement will have a material effect
on the financial position or results of operations of our Company.
Reclassifications - Certain amounts in the 2000 and 1999
consolidated financial statements have been reclassified to
conform to the 2001 presentation.
3. CORPORATE INITIATIVES
We have embarked on long term improvement initiatives of total
quality, process redesign, and training. Included in Corporate
General and Administrative is $7,200,000, $6,902,000, and $7,502,000
for the years ended October 31, 2001, 2000, and 1999, respectively,
related to such initiatives. These amounts are in addition to
software development costs capitalized in those years.
4. PROPERTY
Homebuilding property, plant, and equipment consists of land,
land improvements, buildings, building improvements, furniture and
equipment used to conduct day to day business. Homebuilding
accumulated depreciation related to these assets at October 31, 2001
and October 31, 2000 amounted to $18,367,000 and $22,164,000,
respectively. In addition we have two senior citizen residential
rental communities recorded as senior residential rental
properties on the balance sheets. Accumulated depreciation on senior
residential rental properties at October 31, 2001 and October 31,
2000 amounted to $2,688,000 and $2,294,000, respectively.
5. ESCROW CASH
We hold escrow cash amounting to $4,420,000 and $3,424,000 at
October 31, 2001 and October 31, 2000, respectively, which primarily
represents customers' deposits which are restricted from use by us.
We are able to release other escrow cash by pledging letters of credit
and surety bonds. Escrow cash accounts are substantially invested
in short-term certificates of deposit, time deposits, or money
market accounts.
6. MORTGAGE LOANS HELD FOR SALE
Our wholly-owned mortgage banking subsidiary originates
mortgage loans, primarily from the sale of our homes. Such mortgage
loans are sold in the secondary mortgage market with servicing
released. At October 31, 2001 and 2000, respectively, $105,174,000
and $61,549,000 of such mortgages were pledged against our mortgage
warehouse line (see Note 7). We may incur risk with respect to
mortgages that are delinquent, but only to the extent the losses are
not covered by mortgage insurance or resale value of the home.
Historically, we have incurred minimal credit losses. The mortgage
loans held for sale are carried at the lower of cost or market
value, determined on an aggregate basis. There was no valuation
adjustment at October 31, 2001 or 2000.
7. MORTGAGES AND NOTES PAYABLE
Substantially all of the nonrecourse land mortgages are
short-term borrowings. Nonrecourse mortgages secured by operating
properties are installment obligations having annual principal
maturities in the following years ending October 31, of approximately
$138,000 in 2002, $2,577,000 in 2003, $75,000 in 2004, $81,000 in
2005, $88,000 in 2006 and $445,000 after 2006. The interest
rates on these obligations range from 6.0% to 10.0%.
We have an unsecured Revolving Credit Agreement
("Agreement") with a group of banks which provides up to
$440,000,000 through July 2004. Interest is payable monthly
and at various rates of either the prime rate plus .40% or
LIBOR plus 1.85%. In addition, we pay a fee equal to .375% per
annum on the weighted average unused portion of the line. As
of October 31, 2001 and 2000, there was no outstanding
balance under the Agreement.
Interest costs incurred, expensed and capitalized were:
Year Ended
----------------------------
October October October
31, 2001 31, 2000 31, 1999
-------- -------- --------
(Dollars in Thousands)
Interest capitalized at
beginning of year.............. $25,694 $21,966 $25,545
Plus acquired entity interest.... 3,604 3,397
Plus interest incurred(1)(2)..... 47,272 38,878 24,594
Less interest expensed(2)........ 51,446 34,956 30,343
Less impairment write-off........ 194
Less sale of assets.............. 1,227
-------- -------- --------
Interest capitalized at
end of year(2).................. $25,124 $25,694 $21,966
======== ======== ========
(1) Data does not include interest incurred by our mortgage and
finance subsidiaries.
(2) Represents acquisition interest for construction, land and
development costs which is charged to interest expense when
homes are delivered or when land is not under active
development.
Average interest rates and average balances outstanding for
short-term debt are as follows:
October October October
31, 2001 31, 2000 31, 1999
-------- -------- --------
(Dollars In Thousands)
Average monthly outstanding
borrowings................. $ 74,543 $128,788 $ 55,495
Average interest rate during
period..................... 7.1% 10.0% 9.2%
Average interest rate at end
of period(1)............... 4.1% 8.4% 7.2%
Maximum outstanding at any
month end.................. $120,600 $170,800 $117,085
(1) Average interest rate at the end of the period excludes any charges
on unused loan balances.
In addition, we have a secured mortgage loan warehouse agreement
with a group of banks, which is a short-term borrowing, that provides
up to $110,000,000 through July 26, 2002. Interest is payable monthly
at the Federal Funds Rate plus 1.125% (approximately 3.81% at October 31,
2001) plus fees equal to .625% of the outstanding loan balance. The
loan is repaid when the underlying mortgage loans are sold to permanent
investors by the Company.
8. SENIOR AND SUBORDINATED NOTES
On April 29, 1992, we issued $100,000,000 principal amount of
11 1/4% Subordinated Notes due April 15, 2002. Prior to 1999, we
redeemed $44,551,000 principal amount. The funds were provided by
the revolving credit agreement. In June 1999, we redeemed the
remaining $45,449,000 principal amount at an average price of
101.875% of par. The funds for this redemption were provided
by the issuance of Senior Notes and resulted in an extraordinary
loss of $868,000 net of an income tax benefit of $468,000.
On June 7, 1993, we issued $100,000,000 principal amount of
9 3/4% Subordinated Notes due June 1, 2005. In April 2001, we
retired $253,000 of these notes. Interest is payable semi-annually.
The notes are redeemable in whole or in part at our option, initially
at 104.875% of their principal amount on or after June 1, 1999 and
reducing to 100% of their principal amount on or after June 1, 2002.
On May 4, 1999, we issued $150,000,000 principal amount of
9 1/8% Senior Notes due May 1, 2009. Interest is payable
semi-annually. The notes are redeemable in whole or in part at our
option, initially at 104.563% of their principal amount on or after
May 1, 2004 and reducing to 100% of their principal amount on or
after May 1, 2007.
On October 2, 2000, we issued $150,000,000 principal amount
of 10 1/2% Senior Notes due October 1, 2007. The 10 1/2% Senior
Notes were issued at a discount to yield 11% and have been reflected
net of the unamortized discount in the accompanying consolidated
balance sheet. Interest is payable semi-annually. The notes are
redeemable in whole or in part at our option at 100% of their
principal amount upon payment of a make-whole price.
The indentures relating to the Senior and Subordinated Notes
and the Revolving Credit Agreement contain restrictions on the
payment of cash dividends. At October 31, 2001, $66,013,000 of
retained earnings were free of such restrictions.
The fair value of both the Senior Notes and Subordinated Notes
is estimated based on the quoted market prices for the same or similar
issues or on the current rates offered to us for debt of the same
remaining maturities. The fair value of the Senior Notes and
Subordinated Notes is estimated at $297,750,000 and $96,256,000,
respectively, as of October 31, 2001.
9. RETIREMENT PLAN
In December 1982, we established a defined contribution
savings and investment retirement plan. Under such plan there are
no prior service costs. All associates are eligible to participate
in the retirement plan and employer contributions are based on a
percentage of associate contributions. Plan costs charged to
operations amount to $3,675,000, $2,948,000, and $2,760,000
for the years ended October 31, 2001, 2000, and 1999,
respectively.
10. INCOME TAXES
Income Taxes payable (receivable) including deferred
benefits, consists of the following:
October October
31, 2001 31, 2000
--------- ---------
(In Thousands)
State income taxes:
Current.......................... $ 3,393 $ 1,552
Deferred......................... (2,262) 163
Federal income taxes:
Current.......................... 6,623 5,519
Deferred......................... (8,473) (3,162)
--------- ---------
Total.......................... $ (719) $ 4,072
========= =========
The provision for income taxes is composed of the following
charges (benefits):
Year Ended
-----------------------------------
October October October
31, 2001 31, 2000 31, 1999
--------- --------- ---------
(In Thousands)
Current income tax expense:
Federal(1).................... $ 48,478 $ 13,609 $ 13,253
State(2)...................... 6,461 1,574 4,954
--------- --------- ---------
54,939 15,183 18,207
--------- --------- ---------
Deferred income tax expense:
Federal....................... (9,834) 2,551 860
State......................... (2,437) 921 139
--------- --------- ---------
(12,271) 3,472 999
--------- --------- ---------
Total....................... $ 42,668 $ 18,655 $ 19,206
========= ========= =========
(1) The current federal income tax expense includes a tax benefit
of $468,000 and in the year ended October 31, 1999 relating
to the loss on the redemption of Subordinated Notes that
was reported as an extraordinary item in the "Statements
of Income."
(2) The current state income tax expense is net of the use of
state loss carryforwards amounting to $26,830,000,
$21,330,000, and $5,860,000, for the years ended October 31,
2001, 2000, and 1999.
The deferred tax liabilities or assets have been recognized
in the consolidated balance sheets due to temporary differences as
follows:
October October
31, 2001 31, 2000
-------- ---------
(In Thousands)
Deferred tax assets:
Maintenance guarantee reserves....... 658 740
Inventory impairment loss............ 2,206 1,785
Uniform capitalization of overhead... 6,726 6,008
Post development completion costs.... 5,319 3,194
State net operating loss
carryforwards...................... 27,846 30,916
Other................................ 7,067 2,970
-------- ---------
Total.............................. 49,822 45,613
Valuation allowance(3)............... (27,846) (30,916)
-------- ---------
Total deferred tax assets.......... 21,976 14,697
-------- ---------
Deferred tax liabilities:
Deferred interest.................... 31 31
Installment sales.................... 76 96
Accelerated depreciation............. 2,113 3,965
Acquisition goodwill................. 3,124 2,279
Software development expenses........ 5,897 5,327
-------- ---------
Total deferred tax liabilities..... 11,241 11,698
-------- ---------
Net deferred tax assets(4)............. $10,735 $ 2,999
======== =========
(3) The net change in the valuation allowance of $(3,070,000) results
from a decrease in the separate company state net operating
losses that may not be fully utilized.
(4) In connection with the merger with Washington Homes, Inc. we
recorded a deferred tax liability of $4,534,000.
The effective tax rates varied from the expected rate. The
sources of these differences were as follows:
Year Ended
------------------------------
October October October
31, 2001 31, 2000 31, 1999
-------- -------- --------
Computed "expected" tax rate...... 35.0% 35.0 % 35.0 %
State income taxes, net of Federal
income tax benefit.............. 3.2 3.1 6.5
Permanent timing differences...... 1.6 1.0 .2
Low income housing tax credit..... (1.3) (2.6) (2.8)
Other............................. 1.6 (1.5) .1
-------- -------- --------
Effective tax rate................ 40.1 36.0 % 39.0 %
======== ======== ========
We have state net operating loss carryforwards for financial
reporting and tax purposes of $358,000,000 due to expire between the
years October 31, 2002 and October 31, 2016.
11. REDUCTION OF INVENTORY TO FAIR VALUE
In accordance with "Financial Accounting Standards (SFAS) No. 121
"Accounting for the Impairment of Long Lived Assets and for Long
Lived Assets to Be Disposed Of", we record impairment losses on
inventories related to communities under development when events
and circumstances indicate that they may be impaired and the
undiscounted cash flows estimated to be generated by those assets
are less than their related carrying amounts. During the year
ended October 31, 2001, inventory with a carrying amount of
$12,084,000 was written down by $2,088,000 to its fair value.
This was based on our evaluation of the expected revenue, cost
to complete including interest and selling cost. The writedown
during the year ended October 31, 2001 was attributed to two
communities in the Northeast Region that were part of a
large land acquisition, which resulted in a loss.
Also in accordance with SFAS 121, we record impairment losses
on inventories and long-lived assets held for sale when the related
carrying amount exceeds the fair value less the selling cost. As
of October 31, 2001, inventory with a carrying amount of $1,391,000
was written down by $424,000 to its fair value. No inventory was
written down during the year ended October 31, 2000. As of
October 31, 1999, inventory with a carrying amount of
$4,539,000 was written down by $1,801,000 to its fair value.
The writedowns during the year ended October 31, 2001 were attributed
to two land parcels in Florida and one community in North Carolina.
The writedowns in Florida and North Carolina were based upon changes
in market conditions. The writedowns during the year ended
October 31, 1999 were attributed to one land parcel in
Florida and two residential communities in North Carolina. The
Florida land parcel was written down based on purchase offers.
The communities in North Carolina were written down based on our
decision to discontinue selling homes and offer the remaining
lots for sale.
The total aggregate impairment losses, which are presented in the
consolidated statements of income, in inventory held for future
development or sale were $2,512,000, zero, and $1,801,000 for the
years ended October 31, 2001, 2000, and 1999, respectively.
On the statement of income the line entitled "Homebuilding -
Inventory impairment loss" also includes write-offs of options
including approval, engineering, and capitalized interest costs.
During the years ended October 31, 2001, 2000, and 1999 write-offs
amounted to $1,856,000, $1,791,000 and $290,000, respectively.
During the years ended October 31, 2001, 2000, and 1999 we did
not exercise options in various locations because the communities
pro forma profitability did not produce adequate returns on
investment commensurate with the risk. Those communities were
located in New Jersey, New York, Metro D. C., North Carolina,
and California.
12. TRANSACTIONS WITH RELATED PARTIES
Our Board of Directors has adopted a general policy providing
that it will not make loans to our officers or directors or their
relatives at an interest rate less than the interest rate at the
date of the loan on six month U.S. Treasury Bills, that the
aggregate of such loans will not exceed $3,000,000 at any one
time, and that such loans will be made only with the approval of
the members of our Board of Directors who have no interest in the
transaction. At October 31, 2001 and 2000 included in receivables,
deposits and notes are related party receivables from officers and
directors amounted to $1,119,000 and $3,127,000, respectively.
Due to an oversight the loan balances exceeded $3,000,000 at
October 31, 2000. On November 9, 2000 a $250,000 payment was
received which reduced the loans to within authorized limits.
Interest income from these loans for October 31, 2001, 2000, and
1999 amounted to $84,000, $167,000, and $108,000, respectively.
We provide property management services to various limited
partnerships including one partnership in which Mr. A. Hovnanian,
our Chief Executive Officer, President and a Director, is a general
partner, and members of his family and certain officers and
directors are limited partners. During the years ended October 31,
2001, 2000, and 1999 we received $76,000, $85,000, and $80,000,
respectively, in fees for such management services. At October 31,
2000 and 1999, no amounts were due us by these partnerships.
During the year ended October 31, 2001 we entered into an
agreement to purchase land from an entity that is a family relative
of our Chairman of the Board and our Chief Executive Officer.
As of October 31, 2001, land aggregating $2,384,000 has been
purchased. The Company remains obligated under a land purchase
agreement to purchase an additional $26.9 million of land from this
entity over the next three years. Neither the Company nor the
Chairman of the Board and Chief Executive Officer has a financial
interest in the relative's company from whom the land was purchased.
13. STOCK PLANS
We have a stock option plan for certain officers and key
employees. Options are granted by a Committee appointed by the
Board of Directors. The exercise price of all stock options must
be at least equal to the fair market value of the underlying shares
on the date of the grant. Options granted prior to May 14, 1998
vest in three equal installments on the first, second and third
anniversaries of the date of the grant. Options granted on or after
May 14, 1998 vest in four equal installments on the third, fourth,
fifth and sixth anniversaries of the date of the grant. Certain
Washington Homes associates were granted and held options to
purchase Washington Homes stock prior to the January 23, 2001
merger. These options vest in three installments: 25% on the
first and second anniversary, and 50% on the third anniversary
of the date of the grant. In connection with the merger (See Note
15) the options were exchanged for options to purchase the
Company's Class A Common Stock. In 2000 we extended the life of
options that expired on May 4, 2000 five years which resulted in
additional compensation expense of $346,000 net of taxes. All
options expire ten years after the date of the grant. In
addition, during the years ended October 31, 2000 and 1999 each
of the three outside directors of the Company were granted options
to purchase 10,000 shares at the same price and terms as those
granted to officers and key employees. Stock option transactions
are summarized as follows:
Weighted Weighted Weighted
Average Average Average
Fair Fair Fair
Value (1) Value (1) Value (1)
And And And
October Exercise October Exercise October Exercise
31, 2001 Price 31, 2000 Price 31, 1999 Price
--------- -------- --------- -------- --------- --------
Options outstanding at
beginning of period. 1,980,500 $7.55 1,656,000 $8.02 1,415,000 $8.13
Granted............ 1,048,785 $5.81 444,500 $6.10 251,000 $7.87
Exercised.......... 519,673 $4.29 10,000 $5.81
Forfeited.......... 238,955 $7.67 120,000 $8.60
--------- --------- ---------
Options outstanding at
end of period....... 2,270,657 $7.44 1,980,500 $9.44 1,656,000 $8.29
========= ========= =========
Options exercisable at
end of period....... 1,451,718 1,276,708 1,106,666
Price range of options $2.66- $5.13- $5.13-
outstanding......... $15.08 $11.50 $11.50
Weighted-average
remaining contractual
life................ 6.0 yrs. 7.0 yrs. 5.0 yrs.
(1) Fair value of options at grant date approximate exercise price.
Pro forma information regarding net income and earnings per
share is required under the fair value method of Financial Accounting
Standards (SFAS) No. 123 "Accounting for Stock-Based Compensation" and
is to be calculated as if we had accounted for our stock options under
the fair value method of SFAS 123. The fair value for these options
is established at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions for
2001, 2000, and 1999: risk- free interest rate of 4.4%, 5.9%, and
6.4%, respectively; dividend yield of zero; volatility factor of the
expected market price of our common stock of 0.38, 0.41, and 0.46,
respectively; and a weighted-average expected life of the option of
5.1, 7.0, and 7.7 years, respectively.
The Black-Scholes option valuation model was developed for
use in estimating the fair value of traded options which have no
vesting restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective assumptions
including the expected stock price volatility. Because our employee
stock options have characteristics significantly different from those
of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee
stock options and are not likely to be representative of the effects
on reported net income for future years, if applicable.
For purposes of pro forma disclosures, the estimated fair
value of the options is amortized to expense over the options'
vesting period. Our pro forma information follows (in thousands
except for earnings per share information):
Year Ended
---------------------------------
October October October
31, 2001 31, 2000 31, 1999
---------- ---------- ---------
Pro forma net income.................$ 63,491 $ 32,322 $ 29,851
========== ========== =========
Pro forma basic earnings per share...$ 2.37 $ 1.47 $ 1.39
========== ========== =========
Pro forma diluted earnings per share.$ 2.28 $ 1.47 $ 1.38
========== ========== =========
During the year ended October 31, 1999, we modified our bonus
plan for certain associates. A portion of their bonus will be paid
by issuing a deferred right to receive our Class A Common Stock. The
number of shares will be calculated by dividing the portion of the
bonus subject to the deferred right award by our stock price on the
date the bonus is earned. 25% of the deferred right award will vest
and shares will be issued one year after the year end and then 25% a
year for the next three years. During the years ended October 31,
2001 and 2000, we issued 84,962 and 25,000 shares under the plan.
During the years ended October 31, 2001 and 2000 41,550 and 26,000
shares were forfeited under this plan, respectively. For the years
ended October 31, 2001, 2000, and 1999, approximately 319,000,
281,000, and 200,000 deferred rights were awarded in lieu of
$3,857,000, $1,923,000, and $1,534,000 of bonus payments,
respectively.
14. COMMITMENTS AND CONTINGENT LIABILITIES
We are involved from time to time in litigation arising in
the ordinary course of business, none of which is expected to
have a material adverse effect on us. We were involved in an action
resulting from the non-performance by a land owner (the "Defendant")
to sell real property to us. In 1999, we entered into a Settlement
Agreement and Mutual Release ("SAMR") relating to this action.
Pursuant to the terms of the SAMR, the Defendant stipulated to a
judgement in our favor in the amount of $3,535,349. In 2000 the
judgement was upheld in bankruptcy proceedings. As a result of
the bankruptcy proceeding and evaluation of the collateral
underlying our claim, we recorded a net gain on settlement of
$1.8 million which is included in land sales and other revenues
in the consolidated statements of income at October 31, 2000.
As of October 31, 2001 and 2000, respectively, we are
obligated under various performance letters of credit amounting
to $10,223,000 and $4,284,000. (See Note 5)
15. ACQUISITIONS
On August 7, 1999 we acquired The Matzel and Mumford Organization,
Inc. ("M & M"), a New Jersey homebuilder and its related entities.
On October 1, 1999 we acquired the Goodman Family of Builders, L.P.
("Goodman"), a Texas homebuilder and its related entities. The
combined purchase price for both acquisitions was approximately
$24,400,000 in cash and 1,845,359 shares of our Class A Common
Stock at a weighted average share price of $7.18, of which
483,302 shares were held in escrow (and thus not reported as
issued and outstanding) for pre-acquisition contingencies. As of
October 31, 2001, 241,651 of those shares held in escrow were
released. At the dates of the acquisition we loaned the acquired
entities approximately $85,000,000 to pay off their third party
debt. In addition, both the M & M and Goodman acquisitions
provide for other payments to be made generally dependent upon
the achievement of certain future operating and return objectives.
Both acquisitions were accounted for as a purchase with the
results of operations of the acquired entities included in our
consolidated financial statements as of the dates of acquisitions.
The purchase prices were allocated based on estimated fair values
at the dates of the acquisitions. An intangible asset equal to
the excess purchase prices over the fair values of net assets
acquired of $19,998,000 has been recorded in prepaid expenses and
other assets on the consolidated balance sheet; this amount is
being amortized on a straight-line basis over a period of ten
years.
On January 23, 2001 we merged with Washington Homes, Inc.
for a total purchase price of $87.4 million, of which $38.5 million
was paid in cash and 6,352,900 shares of our Class A Common Stock
valued at $44.9 million were issued and options were issued to
Washington Homes, Inc. employees with an intrinsic value of
$3.4 million were converted to 738,785 of our options. At
the date of acquisition we loaned Washington Homes, Inc.
approximately $57,000,000 to pay off their third party debt.
The merger with Washington Homes, Inc. was accounted for as a
purchase with the results of operations of the merged entity
included in our consolidated financial statements as of the date
of the merger. The purchase price was allocated based on
estimated fair value at the date of the merger. An intangible
asset equal to the excess purchase price over the fair value of
the net assets of $16,689,000 is recorded in prepaid expenses
and other assets on the consolidated balance sheet. This amount
is being amortized on a straight line basis over a period
of ten years.
The following unaudited pro forma financial data presents a
summary of our consolidated results of operations as if the
merger with Washington Homes, Inc. on January 23, 2001 had
occurred on November 1, 1999. Unaudited pro forma financial
data is presented for information purposes only and may not be
indicative of the actual amounts of the Company had the events
occurred on the dates listed above, nor does it purport to
represent future periods.
Year Ended October 31,
------------------------------
2001 2000
------------- -------------
(In Thousands Except Per Share)
Revenues........................... $1,811,701 $1,617,161
Expenses........................... 1,704,844 1,544,083
Income Taxes....................... 42,126 27,556
------------- -------------
Net Income......................... $ 64,731 $ 45,522
============= =============
Diluted Net Income Per
Common Share..................... $ 2.22 $ 1.59
============= =============
These pro forma results have been prepared for comparative
purposes only and include certain adjustments including additional
amortization expense as a result of goodwill, additional
compensation and increased interest expense on acquisition debt.
This pro forma does not purport to be indicative of the results of
operations which actually would have resulted had the combination
been in effect on November 1, 1999 or of future results of
operations of the consolidated entities.
16. Restructuring Charges
Restructuring charges are estimated expenses associated with the
merger of our operations with those of Washington Homes, Inc. on
January 23, 2001. Under our merger plan, administration offices
in Maryland, Virginia, and North Carolina will be either closed,
relocated, or combined. The merger of administration offices was
completed by July 31, 2001. Expenses were accrued for salaries,
severance and outplacement costs for the involuntary termination
of associates, costs to close and/or relocate existing
administrative offices, and lost rent and leasehold improvements.
We estimated that approximately 58 associates would be terminated.
We have accrued approximately $2.0 million to cover termination
and related costs. Associates being terminated are primarily
administrative. In addition, we accrued approximately $1.2 million
to cover closing and/or relocating various administrative offices
in these three states. At October 31, 2001 $1.5 million has been
charged against termination costs relating to the termination of
55 associates and $0.5 million has been charged against closing
and relocation costs.
17. UNAUDITED SUMMARIZED CONSOLIDATED QUARTERLY INFORMATION
Summarized quarterly financial information for the years
ended October 31, 2001 and 2000 is as follows:
Three Months Ended
-----------------------------------------
October July April January
31, 2001 31, 2001 30, 2001 31, 2001(1)
-------- -------- -------- ---------
(In Thousands Except Per Share Data)
Revenues..................... $537,185 $509,250 $402,340 $293,188
Expenses..................... $500,243 $473,965 $379,773 $281,628
Income before income taxes... $ 36,942 $ 35,285 $ 22,567 $ 11,560
State and Federal income tax. $ 15,251 $ 14,273 $ 8,507 $ 4,637
Net Income................... $ 21,691 $ 21,012 $ 14,060 $ 6,923
Per Share Data:
Basic:
Net Income................. $ 0.77 $ 0.74 $ 0.50 $ 0.31
Weighted average number of
common shares outstanding 28,288 28,375 28,176 22,286
Assuming Dilution:
Net Income................. $ 0.74 $ 0.71 $ 0.48 $ 0.30
Weighted average number of
common shares outstanding 29,227 29,623 29,472 22,732
(1) On January 23, 2001, we merged with Washington Homes, Inc.
Three Months Ended
-----------------------------------------
October July April January
31, 2000 31, 2000 30, 2000 31, 2000
-------- -------- -------- ---------
(In Thousands Except Per Share Data)
Revenues..................... $352,483 $284,620 $241,487 $256,969
Expenses..................... $323,151 $272,362 $236,035 $252,193
Income before income taxes... $ 29,332 $ 12,258 $ 5,452 $ 4,776
State and Federal income tax. $ 11,170 $ 4,167 $ 1,994 $ 1,324
Net Income................... $ 18,162 $ 8,091 $ 3,458 $ 3,452
Per Share Data:
Basic:
Net Income................. $ 0.85 $ 0.37 $ 0.16 $ 0.15
Weighted average number of
common shares outstanding 21,463 21,904 22,054 22,327
Assuming Dilution:
Net Income................. $ 0.84 $ 0.37 $ 0.16 $ 0.15
Weighted average number of
common shares outstanding 21,704 21,949 22,111 22,413
18. FINANCIAL INFORMATION OF SUBSIDIARY ISSUER AND SUBSIDIARY
GUARANTORS
Hovnanian Enterprises, Inc., the parent company (the "Parent") is the
issuer of publicly traded common stock. One of its wholly owned
subsidiaries, K. Hovnanian Enterprises, Inc., (the "Subsidiary Issuer")
was the issuer of certain Senior Notes on May 4, 1999 and
October 2, 2000.
The Subsidiary Issuer acts as a finance and management entity thatas of
October 31, 2001 had issued and outstanding approximately $97,747,000
subordinated notes, $300,000,000 senior notes and a revolving credit
agreement with an outstanding balance of zero. The subordinated notes,
senior notes and the revolving credit agreement are fully and
unconditionally guaranteed by the Parent.
Each of the wholly owned subsidiaries of the Parent
(collectively the "Guarantor Subsidiaries"), with the exception of
various subsidiaries formerly engaged in the issuance of
collateralized mortgage obligations, a mortgage lending subsidiary,
a subsidiary holding and licensing the "K. Hovnanian" trade name,
a subsidiary engaged in homebuilding activity in Poland, our Title
subsidiaries, and a joint venture (collectively the "Non-guarantor
Subsidiaries"), have guaranteed fully and unconditionally, on a
joint and several basis, the obligation to pay principal and
interest under the senior notes and revolving credit agreement
of the Subsidiary Issuer.
In lieu of providing separate audited financial statements
for the Guarantor Subsidiaries we have included the accompanying
consolidated condensed financial statements. Management does not
believe that separate financial statements of the Guarantor
Subsidiaries are material to investors. Therefore, separate
financial statements and other disclosures concerning the
Guarantor Subsidiaries are not presented.
The following consolidating condensed financial information
presents the results of operations, financial position and cash
flows of (i) the Parent (ii) the Subsidiary Issuer (iii) the
Guarantor Subsidiaries of the Parent (iv) the Non-guarantor
Subsidiaries of the Parent and (v) the eliminations to arrive at
the information for Hovnanian Enterprises, Inc. on a consolidated
basis.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED BALANCE SHEET
OCTOBER 31, 2001
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- ---------- ---------- ------------ ---------- ----------
Assets
Homebuilding.......................$ 2,022 $ 50,565 $ 882,715 $ 10,229 $ $ 945,531
Financial Services................. 205 117,803 118,008
Income Taxes (Payables)Receivables. (5,067) (3,658) 11,893 (2,449) 719
Investments in and amounts due to
and from consolidated
subsidiaries..................... 378,691 375,514 (668,285) 14,513 (100,433)
-------- ---------- ---------- ------------ ---------- ----------
Total Assets.......................$375,646 $ 422,421 $ 226,528 $ 140,096 $ (100,433)$1,064,258
======== ========== ========== ============ ========== ==========
Liabilities
Homebuilding.......................$ $ 14,679 $ 161,759 $ 291 $ $ 176,729
Financial Services................. 103,569 103,569
Notes Payable...................... 408,206 108 408,314
Income Taxes Payable...............
Stockholders' Equity............... 375,646 (464) 64,661 36,236 (100,433) 375,646
-------- ---------- ---------- ------------ ---------- ----------
Total Liabilities and Stockholders'
Equity...........................$375,646 $ 422,421 $ 226,528 $ 140,096 $ (100,433)$1,064,258
======== ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED BALANCE SHEET
OCTOBER 31, 2000
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- ---------- ---------- ------------ ---------- ----------
Assets
Homebuilding.......................$ (63) $ 76,648 $ 717,484 $ 8,002 $ $ 802,071
Financial Services......... 994 70,476 71,470
Income Taxes (Payables)Receivables. (4,585) (5,873) 12,567 (2,109)
Investments in and amounts due to
and from consolidated
subsidiaries..................... 268,007 353,115 (473,872) 577 (147,827)
-------- ---------- ---------- ------------ ---------- ----------
Total Assets.......................$263,359 $ 423,890 $ 257,173 $ 76,946 $(147,827) $ 873,541
======== ========== ========== ============ ========== ==========
Liabilities
Homebuilding.......................$ $ 11,533 $ 122,807 $ 1,060 $ $ 135,400
Financial Services................. 457 61,114 61,571
Notes Payable...................... 409,041 98 409,139
Income Taxes Payable............... 4,072 4,072
Stockholders' Equity............... 263,359 3,316 129,739 14,772 (147,827) 263,359
-------- ---------- ---------- ------------ ---------- ----------
Total Liabilities and Stockholders'
Equity...........................$263,359 $ 423,890 $ 257,173 $ 76,946 $(147,827) $ 873,541
======== ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED STATEMENT OF INCOME
TWELVE MONTHS ENDED OCTOBER 31, 2001
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
------- ---------- ---------- ------------ ---------- ----------
Revenues:
Homebuilding....................$ $ 431 $1,701,394 $ 46,190 $ (37,480) $1,710,535
Financial Services.............. 10,391 21,037 31,428
Intercompany Charges............ 96,368 30,480 (126,848)
Equity In Pretax Income of
Consolidated Subsidiaries.....106,354 (106,354)
------- ---------- ---------- ------------ ---------- ----------
Total Revenues................106,354 96,799 1,742,265 67,227 (270,682) 1,741,963
------- ---------- ---------- ------------ ---------- ----------
Expenses:
Homebuilding.................... 96,799 1,637,238 8,935 (128,806) 1,614,166
Financial Services.............. 5,748 15,821 (126) 21,443
------- ---------- ---------- ------------ ---------- ----------
Total Expenses................ 96,799 1,642,986 24,756 (128,932) 1,635,609
------- ---------- ---------- ------------ ---------- ----------
Income (Loss) Before Income Taxes106,354 99,279 42,471 (141,750) 106,354
State and Federal Income Taxes....42,668 109 39,278 16,448 (55,835) 42,668
------- ---------- ---------- ------------ ---------- ----------
Net Income (Loss)................$63,686 $ (109)$ 60,001 $ 26,023 $ (85,915) $ 63,686
======= ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED STATEMENT OF INCOME
TWELVE MONTHS ENDED OCTOBER 31, 2000
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
------- ---------- ---------- ------------ ---------- ----------
Revenues:
Homebuilding....................$ $ 391 $1,112,173 $ 21,397 $ (17,726) $1,116,235
Financial Services.............. 6,028 13,296 19,324
Intercompany Charges............ 82,051 34,505 (116,556)
Equity In Pretax Income of
Consolidated Subsidiaries..... 51,818 (51,818)
------- ---------- ---------- ------------ ---------- ----------
Total Revenues................ 51,818 82,442 1,152,706 34,693 (186,100) 1,135,559
------- ---------- ---------- ------------ ---------- ----------
Expenses:
Homebuilding.................... 66,232 1,094,207 2,831 (99,279) 1,063,991
Financial Services.............. 4,591 15,426 (267) 19,750
------- ---------- ---------- ------------ ---------- ----------
Total Expenses................ 66,232 1,098,798 18,257 (99,546) 1,083,741
------- ---------- ---------- ------------ ---------- ----------
Income (Loss) Before Income Taxes. 51,818 16,210 53,908 16,436 (86,554) 51,818
State and Federal Income Taxes.... 18,655 6,616 18,438 5,757 (30,811) 18,655
------- ---------- ---------- ------------ ---------- ----------
Net Income (Loss).................$33,163 $ 9,594 $ 35,470 $ 10,679 $ (55,743) $ 33,163
======= ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED STATEMENT OF INCOME
TWELVE MONTHS ENDED OCTOBER 31, 1999
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
------- ---------- ---------- ------------ ---------- ----------
Revenues:
Homebuilding.....................$ (159) $ 1,120 $ 922,333 $ 22,767 $ (20,405) $ 925,656
Financial Services............... 3,561 17,197 20,758
Intercompany Charges............. 91,695 72 (91,767)
Equity In Pretax Income of
Consolidated Subsidiaries...... 50,776 (50,776)
------- ---------- ---------- ------------ ---------- ----------
Total Revenues................ 50,617 92,815 925,966 39,964 (162,948) 946,414
------- ---------- ---------- ------------ ---------- ----------
Expenses:
Homebuilding..................... 90,111 865,736 2,248 (81,997) 876,098
Financial Services............... 2,757 17,370 (428) 19,699
------- ---------- ---------- ------------ ---------- ----------
Total Expenses................. 90,111 868,493 19,618 (82,425) 895,797
------- ---------- ---------- ------------ ---------- ----------
Income (Loss) Before Income Taxes.. 50,617 2,704 57,473 20,346 (80,523) 50,617
State and Federal Income Taxes..... 19,674 917 21,453 7,771 (30,141) 19,674
Extraordinary Loss................. (868) (868) 868 (868)
------- ---------- ---------- ------------ ---------- ----------
Net Income (Loss)..................$30,075 $ 919 $ 36,020 $ 12,575 $ (49,514) $ 30,075
======= ========== ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
TWELVE MONTHS ENDED OCTOBER 31, 2001
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- --------- ---------- ------------ ---------- ----------
Cash Flows From Operating Activities:
Net Income........................$ 63,686 $ (109)$ 60,001 $ 26,023 $ (85,915) $ 63,686
Adjustments to reconcile net income
to net cash provided by
(used in) operating activities.. 102,908 99,063 (264,122) (50,381) 85,915 (26,617)
-------- --------- ---------- ------------ ---------- ----------
Net Cash Provided By (Used In)
Operating Activities.......... 166,594 98,954 (204,121) (24,358) 37,069
Net Cash Provided By (Used In)
Investing Activities.............. (49,622) (3,770) 13,399 264 (39,729)
Net Cash Provided By (Used In)
Financing Activities.............. (6,215) 114 (59,555) 41,212 (24,444)
Intercompany Investing and Financing
Activities - Net..................(110,684) (118,767) 243,387 (13,936)
-------- --------- ---------- ------------ ---------- ----------
Net Increase (Decrease)............. 73 (23,469) (6,890) 3,182 (27,104)
In Cash and Cash Equivalents Balance,
Beginning of Period............... (63) 17,629 22,506 3,181 43,253
-------- --------- ---------- ------------ ---------- ----------
Cash and Cash Equivalents Balance,
End of Period..................... $ 10 $ (5,840) $ 15,616 $ 6,363 $ 16,149
======== ========= ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
TWELVE MONTHS ENDED OCTOBER 31, 2000
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- --------- ---------- ------------ ---------- ----------
Cash Flows From Operating Activities:
Net Income.........................$ 33,163 $ 9,594 $ 35,470 $ 10,679 $ (55,743) $ 33,163
Adjustments to reconcile net income
to net cash provided by
(used in) operating activities... 751 80,742 (196,014) (35,030) 55,743 (93,808)
-------- --------- ---------- ------------ ---------- ----------
Net Cash Provided By (Used In)
Operating Activities........... 33,914 90,336 (160,544) (24,351) (60,645)
Net Cash Provided By (Used In)
Investing Activities............... (231) (13,262) (4,433) (9) (17,935)
Net Cash Provided By (Used In)
Financing Activities............... (6,461) 76,305 6,864 25,760 102,468
Intercompany Investing and Financing
Activities - Net................... (27,331) (130,355) 156,011 1,675
-------- --------- ---------- ------------ ---------- ----------
Net Increase (Decrease).............. (109) 23,024 (2,102) 3,075 23,888
In Cash and Cash Equivalents Balance,
Beginning of Period................ 46 (5,395) 24,608 106 19,365
-------- --------- ---------- ------------ ---------- ----------
Cash and Cash Equivalents Balance,
End of Period......................$ (63) $ 17,629 $ 22,506 $ 3,181 $ 43,253
======== ========= ========== ============ ========== ==========
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
TWELVE MONTHS ENDED OCTOBER 31, 1999
(Thousands of Dollars)
Guarantor Non-
Subsidiary Subsid- Guarantor Elimin- Consol-
Parent Issuer iaries Subsidiaries ations idated
-------- --------- ---------- ------------ ---------- ----------
Cash Flows From Operating Activities:
Net Income.........................$ 30,075 $ 919 $ 36,020 $ 12,575 $ (49,514) $ 30,075
Adjustments to reconcile net income
to net cash provided by
(used in) operating activities... 15,774 311 (123,977) 63,782 49,514 5,404
-------- --------- ---------- ------------ ---------- ----------
Net Cash Provided By (Used In)
Operating Activities........... 45,849 1,230 (87,957) 76,357 35,479
Net Cash Provided By (Used In)
Investing Activities............... (9,478) 1,868 480 (7,130)
Net Cash Provided By (Used In)
Financing Activities............... (6,291) 106,676 (40,326) (84,597) (24,538)
Intercompany Investing and Financing
Activities - Net................... (39,526) (94,163) 128,000 5,689
-------- --------- ---------- ------------ ---------- ----------
Net Increase (Decrease).............. 32 4,265 1,585 (2,071) 3,811
In Cash and Cash Equivalents Balance,
Beginning of Period................ 14 (9,660) 23,023 2,177 15,554
-------- --------- ---------- ------------ ---------- ----------
Cash and Cash Equivalents Balance,
End of Period......................$ 46 $ (5,395) $ 24,608 $ 106 $ 19,365
======== ========= ========== ============ ========== ==========
19. Subsequent Event (Unaudited)
On December 19, 2001 we entered into a purchase agreement with
The Forecast Group, L.P. ("TFG"), a California homebuilder, to
acquire certain assets and assume related liabilities for an
estimated purchase price of $176.0 million plus the assumption of
debt net of cash acquired. The transaction closed on January 10,
2002 but the final purchase price is subject to adjustment based
on financial performance through January 31, 2002. Under the
terms of the agreement the partners in TFG received $45.5 million
of Hovnanian restricted Class A Common Stock amounting to
approximately 2,200,000 shares and the balance in cash.
EXHIBIT 21 SUBSIDIARY LISTING K. Hovnanian Equities, Inc. EXC, Inc. K. Hovnanian Companies of North Carolina, Inc. KHL, Inc. Hovnanian Texas, Inc. Hovnanian Georgia, Inc. Hovnanian Financial Services III, Inc. K. Hovnanian Mortgage USA, Inc. Hovnanian Financial Services IV, Inc. K. Hovnanian Developments of New Jersey, Inc. KHE Finance, Inc. K. Hov International, Inc. Hovnanian Financial Services II, Inc. New Fortis Investment Hovnanian Financial Services I, Inc. K. Hovnanian Enterprises, Inc. Hovnanian Pennsylvania, Inc. Recreational Development Corp., Inc. K. Hovnanian Marine, Inc. K. Hovnanian Aviation, Inc. K. Hovnanian Companies of North Jersey, Inc. K. Hovnanian at Montville, Inc. K. Hovnanian at Wayne, Inc. K. Hovnanian at Mahwah IV, Inc K. Hovnanian at Morris II, Inc. K. Hovnanian at Mahwah II, Inc. K. Hovnanian at Mahwah III, Inc. K. Hovnanian at Northern Westchester, Inc. K. Hovnanian at Hanover, Inc. K. Hovnanian at Montville II, Inc. K. Hovnanian at Newark Urban Renewal Corp.I, Inc. K. Hovnanian at Newark I, Inc. K. Hovnanian at Newark Urban Renewal Corp.II, Inc. Jersey City Danforth CSO, Inc. K. Hovnanian at Newark Urban Renewal Corp.III, Inc. K. Hovnanian at Newark Urban Renewal Corp. IV, Inc. K. Hovnanian at Newark Urban Renewal Corp. V, Inc. K. Hovnanian at Jersey City I, Inc. K. Hovnanian at Jersey City II, Inc.(Phase 2A) K. Hovnanian at Jersey City III, Inc. K. Hovnanian at Mahwah VI, Inc. K. Hovnanian at Jersey City II, Inc.(Phase 2B) K. Hovnanian at Mahwah VII, Inc. K. Hovnanian at Montclair, New Jersey, Inc. K. Hovnanian at Horizon Heights, Inc. K. Hovnanian at Reservoir Ridge, Inc. K. Hovnanian at Mahwah V, Inc. K. Hovnanian at Mahwah VIII, Inc. K. Hovnanian of North Jersey, Inc. (Hudson River) Montego Bay I Acquisition Corp., Inc. Montego Bay Associates Limited I, LP (MBAI) Montego Bay II Acquisition Corp., Inc. Montego Bay Associates Limited II, LP (MBAII) 0515 Co., Inc. K. Hovnanian at North Brunswick IV, Inc. K. Hovnanian Properties of North Brunswick IV, Inc. Arrow Properties, Inc. KHIPE, Inc. Pine Brook Company, Inc. K. Hovnanian Properties of North Brunswick II, Inc. K. Hovnanian Properties of Galloway, Inc. K. Hovnanian at Cedar Grove I, Inc. K. Hovnanian at Cedar Grove II, Inc. K. Hovnanian Properties of Piscataway, Inc. K. Hovnanian Properties of North Brunswick I, Inc. Molly Pitcher Renovations, Inc. K. Hovnanian Properties of East Brunswick II,Inc. K. Hovnanian Investment Properties of N.J., Inc. K. Hovnanian Investment Properties, Inc. Hovnanian Properties of Atlantic County, Inc. K. Hovnanian Properties of Newark Urban Renewal Corporation, Inc. K. Hovnanian Properties of Hamilton, Inc. K. Hovnanian Properites of Franklin, Inc. K. Hovnanian Properties of North Brunswick III, Inc. K. Hovnanian Properties of Franklin II, Inc. K. Hovnanian at Jacksonville, Inc. K. Hovnanian Properties of North Brunswick V, Inc. K. Hovnanian Properties of Wall, Inc. K.Hovnanian at Pompano Beach, Inc. Hovnanian Properties of Lake Worth, Inc. Landarama, Inc. K. Hovnanian Companies Northeast, Inc. Parthenon Group Minerva Group K. Hovnanian Companies of Central Jersey, Inc. K. Hovnanian Real Estate Investment, Inc. K. Hovnanian at Princeton, Inc. K. Hovnanian at South Brunswick III, Inc. K. Hovnanian at South Brunswick IV, Inc. K. Hovnanian at Plainsboro I, Inc. K. Hovnanian at Plainsboro II, Inc. K. Hovnanian at Klockner Farms, Inc. K. Hovnanian at South Brunswick II, Inc. K. Hovnanian at Hopewell III, Inc. K. Hovnanian at Hopewell I, Inc. K. Hovnanian at South Brunswick, Inc. K. Hovnanian at East Windsor I, Inc. K. Hovnanian at North Brunswick II, Inc. K. Hovnanian at North Brunswick III, Inc. K. Hovnanian at Hopewell II, Inc. K. Hovnanian at Somerset VIII, Inc. K. Hovnanian at Lawrence Square, Inc. Dryer Associates, Inc. K. Hovnanian at East Brunswick V, Inc. K. Hovnanian at Bernards II, Inc. K. Hovnanian at Bridgewater III, Inc. K. Hovnanian at Plainsboro III, Inc. K. Hovnanian at Somerset V, Inc. K. Hovnanian at Somerset VI, Inc. Eastern Title Agency, Inc. K. Hovnanian Mortgage, Inc. Governors Abstract Eastern National Title Insurance Agency, Inc. Founders Title Agency, Inc. K. Hovnanian Companies North Central Jersey, Inc. K. Hovnanian at Bedminster, Inc. K. Hovnanian at Bridgewater IV, Inc. K. Hovnanian at Branchburg III, Inc. K. Hovnanian at Spring Ridge, Inc. K. Hovnanian at Bridgewater V, Inc. K. Hovnanian at Readington, Inc. K. Hovnanian at Branchburg II, Inc. K. Hovnanian at Bridgewater II, Inc. K. Hovnanian at Branchburg I, Inc. K. Hovnanian Companies Jersey Shore, Inc. K. Hovnanian at Wall Township, Inc. K. Hovnanian at Galloway VIII, Inc. K. Hovnanian at Dover Township, Inc. K. Hovnanian at Galloway VII, Inc. K. Hovnanian at Tinton Falls II, Inc. K. Hovnanian at Ocean Township, Inc. K. Hovnanian at Wall Township II, Inc. K. Hovnanian at Wall Township III, Inc. K. Hovnanian at Holmdel Township, Inc. K. Hovnanian at Wall Township IV, Inc. K. Hovnanian at Wall Township V, Inc. K. Hovnanian at Atlantic City, Inc. K. Hovnanian at Ocean Township II, Inc. K. Hovnanian at Ocean Township, Inc. K. Hovnanian at Marlboro Township, Inc. K. Hovnanian at Howell Township, Inc. K. Hovnanian at Howell Township II, Inc. K. Hovnanian at Woodbury Oaks, Inc. K. Hovnanian at Freehold Township, Inc. K. Hovnanian at Lakewood, Inc. K. Hovnanian Companies of the Delaware Valley, Inc. K. Hovnanian Co. of Delaware Valley, Inc. Brokerage Company K. Hovnanian at Lower Saucon, Inc K. Hovnanian at Perkiomen I, Inc. K. Hovnanian at Montgomery I, Inc. K. Hovnanian at Upper Merion, Inc. K. Hovnanian at Perkiomen II, Inc. K. Hovnanian Companies of South Jersey, Inc. K. Hovnanian at Valleybrook, Inc. Kings Grant Evesham Corp. K. Hovnanian at Burlington, Inc. K. Hovnanian at Medford I, Inc. K. Hovnanian at The Reserve @ Medford, Inc K. Hovnanian at Kings Grant I, Inc. K. Hovnanian at Valleybrook II, Inc. K. Hovnanian Real Estate of Florida, Inc. Hovnanian Developments of Florida, Inc. K. Hovnanian Companies of Florida, Inc. Hovnanian of Palm Beach II, Inc. Hovnanian of Palm Beach III, Inc. Hovnanian of Palm Beach IV, Inc. Hovnanian of Palm Beach V, Inc. Hovnanian of Palm Beach VI, Inc. Hovnanian of Palm Beach VII, Inc. Hovnanian of Palm Beach VIII, Inc. Hovnanian of Palm Beach IX, Inc. Hovnanian at Tarpon Lakes I, Inc. Hovnanian at Tarpon Lakes II, Inc. Hovnanian at Tarpon Lakes III, Inc. K. Hovnanian at Pasco I, Inc. K. Hovnanian at Ft. Myers I, Inc. K. Hovnanian at Palm Beach XI, Inc. K. Hovnanian at Jensen Beach, Inc. Hovnanian of Palm Beach X, Inc. K. Hovnanian at Martin Downs I, Inc. K. Hovnanian at Jacksonville I, Inc. K. Hovnanian at Ft. Myers II, Inc. K. Hovnanian at Lawrence Grove, Inc. K. Hovnanian at Jacksonville II, Inc. K. Hovnanian of Palm Beach XIII, Inc. Hovnanian of Palm Beach, Inc. K. Hovnanian at Half Moon Bay, Inc. K. Hovnanian at Woodridge Estates, Inc. Pike Utilities, Inc. Tropical Service Builders, Inc. K. Hovnanian at Embassy Lakes, Inc. K. Hovnanian at Delray Beach II, Inc. K. Hovnanian at Orlando I, Inc. K. Hovnanian at Orlando II, Inc. K. Hovnanian at Orlando III, Inc. K. Hovnanian at Martin Downs II, Inc. K. Hovnanian at Orlando IV, Inc. K. Hovnanian Properties of Orlando, Inc. K. Hovnanian at Delray Beach I, Inc. K. Hovnanian at Pasco II, Inc. K. Hovnanian at Port St. Lucie I, Inc. K. Hovnanian at Delray Beach, Inc. Eastern National Title Insurance Agency, Inc. K. Hovnanian Mortgage of Florida, Inc. South Florida Residential Title Agency, Inc. Eastern National Title Insurance Agency I, Inc. Western Financial Services, Inc. r. e. Scott Mortgage co. of Florida, Inc. New K. Hovnanian Developments of Florida, Inc. New K. Hovnanian Companies of Florida, Inc. K. Hovnanian at Fairway Views, Inc. K. Hovanian at Lake Charleston, Inc. K. Hovnanian at Carolina Country Club I, Inc. K. Hovnanian at Chapel Trail, Inc. K. Hovnanian at Winston Trails, Inc. K. Hovnanian at Lakes of Boca Raton, Inc. K. Hovnanian at Lake Charleston II, Inc. K. Hovnanian at Lake Charleston III, Inc. K. Hovnanian at Carolina Country Club II, Inc. K. Hovnanian at Winston Trails, Inc. K. Hovnanian at Pembroke Isles, Inc. K. Hovnanian at Carolina Country Club III, Inc. K. Hovnanian at Coconut Creek, Inc. K. Hovnanian at Polo Trace, Inc. K. Hovnanian Companies of New York, Inc. K. Hovnanian at Westchester, Inc. K. Hovnanian at Peekskill, Inc. K. Hovnanian at Washingtonville, Inc. K. Hovnanian at Mahopac, Inc. K. Hovnanian at Carmel, Inc. K. Hovnanian Developments of New York, Inc. Cedar Hill Water Corporation Cedar Hill Sewer Corporation R.C.K. Community Management Co., Inc. K. Hovnanian Companies of Massachusetts, Inc. K. Hovnanian at Merrimack, Inc. K. Hovnanian at Merrimack II, Inc. K. Hovnanian at Taunton, Inc. New England Community Management Co., Inc. K. Hovnanian Cos. of Metro Washington, Inc. K. Hovnanian at Ashburn Village, Inc. K. Hovnanian at Woodmont,, Inc. K. Hovnanian at Sully Station, Inc. K. Hovnanian at Bull Run, Inc. K. Hovnanian at Montclair, Inc. K. Hovnanian at River Oaks, Inc. K. Hovnanian at Holly Crest, Inc. K. Hovnanian at Woodmont, Inc. K. Hovnanian at Montclair, Inc.(Montclair Condos) K. Hovnanian at Fair Lakes, Inc. K. Hovnanian at Ashburn Village, Inc. K. Hovnanian at Park Ridge, Inc. K. Hovnanian at Belmont, Inc. K. Hovnanian at Fair Lakes Glen, Inc. K. Hovnanian Developments of Metro Washington, Inc. K. Hovnanian at River Oaks, Inc. K. Hovnanian at Montclair, Inc. (Montclair Laing) K. Hovnanian Companies of California, Inc. K. Hovnanian at Clarkstown, Inc. K. Hovnanian at West Orange, Inc. K. Hovnanian at Wayne III, Inc. K. Hovnanian at Wayne IV, Inc. K. Hovnanian at Wayne V, Inc. K. Hovnanian at Hackettstown, Inc. K. Hovnanian at Spring Mountain, Inc. K. Hovnaian at East Windsor II, Inc. K. Hovnanian Treasure Coast, Inc. K. Hovnanian at La Terraza, Inc. K. Hovnanian at Highland Vineyards, Inc. K. Hovnanian Companies of Southern California II, Inc. K. Hovnanian at Vail Ranch, Inc. K. Hovnanian at Carmel Del Mar, Inc. K. Hovnanian at Calabria, Inc. K. Hovnanian Developments of California, Inc. K. Hovnanian at Ballantrae, Inc. Ballantrae Home Sales, Inc. K. Hovnanian at Hunter Estates, Inc. K. Hovnanian Developments of Maryland, Inc. K. Hovnanian Companies of Maryland, Inc. K. Hovnanian at Seneca Crossing, Inc. K. Hovnanian at Exeter Hills, Inc. K. Hovnanian Southeast Florida, Inc. K. Hovnanian Florida Region, Inc. K. Hovnanian at East Brunswick VI, Inc. K. Hovnanian at Berlin, Inc. K. Hovnanian at Bedminster II, Inc. K. Hovnanian at Marlboro Township II, Inc. K. Hovnanian at Inverrary I, Inc. K. Hovnanian at Mahwah IX, Inc. K. Hovnanian at Hopewell IV, Inc. K. Hovnanian at Northlake, Inc. K. Hovnanian at Castile, Inc. K. Hovnanian at Tierrasanta, Inc. K. Hovnnaian at Bridgewater VI, Inc. K. Hovnanian at Preston, Inc. K. Hovnanian at Bernards III, Inc. K. Hovnanian at Wayne VI, Inc. K. Hovnanian at Rancho Cristianitos, Inc. K. Hovnanian at La Trovata, Inc. K. Hovnanian at Watchung Reserve, Inc. K. Hovnanian at Windsong East Brunswick, Inc. K. Hovnanian at South Brunswick V, Inc. K. Hovnanian at Wall Township III, Inc. K. Hovnanian at Tannery Hill, Inc. K. Hovnanian at Upper Freehold Township I, Inc. K. Hovnanian at Jefferson, Inc. K. Hovnanian at Hershey's Mill, Inc. K. Hovnanian at Bernards VI, Inc. K. Hovnanian at Port Imperial North, Inc. K. Hovnanian at Hopewell V, Inc. K. Hovnanian at Hopewell VI, Inc. K. Hovnanian at Manalapan II, Inc. K. Hovnanian at Union Township, Inc. K. Hovnanian at Wayne VII, Inc. K. Hovnanian at Scotch Plains II, Inc. K. Hovnanian at Thornbury, Inc. K. Hovnanian at Cameron Chase, Inc. K. Hovnanian at Marlboro Township IV, Inc. K. Hovnanian at Port Imperial Urban Renewal, Inc. K. Hovnanian at East Whiteland, Inc. K. Hovnanian at Stonegate, Inc. K. Hovnanian Companies of Southern California, Inc. K. Hovnanian at Crestline, Inc. K. Hovnanian at Sycamore, Inc. K. Hovnanian at Saratoga, Inc. K. Hovnanian at Stone Canyon, Inc. K. Hovnanian at Chaparral, Inc. K. Hovnanian at Ocean Walk, Inc. K. Hovnanian at Maplewood, Inc. K. Hovnanian at Tuxedo, Inc. K. Hovnanian at Bridgeport, Inc. K. Hovnanian at Stonegate, Inc. (California) K. Hovnanian at Lower Saucon II, Inc. K. Hovnanian at Barrington, Inc. K. Hovnanian at The Glen, Inc. K. Hovnanian at Hampton Oaks, Inc. K. Hovnanian at Summerwood, Inc. K. Hovnanian at Chester I, LLC K. Hovnanian at West Windsor, LLC K. Hovnanian at Bernards V, LLC K. Hovnanian's Four Seasons of the Palm Beaches, Inc. K. Hovnanian at Menifee, LLC K. Hovnaian at Rowland Heights, LLC K. Hovnanian at Winchester, LLC K. Hovnanian at Carmel Village, LLC K. Hovnanian's Four Seasons, LLC K. Hovnanian at North Brunswick VI, LLC K. Hovnanian at Lawrence V, LLC K. Hovnanian at Jackson, LLC K. Hovnanian at Blue Heron Pines, LLC K. Hovnanian at Middletown, LLC K. Hovnanian at Berkeley, LLC K. Hovnanian at Guttenberg, LLC K. Hovnanian at Prince William, LLC K. Hovnanian at Lake Terrapin, LLC K. Hovnanian at King Farm, LLC K. Hovnanian at South Bank, LLC K. Hovnanian at Clifton, LLC K. Hovnanian at Jersey City IV, LLC K. Hovnanian at Lafayette Estates, LLC K. Hovnanian at Upper Freehold II, LLC K. Hovnanian at Kincaid, LLC K. Hovnanian at Linwood, LLC K. Hovnanian at South Amboy, LLC K. Hovnanian at Upper Freehold Township III, LLC K. Hovnanian at Brenbrooke, LLC K. Hovnanian at Blooms Crossing, LLC K. Hovnanian at Spring Hill Road, LLC K. Hovnanian at St. Margarets, LLC K. Hovnanian at Paramus, LLC K. Hovnanian Developments of Texas, Inc. The Matzel & Mumford Organization, Inc. Matzel & Mumford of Delaware, Inc. K. Hovnanian at Kent Island, LLC K. Hovnanian at Northfield, LLC K. Hovnanian at Willow Brook, LLC K. Hovnanian at South Brunswick II, Inc. K. Hovnanian at Rancho Santa Margarita, LLC K. Hovnanian at Arbor Heights, LLC K. Hovnanian at the Gables, LLC K. Hovnanian at Riverbend, LLC K. Hovnanian at Encinitas Ranch, LLC K. Hovnanian at Sunsets, LLC K. Hovnanian at Pacific Bluffs, LLC K. Hovnanian at Park Lane, LLC K. Hovnanian at West Milford, LLC K. Hovnanian at Washington, LLC K. Hovnanian at Roderick,LLC K. Hovnanian at Columbia Town Center, LLC K. Hovnanian at North Haledon, LLC K. Hovnanian at Curries Woods, LLC K. Hovnanian at Lake Ridge Crossing, LLC K. Hovnanian at Lower Moreland I, LLC K. Hovnanian at Lower Moreland II, LLC K. Hovnanian at Northampton, LLC K. Hovnanian at Marlboro VII, LLC K. Hovnanian at Marlboro VI, LLC K. Hovnanian at Little Egg Harbor, LLC K. Hovnanian at Barnegat I, LLC K. Hovnanian at Cranbury, LLC K. Hovnanian at Hamburg Contractors, LLC K. Hovnanian at Little Egg Harbor Contractors, LLC K. Hovnanian at Mt. Olive, LLC K. Hovnanian at Sayreville, LLC K. Hovnanian at Sayreville, LLC K. Hovnanian at Cedar Grove III, LLC K. Hovnanian at Woolwich I, LLC K. Hovnanian at Wayne IX, LLC K. Hovnanian at Woodhill Estates, LLC K. Hovnanian Forecast, LLC Westminster Homes of South Carolina, LLC K. Hovnanian Developments of South Carolina, Inc.
ASSET PURCHASE AGREEMENT
Seller: THE FORECAST GROUP, L.P.
Buyer: HOVNANIAN ENTERPRISES, INC.
Dated: January 4, 2002
SECTION 1. DEFINITIONS; PURCHASE AND SALE; CLOSING 2
1.1 Definitions 2
1.3 Purchase of the Assets by the Buyer 11
1.4 Disposition of Buyer's Shares by the Seller 12
1.5 Call Right 14
1.6 Purchase Price Adjustment 14
1.7 Option to Purchase Premier 15
1.8 Closing 15
1.9 Purchase Price Allocation 16
1.10 Further Assurances 16
1.11 Representative 16
1.12 Satisfaction of Debt 16
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE SELLER 16
2.1 The Assets 17
2.2 Material Contracts 18
2.3 Permits 19
2.4 Real Property 19
2.5 Operating Condition 21
2.6 Insurance 21
2.7 Bank Accounts, Powers, etc. 21
2.8 Compliance with Applicable Laws 22
2.9 No Brokers or Finders 22
2.10 Environmental Compliance 22
2.11 Information Generally 23
2.12 No Conflicts; Government Approvals; Third-Party Consents 23
2.13 Legal Proceedings 23
2.14 Acquisition for Investment 23
2.15 Construction Defect Claims 23
2.16 Taxes 24
SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE BUYER 24
3.1 Organization and Related Matters 24
3.2 Authorization 24
3.3 Licenses Held by the Seller 25
3.4 No Conflicts; Government Approvals; Third-Party Consents 25
3.5 No Brokers or Finders 25
3.6 Legal Proceedings 25
3.7 Financing 25
3.8 SEC Reports; Financial Statements 26
3.9 Compliance with Requirements for Short-Form Registration 26
3.10 Capitalization 26
3.11 No Vote Required 26
3.12 Not an Investment Company 27
3.13 Registration of the Buyer's Shares; Securities Laws
Compliance 27
SECTION 4. COVENANTS PRIOR TO CLOSING 27
4.1 Access 27
4.2 Preservation of Business Prior to the Closing Date 28
4.3 Notification of Certain Matters 28
4.4 Permits and Approvals 28
4.5 Reserved Insurance 29
SECTION 5. ADDITIONAL CONTINUING COVENANTS 29
5.1 Non-Competition 29
5.2 Nondisclosure of Proprietary Data 30
5.3 Tax Cooperation 31
5.4 Access to Books and Records 31
5.5 Registration of the Buyer's Shares 31
5.6 Change of Control 33
SECTION 6. CONDITIONS OF PURCHASE 33
6.1 General Conditions 33
6.2 Conditions to Obligations of the Buyer 33
6.3 Conditions to Obligations of the Seller 35
SECTION 7. TERMINATION OF OBLIGATIONS; SURVIVAL 37
7.1 Termination of Agreement 37
7.2 Effect of Termination 37
7.3 Effect of Closing Over Known Unsatisfied Conditions 38
SECTION 8. INDEMNIFICATION 38
8.1 Indemnification by Seller and Previti 38
8.2 Indemnification by the Buyer 39
8.3 Procedure 40
8.4 Survival 41
8.5 Indemnification Thresholds 41
SECTION 9. LIMITATION OF REMEDIES 42
9.1 Breach of Representations 42
9.2 No Other Warranties 42
9.3 No Personal Liability of Any Other Person 42
9.4 Failure to Perform Obligations 42
SECTION 10. GENERAL 42
10.1 Amendments; Waivers 42
10.2 Schedules; Exhibits; Integration 42
10.3 Efforts; Further Assurances 42
10.4 Governing Law 43
10.5 Transfer; Successors and Assigns 43
10.6 Headings 43
10.7 Counterparts 43
10.8 Publicity and Reports 43
10.9 Confidentiality 43
10.10 Appointment of Reference; Waiver of Jury Trial 44
10.11 Parties in Interest 44
10.12 Knowledge Convention 44
10.13 Notices 44
10.14 Expenses 46
10.15 Remedies; Waiver 46
10.16 Attorneys' Fees 46
10.17 Representation by Counsel; Interpretation 46
10.18 Severability 46
10.19 No Offset by Buyer 47
10.20 No Offset by the Seller or Previti 47
10.21 Cross Default with Securities Purchase Agreement 47
Exhibits
Exhibit A Assets and Hold-Back Properties
Exhibit B Form of Lot Option Agreement
Exhibit C Form of ROFO Agreement
Exhibit D Form of Non-Competition and Option Agreement
Exhibit E Form of Park Meadows Option Agreement
Exhibit F Form of Consulting Agreement
Exhibit G Form of Forecast Development Option and Purchase Agreement
Exhibit H Form of Indemnification and Release Agreement
Exhibit I Previti Projects
Exhibit J Form of the Seller's Certificate
Exhibit K Form of OM&M Legal Opinion
Exhibit L Form of the Buyer's Certificate
Exhibit M Form of the ST&B Legal Opinion
Exhibit N Form of Assignment and Assumption Agreement
Schedules
Schedule 1.1 Consolidated Forecast Entities
Schedule 1.9 Purchase Price Allocation Schedule
Schedule 1.12 Debt
Schedule 2.6.1 Policies
Schedule 5.1.1 Excluded Employees
Schedule 5.1.2 Permissible Condominium Projects
Schedule 6.3.4 Assumption of Guarantees
Buyer's Disclosure Schedule
Seller's Disclosure Schedule
A S S E T P U R C H A S E A G R E E M E N T
THIS ASSET PURCHASE AGREEMENT is entered into as of January (2), 2002
(the "Effective Date"), by and among (a)HOVNANIAN ENTERPRISES, INC., a
Delaware corporation (the "Buyer"), (b)THE FORECAST GROUP, L.P., a California
limited partnership (the "Seller"), and (c)JAMES P. PREVITI, an individual
("Previti").
THE PARTIES ENTER THIS AGREEMENT on the basis of the following facts,
understandings and intentions:
A. Prior to the Effective Date, the Parties hereto (among others)
entered into an Option Agreement dated as of October 27, 2001 (the "Option
Date") pursuant to which the Seller, Forecast PP2, LLC, a Delaware limited
liability company, and Forecast Homes, Inc., a California corporation
(Forecast PP2, LLC and Forecast Homes, Inc. shall collectively be referred to
as the "Securities Sellers"), granted to the Buyer, in exchange for Two
Million Dollars ($2,000,000) (the "Option Consideration"), the option to
purchase (a) the limited partnership interest and the general partnership
interest (the "Securities") of Securities Partnership, L.P., a California
limited partnership (the "Securities Partnership") pursuant to the Securities
Purchase Agreement (as defined in Recital C below), and (b) certain assets
owned by the Seller pursuant to this Agreement.
B. As of the Effective Date, the Seller is the owner of the assets
listed on Exhibit A (the "Assets and Hold-Back Properties") attached hereto.
C. Simultaneously herewith, the Buyer, the Securities Sellers and
Previti are entering into an agreement dated as of the Effective Date (the
"Securities Purchase Agreement") pursuant to which the Buyer shall purchase
all of the Securities from the Securities Sellers.
D. At the Closing (and as a condition thereto), the Buyer and
Previti shall enter into a lot option agreement (the "Lot Option Agreement")
in the form attached hereto as Exhibit B (the "Form of Lot Option Agreement")
pursuant to which the Buyer shall have the option to purchase the Hold-Back
Properties.
E. At the Closing (and as a condition thereto), the Buyer and
Previti shall enter into an agreement (the "ROFO Agreement") in the form
attached hereto as Exhibit C (the "Form of ROFO Agreement") pursuant to which
Previti shall grant to the Buyer a right of first offer with respect to
certain real property described therein.
F. At the Closing (and as a condition thereto), the Buyer, Premier
Group, Inc., a California corporation ("Premier"), and Prestige Homes, L.P.,
a California limited partnership ("Prestige"), shall enter into an agreement
(the "Non-Competition and Option Agreement") in the form attached hereto as
Exhibit D (the "Form of Non-Competition and Option Agreement") pursuant to
which each of Premier and Prestige shall agree, as more particularly set
forth therein, to certain restrictions on its ability to (a) compete with the
Buyer in the Homebuilding Business (as defined herein), and (b) solicit
certain persons for employment.
G. At the Closing (and as a condition thereto), the Buyer and
Previti shall enter into an option agreement (the "Park Meadows Option
Agreement") in the form attached hereto as Exhibit E (the "Form of Park
Meadows Option Agreement") pursuant to which the Buyer shall have the option
to purchase certain real property described therein.
H. At the Closing (and as a condition thereto), the Buyer and
Previti shall enter into a consulting agreement (the "Consulting Agreement")
in the form attached hereto as Exhibit F (the "Form of Consulting Agreement")
pursuant to which Previti shall provide certain consulting services to the
Buyer with respect to the Homebuilding Business.
I. At the Closing (and as a condition thereto), the Buyer and
Forecast Development, L.P., a California limited partnership ("Forecast
Development"), shall enter into an agreement (the "Forecast Development
Option and Purchase Agreement") in the form attached hereto as Exhibit G (the
"Form of Forecast Development Option and Purchase Agreement") pursuant to
which Forecast Development shall grant to the Buyer an option to purchase
Forecast Development's limited partnership interest in Premier.
J. At the Closing (and as a condition thereto), the Buyer and the
Seller shall enter into an indemnification and release agreement (the
"Indemnification and Release Agreement") in the form attached hereto as
Exhibit H (the "Form of Indemnification and Release Agreement") pursuant to
which (a)the Buyer shall indemnify and release the Seller with respect to any
claims with respect to the Assets, and (b)the Seller shall indemnify and
release the Buyer with respect to any claims regarding the Excluded Assets.
K. Prior to the Effective Date, the Buyer shall have delivered to
the Seller a copy of the resolutions adopted by the Buyer's Board approving
the execution, delivery, and performance of this Agreement and the
transactions contemplated hereby and each agreement, certificate, instrument
or other document to be delivered pursuant hereto to which the Buyer is a
party.
L. Subject to the terms and conditions of this Agreement, the Seller
desires to sell and the Buyer desires to buy all of the Assets at the Closing
in consideration for, among other things, the Purchase Price.
NOW, THEREFORE, IN CONSIDERATION of the mutual covenants and promises
of the Parties, the Parties to this Agreement, intending to be legally bound,
agree as follows:
SECTION 1. DEFINITIONS; PURCHASE AND SALE; CLOSING
1.1 Definitions.
1.1.1. General. For all purposes of this Agreement, except as
otherwise expressly provided herein:
(a) the terms defined in this Section 1 have the meanings
assigned to them in this Section 1 and include the plural as well as the
singular;
(b) all accounting terms not otherwise defined in this
Agreement have the meanings assigned to them under GAAP;
(c) unless otherwise specified, all references in this
Agreement to designated "Sections," subsections and other subdivisions are to
the designated Sections, subsections and other subdivisions of the body of
this Agreement;
(d) pronouns of either gender or neuter shall include, as
appropriate, the other pronoun forms;
(e) the words "herein," "hereof," "hereby" and "hereunder"
and other words of similar import refer to this Agreement as a whole and not
to any particular Section, subsection or other subdivision; and
(f) the words "made available" shall mean a document that
(i)is filed with the SEC and accessible on the SEC's website as of the
Effective Date, or (ii)was placed in the document room accessible by the
Buyer and its representatives for purposes of conducting its due diligence
investigation on or before October 22, 2001, or (iii)is referenced in a title
report or title policy with respect to Real Property delivered to the Buyer
or placed in said room on or before October 22, 2001.
1.1.2. Definitions. As used in this Agreement and the Exhibits
and Schedules delivered pursuant to this Agreement, the following definitions
shall apply:
(a) "Account" shall have the meaning set forth in Section
2.7.
(b) "Action" means any action, complaint, claim, demand,
accusation, petition, investigation, suit or other proceeding, including,
without limitation, those under or relating to Environmental Laws, whether
civil, criminal, administrative or investigative, in Law or in equity, or
before any arbitrator or Governmental Entity.
(c) "Additional Consideration" shall have the meaning set
forth in Section 1.6.1.
(d) "Affiliate" means a Person that directly, or indirectly
through one or more intermediaries, controls, or is controlled by, or is
under common control with, a specified Person.
(e) "Agreement" means this Asset Purchase Agreement by and
among the Buyer, the Seller and Previti, as the same may be amended or
supplemented from time to time in accordance with its terms, together with
all of the Exhibits and Schedules attached hereto or incorporated herein by
reference.
(f) "Approval" means any approval, authorization, consent,
qualification or registration, or any waiver of any of the foregoing,
required to be obtained from, or any notice, statement or other communication
required to be filed with or delivered to, any Governmental Entity or any
other Person.
(g) "Assets" shall mean all of the assets owned by the
Seller, the Consolidated Forecast Entities and Previti (other than the
Excluded Assets) that are primarily used in the Homebuilding Business,
including, without limitation, those which are listed as Assets on Exhibit A
attached hereto.
(h) "Auditors" means Ernst & Young LLP, independent public
accountants.
(i) "Buyer" shall have the meaning set forth in the
introductory paragraph of this Agreement.
(j) "Buyer's Board" shall mean the board of directors of the
Buyer.
(k) "Buyer's SEC Reports" shall mean the following reports
filed by the Buyer with the SEC, in the form filed with the SEC, except to
the extent permitted by Regulation S-T under the Securities Act: (i)its
Annual Report to Shareholders and Annual Report on Form 10-K for the fiscal
years ended September 30, 2000 and September 30, 2001, (ii)its Proxy
Statement for its 2001 Annual Meeting of Shareholders, (iii)its Quarterly
Report on Form 10-Q for the quarter ended December 31, 2001, (iv)any Current
Reports on Form 8-K filed by it after September 30, 2001, and (v)any
amendments and supplements to any such reports filed by the Buyer with the
SEC.
(l) "Buyer's Shares" shall mean the Common Stock conveyed to
Seller pursuant to Section 1.3.1 hereof.
(m) "Call Payment" shall have the meaning set forth in
Section 1.5.
(n) "Cash Purchase Portion" shall have the meaning set forth
in Section 1.3.1.
(o) "CERCLA" means the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as subsequently amended.
(p) "Change of Control" shall mean, in a transaction or
series of related transactions, (i) the liquidation, winding up, or
dissolution of the Buyer, whether voluntary or involuntary, (ii) the sale of
all or substantially all of the assets of the Buyer, (iii) the reorganization
or recapitalization of the Buyer, or (iv) the sale, merger, or consolidation
of the Buyer in which the holders of the securities of the Buyer immediately
prior to such transaction(s) hold less than fifty percent (50%) of the voting
power of the surviving entity after such transaction(s).
(q) "Change of Control Payment" shall have the meaning set
forth in Section 1.4.4.
(r) "Closing" means the consummation of the purchase and
sale of the Assets pursuant to the terms of this Agreement.
(s) "Closing Date" shall mean February 1, 2002 or such other
date as the Parties may mutually agree in writing.
(t) "Closing Price" shall have the meaning set forth in
Section 1.3.1.
(u) "Closing Refund" shall have the meaning set forth in
Section 1.6.1.
(v) "Code" means the Internal Revenue Code of 1986, as
amended, and the rules and regulations promulgated thereunder.
(w) "Collateral Agreements" means, collectively, the Lot
Option Agreement, the ROFO Agreement, the Non-Competition and Option
Agreement, the Park Meadows Option Agreement, the Forecast Development Option
and Purchase Agreement, the Consulting Agreement, the Assignment and
Assumption Agreement and the Indemnification and Release Agreement.
(x) "Common Stock" shall mean shares of the Class A common
stock of the Buyer, par value $.01 per share.
(y) "Consolidated Forecast Entities" means, collectively,
the entities listed on Schedule 1.1 attached hereto, and their subsidiaries
and predecessors engaged in the Homebuilding Business.
(z) "Consolidated Net Worth" means the aggregate book value
of the Hold-Back Properties, the Assets and the Securities, plus any amounts
credited to or deposited by or on behalf of (i) the Seller with respect to
any Contract relating to the Assets, or (ii) the Securities Partnership with
respect to any Contract less any Liabilities relating to the Assets of the
Consolidated Forecast Entities and assumed by Buyer pursuant to this
Agreement, the Securities Agreement or any Collateral Agreement (other than
the Excluded Liabilities); provided, however, that the determination of the
Consolidated Net Worth shall not take into account any stepped-up basis of
the Assets resulting from the transactions contemplated hereby.
(aa) "Consulting Agreement" shall have the meaning set forth
in Recital H.
(bb) "Contract" means any agreement, arrangement, bond,
commitment, franchise, indemnity, indenture, instrument, lease, license or
understanding, whether or not in writing, entered into by the Buyer, the
Seller or any of the Consolidated Forecast Entities, as applicable,
specifically excluding, however, the Collateral Agreements.
(cc) "Controlled Entity" means any entity (i) in which the
direct or indirect beneficial ownership (as described in Rule 13d-3 under the
Exchange Act) of at least fifty-one percent (51%) of its voting securities is
held by Previti, or (ii) with respect to which Previti has the contractual
right to exercise control.
(dd) "Covered Counties" shall have the meaning set forth
in Section 5.1.2.
(ee) "Day" shall mean Larry R. Day, a natural person.
(ff) "days" shall mean calendar days, unless specifically
provided to the contrary in a particular instance in this Agreement.
(gg) "Debt" shall have the meaning set forth in Section
1.12.
(hh) "Development Status" shall have the meaning set forth
in Section 2.4.1.
(ii) "Disclosure Schedule" means a disclosure schedule
attached to this Agreement and prepared by or on behalf of the Buyer or the
Seller, as applicable, which disclosure schedules set forth with specificity
exceptions to the representations and warranties of the Buyer and the Seller,
respectively, contained in this Agreement.
(jj) "Divestiture Period" shall have the meaning set forth in
Section 1.4.2.
(kk) "Effective Date" means the date this Agreement is
duly authorized, executed and delivered by each Party to the other, as more
particularly set forth in the introductory paragraph of this Agreement.
(ll) "Encumbrance" means any claim, charge, mortgage, title
restriction, title defect, easement, encumbrance, lease, covenant, security
interest, hypothecation, lien, option, pledge, rights of others, or
restriction of any kind, imposed by Contract or Law, except for any
restrictions on transfer generally arising under any applicable federal or
state securities law.
(mm) "Environmental Laws" means any past or present
federal, state or local codes, regulations, rules, statutes, ordinances or
similar items of any Governmental Entities, and any covenants running with
the land, that relate to environmental, health, industrial hygiene,
pollution, or safety matters, including, without limitation, the Clean Air
Act, CERCLA, the Federal Water Pollution Control Act, the Hazardous Materials
Transportation Act, the Resource Conservation and Recovery Act of 1976, the
Toxic Substances Control Act, any other applicable Laws of any jurisdiction
in which any of the Combined Forecast Entities is conducting or has during
any specifically referenced time period set out in this Agreement conducted
business and any judicial or administrative decrees, interpretations,
judgments or Orders with respect thereto.
(nn) "Environmental Reports" shall have the meaning set
forth in Section 2.4.9.
(oo) "Equity Securities" means any capital stock or other
equity interest or any securities convertible into or exchangeable for
capital stock or any other rights, warrants or options to acquire any of the
foregoing securities.
(pp) "ERISA" means the Employee Retirement Income Security
Act of 1974, as amended, and the related regulations and published
interpretations.
(qq) "Exchange Act" means the Securities Exchange Act of
1934, as amended, and the rules and regulations promulgated thereunder.
(rr) "Excluded Assets" shall mean, collectively, the Hold-
Back Property and the Previti Projects.
(ss) "Excluded Employees" shall have the meaning set forth in
Section 5.1.1.
(tt) "Excluded Liabilities" shall mean any and all known and
unknown Liabilities (i)associated with the Excluded Assets or arising as a
result of or in connection with the ownership or use of the Excluded Assets
by the Seller, including, without limitation, under any Environmental Law,
and (ii)of the Seller, Previti or any of their Affiliates relating to,
pertaining to, or arising out of the Assets with respect to income or other
Taxes for periods or portions thereof ending on or prior to the Closing Date,
including, without limitation, any Taxes arising in connection with the
consummation of the transactions contemplated hereby.
(uu) "Executive Officers" means, (i)with respect to the
Seller, collectively, Messrs. Previti, Day, Glankler and Richard Munkvold,
and (ii)with respect to the Buyer, collectively, Messrs. Ara Hovnanian,
Geaton DeCesaris, Peter Reinhart and Larry Sorsby.
(vv) "Exhibit" means an exhibit attached to, or
incorporated by reference in, this Agreement.
(ww) "Final Balance Sheet" shall have the meaning set
forth in Section 1.6.2.
(xx) "Financial Statements" means the audited financial
statements dated October 31, 2001 prepared by the Auditors with respect to
the assets and liabilities of the Seller.
(yy) "Forecast Development" shall have the meaning set
forth in Recital I.
(zz) "Forecast Development Option and Purchase Agreement"
shall have the meaning set forth in Recital I.
(aaa) "Fundamental Default" means a default (beyond any
applicable cure period) by the Buyer under any of Section 1.3, 1.4.4, 1.4.5,
1.5 or 1.6.1.
(bbb) "GAAP" means generally accepted accounting principles
in the United States, as in effect from time to time, consistently applied.
(ccc) "Glankler" shall mean Frank Glankler, a natural
person.
(ddd) "Governmental Entity" means any government or any
agency, bureau, board, commission, court, department, official, political
subdivision, tribunal or other instrumentality of any government, whether
federal, state or local, domestic or foreign.
(eee) "Hart-Scott-Rodino Act" means the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, and the related regulations
and published interpretations.
(fff) "Hazardous Substance" means substances that are
defined or listed in, or otherwise classified pursuant to, any applicable
Laws as "hazardous substances," "solid wastes," "oil," "petroleum,"
"hazardous materials," "hazardous wastes" or "toxic substances."
(ggg) "Hold-Back Properties" shall mean those properties
listed as Hold-Back Properties on Exhibit A attached hereto.
(hhh) "Homebuilding Business" means the business of the
Consolidated Forecast Entities, including, by way of limitation, the
construction of single-family, for sale residential housing and the sale-
leaseback of model homes in the applicable homebuilding communities.
(iii) "Indemnifiable Claim" means any Loss for or against
which any party is entitled to indemnification as set forth in Section 5.6 or
8.
(jjj) "Indemnification and Release Agreement" shall have the
meaning set forth in Recital J.
(kkk) "Indemnified Party" means the party entitled to
indemnity as set forth in Section 8.
(lll) "Indemnifying Party" means the party obligated to
provide indemnification as set forth in Section 8.
(mmm) "IRS" means the Internal Revenue Service or any
successor entity.
(nnn) "knowledge of the Buyer" and words of similar import
and effect shall have the meaning set forth in Section 10.12.
(ooo) "knowledge of the Seller" and words of similar import
and effect shall have the meaning set forth in Section 10.12.
(ppp) "Law" means any constitutional provision, statute or
other law, rule, regulation, or interpretation of any Governmental Entity and
any Order.
(qqq) "Liability" means any liability or obligation of any
kind, character or description, contingent or otherwise, known or unknown,
whether liquidated or unliquidated, secured or unsecured, and/or joint or
several.
(rrr) "Lock-Out Period" shall have the meaning set forth in
Section 1.4.1.
(sss) "Loss" means any cost, damage, disbursement, expense,
liability, loss, deficiency, obligation, penalty or settlement of any kind or
nature, contingent or otherwise, that is not recaptured through insurance
proceeds or any other form of rebate, credit or reimbursement, including,
without limitation, interest or other carrying costs, penalties, reasonable
legal, accounting and other professional fees and expenses incurred in the
investigation, collection, prosecution and defense of claims and amounts paid
in settlement.
(ttt) "Lot Option Agreement" shall have the meaning set forth
in Recital D.
(uuu) "Market Price," as applied to any publicly-traded
class of security on any specified day, means the average closing market
price (regular way) of such security on the New York Stock Exchange (or any
other major exchange on which such security is listed or any market on which
such security is included) for the trailing five (5)-trading days at the
close of markets immediately preceding the specified day.
(vvv) "material adverse effect," means, with respect to a
Person or a specific parcel of Real Property or the Homebuilding Business, as
applicable, any change or effect that has resulted or could reasonably be
expected to result in Losses, together with any other change or effect,
suffered in excess of Five Hundred Thousand Dollars ($500,000); provided,
however, that a decline or forecasted decline in general economic conditions
or matters generally affecting homebuilding businesses in one or more real
estate markets in which such Person conducts business or operates or any Real
Property is located, or homebuilding companies in general (including, without
limitation, the cost or availability of energy or energy-related products,
changes in or affecting interest rates, securities markets, accounting
principles, practices or conventions, applicable laws and regulations,
homebuilding starts, closings, building and/or permit moratoria, zoning
changes or comparable events or events in the nature of the foregoing) shall
not be deemed to have a material adverse effect.
(www) "Material Contract" shall have the meaning set forth
in Section 2.2.1.
(xxx) "Maximum Proceeds" shall have the meaning set forth
in Section 1.4.5.
(yyy) "Maximum Share Allocation" shall mean that number of
Buyer's Shares equal to nineteen and nine-tenths percent (19.9%) of the
number of all shares of outstanding Common Stock as of the end of the trading
day on the Closing Date.
(zzz) "Minimum Proceeds" shall have the meaning set forth
in Section 1.4.5.
(aaaa) "Monthly Repurchase Amount" shall have the meaning
set forth in Section 1.3.2.
(bbbb) "Monthly Repurchase Price" shall have the meaning set
forth in Section 1.3.2.
(cccc) "Monthly Sale Amount" shall have the meaning set
forth in Section 1.4.2.
(dddd) "Net Worth Deficiency" shall have the meaning set
forth in Section 1.6.1.
(eeee) "Net Worth Surplus" shall have the meaning set forth
in Section 1.6.1.
(ffff) "Non-Competition and Option Agreement" shall have the
meaning set forth in Recital F.
(gggg) "Notice of Dispute" shall have the meaning set forth
in Section 1.6.2.
(hhhh) "Option Consideration" shall have the meaning set
forth in Recital A.
(iiii) "Option Date" shall have the meaning set forth in
Recital A.
(jjjj) "Order" means any decree, injunction, judgment,
order, ruling, assessment or writ, including, without limitation, those
arising under any Environmental Law.
(kkkk) "Park Meadows Option Agreement" shall have the
meaning set forth in Recital G.
(llll) "Party" means any party to this Agreement.
(mmmm) "Permit" means any license, permit, franchise,
certificate of authority, order or any waiver of the foregoing, required to
be issued by any Governmental Entity.
(nnnn) "Permitted Encumbrance" shall have the meaning set
forth in Section 2.4.2.
(oooo) "Person" means any association, corporation,
individual, partnership, limited liability company, trust or any other entity
or organization, including any Governmental Entity.
(pppp) "Policies" shall have the meaning set forth in
Section 2.6.1.
(qqqq) "Premier" shall have the meaning set forth in Recital
F.
(rrrr) "Premier Option" shall have the meaning set forth in
Section 1.7.
(ssss) "Premier Shareholders" shall have the meaning set
forth in Section 1.7.
(tttt) "Previti" has the meaning set forth in the
introductory paragraph of this Agreement.
(uuuu) "Previti Projects" shall mean the assets transferred
by the Seller to a third-party prior to the Effective Date and listed on
Exhibit I (the "Previti Projects") attached hereto.
(vvvv) "Property Documents" shall have the meaning set
forth in Section 2.4.2.
(wwww) "Purchase Price" shall have the meaning set
forth in Section 1.3.1.
(xxxx) "Real Property" shall have the meaning set forth in
Section 2.4.1.
(yyyy) "Recital" shall mean one of the introductory
paragraphs to this Agreement.
(zzzz) "Registration Deadline" shall have the meaning set
forth in Section 1.3.2.
(aaaaa) "Registration Statement" shall have the meaning set
forth in Section 5.5.1.
(bbbbb) "Representative" shall mean Previti (and any designee
or nominee so named by Previti).
(ccccc) "ROFO Agreement" shall have the meaning set forth in
Recital E.
(ddddd) "Sale Proceeds" shall mean the aggregate sales
proceeds (net of any and all out-of-pocket costs, brokers' fees, filing fees
and other related transaction costs, fees and expenses) from the sales or
sales by Previti from time to time of the Buyer' Shares (whether such sales
are on the open market or to the Buyer pursuant to the terms of this
Agreement) during any specified time period or for any specified number of
Buyer's Shares in accordance with Section 1.4.
(eeeee) "Salomon" shall mean Salomon Smith Barney Inc.
(fffff) "Schedule" means any schedule attached to, or
incorporated by reference in, this Agreement.
(ggggg) "SEC" shall mean the United States Securities and
Exchange Commission.
(hhhhh) "SEC Reports" means reports filed by a Person with
the SEC.
(iiiii) "Securities" shall have the meaning set forth in
Recital A.
(jjjjj) "Securities Act" shall mean the Securities Act of
1933, as amended, and the rules and regulations promulgated thereunder.
(kkkkk) "Securities Partnership" shall have the meaning set
forth in Recital A.
(lllll) "Securities Purchase Agreement" shall have the
meaning set forth in Recital C.
(mmmmm) "Securities Sellers" shall have the meaning set
forth in Recital A.
(nnnnn) "Seller" has the meaning set forth in the
introductory paragraph of this Agreement.
(ooooo) "Share Allocation" shall have the meaning set forth
in Section 1.3.1.
(ppppp) "Subsidiary" means any Person in which the Buyer has
a direct or indirect equity or ownership interest in excess of ten percent
(10%).
(qqqqq) "Tax" means any foreign, federal, state, county or
local income, sales and use, excise, franchise, real and personal property,
transfer, gross receipt, capital stock, production, business and occupation,
disability, employment, payroll, severance or withholding tax or charge
imposed by any Governmental Entity, and any interest and/or penalties (civil
or criminal) or addition to tax related thereto or to the nonpayment thereof.
(rrrrr) "Tax Proceeding" shall have the meaning set forth in
Section 5.3.
(sssss) "Tax Return" means a report, return or other
information required to be supplied to a Governmental Entity with respect to
Taxes including, where permitted or required, combined or consolidated
returns for any group of entities that includes the Consolidated Forecast
Entities including any amendments thereof.
(ttttt) "Title Company" means Orange Coast Title Company in
Santa Ana, California (Attention: Ms. Kathy Danneman).
(uuuuu) "Title Policy" means for each parcel of Real
Property, a CLTA Standard Coverage Owner's Policy of Title Insurance (with no
endorsements thereto and no indemnification provided to the Title Company by
Seller), with an effective date as of the Closing Date naming the Buyer as
the insured.
(vvvvv) "Transfer" means the transfers by the Seller of
(i)the Excluded Assets to a third party, and (ii)certain intangible property
to Securities Partnership.
(wwwww) "WARN Act" means the Worker Adjustment and
Retraining Notification Act.
1.2 Transfer of the Assets by the Seller and Assumption of Liabilities
by the Buyer. Subject to the terms and conditions of this Agreement, (a)the
Seller shall sell all of the Assets to the Buyer on the Closing Date, and
(b)the Buyer shall assume all of the Liabilities associated with the Assets
and Securities (but specifically excluding the Excluded Liabilities).
1.3 Purchase of the Assets by the Buyer.
1.3.1. Purchase Price. Subject to the terms and conditions of
this Agreement, the Buyer shall purchase the Assets from the Seller for a
purchase price of One Hundred Fifteen Million Five Hundred Thousand Dollars
($115,500,000) (the "Purchase Price"), of which (a)Seventy Million Dollars
($70,000,000) shall be payable in cash (the "Cash Purchase Portion"), and
(b)Forty-Five Million Five Hundred Thousand Dollars ($45,500,000) shall be
payable in Common Stock, the number of shares of which shall not exceed the
Maximum Share Allocation, and shall be determined by dividing Forty-Five
Million Five Hundred Thousand Dollars ($45,500,000) by the Market Price of
the Common Stock on the Closing Date (the "Closing Price"), and rounding such
quotient to the nearest number of whole shares (the "Share Allocation"). In
the event that the calculation set forth above yields a number of shares of
Common Stock that exceeds the Maximum Share Allocation, then (i) Buyer shall
pay to the Seller cash (which shall be deemed a part of the Cash Purchase
Portion) in an amount equal to the Closing Price multiplied by the number
equal to the difference between the Share Allocation and the Maximum Share
Allocation, and (ii) the Share Allocation shall be deemed equal to the
Maximum Share Allocation. The amount of the Cash Purchase Portion and the
Share Allocation shall be subject to adjustment as provided below, and from
and after any such adjustment(s), the terms "Buyer's Shares," "Share
Allocation" and "Purchase Price" shall refer to such adjusted amounts.
1.3.2. Registration of the Buyer's Shares. After the Closing
Date, in accordance with Section 5.6, the Buyer shall cause all of the
Buyer's Shares to be fully registered under the Securities Act and freely
transferable. The Buyer shall inform the Seller of the form and content of
the financial statements of the Consolidated Forecast Entities that the Buyer
reasonably and in good faith expects the SEC to require (with specific
reference to the applicable SEC rule or comment). The Seller agrees to use
commercially reasonable efforts, in good faith, to prepare the financial
statements of the Consolidated Forecast Entities so that the form and content
of such financial statements are consistent with the previous sentence. If
for any reason the Buyer does not or is unable to fully register all of the
Buyer's Shares under the Securities Act on or before the day that is six (6)
months after the Closing Date (the "Registration Deadline"), then the Buyer
shall purchase all of the Buyer's Shares from the Seller as follows:
(a) On or before the fifth (5th) day of each calendar month
following the Registration Deadline, for eighteen (18) consecutive months,
the Buyer shall, in accordance with this Section 1.3.2, purchase from the
Seller a number of the Buyer's Shares equal to the Share Allocation divided
by eighteen (the "Monthly Repurchase Amount").
(b) The purchase price to be paid by the Buyer to the Seller
for the purchase of the Buyer's Shares pursuant to subsection (a) above shall
be the Market Price as of the day of repurchase multiplied by the Monthly
Repurchase Amount (the "Monthly Repurchase Price").
(c) The Buyer shall remit the Monthly Repurchase Price
within two (2) business days of its receipt of the certificates representing
the applicable Buyer's Shares and any stock powers or endorsements necessary
to evidence the transfer of the applicable Buyer's Shares to the Buyer.
(d) Within five (5) days after the final repurchase by the
Buyer of the Buyer's Shares in accordance with this Section 1.3.2, the Buyer
or the Seller, as the case may be, shall make any payment to the other that
may be required by either Section 1.4.5(a) or 1.4.5(b).
1.3.3. Equitable Adjustment. The Share Allocation shall be
subject to proportionate adjustment in the event of any stock split, reverse
stock split, dividend payable in stock, reclassification, combination or
extraordinary distribution, or any other event in the nature of any of the
foregoing, whereby the Buyer issues, without consideration, additional shares
of its Common Stock with a record date prior to the Closing Date, and in such
case the term "Buyer's Shares" shall refer to such adjusted amount.
1.4 Disposition of Buyer's Shares by the Seller.
1.4.1. Lock-Out Period. Subject to Section 1.4.4, during the
period from the Closing Date to the last day of the calendar month in which
the six (6) month anniversary of the Closing Date occurs (the "Lock-Out
Period"), the Seller shall not sell the Buyer's Shares without the Buyer's
prior written consent. The Parties agree that the Seller may, in its sole
and absolute discretion, at any time, pledge and/or hypothecate the Buyer's
Shares; provided, however, that the lender thereunder shall agree in writing
to take such pledge or hypothecation subject to the terms of this Agreement
applicable to the Buyer's Shares.
1.4.2. Divestiture Period. Subject to Section 1.4.4, during the
period between the first day following the Lock-Out Period and the last day
of the calendar month in which the two (2) year anniversary of the Closing
Date occurs (the "Divestiture Period"), the Buyer and the Seller shall cause
a third party mutually selected by the Buyer and the Representative to sell
all of the Buyer's Shares pursuant to the following procedures:
(a) The Buyer shall pay for any and all (i)brokers' fees and
commissions incurred in connection with any disposition of the Buyer's
Shares, and (ii)out-of-pocket costs, brokers' fees and commissions, filing
fees, auditing fees and other related transaction costs, fees and expenses
incurred by the Seller in connection with any unusual transaction for the
sale of the Buyer's Shares if such sale transaction is proposed by the Buyer.
(b) The Buyer shall have the right to select the broker
engaged in such disposition of the Buyer's Shares if (i) such broker requires
a lesser commission arrangement than the broker selected by the Seller, (ii)
the Seller consents in writing to the engagement of such broker (which
consent shall not be unreasonably withheld or delayed), and (iii) the Buyer's
selection of such broker does not in any way prejudice the interests of the
Seller.
(c) Each calendar month, the Seller shall sell that number
of the Buyer's Shares (the "Monthly Sale Amount") equal to the Share
Allocation divided by eighteen (18), rounded off to the nearest number of
whole shares.
1.4.3. Extension of Divestiture Period. The Divestiture Period
shall be deemed to extend for the necessary number of days required to
dispose of the Buyer's Shares pursuant to this Section 1.4.
1.4.4. Change of Control. In the event of a Change of Control,
the Buyer shall, within five (5) days of such Change of Control (a)repurchase
any and all remaining outstanding Buyer's Shares for a per share price equal
to one hundred and fifteen percent (115%) of the Closing Price (the "Change
of Control Payment"), and (b)deliver payment thereof to the Seller, without
demand, deduction, offset or delay; provided, however, that such payment
shall be net of any adjustment required pursuant to either Section 1.4.5(a)
or 1.4.5(b). Within five (5) days after the Seller's receipt of the Change
of Control Payment, the Buyer or the Seller, as the case may be, shall make
any payment to the other that may be required by either Section 1.4.5(a) or
1.4.5(b).
1.4.5. Adjustment Based on Market Price of the Buyer's Shares.
(a) Minimum Proceeds. If the aggregate Sales Proceeds from
the sales of the Buyer's Shares (including sales to the Buyer pursuant to
Section 1.3.2, 1.4.4 or 1.5) do not equal or exceed Forty Million Nine
Hundred Fifty Thousand Dollars ($40,950,000) (the "Minimum Proceeds"), then
the Buyer shall, within five (5) days after the last sale of the Buyer's
Shares, deliver to the Seller (without demand, deduction, offset or delay)
cash in an amount equal to the difference between (i)the Minimum Proceeds,
and (ii)the Sale Proceeds.
(b) Maximum Proceeds. If, at any time during the
Divestiture Period, the aggregate Sales Proceeds from the sales of the
Buyer's Shares (including sales of the Buyer's Shares to the Buyer pursuant
to Section 1.3.2, 1.4.4 or 1.5) exceed Fifty-Two Million Three Hundred
Twenty-Five Thousand Dollars ($52,325,000) (the "Maximum Proceeds"), then the
Seller shall, within five (5) days after the last sale of the Buyer's Shares,
deliver to the Buyer (without demand, deduction, offset or delay) (i)cash in
an amount equal to the difference between (A)such aggregate Sale Proceeds,
and (B)the Maximum Proceeds, and (ii)any and all certificates, stock powers
or endorsements required to transfer any remaining unsold Buyer's Shares to
the Buyer in exchange for Ten Dollars ($10) in consideration.
(c) Limitations on Adjustments. The payments of the Buyer
or the Seller required by this Section 1.4.5 shall be made only (i) with
respect to those Buyer's Shares sold during the Divestiture Period, and (ii)
if none of such sales is a "block" or other non-customary sale or trade at a
discount to the then-current Market Price, regular way that were not mutually
agreed upon in advance. Any payment made pursuant to this Section 1.4.5
shall be treated as an adjustment to the Purchase Price.
1.5 Call Right. During the time period beginning on the one (1) year
anniversary of the Closing Date and ending on the two (2) year anniversary of
the Closing Date, the Buyer may elect to repurchase all remaining Buyer's
Shares then owned by the Seller by (a) providing not less than ten (10) days'
prior written notice to the Representative of such election (which election
shall be irrevocable and unconditional), and (b) delivering to the Seller, in
exchange for the certificate representing such Buyer's Shares and any
necessary stock powers or endorsements, an amount in immediately available
funds equal to the product of the number of the then-remaining Buyer's Shares
and one hundred fifteen percent (115%) of the Closing Price (the "Call
Payment"); provided, however, that such payment shall be net of any
adjustment required pursuant to either Section 1.4.5(a) or 1.4.5(b).
1.6 Purchase Price Adjustment.
1.6.1. Closing Refund; Additional Consideration. If the
Consolidated Net Worth included on the Final Balance Sheet is (a) less than
One Hundred Forty-Five Million Dollars ($145,000,000) (the amount of such
difference being the "Net Worth Deficiency"), the Seller shall pay to the
Buyer an amount, in immediately available funds, equal to the Net Worth
Deficiency multiplied by 1.55 (the "Closing Refund"), or (b) greater than One
Hundred Forty-Five Million Dollars ($145,000,000) (the amount of such
difference being the "Net Worth Surplus"), the Buyer shall pay to the Seller
an amount, as additional consideration, in immediately available funds, equal
to the Net Worth Surplus multiplied by 1.55 (the "Additional Consideration")
and such payment shall be a decrease or an increase in the Purchase Price, as
appropriate. Any Closing Refund or Additional Consideration shall be paid
within five (5) business days after the Final Balance Sheet becomes final and
binding on the Parties pursuant to Section 1.6.2. Any late payment (i) by
the Seller of the Closing Refund, or (ii) by the Buyer of the Additional
Consideration, shall bear interest at one percent (1%) per month, compounded
monthly.
1.6.2. Final Balance Sheet.
(a) The Parties shall cause the Auditors, within sixty (60)
days following the Closing Date, at the Buyer's sole cost and expense, to
deliver to each of the Parties, a balance sheet regarding the Consolidated
Net Worth as of January 31, 2002 (as it may be adjusted pursuant to this
Section 1.6.2, the "Final Balance Sheet"), together with a written notice
stating whether there is a Net Worth Deficiency or a Net Worth Surplus and,
if applicable, specifying the amount thereof. During the preparation of the
Final Balance Sheet, the Seller shall have the right to be present at each
discussion between the Buyer and the Auditors in respect of the audit and to
observe the work performed by the Buyer and the Auditors in connection with
their preparation of the Final Balance Sheet. After the Closing, the Buyer
shall allow the Auditors access to such books and records that were
transferred to the Buyer by the Seller at the Closing as the Auditors may
reasonably require for such audit. The Final Balance Sheet shall be prepared
in accordance with GAAP as the Auditors determine is applicable to an
Exchange Act reporting company with registered equity securities. In the
event the Closing occurs prior to January 31, 2002, the Buyer shall, from the
Closing Date through January 31, 2002, operate the Homebuilding Business in
the ordinary course of business, which shall include the sale-leaseback of
model homes.
(b) If either of the Parties disputes any item(s) on the
Final Balance Sheet, such disputing Party shall notify the other Party in
writing thereof (the "Notice of Dispute") within thirty (30) days after the
Auditor's delivery of the Final Balance Sheet to each of the Buyer and the
Seller, which Notice of Dispute shall set forth in reasonable detail the
items in dispute, the basis for dispute and the amounts being disputed. If
neither of the Parties delivers a Notice of Dispute within the aforesaid
thirty (30)-day period, the Final Balance Sheet shall become final and
binding upon, and non-appealable by, all Parties at the end of such period
and any Closing Refund or Additional Consideration evidenced by the Final
Balance Sheet delivered pursuant to Section 1.6.2, if applicable, shall be
paid pursuant to Section 1.6.1.
(c) If either of the Parties timely delivers a Notice of
Dispute to the other Party, the Representative and the Buyer shall attempt in
good faith to resolve such dispute(s). If the Representative and the Buyer
are unable to resolve any disputed item(s) within ten (10) business days
after the non-disputing Party's receipt of the Notice of Dispute, such
disputed item(s) shall be submitted by the disputing Party within five (5)
days after the expiration of such ten (10) business day period to one of the
"Big 5" accounting firms which is independent of both the Seller and the
Buyer and not heretofore engaged by either Party, chosen with the mutual
consent of the Representative and the Buyer. This accounting firm shall be
instructed to resolve such disputed item(s) based upon the presentations of
the Seller and the Buyer within twenty (20) days after the initial submission
as aforesaid. The resolution of disputes by the accounting firm so selected
shall be set forth in writing and shall become final and binding upon, and
non-appealable by, all Parties, and the Final Balance Sheet shall become
final and binding upon the date of such resolution. The costs and expenses
of such resolution, including, without limitation, the costs and fees of the
efforts of the accounting firm retained to resolve such dispute, shall be
paid by the losing party.
(d) Between the Closing Date and the completion of the Final
Balance Sheet, the Buyer shall afford the Seller and its representatives
reasonable access during normal working hours to all books, records,
correspondence, files, financial statements, operating data and all other
information with respect to the business of the Consolidated Forecast
Entities as in existence prior to the Closing Date, and shall provide to the
Seller, the Auditors and their respective representatives such operating and
financial data and any other information with respect to the business of the
Consolidated Forecast Entities, as in existence prior to the Closing Date as
they may from time to time reasonably request for the purpose of preparing
the Final Balance Sheet and resolving any disputed items. The Seller shall
perform those procedures normally performed in a year-end closing and take
such other reasonable measures as are reasonably necessary to prepare the
Final Balance Sheet. The Buyer shall make reasonably available to the Seller
the appropriate officers and employees of the business of the Seller for
purposes of assisting the Seller, the Auditors or their respective
representatives, at no cost to Seller, in the preparation of the Final
Balance Sheet and resolving any disputed items.
1.6.3. Survival. The Parties' obligations under Sections 1.3,
1.4, 1.5 and 1.6 shall survive the Closing Date and remain in full force and
effect.
1.7 Option to Purchase Premier. On or prior to the Closing Date,
Previti and the other shareholders of Premier at that time (collectively, the
"Premier Shareholders"), shall, pursuant to the terms and provisions of the
Non-Competition and Option Agreement, grant to the Buyer an option to
purchase the assets of Premier (the "Premier Option"). The Premier Option
shall terminate, at Previti's sole discretion, upon a Fundamental Default by
the Buyer.
1.8 Closing. The Closing will take place (a) at the offices of
O'Melveny & Myers LLP, 610 Newport Center Drive, Newport Beach, California,
at 10:00 a.m. (Pacific Time) on January --, 2002, or (b)on such other date or
at such other location as the Representative and the Buyer may mutually agree
in writing. In no case shall the Closing occur after the date specified in
Section 7.1, unless extended by the mutual written agreement of the Parties
as provided in Section 7.1. At the Closing, the Buyer shall (i)pay the Cash
Purchase Portion to the Seller in cash by wire transfer of immediately
available federal funds to such account(s) as shall be specified in
instructions from the Representative to the Buyer at least three (3) business
days prior to the Closing, (ii) issue and deliver the Buyer's Shares to the
Seller registered in the name of such Persons in such denominations as shall
be specified in instructions from the Representative at least three (3)
business days prior to the Closing, and (iii) execute any and all documents
that the Seller and any other interested party in the transactions
contemplated hereunder shall deem necessary to perfect the intentions of the
Parties to this Agreement, including, without limitation, documents
reasonably and customarily required by the Title Company and/or any escrow
holder.
1.9 Purchase Price Allocation. The Parties shall not cause to be filed
any Tax Return or otherwise take any position for federal or state income Tax
purposes which is inconsistent with the allocations set forth on Schedule 1.9
(the "Purchase Price Allocation Schedule") attached hereto, prepared in
accordance with the tax rules under Sections 1060 and 755 of the Code which
have been agreed upon through arms-length negotiations by the Buyer and the
Seller and which represent the respective fair market value of the Assets.
1.10 Further Assurances. At any time and from time to time after the
Closing Date, upon the written request of the Buyer or the Seller to the
other, as applicable, and without any cost or expense to the responding
Party, the Buyer and the Seller, as applicable, shall execute and deliver
such instruments of conveyance, assignment and transfer and other documents
as the Buyer or the Seller, as applicable, may reasonably request to (a)
transfer to and vest in the Buyer (or any of its Subsidiaries) and to put the
Buyer (or any of its Subsidiaries) in possession of, the Assets, or (b) to
otherwise carry out the intent and purposes of this Agreement.
1.11 Representative. The Seller hereby appoints the Representative to
represent the Seller in connection with any part or all of the transactions
contemplated by this Agreement and to take any and all action on its behalf
under this Agreement that may be taken or received by the Seller as to any or
all of the transactions contemplated under the terms of this Agreement.
Without giving notice to the Seller, the Representative shall have full and
irrevocable authority on behalf of the Seller to (a) deal with the Buyer,
(b)accept and give notices and other communications relating to this
Agreement, (c) settle any disputes relating to this Agreement, (d) waive any
condition to the obligations of the Seller included in this Agreement, (e)
execute any document or instrument that the Representative may deem necessary
or desirable in the exercise of the authority granted under this Section
1.11, and (f) act in connection with all matters arising out of, based upon,
or in connection with, this Agreement and the transactions contemplated
hereby. The Buyer shall be entitled to rely on the advice, information,
instructions and decisions of the Representative evidenced by a writing
signed by him without any obligation independently to verify, authenticate or
seek the confirmation or approval of the Representative's advice,
information, instructions or decisions or any other facts from the Seller or
any other Person. Any certificate to be delivered by the Seller at the
Closing may be executed and delivered by the Representative on behalf of the
Seller.
1.12 Satisfaction of Debt. The Parties agree that the Buyer shall,
simultaneously with the Closing, satisfy any and all debt relating to the
Assets or the Homebuilding Business generally set forth on Schedule 1.12 (the
"Debt") attached hereto.
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE SELLER
The Parties agree that the sale of the Assets shall be without
representation or warranty by the Seller, express or implied, except as
specifically set forth in this Agreement. Other than with respect to the
representations and warranties contained in Sections 2.1.1 and 2.16 (as
limited by Section 8.1.1), none of the representations and warranties
contained herein shall survive the Closing; provided, however that to the
extent that the making of any such representation or warranty constituted
actual fraud (and as further limited by Section 8.1.2) on the part of the
Seller, the Buyer's right to bring any Action against the Seller thereunder
and to such extent shall survive the Closing and shall remain in full force
and effect until the date that is ninety (90) days after the expiration of
the applicable statutory period; provided, however, such Action shall be
filed in accordance with Section 10.10 by the Buyer within ninety (90) days
after the Buyer's knowledge thereof or the claim (and the applicable remedy)
shall be automatically waived. Except as otherwise specifically indicated on
the Seller's Disclosure Schedule as to the particular section as to which an
exception is being disclosed, the Seller represents and warrants to the Buyer
as follows:
2.1 The Assets.
2.1.1. Ownership at the Closing. At the Closing, the Seller shall
have good and marketable title to, and sole record and beneficial ownership
of, the Assets, all of which are to be transferred to the Buyer by the Seller
pursuant to this Agreement free and clear of Encumbrances, except Permitted
Encumbrances and those exceptions set forth on the Seller's Disclosure
Schedule.
2.1.2. Transfer of Unencumbered Title to the Assets. Upon the
Closing, the Seller shall transfer to the Buyer legal and beneficial
ownership of the Assets, free and clear of all Encumbrances other than the
Permitted Encumbrances and those exceptions set forth on the Seller's
Disclosure Schedule.
2.1.3. Formation; Power and Authority. The Seller is a duly
formed and validly existing limited partnership, in good standing, under the
laws of the State of California with the power under the California Revised
Limited Partnership Act and its partnership agreement to own, lease and
operate its properties, to carry on its business as now conducted, to enter
into this Agreement and to transfer, convey and sell to the Buyer at the
Closing the Assets. The Seller is duly qualified or registered to transact
business in each jurisdiction in which it conducts its businesses, except
where the failure, individually or in the aggregate, to be so qualified or
registered could not reasonably be expected to have a material adverse effect
on the assets, business operations, earnings, properties or condition of the
Seller. The Seller has made available to the Buyer true, correct and
complete copies of all organizational or constituent documents of the Seller
and each of the Consolidated Forecast Entities.
2.1.4. Authorization. The execution, delivery and performance of
this Agreement and the transactions contemplated hereby by the Seller have
been duly and validly authorized by all necessary partnership action on the
part of the Seller. This Agreement has been duly executed and delivered by
the Seller and constitutes the legal, valid and binding obligation of the
Seller, enforceable against the Seller in accordance with its terms except as
may be limited by bankruptcy, insolvency, reorganization, moratorium and
other similar laws relating to or limiting creditors' rights generally and
equitable principles.
2.1.5. Absence of Certain Changes. Except as set forth on the
Seller's Disclosure Schedule and with respect to the Transfer, since October
31, 2001, the Consolidated Forecast Entities (a)have preserved and maintained
their Assets generally in accordance with past practice, and (b)have not
suffered a material adverse effect.
2.1.6. Compliance with Applicable Laws. Except as denoted in the
description of Actions pending against the Seller that is set forth on the
Seller's Disclosure Schedule, to the Seller's knowledge, the Consolidated
Forecast Entities are in material compliance with all applicable Laws with
respect to the Assets, except where the noncompliance, individually or in the
aggregate, could not reasonably be expected to have a material adverse effect
on the Assets. Except as denoted in the description of Actions pending
against the Seller that is set forth on the Seller's Disclosure Schedule, to
the Seller's knowledge, no Action has been filed, commenced or threatened in
writing against any of the Consolidated Forecast Entities alleging a failure
to so comply with applicable Laws, nor has any Governmental Entity provided
any Consolidated Forecast Entities with written notice regarding a present
intention to commence an Action based upon the Seller's noncompliance with
applicable Laws.
2.1.7. Adequacy of Assets. The assets of Securities Partnership
and the Assets include all assets and properties of every kind and
description, real, personal or mixed, tangible or intangible, the use of
which is reasonably necessary to enable the Buyer to conduct the Homebuilding
Business substantially as conducted prior to the Effective Date.
2.2 Material Contracts.
2.2.1. Descriptions. The Seller's Disclosure Schedule lists each
Contract (each, a "Material Contract," and collectively, the "Material
Contracts") that:
(a) shall obligate the successor owner of any of the Assets
to pay a contractor or subcontractor an amount in excess of Two Hundred and
Fifty Thousand Dollars ($250,000) over a one (1)-year period;
(b) shall obligate the successor owner of any of the Assets
to pay to any party other than a contractor or subcontractor an amount in
excess of Fifty Thousand Dollars ($50,000) over a one (1)-year period;
(c) represents an indenture, loan or credit agreement in
excess of Fifty Thousand Dollars ($50,000), or provides for or evidences a
loan or extension of credit, a letter of credit or any security or guaranty
in excess of Fifty Thousand Dollars ($50,000) in respect thereof, to which
any of the Assets is bound;
(d) provides a guaranty or indemnity (other than indemnities
that are provided in the ordinary course of business, e.g., mechanics lien
indemnities, among others) by the owner of any of the Assets;
(e) contains a right of first refusal, first offer
obligation or purchase option with respect to any of the Assets, except as
otherwise set forth or described in this Agreement and/or the Collateral
Agreements;
(f) expressly limits or restricts the ability of the owner
of any of the Assets to conduct any type of business in any manner or place;
and
(g) represents (i)a sales agency, broker or finder Contract,
(ii)a loan origination or customer referral Contract that involves an
aggregate payment over a one (1) year period in excess of Fifty Thousand
Dollars ($50,000), (iii)consulting, advisory, marketing, management and other
service agreements that are not terminable by the owner of any Asset without
further liability on not more than thirty (30) days' notice and provides for
annual payments per individual agreement exceeding Fifty Thousand Dollars
($50,000), or (iv)a performance, completion, surety or other bond or
performance guarantee of more than Fifty Thousand Dollars ($50,000), in each
instance to which the owner of any Asset is a party or bound.
True, correct and complete copies of such Material Contracts, including all
amendments and supplements, if any, have been made available to the Buyer.
2.2.2. No Breach. To the Seller's knowledge, the Seller has duly
performed, in all material respects, all its obligations under each Material
Contract to the extent that such obligations to perform have accrued. Except
as specifically set forth on the Seller's Disclosure Schedule, to the
Seller's knowledge, no breach or default, alleged breach or default, or event
which would (with the passage of time, notice or both) constitute a breach or
default thereunder in any material respect by the Seller has occurred under
any Material Contract or will occur as a result of this Agreement.
2.3 Permits. To the Seller's knowledge, the Seller possesses or
currently and reasonably anticipates that the successor owner of the Assets
should be able to obtain in the ordinary course of business, all Permits
necessary for the lawful development of the Real Property, except where the
failure to hold such Permits could not, individually or in the aggregate,
reasonably be expected to have a material adverse effect on the value of such
Real Property as fully developed.
2.4 Real Property.
2.4.1. Real Property. The Seller's Disclosure Schedule sets forth
an identifying description or, if available, the street address of each
parcel of real property owned by the Seller and included in the Assets. The
real property to be sold by the Seller to the Buyer pursuant to this
Agreement is referred to herein as the "Real Property." The Seller's
Disclosure Schedule also sets forth the general (not detailed) development
status of each project included in the Assets and the Seller's reasonable
good faith estimate of the projected finished lot cost thereof, exclusive of
any and all fees and expenses of any kind or amount owed or to be paid to
unaffiliated third parties (the "Development Status"); provided, however,
that such good faith estimate shall not constitute a covenant or a guarantee
of any kind of nature. With regard to lots on which a single-family
residence may be constructed, to the Seller's knowledge, such lots have or
are reasonably expected to obtain access to streets that are, or in the
future will be, dedicated public rights-of-way or private roadways that are
reasonably expected to be connected to and serviced by electric, gas, sewage,
telephone, cable television and water facilities upon the payment of
customary fees; and the grading thereof has or is reasonably expected to be
completed pursuant to approved grading and drainage plans. Building permits
and (upon the completion of the applicable single-family residence final
inspection and approval by the local Governmental Entity) certificates of
occupancy (or their equivalent) have been, or are reasonably expected to be,
obtained (upon payment of applicable fees therefor where required by the
applicable municipality, the recording of the final plat and/or the
completion of necessary on- and off-site improvements) for all such Real
Property. Except as set forth on the Seller's Disclosure Schedule, with
regard to the Real Property which is not yet ready for construction of a
single-family residence, to the Seller's knowledge, there are no material,
unusual matters which would likely prevent, prohibit, impair or materially
delay the currently intended development, use or occupancy of such Real
Property, taken as a whole, or cause the most recent projected finished lot
cost (as listed on the Seller's Disclosure Schedule) to be materially
exceeded. No forward-looking statements shall constitute predictions,
guarantees or assurances of actual future results or the likelihood of such
results.
2.4.2. Good and Marketable Title.
(a) To the Seller's knowledge, based solely upon its review
of owner's policies of title insurance from independent title companies, the
Seller has good and marketable title in fee simple to the Real Property,
subject only to (i)the Encumbrances listed on the Seller's Disclosure
Schedule including, without limitation, the exceptions described in the
Seller's title insurance policies for each parcel of the Real Property, (ii)
liens for Taxes not yet due and payable, and (iii) such imperfections of
title, pledges, liens and encumbrances, if any, as do not (A) materially
detract from the value or materially interfere with the present or intended
use of the Assets, (B)cause or result in any absence, loss or reversion of
title, or (C) cause or result in any restriction on or inability to transfer
title (the items set forth in clauses (i), (ii) and (iii) above, being
referenced to herein as "Permitted Encumbrances"). True, correct and
complete copies of any existing surveys, plans, plats and material documents,
if any, which the Seller believes to be directly related to the current state
of the entitlements appurtenant to the Real Property (collectively, the
"Property Documents") have been made available to the Buyer, in each case to
the extent in the Consolidated Forecast Entities' possession. Other than as
set forth on the Seller's Disclosure Schedule, the Seller has no rights to
acquire any real property other than the Real Property.
(b) The Seller has, to the Seller's knowledge, valid and
binding title insurance policies and/or commitments to issue valid and
binding title insurance policies with respect to all Real Property. Copies
of such title insurance policies and commitments to issue title insurance
policies have been made available to the Buyer.
2.4.3. No Condemnation. Except as set forth on the Seller's
Disclosure Schedule, no condemnation, eminent domain or similar proceeding is
pending with respect to any Real Property.
2.4.4. Compliance with Laws. Except as set forth on the Seller's
Disclosure Schedule, the subdivisions, buildings and improvements on the Real
Property do not violate, in any material respect, (a) any applicable Law,
including, without limitation, any building set-back or zoning law,
ordinance, regulation or statute for which a variance or other lawful
exception has not been obtained, except where the noncompliance, individually
or in the aggregate, could not reasonably be expected to have a material
adverse effect on the Real Property, or (b) any restrictive covenant
affecting any such Real Property.
2.4.5. Site Obligations. Except as set forth on the Seller's
Disclosure Schedule, to the Seller's knowledge, no Real Property is currently
subject to any condition or obligation to any Governmental Entity or other
Person requiring the owner or any transferee thereof to donate land, money or
other real property or to make off-site public improvements not associated
with the Real Property or take other mitigation measures.
2.4.6. Assessments. To the Seller's knowledge, all charges or
assessments made against the owner or developer of the Real Property or any
lots included therein for installation of public improvements serving the
subdivision, including, without limitation, those for construction of sewer
lines, water lines, storm drainage systems, electric lines, natural gas
lines, streets (including perimeter streets), and roads and curbs, that are
required by any Governmental Entity prior to the granting of a building
permit for a real property lot on which construction has already commenced,
have been paid or are set forth on the most recent Financial Statement or
have been incurred since the date thereof in the ordinary course of business
consistent with past practice.
2.4.7. Subdivision Standards. Except as set forth on the Seller's
Disclosure Schedule, to the Seller's knowledge, the Real Property and all
lots included therein conform or are reasonably expected to conform, in all
material respects, to the appropriate Governmental Entity's subdivision
standards (except for variances approved by the applicable Governmental
Authority). To the Seller's knowledge, there is no material impediment to
subdivision approval for any undeveloped portion of the Real Property that
would (despite commercially reasonable measures and payments by the Buyer)
prevent, prohibit, impair or materially delay the eventual construction and
sale of homes on such Real Property.
2.4.8. Moratoria. To the Seller's knowledge, except as set forth
with specificity on the Seller's Disclosure Schedule, there is no moratorium
currently in place that is applicable to or affects any of the Real Property
as to (a)the issuance of building permits for the construction of homes or
certificates of occupancy therefor, or (b)the purchase of sewer or water
taps.
2.4.9. Soil Conditions. To the Seller's knowledge, except (a) as
set forth in the environmental reports with respect to the Real Property made
available to the Buyer (the "Environmental Reports"), (b) as set forth on the
Seller's Disclosure Schedule, or (c) to the extent included in the finished
lot costs reflected on the Seller's Disclosure Schedule, there are no soil
conditions affecting any of the lots included in the Real Property that would
materially and adversely impair, delay or prevent the construction of homes
or that would materially increase the cost of construction thereon. To
Seller's knowledge, true, correct and complete copies of all Environmental
Reports have been made available to the Buyer.
2.4.10. Certain Environmental Matters. To the Seller's knowledge,
except as set forth in the Environmental Reports or on the Seller's
Disclosure Schedule, the Real Property does not contain any material
wetlands, endangered or otherwise protected species or habitats therefor and
is not located within a "critical," "preservation," "conservation,"
"environmentally sensitive" or similar type of area, which in any case would
interfere, in any material, adverse respect, with the development thereof in
accordance with its development plan and preliminary plat.
2.4.11. Ownership. None of the Consolidated Forecast Entities, any
Controlled Entity nor Previti owns any real property or right to acquire any
real property that may be developed for the construction of single-family
homes, other than (a)the Real Property, and (b)the real property included in
the Excluded Assets.
2.5 Operating Condition. To the Seller's knowledge, the buildings and
equipment, if any, included in the Assets, are in operating condition and are
generally adequate for their present and intended use.
2.6 Insurance.
2.6.1. Policies. The Seller's Disclosure Schedule lists all
insurance policies and bonds in excess of a face amount of One Hundred
Thousand Dollars ($100,000) with respect to the Assets and the Consolidated
Forecast Entities (the "Policies"). Except as set forth in Schedule 2.6.1,
no material disagreement or dispute exists between any of the insurers and
any of the Consolidated Forecast Entities, subject to defense arrangements
undertaken in accordance with applicable reservations of rights; provided,
however, nothing herein shall constitute a waiver of any of the Consolidated
Forecast Entities' rights against such insurers. To the Seller's knowledge,
none of the Consolidated Forecast Entities is in material default under any
such policy or bond. None of the Consolidated Forecast Entities has received
any written notice from any insurer or agent of any intent to cancel or not
renew any such policy or bond.
2.6.2. Claims. There is no material claim by any of the
Consolidated Forecast Entities pending under any of the Policies as to which
coverage has been denied to it in writing by the underwriters of such Policy.
To the Seller's knowledge, there has been no occurrence that may form the
basis of a material claim that is by or on behalf of any of the Consolidated
Forecast Entities under any such Policy. To the Seller's knowledge, no
coverage as to any material claim under any of such Policies has been denied
by the underwriters of such Policy, excluding any qualifications regarding
the underwriters reservation of rights. All premiums currently due and
payable under all such Policies have been paid in all material respects.
2.7 Bank Accounts, Powers, etc. The Seller's Disclosure Schedule lists
each bank, trust company, savings institution, brokerage firm, mutual fund or
other financial institution with which the Seller has an account (each, an
"Account") and the names and identification of all Persons authorized to draw
thereon or to have access thereto, and lists the names of each Person holding
powers of attorney or agency authority from the Seller.
2.8 Compliance with Applicable Laws. Except as set forth on the
Seller's Disclosure Schedule, (a)the Consolidated Forecast Entities have
complied, in all material respects, with all applicable Laws in the conduct
of its business, including, without limitation, the Homebuilding Business,
and (b)no material Action has been filed or commenced against the Seller
alleging a material failure to so comply.
2.9 No Brokers or Finders. Other than Salomon, no agent, broker,
finder, or investment or commercial banker, or other Person or firm acting on
behalf of the Seller in connection with the negotiation, execution or
performance of this Agreement or the transactions contemplated by this
Agreement is or will be entitled to any brokerage or finder's or similar fee
or other commission as a result of this Agreement or such transactions
contemplated hereunder; provided, however, that (a)the Buyer shall have full
responsibility for the obligations to any Person claiming a fee through
Buyer, and (b)the Seller shall have full responsibility for Salomon.
2.10 Environmental Compliance.
2.10.1. No Violation of Environmental Laws. Except as set forth in
the Environmental Reports or on the Seller's Disclosure Schedule, to the
Seller's knowledge, none of the Consolidated Forecast Entities is, in any
material respect, in violation or non-compliance with any Environmental Laws.
2.10.2. No Liability. Except as set forth in the Environmental
Reports or on the Seller's Disclosure Schedule, and, as to events occurring
prior to the Seller's acquisition of each parcel of Real Property, to the
Seller's knowledge, none of the Consolidated Forecast Entities nor any parcel
of Real Property is subject to any material Liability or Lien in connection
with any release or threatened release of any Hazardous Substance into the
environment or subject to any material reclamation or remediation
requirements under any Environmental Laws, except where the noncompliance,
individually or in the aggregate, could not reasonably be expected to have a
material adverse effect on the Real Property.
2.10.3. Not Named as a Potentially Responsible Party. To the
Seller's knowledge, none of the Consolidated Forecast Entities has, in the
three (3) years preceding the Effective Date, been named as a potentially
responsible party under CERCLA or any corresponding state Laws.
2.10.4. Hazardous Substances. Except as set forth in the
Environmental Reports or on the Seller's Disclosure Schedule, in the three
(3) years preceding the Effective Date, (a) none of the Consolidated Forecast
Entities has, in connection with the Real Property, generated, used,
transported, treated, stored, released or disposed of, or has suffered or
permitted anyone else to generate, use, transport, treat, store, release or
dispose of any Hazardous Substance in connection with the Real Property in
violation of any Environmental Laws or which would require reporting to or
notification of any Governmental Entity, (b) to the Seller's knowledge, no
asbestos or polychlorinated biphenyl or underground storage tank is contained
in or located at any Real Property, and (c) to the Seller's knowledge, any
Hazardous Substance handled or dealt with in any way in connection with any
Real Property has been and is being handled or dealt with, in all material
respects, in compliance with applicable Environmental Laws, except where the
noncompliance, individually or in the aggregate, could not reasonably be
expected to have a material adverse effect on the Real Property.
2.10.5. No Notices. Except as set forth in the Environmental
Reports or on the Seller's Disclosure Schedule, in the three (3) years
preceding the Closing Date, none of the Consolidated Forecast Entities has
generated, used, transported, stored, released or disposed of any Hazardous
Substances in connection with the conduct of the Homebuilding Business or the
use of any property or facility currently owned or operated (and, to the
Seller's knowledge, heretofore owned or operated) by any Consolidated
Forecast Entity, which has created any Liability under any Environmental Laws
or which would require reporting to or notification of any Governmental
Entity.
2.10.6. Assumption of Liabilities. Except as set forth on the
Seller's Disclosure Schedule or in any environmental guarantees or
indemnities existing under any lending documents relating to the Real
Property or the Homebuilding Business, none of the Consolidated Forecast
Entities has contractually assumed any liability or obligation under or
relating to any Environmental Law.
2.11 Information Generally. The information prepared by the
Consolidated Forecast Entities and thereafter made available by the Seller to
the Buyer in or pursuant to this Agreement or in or pursuant to the Schedules
or Exhibits hereto does not and will not, as of the date provided, contain
any untrue statement of a material fact, and does not and will not, as of the
date provided, omit to state a material fact necessary to make the statements
or facts contained therein not misleading. Notwithstanding the foregoing,
the Seller makes no representations with respect to information prepared by
Persons other than the Consolidated Forecast Entities, Previti or Previti's
Affiliates and the Seller provides no assurances with respect to future
events.
2.12 No Conflicts; Government Approvals; Third-Party Consents. Except
as set forth on the Seller's Disclosure Schedule, the execution, delivery and
performance of this Agreement by the Seller and the consummation of any of
the transactions contemplated hereby will not, to the Seller's knowledge, (a)
violate, or constitute a non-technical breach or material default (whether
upon lapse of time or notice or both) under, or results in any material
augmentation or acceleration of rights, benefits or obligations of any party
under (including the acceleration of indebtedness or any prepayment
obligation), the constituent documents of the Seller or any Contract listed
on the Seller's Disclosure Schedule, or (b) violate any Law or Order
applicable to the Seller or the Assets, except for such violations, breaches
or defaults that cannot, individually or in the aggregate, reasonably be
expected to have a material adverse effect on the Seller or the Real
Property, taken as a whole. Except as set forth on the Seller's Disclosure
Schedule, this Agreement and/or as required under the Hart-Scott-Rodino Act,
the execution and delivery of this Agreement by the Seller and the
performance of this Agreement by the Seller shall not require a filing or
registration with, or the issuance of any Permit or Approval by, any other
Person or Governmental Entity.
2.13 Legal Proceedings. Except as set forth on the Seller's
Disclosure Schedule, (a) no Order or Action is pending or, to the Seller's
knowledge, threatened against Previti, the Seller or any of the Consolidated
Forecast Entities or any of the Assets that, if resolved unfavorably against
such Person or Asset, individually or when aggregated with one or more other
such Orders or Actions, would have a material adverse effect on such Person
or Asset or would materially and adversely effect the Seller's ability to
materially perform this Agreement, (b) the Seller does not reasonably expect
any of such Orders or Actions, individually or in the aggregate, to have a
material adverse effect on the Seller or the Assets, (c) no Order or Action
is pending with respect to the entitlements pertaining to any Real Property,
(d) no Action is pending against the Seller that would prevent the execution,
delivery or performance of this Agreement by the Seller or the transfer,
conveyance and sale of the Assets to be sold by the Seller to the Buyer
pursuant to the terms hereof, and (e)neither the Seller nor any of the Assets
is a party to, subject to or bound by any Action or Order.
2.14 Acquisition for Investment. Previti is an "accredited investor,"
as such term is defined in Regulation D under the Securities Act, or
otherwise has such knowledge and experience in financial and business matters
that Previti is capable of evaluating the merits and risks of Previti's
investment hereunder.
2.15 Construction Defect Claims. Except with respect to those claims
of construction defects, or personal injuries stemming from such claims,
which, individually or in the aggregate, could not reasonably be expected to
have a material adverse effect on the Homebuilding Business, all (a)material
claims regarding construction defects which have been disclosed to the
underwriter of any of the Policies, and (b)claims regarding construction
defects which could reasonably be expected to exceed Fifty Thousand Dollars
($50,000) and which the division presidents of the Seller have received
written notice of such claims are set forth on the Seller's Disclosure
Schedule. Together with any Policies, the amounts reserved therefor by the
Seller on its Financial Statements in accordance with GAAP is specified, and,
to the Seller's knowledge, is reasonable under the circumstances; provided,
however, that Seller cannot and is not providing any assurance or guarantee
with respect thereto.
2.16 Taxes.
2.16.1. Other than as set forth on the Seller's Disclosure
Schedule, all Tax Returns required to be filed by or on behalf of the Seller
with respect to the Assets have been duly and timely filed (taking into
account any extensions) and such Tax Returns have been prepared in accordance
with applicable Laws and, to the best of Previti's knowledge, are true and
correct in all material respects.
2.16.2. All Taxes shown on the Tax Returns have been timely paid in
full and no other Taxes or penalties are payable by the Seller with respect
to items or periods covered by such Tax returns.
2.16.3. None of the Assets is tax-exempt use property within the
meaning of Section 168(h) of the Code and none of the Assets is property that
is or will be required to be treated as being owned by another person
pursuant to the provisions of Section 168(f)(8) of the Internal Revenue Code
of 1954, as amended and as in effect immediately prior to the enactment of
the Tax Reform Act of 1986.
2.16.4. Tax Liens. There are no tax liens on any of the Assets
with respect to Taxes, other than liens for (a) Taxes not yet due and
payable, or (b) Taxes that the Consolidated Forecast Entities are contesting
in good faith through appropriate procedures and/or proceedings which are
described on the Seller's Disclosure Schedule.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE BUYER
The Parties agree that the purchase of the Assets shall be without
representation or warranty by the Buyer, express or implied, except as
specifically set forth in this Agreement. None of the representations and
warranties contained herein shall survive Closing; provided, however, that to
the extent that the making of any such representation or warranty constituted
actual fraud (and as further limited by Section 8.2) on the part of the
Buyer, the Seller's right to promptly bring an Action against the Buyer
thereunder and to such extent shall survive the Closing and shall remain in
full force and effect until the date that is ninety (90) days after the
expiration of the applicable statutory period; provided, however, such Action
shall be filed in accordance with Section 10.10 by the Seller within ninety
(90) days after the Seller's actual discovery thereof or the claim (and the
applicable remedy) shall automatically be waived. Except as otherwise
indicated on the Buyer's Disclosure Schedule as to the particular section as
to which an exception is being disclosed, the Buyer represents and warrants
to the Seller and Previti as follows:
3.1 Organization and Related Matters. The Buyer is duly organized,
validly existing and in good standing under the Laws of the State of
Delaware, with the necessary corporate power and authority (a)to own and
operate its business as now being conducted and as presently proposed to be
conducted, and (b)to execute, deliver and perform this Agreement.
3.2 Authorization. The execution, delivery and performance of this
Agreement by the Buyer have been duly and validly authorized by the Buyer's
Board and by all other necessary corporate action on the part of the Buyer,
including, without limitation, the requisite vote of the holders of the
capital stock of the Buyer, and no other corporate proceedings on the part of
the Buyer are necessary to authorize this Agreement or the transactions
contemplated hereunder. This Agreement has been duly and validly executed
and delivered by the Buyer and constitutes the legal, valid and binding
obligation of the Buyer, enforceable against the Buyer in accordance with its
terms, except as may be limited by bankruptcy, insolvency, reorganization,
moratorium and other similar laws relating to or limiting creditors' rights
generally and equitable principles.
3.3 Licenses Held by the Seller. The Buyer acknowledges and agrees that
any licenses from the Department of Real Estate or the Contractors' Board
held by the Consolidated Forecast Entities as of the Closing Date shall not
be transferred or delivered to the Buyer, and that the Buyer shall rely upon
its own licenses, if any, to manage or develop any of the Assets acquired in
connection with this Agreement after the Closing Date.
3.4 No Conflicts; Government Approvals; Third-Party Consents. Except as
set forth on the Buyer's Disclosure Schedule, the execution, delivery and
performance of this Agreement by the Buyer, including, without limitation,
the issuance of the Buyer's Shares in connection with this Agreement, will
not, to the Buyer's knowledge, violate the provisions of, or constitute a
breach or default (whether upon lapse of time and/or the occurrence of any
act or event or otherwise) under (a) the constituent documents of the Buyer
or any of its Subsidiaries, or (b) any Law or Order to which the Buyer or its
Subsidiaries or any of their assets is subject, except for such violations,
breaches or defaults that cannot reasonably be expected to be materially
adverse to the Buyer and its Subsidiaries, taken as a whole. Except as set
forth with specificity on the Buyer's Disclosure Schedule and/or as required
under the Hart-Scott-Rodino Act, the execution and delivery of this Agreement
by the Buyer and the performance of this Agreement by the Buyer will not
require a filing or registration with, or the issuance of any Permit or
Approval by, any other third party or Governmental Entity.
3.5 No Brokers or Finders. No agent, broker, finder or investment or
commercial banker, or other Person or firms engaged by or acting on behalf of
the Buyer or its Affiliates in connection with the negotiation, execution or
performance of this Agreement, the Securities Purchase Agreement or the
transactions contemplated thereunder, is or will be entitled to any broker's
or finder's or similar fees or other commissions as a result of this
Agreement, the Securities Purchase Agreement or the transactions contemplated
thereunder; provided, however, that (a)the Buyer shall have full
responsibility for any obligations to any Person claiming a fee through the
Buyer, if any, and (b)the Seller shall have full responsibility for the
obligations to Salomon.
3.6 Legal Proceedings. Except as set forth on the Buyer's Disclosure
Schedule, there is no Order or Action pending or, to the Buyer's knowledge,
threatened against either the Buyer or any of its Subsidiaries that if
resolved unfavorably against the Buyer or any of its Subsidiaries could
reasonably be expected to have a material adverse effect on the financial
position of the Buyer and its Subsidiaries taken as a whole or on the Buyer's
ability to materially perform this Agreement, nor, to the Buyer's knowledge,
is there any outstanding judgment, settlement, decree or injunction, in each
case against the Buyer, any of its Subsidiaries or any of their respective
assets, or any statute, rule or Order of any Governmental Entity applicable
to the Buyer or any of its Subsidiaries that could reasonably be expected to
have a material adverse effect on the financial position of the Buyer and its
Subsidiaries taken as a whole or on the Buyer's ability to materially perform
this Agreement.
3.7 Financing. The Buyer currently has available sufficient funds and
authorized Common Stock, which is capable of being registered under the
Securities Act, to enable it to consummate the transactions contemplated
hereby and by the Securities Purchase Agreement and the Buyer's ability to
close the transactions in accordance with this Agreement and the Securities
Purchase Agreement is not and will not be conditioned or contingent upon the
Buyer's stock price, economic conditions or the Buyer's ability to receive
any additional funds or financing.
3.8 SEC Reports; Financial Statements. The Buyer has delivered to the
Seller the Buyer's SEC Reports. The consolidated financial statements of the
Buyer included in the Buyer's SEC Reports comply as to form in all material
respects with applicable accounting requirements and the published rules and
regulations of the SEC with respect thereto, have been prepared in accordance
with GAAP (except, in the case of unaudited consolidated quarterly
statements, as permitted by Form 10-Q of the SEC) applied on a consistent
basis during the periods involved (except as may be indicated in the notes
thereto) and present fairly, in all material respects, the consolidated
financial position of the Buyer and its consolidated Subsidiaries as of the
dates thereof and the consolidated results of their operations and cash flows
for the periods then ended (subject, in the case of unaudited quarterly
statements, to normal year-end audit adjustments). Neither the Buyer nor any
of its Subsidiaries has any material liability (contingent or otherwise) or
obligations, in each case that are required to be disclosed by GAAP, except
liabilities that (a) are reflected or disclosed in the most recent financial
statements included in the Buyer's SEC Reports, or (b) were incurred after
the date of such most recent financial statements in the ordinary course of
business consistent with past practice.
3.9 Compliance with Requirements for Short-Form Registration. The Buyer
has complied in all material respects with all requirements under the New
York Stock Exchange (and any other major exchange on which the Buyer's
securities are listed or any major market on which the Buyer's securities are
included), the Securities Act and the Exchange Act, and has satisfied all
requirements for the use of a short-form registration of the Buyer's
securities under the Securities Act, including, without limitation, a Form S-
3.
3.10 Capitalization.
3.10.1. As of the Effective Date, the authorized capital stock of
the Buyer consists of (a) eighty-seven million (87,000,000) shares of Common
Stock, of which Twenty Million Six Hundred Seven Thousand One Hundred
Seventy-Eight (20,607,178) shares are currently issued and outstanding, (b)
thirteen million (13,000,000) shares of Class B common stock, par value $0.01
per share, of which Seven Million Four Hundred Seventy-One Thousand Six
Hundred Forty (7,471,640) shares are currently issued and outstanding, (c)
one hundred thousand (100,000) shares of preferred stock, par value $0.01 per
share, of which none are currently issued and outstanding and (d) options to
acquire Two Million Six Hundred Twenty-Three Thousand Seven Hundred Fifty-Two
(2,623,752) shares of the Buyer's Common Stock issued pursuant to the Buyer's
various option plans. Except as set forth on the Buyer's Disclosure Schedule
or pursuant to Buyer's benefit plans, as of the Effective Date, there are no
outstanding (i) Contracts, options, warrants or other rights to subscribe for
or purchase any Equity Securities of the Buyer, (ii) Contracts or other
obligations to issue or grant any rights to acquire any Equity Securities of
the Buyer, or (iii) Contracts or other obligations to restructure or
recapitulate the Buyer or any of its Subsidiaries. As of the Effective Date,
there are no outstanding Contracts of the Buyer to repurchase, redeem or
otherwise acquire any Equity Securities of the Buyer or its Subsidiaries.
3.10.2. The issuance of the Buyer's Shares has been duly authorized
by all necessary corporate action on the part of the Buyer and, when issued
pursuant to this Agreement, will be validly issued, fully paid and non-
assessable. The Buyer's Shares will be issued without any violation of
preemptive rights, co-sale rights, rights of first refusal or any other
similar right or restriction arising under the Buyer's charter or Delaware
General Corporation Law or any other document or agreement or any other
restriction, including, without limitation, restrictions on transfer.
3.11 No Vote Required. The affirmative vote of the holders of capital
stock of the Buyer is not required of any class or series of the Buyer's
capital stock in order to approve this Agreement, the Securities Purchase
Agreement or the transactions contemplated thereunder or under any Collateral
Agreement. The Buyer's Board, at a meeting duly called and held prior to the
Effective Date (a)determined that this Agreement, the Securities Purchase
Agreement and the transactions contemplated thereby, and under any Collateral
Agreement, are fair to, and in the best interests of, the stockholders of the
Buyer, and (b)approved this Agreement, the Securities Purchase Agreement, any
Collateral Agreement and the transactions contemplated thereby. Prior to the
Effective Date, the Buyer has delivered to the Seller a copy of the complete
set of minutes of the meeting and all the resolutions of the Buyer's Board.
3.12 Not an Investment Company. Neither the Buyer nor any of its
Subsidiaries is an "investment company" or an entity "controlled" by an
"investment company" within the meaning of the Investment Company Act of
1940, as amended, and the rules and regulations promulgated thereunder.
3.13 Registration of the Buyer's Shares; Securities Laws Compliance.
The Buyer's Shares shall be issued to the Seller (or its designee) in
compliance with the Securities Act, all applicable state securities laws and
all applicable rules and regulations of the New York Stock Exchange (or any
other exchange on which the Buyer's securities are listed or any other market
on which the Buyer's securities are included). The SEC has not initiated any
proceedings to remove, suspend or terminate from listing or quotation the
Buyer's common stock from any securities exchange upon which it is listed for
trading, included or designated for quotation, or threatened to initiate any
proceedings for any of such purposes. If the SEC shall enter any such stop
order at any time, the Buyer shall use its best efforts to obtain the lifting
of such order at the earliest possible moment. Additionally, the Buyer
agrees that it shall comply with the provisions of Rules 424(b), 430A and
434, as applicable, under the Securities Act and will use its best efforts to
confirm that any filings made by it under such Rule 424(b) were received in a
timely manner by the SEC. The Buyer has not received any notification from
the New York Stock Exchange (or any other exchange on which the Buyer's
securities are listed or any other market on which the Buyer's securities are
included) indicating that the Buyer's securities shall or may be removed from
listing or inclusion on such exchange or market, as applicable.
SECTION 4. COVENANTS PRIOR TO CLOSING
4.1 Access. The Seller shall cause the Consolidated Forecast Entities
to afford the Buyer, its agents and its attorneys reasonable access during
normal business hours, upon advance written notice and in such manner as will
not unreasonably interfere with the usual day-to-day conduct of the Seller's
businesses, to the offices, properties and financial records of the
Consolidated Forecast Entities as the Buyer may from time to time reasonably
request. In furtherance and not in limitation of the foregoing, the Buyer
shall be entitled to conduct or cause to be conducted (at its sole expense)
on any Real Property such soils and geological tests and environmental
inspections, audits and tests (including the taking of soils and ground water
samples) and such structural and other physical inspections as the Buyer
shall deem reasonably necessary or useful in connection with the transactions
contemplated by this Agreement, so long as such inspections, audits and tests
do not delay the Closing Date and the Buyer conducts the same in material
compliance with all Laws and upon written notice to the Seller delivered
three (3) days prior to the date of such inspection, audit or test and so
long as the Buyer causes its consultants (prior to their entry upon any Real
Property) to name the Seller as an additional insured under insurance
policies carried by such consultants. The Buyer shall cause any property
damage resulting from any such testing, inspection or audit to be promptly
repaired at the Buyer's sole cost, and the Buyer hereby agrees to indemnify,
defend and hold the Seller and the other Consolidated Forecast Entities, as
applicable, harmless from any Loss incurred by the Seller and/or the
Consolidated Forecast Entities (including, without limitation, any Loss
incurred by Seller related to any property damage and/or any personal
injury), and/or arising out of the conduct of any such tests, inspections or
audits. Notwithstanding any of the foregoing, the Buyer shall have no
obligation to indemnify or hold harmless any Person regarding any remediation
of, or any response to, any contamination or violation of Environmental Law,
or any other liability under or relating to any Environmental Law discovered,
but not actually caused, by the Buyer's tests, inspections or audits. The
Buyer's obligations hereunder shall survive the expiration or termination of
this Agreement without any limitation or qualification.
4.2 Preservation of Business Prior to the Closing Date.
4.2.1. Except as otherwise set forth on the Seller's Disclosure
Schedule, during the period beginning on the Option Date and ending on the
Closing Date, the Seller shall not sell more than five percent (5%) of the
Assets outside of the ordinary course of business in one or a series of
related transactions; provided, however, that nothing contained herein shall
limit or restrict the ability or right of any of the Consolidated Forecast
Entities' to sell lots included in the Assets to individual home buyers in
the ordinary course of business.
4.2.2. During the period beginning on the Effective Date and
ending on the Closing Date:
(a) Conduct of Business. Except as otherwise set forth on
the Seller's Disclosure Schedule, the Seller shall cause the Consolidated
Forecast Entities to conduct the Homebuilding Business generally in
accordance with their past business practices.
(b) Goodwill. The Seller shall cause the Consolidated
Forecast Entities to use commercially reasonable efforts to preserve the
goodwill of customers, suppliers and others having business relations with
the Consolidated Forecast Entities.
(c) Third Party Rights. Except with respect to (i)the
Permitted Encumbrances, (ii)those items set forth on the Seller's Disclosure
Schedule, and (iii)those items as to which the Buyer has given its written or
oral approval, the Seller shall not grant to any person any Contract or other
right to use or acquire any portion of the Real Property, or to the
furnishing or use of any facility or amenity on or relating to the Real
Property, in each case that will continue past the Closing Date.
4.3 Notification of Certain Matters. The Seller shall give prompt
written notice to the Buyer, and the Buyer shall give prompt written notice
to the Seller, of such Party's respective knowledge of (a) the occurrence, or
failure to occur, of any event that would be likely to cause any
representation or warranty contained in this Agreement to be untrue or
inaccurate in any material adverse respect at any time between the Effective
Date and the Closing Date, and (b) any failure of the Buyer or the Seller, as
the case may be, to comply with or satisfy, any covenant, condition or
agreement to be complied with or satisfied by it under this Agreement to the
extent such covenants, conditions or agreements may be qualified therein by
materiality or otherwise.
4.4 Permits and Approvals.
4.4.1. Pre-Closing. The Seller and the Buyer each agree to
cooperate and use commercially reasonable efforts to obtain all (and shall
promptly prepare all registrations, filings and applications, requests and
notices preliminary to all) Approvals and Permits that may be necessary to
consummate the transactions contemplated by this Agreement, including,
without limitation, the Approvals listed on the Seller's Disclosure Schedule
(which shall be obtained at the Seller's expense) and the Buyer's Disclosure
Schedule (which shall be obtained at the Buyer's expense).
4.4.2. Post-Closing. To the extent that the Approval of a third
party with respect to any Material Contract is required in connection with
the transactions contemplated by this Agreement but is not obtained prior to
the Closing Date, the Seller shall (but without limitation on the Buyer's
rights under Section 6.2 and without any cost to the Seller) attempt in a
commercially reasonable manner to assist the Buyer in obtaining for the Buyer
the benefits of each such Contract. Previti and the Seller agree, for a
period of six (6) months following the Closing Date, to reasonably cooperate
with the Buyer (at no cost or expense to Previti or the Seller) and, to the
extent permitted by Law, to permit the Buyer to use the appropriate licenses
or permits of the Seller, Previti or the Consolidated Forecast Entities with
respect to the Assets only. In connection therewith, neither the Seller,
Previti or any of the Consolidated Forecast Entities shall be obligated to
cooperate in the event that doing so could jeopardize such licenses or
permits. Additionally, the Buyer shall indemnify and hold the Seller,
Previti and the Consolidated Forecast Entities harmless from and against any
loss, cost, damage or claim, including, without limitation, any attorneys'
fees and costs arising in connection with its cooperation with the Buyer or
the Buyer's use of such licenses or permits, except to the extent arising
from the Seller's willful misconduct or gross negligence.
4.5 Reserved Insurance. Prior to the Closing Date, the Buyer shall (a)
name Previti and the Consolidated Forecast Entities as additional insureds
under the insurance policies carried by the Buyer and its Affiliates with
respect to the Homebuilding Business, and (b) provide the Representative with
evidence reasonably satisfactory to the Representative of having named
Previti and each of the Consolidated Forecast Entities as additional insureds
under the foregoing insurance policies for ten (10) years following the
Closing. The Parties acknowledge and agree that notwithstanding any other
provision in this Agreement to the contrary, the assignment of the Policies
pursuant to this Agreement and the inclusion of the Policies as "Assets"
hereunder, the Seller, Previti and the Consolidated Forecast Entities, as
applicable, retain the benefit of the Policies with respect to the Excluded
Assets (and any Excluded Liabilities) and shall have the right and ability to
make claims under the Policies for any and all Excluded Liabilities.
SECTION 5. ADDITIONAL CONTINUING COVENANTS
5.1 Non-Competition.
5.1.1. Restrictions on Competitive Activities. Except as
expressly set forth in Section 5.1.2, after the Closing Date and for a period
of three (3) years thereafter, each of the Seller and Previti agrees that it
shall not (a) directly or indirectly, through an Affiliate or otherwise, for
its own benefit or that of another, engage, own or manage or act as an
employee for any Person that engages in the construction of single-family,
for sale residences or residential condominiums in the Covered Counties, and
(b) solicit for employment or employ any individual employed by the Seller or
its Affiliates as of either October 1, 2001 or the Closing Date.
Notwithstanding clause (b) of the immediately preceding sentence, Previti may
solicit for employment or employ any individual that (i) is terminated by the
Buyer, commencing six (6) months after the Closing Date, (ii) terminates his
employment with the Buyer and is subsequently employed by a third party for
at least six (6) months, (iii) is a relative of Previti, or (iv) is an
individual listed on Schedule 5.1.1 (the "Excluded Employees") attached
hereto; provided, however, that in the instance of clause (i) or (ii),
Previti shall not employ such individual in a role related to homebuilding
until such time as the three (3) year anniversary of the Closing Date has
occurred.
5.1.2. Exceptions. Nothing contained in this Agreement shall
limit the right of Previti, the Group or any of the Controlled Entities,
without limitation, (a) to participate in the development and construction of
single-family, for sale residences on the real property included in the
Previti Projects and in the development and construction of those condominium
projects set forth on Schedule 5.1.2 (the "Permissible Condominium Projects")
attached hereto, (b) to hold their respective current investments or to
manage their other current businesses which are unrelated to the Homebuilding
Business and the sale of single-family homes, (c)to construct for the purpose
of selling or leasing for its own account, any development that is not
single-family residential construction, including, without limitation, multi-
family rental properties, (d) to acquire and entitle raw land for single-
family or multi-family residential or commercial, retail or industrial
development, (e) to retain or increase its ownership and/or equity interest
in Premier and to participate in any activity of Premier in connection with
the construction, development and sale of any residential property,
including, without limitation, the homebuilding business of Premier;
provided, however, that (1) if Premier executes and delivers the Non-
Competition and Option Agreement effective as of the Closing Date, Premier
shall (i) limit its construction for sale of single family homes (including
condominiums) in all of the counties in California (the "Covered Counties"),
to not more than (A) one hundred and fifty (150) in the calendar year 2002,
(B) two hundred and fifty (250) in the calendar year 2003, and (C) three
hundred fifty (350) in the calendar year 2004, and (ii)sell each such single-
family residence for a base amount (exclusive of non-standard options and
non-standard add-ons, etc.) exceeding Three Hundred Thousand Dollars
($300,000), or (2) if Premier does not execute and deliver the Non-
Competition and Option Agreement effective as of the Closing Date, Previti
shall limit his and the Controlled Entities' construction for sale of single
family residences to (i) not more than (A)six hundred (600) homes in the
three (3) year period following the Closing Date in the Covered Counties and
(B)two hundred fifty (250) homes in any single year in the Covered Counties,
and (ii)single-family residences that sell for a for a base amount (exclusive
of non-standard options and non-standard add-ons, etc.) exceeding Three
Hundred Thousand Dollars ($300,000), (f)as a passive investor without veto
rights, to hold and make investments in securities of any corporation or
limited partnership that is registered on a national securities exchange or
admitted to trading privileges thereon or actively traded in a generally
recognized over-the-counter market, provided the Seller's equity interest
therein (other than interests in the Buyer) does not exceed five percent (5%)
of the outstanding shares or interests in such corporation or partnership,
and (g)as a passive investor in or as a secured or unsecured lender (i) to
real estate investment companies and/or investors which provide financing to
commercial and/or residential real estate owners and developers or (ii)
directly to commercial and/or residential real estate owners and developers
(which shall include the right to exercise any and all remedies available to
such party as lender with respect to defaulted loans, including, without
limitation, the right to foreclose, accept a deed-in-lieu of foreclosure and
to own, operate and/or complete the construction and/or development of any
commercial or residential project acquired as a result of any such default).
In addition, nothing herein shall limit the right of Previti to periodically
invest in and consult with respect to any homebuilding efforts initiated by
either of his two (2) sons; provided, however, that such Previti invested
homebuilding activities undertaken by either son shall not exceed the
construction of twelve (12) units of single-family, for sale residential
homes over any period of twelve (12) consecutive months from the Closing Date
through the third anniversary of the Closing Date. Nothing in this Section
5.1.2 shall serve to restrict or limit the rights or abilities of either of
Previti's sons to acquire, entitle, develop and/or construct any type or
number of developments at any time if such activity is without the investment
of Previti and without the direct material involvement of Previti in such
activities.
5.1.3. Special Remedies and Enforcement. The Seller recognizes
and agrees that a breach by the Seller or any Controlled Entity of any of the
covenants set forth in this Section 5.1 could cause irreparable harm to the
Buyer, that the Buyer's remedies at Law in the event of such breach would be
inadequate, and that, accordingly, in the event of such breach, a restraining
order or injunction or both may be issued pursuant to and subject to
appropriate legal proceedings against the Seller, in addition to any other
rights and remedies which are available to the Buyer (subject to the
limitations in this Agreement). If this Section 5.1 is more restrictive than
permitted by the Laws of the jurisdiction in which the Buyer seeks
enforcement hereof, this Section 5.1 shall be limited to the extent required
to permit enforcement under such Laws. Without limiting the generality of
the foregoing, the Parties intend that the covenants contained in the
preceding portions of this Section 5.1 shall be construed as a series of
separate covenants, one for each of the Covered Counties. Except for
geographic coverage, each such separate covenant shall be deemed identical in
terms. If, in any judicial proceeding, a court shall refuse to enforce any
of the separate covenants deemed included in this Section 5.1, then such
unenforceable covenant shall be deemed eliminated from these provisions for
the purpose of those proceedings to the extent necessary to permit the
remaining separate covenants to be enforced.
5.2 Nondisclosure of Proprietary Data. Each of Previti and the Seller
agrees that the Seller will not, and agrees to cause the Consolidated
Forecast Entities to not (a)divulge or otherwise disclose any trade secret or
other proprietary data concerning the business or policies of the Seller or
its Affiliates as they relate to the Assets, or (b)divulge or otherwise
disclose to Persons other than the Buyer, any confidential information
concerning the business or policies of the Seller or its Affiliates as they
relate to the Assets, except, in each case, (i) to the extent that such
information is or hereafter becomes lawfully obtainable from other sources,
(ii) to the extent that such information is necessary or appropriate to
disclose to a Governmental Entity having jurisdiction over the disclosing
Party, (iii) as may otherwise be required by Law, or (iv) to the extent such
duty of confidentiality is waived in writing by the Buyer.
5.3 Tax Cooperation. After the Closing Date, the Seller and the Buyer
shall, and shall cause their respective Affiliates to, cooperate in a
commercially reasonable manner with each other in the preparation and filing
of all Tax Returns and any Tax investigation, audit or other proceeding with
respect to the Seller (a "Tax Proceeding") and shall provide, or cause to be
provided, any records and other information in their possession or control or
in the control of their agents reasonably requested by such other Party in
connection therewith as well as access to, and the cooperation of, their
respective Auditors at each Party's request. The Seller shall not agree to
any settlement concerning Taxes with respect to the Assets for any taxable
period which would result in an increase of more than One Million Dollars
($1,000,000) in Taxes of the Buyer for any taxable period ending after the
Closing Date, without the prior written consent of the Buyer. Except as to
the extent the Seller has indemnified such costs pursuant to the provisions
set forth in this Agreement or the Collateral Agreements, the Buyer and the
Seller shall bear their respective costs and expenses in connection with any
Tax Proceeding. Any information obtained pursuant to this Section 5.3 or
pursuant to any other Section of this Agreement providing for the sharing of
information or the review of any Tax Return or other information relating to
Taxes shall be subject to Section 10.9.
5.4 Access to Books and Records. After the Closing Date, the Buyer
shall afford the Seller and its accountants, counsel and other
representatives, reasonable access during normal business hours to the books
and records related to the Assets transferred to the Buyer by the Seller for
the period prior to the Closing Date that relate to Tax matters or any third-
party claims against the Seller relating to the business of the Consolidated
Forecast Entities during any such period. The Seller or its representatives,
may, at the Seller's own expense, make copies of such books and records. The
Buyer understands that there are certain 2000 and 1999 tax returns for
entities associated with the Consolidated Forecast Entities for which Tax
Returns have not yet been prepared and that such Tax returns are identified
on the Seller's Disclosure Schedule. The Buyer agrees after the Closing to
give the Seller's accountants and tax accountants complete access to the
information needed to prepare such returns.
5.5 Registration of the Buyer's Shares.
5.5.1. Obligations of the Buyer. Within the first six (6) months
following the Closing Date, the Buyer shall:
(a) prepare and file with the SEC a registration statement
(a "Registration Statement") to register all of the Buyer's Shares and cause
such Registration Statement to become effective;
(b) keep such Registration Statement effective for such time
as shall be required for the Seller to dispose of all of the Buyer's Shares;
(c) prepare and file with the SEC such amendments and
supplements to such Registration Statement and the prospectus used in
connection with such Registration Statement as may be necessary to comply
with the provisions of the Securities Act with respect to the disposition of
all securities covered by such Registration Statement;
(d) furnish to Previti and the Consolidated Forecast
Entities such number of copies of a prospectus, including a preliminary
prospectus, in conformity with the requirement of the Securities Act and such
other documents as they may request in order to facilitate the disposition of
all of the Buyer's Shares;
(e) register and qualify the Buyer's Shares covered by such
Registration Statement under such other securities or Blue Sky laws of such
jurisdictions as shall be reasonably requested by the Seller;
(f) provide a transfer agent and registrar for the Buyer's
Shares and a CUSIP number for such Buyer's Shares, in each case not later
than the effective date of such registration;
(g) cause all of the Buyer's shares registered pursuant
hereto to be listed on each securities exchange (or automated quotation
service) on which similar securities issued by the Buyer are then listed, or
if no such listing exists, then on either the New York Stock Exchange, the
American Stock Exchange or NASDAQ;
(h) notify Previti and the Consolidated Forecast Entities at
any time when a prospectus relating thereto is required to be delivered under
the Securities Act or the happening of any event which causes the prospectus
included in such registration statement, as then in effect, to include an
untrue statement of a material fact or omits to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading in light of the circumstances then existing; and
(i) cause its counsel to furnish, at the request of Previti
or any of the Consolidated Forecast Entities, on the date that any of the
Buyer's Shares are delivered to a purchaser or purchasers thereof an opinion,
dated such date, of the counsel representing the Buyer, in form and substance
as is customarily given to remove all legends from such shares.
5.5.2. Failure to Register the Buyer's Shares. In the event that
the Buyer does not fulfill its foregoing obligations, the Seller shall have
the right to cause the Buyer to promptly repurchase all of the Buyer's Shares
from the Seller pursuant to Section 1.3.2.
5.5.3. Expenses of Registration. All expenses, including, without
limitation, out-of-pocket costs incurred by Previti, commissions, filing
fees, transaction fees, stock transfer taxes and fees of counsel (which
counsel's fee shall not exceed Ten Thousand Dollars ($10,000) except in the
event of default by the Buyer), incurred in connection with the registration
of the Buyer's Shares (including, without limitation, the filing of the
Registration Statement and any other related filings with the SEC) shall be
paid by the Buyer.
5.5.4. Protection. The Buyer agrees to indemnify, defend and hold
harmless Previti and the Consolidated Forecast Entities against any Loss as
incurred, to which Previti and the Consolidated Forecast Entities may become
subject, under the Securities Act, the Exchange Act or other federal or state
statutory law or regulation, or at common law or otherwise (including in
settlement of any litigation), insofar as such Loss (or actions in respect
thereof as contemplated below) arises out of or is based (a)upon any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement, or any amendment thereto, including any information
deemed to be a part thereof pursuant to Rule 430A under the Securities Act,
or the omission or alleged omission therefrom of a material fact required to
be stated therein or necessary to make the statements therein not misleading;
or (b)upon any untrue statement or alleged untrue statement of a material
fact contained in any preliminary prospectus or prospectus (or any amendment
or supplement thereto), or the omission or alleged omission therefrom of a
material fact necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading; and to
reimburse Previti and the Consolidated Forecast Entities for any and all
expenses (including the fees and disbursements of counsel chosen solely by
Previti and the Consolidated Forecast Entities) as such expenses are
reasonably incurred by Previti and the Consolidated Forecast Entities in
connection with investigating, defending, settling, compromising or paying
any such loss, claim, damage, liability, expense or action; provided,
however, that the Buyer shall not have liability under clauses (a) and (b) to
the extent such statement was related to the Assets, Previti or the
Consolidated Forecast Entities and was provided in writing directly to the
Buyer by Previti specifically for inclusion in the applicable registration
statement or prospectus. The indemnity agreement set forth in this Section
5.5.4 shall be in addition to any liabilities that the Buyer may otherwise
have and shall survive the Closing Date.
5.6 Change of Control. The Buyer shall not enter into any agreement
with any third party to effect or obligate itself to effect a Change of
Control unless the surviving entity of such contemplated Change of Control
transaction shall agree to assume all of the Buyer's obligations under this
Agreement (and any other related agreements), including, without limitation,
the Buyer's obligations with respect to the Buyer's Shares and Section 10.9;
provided, however, nothing herein shall limit, modify or change in any way
Buyer's obligations arising under Sections 1.3, 1.4, 1.5 and 1.6.
SECTION 6. CONDITIONS OF PURCHASE
6.1 General Conditions. The obligations of the Parties to effect the
Closing shall be subject to the following conditions, except to the extent
waived in writing by all Parties:
6.1.1. No Orders; Legal Proceedings. No Law or Order shall have
been enacted, entered, issued or enforced by any Governmental Entity, nor
shall any Action have been instituted and remain pending at what would
otherwise be the Closing Date, which prohibits or restricts or would (if
successful) prohibit or materially restrict the transactions contemplated by
this Agreement. No Governmental Entity shall have notified any Party that
consummation of the transactions contemplated by this Agreement would
constitute a violation of any Laws of any jurisdiction or that it intends to
commence proceedings to restrain or prohibit such transactions or force
divestiture or rescission, unless such Governmental Entity shall have
withdrawn such notice and abandoned any such proceedings prior to the time
which otherwise would have been the Closing Date.
6.1.2. Approvals. All Permits and Approvals required to be
obtained from any Governmental Entity to consummate the transactions
contemplated by this Agreement shall have been received or obtained on or
prior to the Closing Date.
6.1.3. Hart-Scott-Rodino Act Approvals. If applicable, all
waiting periods (and any extensions thereof) under the Hart-Scott-Rodino Act
shall have been expired or otherwise been terminated.
6.1.4. No Prohibition. No Action, suit or proceeding shall be
pending before any court or quasi-judicial or administrative agency of any
federal, state, local or foreign jurisdiction or before any arbitrator
wherein an unfavorable result would (a) prevent consummation of any of the
transactions contemplated hereby, or (b) cause any of the transactions
contemplated hereby to be rescinded following consummation.
6.1.5. Securities Purchase Agreement. All of the Closing
conditions set forth in the Securities Purchase Agreement have been satisfied
or waived by the parties thereto.
6.2 Conditions to Obligations of the Buyer. The obligations of the
Buyer to effect the Closing shall be subject to the following conditions,
except to the extent waived in writing by the Buyer:
6.2.1. Representations and Warranties and Covenants of the Seller.
The representations and warranties of the Seller and the Consolidated
Forecast Entities contained in this Agreement (as qualified by matters set
forth as exceptions thereto in the Seller's Disclosure Schedule and as
otherwise permitted by the terms of this Agreement) shall be true in all
material respects at the Effective Date and at the Closing Date, as
applicable, with the same effect as though made at and as of such time. The
Seller and the Consolidated Forecast Entities shall have in all material
respects performed all obligations and complied with all covenants and
conditions required by this Agreement to be performed or complied with by
them at or prior to the Closing Date, and the Seller shall have delivered to
the Buyer a certificate of the Seller to such effect, dated the Closing Date,
in the form of Exhibit J (the "Form of the Seller's Certificate") attached
hereto, subject to any bring-down to reflect the then current state of facts.
6.2.2. Consents. The Seller shall have obtained (and provided
evidence to the Buyer of receipt of) any Approvals of third parties set forth
on the Seller's Disclosure Schedule.
6.2.3. FIRPTA Affidavit. The Seller shall have executed and
delivered affidavits in a form reasonably satisfactory to the Buyer
providing, among other things, under penalty of perjury, its U.S. taxpayer
identification number and that it is not a "foreign person" within the
meaning of Sections 1445 and 7701 of the Code;
6.2.4. Opinion of Counsel. O'Melveny & Myers LLP, legal counsel
for the Seller, shall have delivered to the Buyer a legal opinion
substantially in the form of Exhibit K (the "Form of OM&M Legal Opinion")
attached hereto.
6.2.5. Seller's Certificates. The Seller shall have caused to be
delivered to the Buyer certificates, in a form reasonably satisfactory to the
Buyer, which shall include:
(a) copies of the resolutions that the board of directors of
the Seller and the partners thereof adopting and approving the execution,
delivery, and performance of this Agreement and each agreement, certificate,
instrument and other document to be delivered pursuant thereto to which they
are party;
(b) incumbency certificates setting forth the names, offices
and signatures of the Persons signing on behalf of them; and
(c) an officer's certificate of the Seller which certifies
that each of the transactions contemplated by the Transfer have been
completed on or prior to the Closing Date.
6.2.6. Other. The Seller shall have delivered to the Buyer such
other certificates as the Buyer may reasonably request to effect the
transactions contemplated hereby; provided, however, the Seller shall not be
obligated to undertake any step which would create obligations or liabilities
not specifically set forth in this Agreement, including, without limitation,
any obligations or liabilities to any third-parties.
6.2.7. Disclosure Documents. The Seller shall have delivered to
the Buyer copies of the Seller's SEC Reports.
6.2.8. Title Insurance. The Title Company shall be in a position
to issue Title Policies to the Buyer with respect to the Real Property, which
policies shall be subject only to the Permitted Encumbrances.
6.2.9. Lot Option Agreement. Previti shall have validly executed
and delivered the Lot Option Agreement.
6.2.10. Non-Competition and Option Agreement. Premier shall have
validly executed and delivered the Non-Competition and Option Agreement.
6.2.11. ROFO Agreement. Previti shall have validly executed and
delivered the ROFO Agreement.
6.2.12. Park Meadows Option Agreement. Previti shall have validly
executed and delivered the Park Meadows Option Agreement.
6.2.13. Consulting Agreement. Previti shall have validly executed
and delivered the Consulting Agreement.
6.2.14. Forecast Development Option and Purchase Agreement.
Forecast Development shall have validly executed and delivered the Forecast
Development Option and Purchase Agreement.
6.2.15. Indemnification and Release Agreement. Previti and the
Seller shall have validly executed and delivered the Indemnification and
Release Agreement.
6.3 Conditions to Obligations of the Seller. The obligations of the
Seller to effect the Closing shall be subject to the following conditions,
except to the extent waived by the Seller in writing:
6.3.1. Representations and Warranties and Covenants of the Buyer.
The representations and warranties of the Buyer herein contained (as
qualified by matters set forth as exceptions thereto in the Buyer's
Disclosure Schedule) shall be true in all material respects at the Effective
Date and at the Closing Date, as applicable, with the same effect as though
made at and as of such time; the Buyer shall have in all material respects
performed all obligations and complied with all covenants and conditions
required by this Agreement to be performed or complied with by it at or prior
to the Closing Date. The Buyer shall have delivered to the Seller a
certificate of the Buyer to such effect, dated the Closing Date, the form of
which appears as Exhibit L (the "Form of the Buyer's Certificate") attached
hereto.
6.3.2. Consents. The Buyer shall have obtained any and all
Approvals of third parties that are necessary in order to consummate the
transactions contemplated hereby, including, without limitation, the
Approvals set forth on the Buyer's Disclosure Schedule.
6.3.3. Opinion of Counsel. The Seller shall receive at the
Closing from Simpson, Thacher & Bartlett, an opinion dated the Closing Date,
in form and substance substantially as set forth in Exhibit M (the "Form of
the ST&B's Legal Opinion") attached hereto.
6.3.4. Assumption of Guarantees. The Buyer shall have assumed the
guarantees identified in Schedule 6.3.4 attached hereto by an instrument
acceptable to the Seller that fully and completely releases the Seller that
is a guarantor thereunder and each partner or shareholder, as applicable, of
the Seller, from any liability under such guarantees.
6.3.5. Assumption of Liabilities. The Buyer shall have assumed
all of the Liabilities of the Seller with respect to the Assets (other than
the Excluded Liabilities) pursuant to an assignment and assumption agreement
in the form attached hereto as Exhibit N (the "Form of Assignment and
Assumption Agreement"). Nothing contained herein or therein shall require
the Buyer to assume the Excluded Liabilities.
6.3.6. Secretary's Certificate. The Buyer shall have delivered to
the Seller a certificate, in a form acceptable to the Seller, which shall
include:
(a) a copy of the Buyer's certificate of incorporation
certified by the Secretary of State of the State of Delaware not more than
five (5) business days before the Closing Date;
(b) a long-form good standing certificate from the Secretary
of State of the State of Delaware, dated no earlier than five (5) business
days before the Closing Date, stating that the Buyer is in existence and in
good standing under the laws of the State of Delaware;
(c) a copy of the resolutions that the Buyer's Board or
executive committees of the Buyer adopted approving the execution, delivery
and performance of this Agreement and the transactions contemplated hereby
and each agreement, certificate, instrument or other document to be delivered
pursuant hereto to which it is a party; and
(d) an incumbency certificate setting forth the names,
offices and signatures of all of the officers signing on behalf of the Buyer.
6.3.7. Change of Ownership Filings. The Buyer shall have
completed and filed all "Change of Ownership" statements with each county in
which any Assets are located.
6.3.8. Purchase Price. The Buyer shall have delivered to the
Seller (a) the Cash Purchase Portion (less the Option Consideration) by wire
transfer of immediately available federal funds to such account or accounts
as shall be specified in instructions from the Representative prior to the
Closing Date, and (b) stock certificates evidencing all of the Buyer's
Shares.
6.3.9. Listing of the Buyer's Shares. The Buyer's Shares shall
have been listed on the New York Stock Exchange, subject to official notice
of issuance, and the Buyer shall have delivered evidence of such
authorization to the Seller.
6.3.10. Other Matters. The Buyer shall have delivered to the
Seller such other certificates, documents and instruments as the Seller may
reasonably request to effect the transactions contemplated hereby.
6.3.11. Lot Option Agreement. The Buyer shall have validly
executed and delivered the Lot Option Agreement.
6.3.12. Non-Competition and Option Agreement. The Buyer shall have
validly executed and delivered the Non-Competition and Option Agreement.
6.3.13. ROFO Agreement. The Buyer shall have validly executed and
delivered the ROFO Agreement.
6.3.14. Park Meadows Option Agreement. The Buyer shall have
validly executed and delivered the Park Meadows Option Agreement.
6.3.15. Consulting Agreement. The Buyer shall have validly
executed and delivered the Consulting Agreement.
6.3.16. Forecast Development Option and Purchase Agreement. The
Buyer shall have validly executed and delivered the Forecast Development
Option and Purchase Agreement.
6.3.17. Indemnification and Release Agreement. The Buyer shall
have validly executed and delivered the Indemnification and Release
Agreement.
6.3.18. Satisfaction of Debt. The Buyer shall have satisfied all
of the Debt pursuant to Section 1.12.
SECTION 7. TERMINATION OF OBLIGATIONS; SURVIVAL
7.1 Termination of Agreement. Anything in this Agreement to the
contrary notwithstanding, this Agreement and the transactions contemplated by
this Agreement (a)shall terminate if the Closing (including, without
limitation, the Seller's receipt of the Purchase Price) does not occur on or
before 10:00 a.m. (Pacific Time) on February 1, 2002, unless extended by
mutual consent in writing of the Buyer and the Seller, and (b)otherwise may
be terminated at any time before the Closing as follows and in no other
manner:
7.1.1. Mutual Consent. By mutual consent in writing of the Buyer
and the Seller.
7.1.2. Conditions to the Buyer's Performance Not Met. By the
Buyer, by written notice to the Seller, if any event occurs or condition
exists which would render impossible the satisfaction of one or more
conditions to the obligations of the Buyer to consummate the transactions
contemplated by this Agreement as set forth in Section 6.1 or 6.2.
Notwithstanding the foregoing, the Buyer may not terminate this Agreement
pursuant to this Section 7.1.2 if such failure of condition resulted, in
whole or in part, from the breach by the Buyer of any of its obligations
under this Agreement.
7.1.3. Conditions to the Seller's Performance Not Met. By the
Seller, by written notice to the Buyer, if any event occurs or condition
exists which would render impossible the satisfaction of one or more
conditions to the obligations of the Seller to consummate the transactions
contemplated by this Agreement as set forth in Section 6.1 or 6.3.
Notwithstanding the foregoing, the Seller may not terminate this Agreement
pursuant to this Section 7.1.3 if such failure of condition resulted, in
whole or in part, from the breach by the Seller of any of its obligations
under this Agreement.
7.1.4. Material Breach. By the Buyer or the Seller if there has
been a material misrepresentation or other material breach by the other in
its representations, warranties or covenants set forth in this Agreement;
provided, however, that if such breach is susceptible to cure, the breaching
Party shall have ten (10) business days in which to cure such breach after
actual receipt of written notice from the other Party of its intention to
terminate this Agreement if such breach continues.
7.2 Effect of Termination. In the event that this Agreement shall be
terminated pursuant to Section 7.1, all further obligations of the Parties
under this Agreement shall terminate without further liability of any Party
to any other, except that the obligations of the Parties contained in
Sections 10.9, 10.14 and 10.16 and the Buyer's indemnification obligations
pursuant to Section 4.1 shall survive any such termination. A termination
under Section 7.1 shall not relieve any Party of any liability that may
otherwise exist for a willful breach of, or for any willful misrepresentation
under, this Agreement, or be deemed to constitute a waiver of any available
remedy (including specific performance if available) for any such breach;
provided, however, that the Buyer shall not have the right to pursue any form
of injunctive relief against Previti, the Seller or any of the Consolidated
Forecast Entities. Additionally, no termination shall give rise to the
release of the Buyer from any Loss or indemnities provided to the Seller
under this Agreement with respect to any of the Buyer's (or its agents) due
diligence.
7.3 Effect of Closing Over Known Unsatisfied Conditions.
7.3.1. Waiver. Except with respect to matters bearing on the
Buyer's Shares, if either the Buyer or the Seller elects to proceed with the
Closing, each and every such condition that is unsatisfied at the Closing
Date shall be deemed to be waived. Such decision shall, to the extent the
waiving party had knowledge as of the time of the Closing with respect
thereto, constitute a waiver of any liability for breach of, or
misrepresentation under, this Agreement in connection with such unsatisfied
condition(s) and such breach of a representation or warranty in favor of the
other.
7.3.2. Effect of Waiver. If the Buyer shall waive or be deemed to
have waived any condition set forth in Section 6.1 or 6.2, the Buyer shall be
deemed to have (a)fully released and forever discharged the Seller and its
Affiliates, the Representative, partners, shareholders, officers, directors,
agents and representatives from and on account of all claims, demands or
charges (known or unknown) with respect to the waived condition and, to the
extent that the Buyer had knowledge as of the time of the Closing with
respect thereto, any facts or circumstances giving rise to or in respect of
such waived condition, and (b) waived any opinion or certificate contemplated
by Section 6.1 or 6.2 with respect to such matters. THE BUYER, AFTER
CONSULTATION WITH LEGAL COUNSEL AND WITH FULL KNOWLEDGE OF THE CONSEQUENCES
OF ITS ACTIONS, WAIVES THE PROVISIONS OF CALIFORNIA CIVIL CODE SECTION 1542,
WHICH PROVIDES:
"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH
THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS
FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF
KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS
SETTLEMENT WITH THE DEBTOR."
Buyer's Initials:
SECTION 8. INDEMNIFICATION
8.1 Indemnification by Seller and Previti.
8.1.1. Ownership of the Assets. The Seller and Previti shall
jointly and severally indemnify, defend and hold harmless the Buyer and its
officers, directors, stockholders and Affiliates from and against any and all
material Losses, whether or not involving a third-party claim, directly based
upon or directly arising from any material breach of the representations or
warranties made by the Seller under Section 2.1.1 only (and no other
agreement); provided, however, that the Seller's and Previti's
indemnification obligations hereunder shall exist only with respect to Losses
of which the Seller and Previti are timely notified in accordance with
Section 8.3.1.
8.1.2. Indemnification for Actual Fraud. The Seller and Previti,
as to matters concerning the Consolidated Forecast Entities, shall jointly
and severally indemnify, defend and hold harmless the Buyer and its officers,
directors, stockholders and Affiliates from and against any and all Losses,
whether or not involving a third-party claim (but expressly excluding all
homeowner allegations of fraud or similar claims or class action claims),
that are not reflected in the Financial Statements or on the Seller's
Disclosure Schedule, as a result of, or based upon or arising from, any
fraudulent misrepresentation made by the Seller in Section 2 (including,
without limitation, fraudulent misrepresentations made by the Seller in
Section 2.13 regarding actually asserted and existing homeowner fraud
claims); provided, however, that the Seller's and Previti's indemnification
obligations hereunder shall exist only with respect to Losses of which the
Seller and Previti are timely notified in accordance with Section 8.3.1;
provided, further, any indemnification claim hereunder shall be filed in
accordance with Section 10.10 by the Buyer within ninety (90) days after the
Buyer's discovery thereof or the claim (and the applicable remedy) shall
automatically be waived. Such fraudulent misrepresentation under this
Section 8.1.2 (a) must constitute "actual fraud" under the California Civil
Code, (b) shall be determined based only on the actual (not imputed or
constructive) knowledge of any of the Executive Officers, and (c) must be the
subject of a final, non-appealable judgment.
8.1.3. Tax Indemnification. From and after the Closing Date, the
Seller and Previti shall jointly and severally indemnify, defend and hold the
Buyer harmless from and against any and all Taxes (including ad valorem
taxes) with respect to the Assets for which the Buyer is liable, or that
result in Encumbrances on any of the Assets:
(a) for any Tax period of the Seller that ends on or before
the Closing Date;
(b) relating to or arising out of the Excluded Liabilities;
and
(c) any taxes asserted against the Buyer or the Consolidated
Forecast Entities due to liability directly resulting from the Transfer.
The Seller's and Previti's indemnification obligations under this
Section 8.1.3 shall terminate upon the expiration of the applicable statute
of limitations on assessment of the relevant Tax. The Seller's and Previti's
liability under this Section 8.1.3 shall include any Losses with respect to
the reasonable, necessary and actually incurred out-of-pocket costs and
expenses of the Buyer directly incurred in responding to an examination,
audit, administrative or court proceeding, or other procedure in which a Tax
authority seeks to propose an adjustment, that if pursued successfully, would
give rise to a liability for Taxes for which the Buyer would be eligible for
indemnification under this Section 8.1.3. For purposes of this Section
8.1.3, in the case of any Taxes that are imposed on a periodic basis and are
payable for a Tax period that includes (but does not end on) the Closing
Date, the portion of such Tax which relates to the portion of such Tax period
ending on the Closing Date shall (i)in the case of any Taxes, other than
Taxes based upon or related to income or receipts, be deemed to be the amount
of such Tax for the entire Tax period multiplied by a fraction the numerator
of which is the number of days in the Tax period ending on the Closing Date
and the denominator of which is the number of days in the entire Tax period,
and (ii)in the case of any Tax based upon or related to income or receipts
(including franchise Taxes to the extent based upon income, receipts or
earned surplus) be deemed equal to the amount which would be payable if the
relevant Tax period ended on the Closing Date for the Seller.
8.2 Indemnification by the Buyer. The Buyer shall indemnify and hold
harmless Previti, the Seller, each of the Consolidated Forecast Entities and
their officers, directors, employees, stockholders and Affiliates from and
against any material Losses, whether or not involving a third-party claim,
that are not reflected on the Buyer's Disclosure Schedule as a result of, or
based upon or arising from, any fraudulent misrepresentation made by the
Buyer under Section 3; provided, however, that the Buyer's indemnification
obligations pursuant to this Section 8.2 shall exist only with respect to
Losses of which the Buyer is timely notified in accordance with Section
8.3.1; provided, further, any indemnification claim hereunder shall be filed
in accordance with Section 10.10 by the Seller or such Person within ninety
(90) days after such Person's discovery thereof or the claim (and the
applicable remedy) shall automatically be waived. Such fraudulent
misrepresentation under this Section 8.2 (a) must constitute "actual fraud"
under the California Civil Code, (b) shall be determined based on the actual
(not imputed or constructive) knowledge of the Buyer, and (c) must be the
subject of a final, non-appealable judgment. Nothing herein shall limit the
Buyer's liabilities (and indemnification obligations) with respect to any
matter pertaining to the Buyer's Shares, including, without limitation, the
disposition thereof, or any obligation of the Buyer under Section 5.5.4 or
Section 5.6.
8.3 Procedure.
8.3.1. Notice. Any Indemnified Party with respect to any Loss
shall give written notice to the Indemnifying Party, and such notice shall
(a) describe in reasonable detail the nature of the claim of Loss, (b)
provide a copy of all papers served (and/or delivered) with respect to such
claim (and/or any examination, audit or other procedure), if any, (c) set
forth the basis of the Indemnified Party's request for indemnification under
this Agreement, and (d) provide a waiver of any right to receive
indemnification for such Loss under the Securities Purchase Agreement. Such
notice to the Indemnifying Party shall be delivered by the Indemnified Party
within thirty (30) days of the Indemnified Party's knowledge of such Loss and
prior to the expiration of the applicable statutory period; provided,
however, that any delay by the Indemnified Party beyond the aforesaid thirty
(30) day period shall not waive the Indemnified Party's claim regarding such
Loss, except to the extent such delay prejudices (or could reasonably be
expected to lead to the prejudice of) the Indemnifying Party's ability to
effectively defend such claim, but in no event shall such notice be delayed
by more than ninety (90) days of the Indemnified Party's knowledge of such
Loss.
8.3.2. Defense. If any claim, demand or liability is asserted by
any third party against any Indemnified Party, the Indemnifying Party shall
have the right and shall upon the written request of the Indemnified Party,
defend any Actions brought against the Indemnified Party in respect of any
Indemnifiable Claims with counsel of its choice reasonably acceptable to the
Indemnified Party and, in the case of a Tax-related Action, tax advisors of
its choice reasonably acceptable to the Indemnified Party. In any such
action or proceeding, the Indemnified Party shall have the right to retain
its own counsel, but the fees and expenses of such counsel shall be at its
own expense unless (a) the Indemnifying Party and the Indemnified Party
mutually agree in writing to the retention of such counsel, or (b) the named
parties to any such suit, action or proceeding (including any impleaded
parties) include both the Indemnifying Party and the Indemnified Party, and
in the reasonable judgment of the Indemnified Party, representation of the
Indemnifying Party and the Indemnified Party by the same counsel would be
inadvisable due to potential conflicts of interests between them. The
Parties shall cooperate and may participate in the defense of all third-party
claims which may give rise to Indemnifiable Claims hereunder. If the
Indemnifying Party assumes the defense, (i) it shall be conclusively
established for purposes of this Agreement that the claims made in the Action
are within the scope of and subject to indemnification, but only if the
Indemnifying Party assumed the defense pursuant to clause (a) above and not
clause (b), and (ii) no compromise or settlement of such claims may be
effected by the Indemnifying Party without the Indemnified Party's written
consent (which consent shall not be unreasonably withheld) unless there is no
finding or admission of any violation of legal requirement or any violation
of the rights of any Person and no effect on any other claims that may be
made against the Indemnified Party, or the exclusive relief provided is
monetary damages that are paid in full by the Indemnifying Party. If written
notice is given to an Indemnifying Party of the commencement of any Action
and the Indemnifying Party does not, within twenty (20) days after the
Indemnified Party's written notice is given, give written notice to the
Indemnified Party of its election to assume the defense of such Action, the
Indemnifying Party shall be bound by any determination made in such Action or
any compromise or settlement effected by the Indemnified Party. In
connection with the defense of any claim, each Party shall make available to
the Party controlling such defense, any books, records or other documents
within its control that are reasonably requested in the course of or
necessary or appropriate for such defense.
8.3.3. Insurance Matters. The amount of any Loss for which
indemnification is provided under Section 8.1 or 8.2 shall be net of, and
subject to, any insurance proceeds received and the amount of any related
deductible with respect to such Loss under any insurance policy maintained by
the Buyer or the Seller. The Parties agree that, simultaneously with their
actions to obtain indemnification for a Loss from the Indemnifying Party
under this Agreement, the Indemnified Party shall use commercially reasonable
efforts to recover any insurance proceeds that may be obtainable with respect
to such Loss. The Seller shall reasonably cooperate, at no expense to the
Seller, with the Buyer in the Buyer's efforts to seek to obtain insurance to
cover any breaches or misrepresentations in the Seller's representation and
warranties contained in this Agreement, if any. If such insurance proceeds
or other contributions or reductions to the amount payable by the
Indemnifying Party under this Section 8 is made available or otherwise
determined after payment by the Indemnifying Party of any amount otherwise
required to be paid to an Indemnified Party pursuant to this Section 8, the
Indemnified Party shall repay to the Indemnifying Party promptly after such
determination (and in any event within ten (10) days after determination of
the Indemnifying Party's right to receive such insurance proceeds), any
amount the Indemnifying Party would not have had to pay pursuant to this
Section 8 had such determination been made at the time of such payment.
8.3.4. Indemnification in the Securities Purchase Agreement. Any
payment to an Indemnified Party under Section 8.1 or 8.2 otherwise due and
payable hereunder shall be decreased to the extent of any indemnification
proceeds received under Section 8 of the Securities Purchase Agreement by the
Indemnified Party with respect to the same Loss. Neither the Buyer nor the
Seller shall have any right to receive indemnification payments under both
this Agreement and the Securities Purchase Agreement for the same Loss.
8.3.5. Tax Treatment of Indemnification Payments. Any payment
under Section 8.1 shall be treated as an adjustment to the Purchase Price.
8.4 Survival.
8.4.1. The Seller. The indemnification obligations of Previti
under Sections 8.1.1 and 8.1.2 shall survive the Closing and terminate at the
expiration of the applicable statutory period. The indemnification
obligations of Previti under Section 8.1.3 shall survive indefinitely.
8.4.2. The Buyer. The indemnification obligations of the Buyer
under Sections 5.5.4, 5.6, 8.2 and the final sentence of 4.1 shall survive
the Closing and shall terminate at the expiration of the applicable statutory
period.
8.5 Indemnification Thresholds. Neither the Seller nor Previti shall be
obligated to indemnify the Buyer pursuant to Section 8.1 until the aggregate
amount of Losses for which such indemnification would otherwise be available
under this Agreement or under the Securities Purchase Agreement is in excess
of Six Hundred Fifty Thousand Dollars ($650,000), in which event Previti or
the Seller, as applicable, shall be obligated to indemnify the Buyer for all
material Losses from the first dollar. The Buyer shall not be obligated to
indemnify the Seller pursuant to Section 8.2 until the aggregate amount of
Losses for which such indemnification would otherwise be available is in
excess of Six Hundred Fifty Thousand Dollars ($650,000) in which event the
Buyer shall be obligated to indemnify Previti, the Seller or any of the
Consolidated Forecast Entities for all Losses from the first dollar;
provided, however, nothing herein shall limit the Buyer's liabilities (and
indemnification obligations) with respect to the Buyer's indemnification
obligations contained in Section 4.1 or with respect to any matter pertaining
to the Buyer's Shares, including, without limitation, the disposition
thereof, or any obligation of the Buyer under Section 5.5.4 or Section 5.6.
8.6 Seller Jointly and Severally Liable. The Seller and Previti hereby
agree to be jointly and severally liable for any Loss for which Previti or
any Securities Seller is liable under Section 8 of the Securities Purchase
Agreement.
SECTION 9. LIMITATION OF REMEDIES
9.1 Breach of Representations. The indemnification obligations provided
in Sections 8.1 and 8.2 shall be the sole and exclusive remedies available to
any Party from any other Party or from any of the Consolidated Forecast
Entities with respect to any Loss resulting from, or based upon or arising
from, any breach of any of the representations or warranties made under this
Agreement.
9.2 No Other Warranties. Except as expressly set forth in this
Agreement and in the Securities Purchase Agreement or the Collateral
Agreements, none of Previti, the Seller, their counsel, sales agents, nor any
of their Affiliates or attorney of Previti, the Seller, their counsel,
broker, or sales agents, nor any other party related in any way to any of the
foregoing (each, a "Seller Party," and collectively, the "Seller Parties")
have or shall be deemed to have made any verbal or written representations,
warranties, promises or guarantees (whether express, implied, statutory or
otherwise) to the Buyer with respect to the Assets or any other matters.
9.3 No Personal Liability of Any Other Person. Except as specifically
set forth herein, no Person (including, without limitation, the Seller) shall
have any liability to the Buyer (or any Affiliate thereof) arising under this
Agreement or in connection with the transactions contemplated under this
Agreement (or any other related agreements). Moreover, notwithstanding
anything else in this Agreement to the contrary, no officer, director or
employee of any of the Consolidated Forecast Entities shall have any
liability to the Buyer (or any Affiliate thereof) whatsoever, excepting
solely as it may pertain to Previti pursuant to Sections 8.1.1, 8.1.2 and
8.1.3.
9.4 Failure to Perform Obligations. Except as otherwise specifically
set forth herein, the Parties agree that the performance obligations of each
of the Parties contained herein shall survive Closing, and except as
otherwise specifically set forth herein, nothing contained in this Agreement
shall restrict or limit either Party's ability to bring or maintain an Action
at Law or in equity with respect thereto.
SECTION 10. GENERAL
10.1 Amendments; Waivers. This Agreement and any Schedule or Exhibit
attached hereto may be amended only by agreement in writing of all Parties.
No waiver of any provision nor consent to any exception to the terms of this
Agreement shall be effective unless in writing and signed by the Party to be
bound and then only to the specific purpose, extent and instance so provided
by an authorized representative thereof.
10.2 Schedules; Exhibits; Integration. Each Schedule and Exhibit
delivered pursuant to the terms of this Agreement shall be in writing and
shall constitute a part of this Agreement, although Schedules need not be
attached to each copy of this Agreement. This Agreement, together with such
Schedules and Exhibits, constitutes the entire agreement among the Parties
pertaining to the subject matter hereof and supersedes all prior agreements
and understandings of the Parties in connection therewith. Without limiting
the effect of the foregoing provisions of this Section 10.2, except as
expressly set forth in this Agreement, none of the Parties is making or shall
be deemed to have made any representation, warranty or covenant of any kind,
either express or implied.
10.3 Efforts; Further Assurances. Each Party shall use its
commercially reasonable efforts to cause all conditions to its obligations
hereunder to be timely satisfied and to perform and fulfill all obligations
on its part to be performed and fulfilled under this Agreement. The Parties
shall reasonably cooperate with each other in such actions and in securing
requisite Approvals. Each Party shall execute and deliver both before and
after the Closing such further certificates and other documents and take such
other actions as any other Party may reasonably request in furtherance of and
as contemplated by this Agreement to consummate or implement the transactions
contemplated hereby or to evidence such events or matters. Nothing herein
shall modify, amend or extend the Closing Date.
10.4 Governing Law. This Agreement, the legal relations between the
Parties and any Action, whether contractual or non-contractual, instituted by
any Party with respect to matters arising under or growing out of or in
connection with or in respect of this Agreement, including, without
limitation, the negotiation, execution, interpretation, coverage, scope,
performance, breach, termination, validity, or enforceability of this
Agreement, shall be governed by and construed in accordance with the Laws of
the State of California applicable to contracts made and performed in such
State and without regard to conflicts of law doctrines.
10.5 Transfer; Successors and Assigns. Except as contemplated herein,
in the Securities Purchase Agreement or any Collateral Agreement, the Buyer
may not assign or transfer this Agreement or any of the rights hereunder
without the Seller's prior written consent, which consent shall not be
required in the a case of a proposed assignment or transfer to an Affiliate
of the Buyer so long as the Buyer (a) provides complete copies of all
relevant documentation, (b) remains fully liable under this Agreement without
any further documentation, and (c) unconditionally guarantees (i) any and all
of the obligations and performance of the proposed assignee under this
Agreement, and (ii) any and all of the Buyer's obligations under the
Securities Purchase Agreement and the Collateral Agreements. In the event
the Seller consents to any such assignment or transfer, the Seller may elect
in its sole discretion, to pursue any of its remedies solely against the
Buyer, or against the Buyer and the assignee or transferee. Any attempted
assignment in violation of this Section 10.5 shall be void.
10.6 Headings. The Table of Contents and the descriptive headings of
the Sections, subsections and other subdivisions of this Agreement and of the
Exhibits and Schedules are for convenience only and do not constitute a part
of this Agreement.
10.7 Counterparts. This Agreement may be executed in any number of
identical counterparts, each of which when executed and delivered shall be an
original, but all such counterparts shall constitute but one and the same
instrument. Any signature page of this Agreement may be from any counterpart
without impairing the legal effect of any signatures thereof, and may be
attached to another counterpart, identical in form thereto, but having
attached to it one or more additional signature pages. Delivery by any Party
or its respective representatives of telecopied (counterpart) signature pages
shall be as binding an execution and delivery of this Agreement by such Party
as if the other Party had received the actual physical copy of the entire
Agreement with an ink signature from such Party.
10.8 Publicity and Reports. The Seller and the Buyer shall coordinate
all publicity relating to the transactions contemplated by this Agreement and
no Party shall issue any press release, publicity statement or other public
notice relating to this Agreement, or the transactions contemplated by this
Agreement, without consulting with, and receiving approval from (which
approval shall not be unreasonably withheld or delayed), the other Party,
except to the extent that a particular action is required by applicable Law
or the rules of any national securities exchange; provided, however, in such
instance, the applicable Party shall use commercially reasonable efforts to
inform the other of such action in writing in advance.
10.9 Confidentiality. All information disclosed by any Party (or its
representatives) whether before or after the Effective Date, in connection
with the transactions contemplated by, or the discussions and negotiations
preceding, this Agreement to any other Party (or its representatives) shall
be kept confidential by such other Party and its representatives and shall
not be used by any such Persons other than as contemplated by this Agreement,
except (a) to the extent that such information was known by the recipient
when received, (b) to the extent that such information is or hereafter
becomes lawfully obtainable from other sources, (c) to the extent that such
information is necessary or appropriate to disclose to a Governmental Entity
having jurisdiction over the disclosing Party, (d) as may otherwise be
required by Law, or (e) to the extent such duty of confidentiality is waived
in writing by the other Party. If a Party discloses any information related
to this Agreement or the transactions contemplated hereunder pursuant to any
of clauses (a) through (e) above, then such Party shall provide the other
Party with written notice of such disclosure. If this Agreement is
terminated in accordance with its terms, each Party shall return upon written
request from the other Party all documents (and reproductions thereof)
received by it or its representatives from such other Party (and, in the case
of reproductions, all such reproductions made by the receiving Party) that
include information not within exceptions set forth in clauses (a) through
(e) above, unless the recipients provide assurances reasonably satisfactory
to the requesting Party that such documents have been destroyed.
10.10 Appointment of Reference; Waiver of Jury Trial. Any action
brought to interpret or enforce this Agreement may be tried by the reference
procedures set forth in California Code of Civil Procedure Section 638 et
seq. upon motion by any party to the appropriate Superior Court. A single
referee that is an active judge shall be appointed by the presiding judge of
the appropriate Superior Court, and the Action shall be placed on the
expedited reference calendar. Each of the Seller and the Buyer hereby waives
the right to trial by jury. During the pendency of the expedited reference
proceeding, the Seller shall pay one-half of the cost of the referee and the
Buyer shall pay the other half of such cost. Upon the conclusion of the
referenced proceeding, the losing party shall pay all remaining unpaid costs
of the referenced proceeding and shall reimburse the prevailing party (as
shall be determined by the referee) for such costs previously paid by the
prevailing party. Such reimbursement shall be included in any judgment or
final order issued in the referenced proceeding, which judgment or order
shall be non-appealable.
10.11 Parties in Interest. This Agreement shall be binding upon and
inure to the benefit of each Party, and nothing in this Agreement, express or
implied, is intended to confer upon any other Person any rights or remedies
of any nature whatsoever under or by reason of this Agreement, except for
Section 10.5 (which is intended to be for the benefit of the persons provided
for therein and may be enforced by such persons).
10.12 Knowledge Convention. Statements in this Agreement or in any
Schedule, Exhibit, certificate or other documents delivered to any Party
pursuant to this Agreement made "to the Seller's knowledge" (or words of
similar intent or effect) shall be deemed to be made to the actual (not
implied or constructive) knowledge of the applicable Executive Officers and
shall not include any other Person's knowledge. The reference to the
applicable Executive Officers shall not imply and shall not give rise to any
personal liability of such persons. Statements in this Agreement or in any
Schedule, Exhibit, certificate or other documents delivered to any Party
pursuant to this Agreement stating the "Seller's expectations" (or words of
similar intent or effect) shall be deemed to refer to the actual expectations
of Previti and shall not include any other Person's expectations or any
guarantee thereof.
10.13 Notices. Except as otherwise expressly provided herein, all
notices, requests, approvals, consents and demands to or upon the respective
Parties hereto to be effective shall be in writing (and shall be delivered by
hand, or nationally recognized courier service), and shall be deemed to have
been duly given or made when delivered by hand, or, in the case of a
nationally recognized courier service, one (1) business day after delivery to
such courier service, addressed as follows, or to such other address as may
be hereafter notified by the respective Parties hereto:
If to the Buyer, to:
Hovnanian Enterprises, Inc.
10 Highway 35
P.O. Box 500
Red Bank, New Jersey 07701
Attn: Peter Reinhart, Esq.
Telephone: (732) 747-7800
Telecopy: (732) 747-6835
and:
Hovnanian Enterprises, Inc.
1802 Brightseat Road
Landover, Maryland 20785-4235
Attn: Mr. Geaton A. DeCesaris, Jr.
Telephone: (301) 772-8900
Telecopy: (301) 772-1380
with a copy to:
Simpson Thacher & Bartlett
10 Universal City Plaza
Suite 1850
Los Angeles, California 94608
Attn: Daniel Clivner, Esq.
Telephone: (818) 755-9613
Telecopy: (818) 755-7009
If to Seller or Premier, to:
10670 Civic Center Drive
Rancho Cucamonga, California 91730
Attn: Mr. James P. Previti (marked "Woodlands - Personal &
Confidential" and sent only after personal (not voice-mail)
notice to Mr. Previti)
Telephone: (909) 987-7788
Telecopy: (909) 980-7305
with a copy to:
10670 Civic Center Drive
Rancho Cucamonga, California 91730
Attn: Larry R. Day, Esq. (marked "Woodlands - Personal &
Confidential" and sent only after personal (not voice-mail)
notice to Mr. Day)
Telephone: (909) 987-7788
Telecopy: (909) 987-8958
and:
O'Melveny & Myers LLP
Embarcadero Center West
275 Battery Street, Suite 2600
San Francisco, California 94111-3305
Attn: Peter T. Healy, Esq.
Telephone: (415) 984-8833
Telecopy: (415) 984-8701
10.14 Expenses. Except as otherwise expressly set forth herein, the
Seller and the Buyer shall each pay its own expenses incident to the
negotiation, preparation and performance of this Agreement and the
transactions contemplated hereby, including, without limitation, the fees,
expenses and disbursements of their respective advisors, accountants,
auditors and counsel. The Parties agree that the Seller shall pay the costs
and expenses incurred in connection with the Title Policies; provided,
however, that the Buyer agrees that it shall be solely responsible for any
additional costs relating to any extended coverage or endorsements beyond
that afforded by the Title Policy. The Parties agree that the Buyer shall
pay the costs of the filing fee associated with a filing under the Hart-
Scott-Rodino Act, if applicable. The Seller's expenses incurred prior to the
Closing and not otherwise specifically allocated by this Agreement shall be
paid by the Seller or by its Affiliates.
10.15 Remedies; Waiver. To the extent permitted by Law, all rights and
remedies existing under this Agreement are cumulative to and not exclusive
of, any rights or remedies otherwise available under applicable Law. No
failure on the part of any Party to exercise or delay in exercising any right
hereunder shall be deemed a waiver thereof, nor shall any single or partial
exercise preclude any further or other exercise of such or any other right.
10.16 Attorneys' Fees. In the event of any Action by any Party arising
under or out of, in connection with or in respect of, this Agreement or the
transactions contemplated hereby, the prevailing Party shall be entitled to
reasonable attorney's fees, costs and expenses incurred in such Action.
Attorney's fees incurred in enforcing any judgment in respect of this
Agreement are recoverable as a separate item. The Parties intend that the
preceding sentence be severable from the other provisions of this Agreement,
survive any judgment and, to the maximum extent permitted by Law, not be
deemed merged into such judgment.
10.17 Representation by Counsel; Interpretation. The Seller and the
Buyer each acknowledge that each Party has been represented by counsel in
connection with this Agreement and the transactions contemplated by this
Agreement. Accordingly, any rule of Law, including, without limitation,
Section 1654 of the California Civil Code, or any legal decision that would
require interpretation of any claimed ambiguities in this Agreement against
the Party that drafted it has no application and is expressly waived. The
provisions of this Agreement shall be interpreted in a reasonable manner to
effect the intent of the Buyer and the Seller.
10.18 Severability. If any provision of this Agreement is determined
to be invalid, illegal or unenforceable by any Governmental Entity, the
remaining provisions of this Agreement shall remain in full force and effect
provided that the economic and legal substance of the transactions
contemplated is not affected in any manner materially adverse to any Party.
In the event of any such determination, the Parties agree to negotiate in
good faith to modify this Agreement to fulfill as closely as possible the
original intents and purposes hereof. To the extent permitted by Law, the
Parties hereby to the same extent waive any provision of Law that renders any
provision hereof prohibited or unenforceable in any respect.
10.19 No Offset by Buyer. Notwithstanding anything in this Agreement
to the contrary, neither the Buyer nor anyone claiming through the Buyer
shall have any rights of offset under this Agreement or otherwise, in the
event of any breach hereunder by the Seller, Previti or any Consolidated
Forecast Entity, or any Affiliate thereof, including, without limitation, any
right of offset or excuse to Buyer's performance respecting Buyer's
obligations regarding the Buyer's Shares (including, without limitation, the
disposition thereof), the price protective provisions set forth in Section
1.4.5, the adjustments to the Purchase Price set forth in Section 1.6, the
indemnification provisions of Sections 5.6 and 8.2 or under the Securities
Purchase Agreement or any of the Collateral Agreements.
10.20 No Offset by the Seller or Previti. Notwithstanding anything in
this Agreement to the contrary, but expressly excepting any actions and/or
inactions by the Buyer or its directors, officers, employees, representatives
or agents that are directly related to the obligation of the Seller, Previti,
or anyone claiming through any of them, none of the Seller, Previti, nor
anyone claiming through them shall have any rights of offset under this
Agreement or otherwise, in the event of any breach hereunder by the Buyer, or
any Affiliate thereof, including, without limitation, any right of offset or
excuse to the Seller's or Previti's performance respecting the
indemnification provisions of Section 8.1 or under the Securities Purchase
Agreement or any of the Collateral Agreements.
10.21 Cross Default with Securities Purchase Agreement.
10.21.1. Effectiveness of this Agreement. This Agreement shall not
be operable or effective unless and until the Buyer, the Securities Sellers
and Previti validly execute and deliver to the other parties thereto the
Securities Purchase Agreement.
10.21.2. Default by Buyer. A default by the Buyer under the
Securities Purchase Agreement shall constitute a default by the Buyer under
this Agreement.
10.21.3. Default by Securities Sellers or Previti. A default by
the Securities Sellers and/or Previti under the Securities Purchase Agreement
shall constitute a default by Seller and/or Previti, as applicable, under
this Agreement.
10.21.4. Termination. In the event the Securities Purchase
Agreement is terminated pursuant to the terms thereof, this Agreement shall
be deemed terminated as of the date of such termination of the Securities
Purchase Agreement, at which time this Agreement shall be of no further force
or effect except with respect to those obligations, which, pursuant to the
express provision of this Agreement, are to survive the termination of this
Agreement. (The remainder of this page intentionally left blank.
IN WITNESS WHEREOF, the Parties have executed this Agreement as of the
Effective Date.
"BUYER"
HOVNANIAN ENTERPRISES, INC., a Delaware
corporation
By: /S/Geaton DeCesaris, Jr.
Its: President of Homebuilding
Operations
"SELLER"
THE FORECAST GROUP, L.P., a California
limited partnership
By: /S/Larry R. Day
Its: Executive Vice President
"PREVITI"
JAMES P. PREVITI, an individual
By: /S/James P. Peviti
SECURITIES PURCHASE AGREEMENT
Sellers: FORECAST PP2, LLC
FORECAST HOMES, INC.
Buyer: HOVNANIAN ENTERPRISES, INC.
Dated: January 4, 2002
SECTION 1. DEFINITIONS; PURCHASE AND SALE; CLOSING 2
1.1 Definitions 2
1.2 Transfer of the Securities by the Sellers 9
1.3 Purchase of the Securities by the Buyer 9
1.4 Closing 9
1.5 Purchase Price Allocation 9
1.6 Further Assurances 9
1.7 Representative 10
1.8 Satisfaction of Debt 10
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE SELLERS 10
2.1 The Group; the Sellers 10
2.2 Capitalization 11
2.3 Subsidiaries 11
2.4 Financial Statements; Changes; Contingencies 12
2.5 No Material Adverse Changes 12
2.6 Absence of Certain Changes 13
2.7 Taxes 14
2.8 Compliance with Applicable Laws 15
2.9 Absence of Unethical Business Practices 15
2.10 Material Contracts 15
2.11 Adequacy of Assets 17
2.12 Intangible Property 17
2.13 Labor Relations 17
2.14 Minute Books 18
2.15 Accounting Records 18
2.16 Insurance 18
2.17 Employees 19
2.18 Employee Benefit Plans 19
2.19 No Brokers or Finders 21
2.20 Accounts Receivable 21
2.21 SEC Reports 22
2.22 Information Generally 22
2.23 No Conflicts; Government Approvals; Third-Party Consents 22
2.24 Legal Proceedings 22
2.25 Receipt of Agreements; Access to Information 23
2.26 Intercompany Obligations 23
2.27 Land Purchase Contracts 23
SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE BUYER 23
3.1 Organization and Related Matters 23
3.2 Authorization 23
3.3 No Conflicts; Government Approvals; Third-Party Consents 24
3.4 Investment Representation 24
3.5 No Brokers or Finders 24
SECTION 4. COVENANTS PRIOR TO CLOSING 24
4.1 Access 24
4.2 Preservation of Business Prior to the Closing Date 24
4.3 Notification of Certain Matters 25
4.4 Approvals 25
4.5 No Shop 25
4.6 Financial Statements 26
4.7 Intercompany Obligations 26
4.8 Tax Status of Securities Partnership 26
SECTION 5. ADDITIONAL CONTINUING COVENANTS 26
5.1 Non-Competition 26
5.2 Nondisclosure of Proprietary Data 26
5.3 Tax Returns 26
5.4 Tax Cooperation 27
5.5 Section 754 Election 27
5.6 Cooperation 28
5.7 Employees and Employee Benefits 28
5.8 Assumption of Office Lease 28
5.9 Use of Name 29
5.10 Change of Control 29
5.11 Insurance 29
SECTION 6. CONDITIONS OF PURCHASE 29
6.1 General Conditions 29
6.2 Conditions to Obligations of the Buyer 30
6.3 Conditions to Obligations of the Sellers 31
SECTION 7. TERMINATION OF OBLIGATIONS; SURVIVAL 33
7.1 Termination of Agreement 33
7.2 Effect of Termination 33
7.3 Effect of Closing Over Known Unsatisfied Conditions 34
SECTION 8. INDEMNIFICATION 34
8.1 Indemnification by the Sellers and Previti 34
8.2 Indemnification by the Buyer 36
8.3 Procedure 36
8.4 Survival 37
8.5 Limitation of Remedies 37
8.6 Sellers Jointly and Severally Liable 38
SECTION 9. LIMITATION OF REMEDIES 38
9.1 Breach of Representations 38
9.2 No Other Warranties 38
9.3 No Personal Liability of Any Other Person 38
9.4 Failure to Perform Obligations 38
SECTION 10. GENERAL 38
10.1 Amendments; Waivers 38
10.2 Schedules; Exhibits; Integration 39
10.3 Efforts; Further Assurances 39
10.4 Governing Law 39
10.5 Transfer; Successors and Assigns 39
10.6 Headings 39
10.7 Counterparts 39
10.8 Publicity and Reports 40
10.9 Confidentiality 40
10.10 Appointment of Referee; Waiver of Jury Trial 40
10.11 Parties in Interest 40
10.12 Knowledge Convention 40
10.13 Notices 41
10.14 Expenses 42
10.15 Remedies; Waiver 42
10.16 Attorneys' Fees 42
10.17 Representation by Counsel; Interpretation 42
10.18 Severability 43
10.19 No Offset 43
10.20 No Offset by the Sellers or Previti 43
10.21 Cross Default with Asset Purchase Agreement 43
Exhibits
Exhibit A Form of Indemnification and Release Agreement
Exhibit B Form of Partnership Interest Assignment
Exhibit C Form of the Sellers' Certificate
Exhibit D Form of OM&M Legal Opinion
Exhibit E Form of the Buyer's Certificate
Exhibit F Form of ST&B Legal Opinion
Exhibit G Form of Assignment and Assumption Agreement
Schedules
Schedule 1.1 Consolidated Forecast Entities
Schedule 1.2 Intangible Rights
Schedule 1.5 Allocation of Purchase Price Among the Sellers
Schedule 1.8 Debt
Schedule 2.1.1 Ownership Schedule
Schedule 2.4.1 Financial Statements of the Group
Schedule 2.16.1 Policies
Schedule 2.26 Intercompany Obligations
Schedule 4.2.3 Excluded Employees
Schedule 6.3.5 Assumption of Guarantees
Buyer's Disclosure Schedule
Sellers' Disclosure Schedule
S E C U R I T I E S P U R C H A S E A G R E E M E N T
THIS SECURITIES PURCHASE AGREEMENT is entered into as of January 2,
2002 (the "Effective Date"), by and among (a)HOVNANIAN ENTERPRISES, INC., a
Delaware corporation (the "Buyer"), (b)(i) FORECAST HOMES, INC., a California
corporation ("Forecast Homes"), and (ii)FORECAST PP2, LLC, a Delaware limited
liability company ("Forecast PP2") (each, a "Seller," and collectively, the
"Sellers"), and (c) JAMES P. PREVITI, an individual ("Previti").
THE PARTIES ENTER THIS AGREEMENT on the basis of the following facts,
understandings and intentions:
A. Prior to the Effective Date, The Forecast Group, L.P., a
California limited partnership (the "Group"), transferred certain of its
tangible assets to a certain entity (such transfer of tangible assets shall
be referred to as the "Asset Transfer").
B. On or before January 9, 2002, the Group shall have transferred
its intangible assets to Securities Partnership, L.P., a California limited
partnership (the "Securities Partnership") (such transfer of intangible
assets shall be referred to as the "Securities Transfer").
C. As of the Effective Date, (a) Forecast Homes is the sole general
partner of Securities Partnership, and (b) Forecast PP2 is the sole limited
partner of Securities Partnership.
D. Simultaneously herewith, the Buyer, the Group, and Previti are
entering into an agreement (the "Asset Purchase Agreement") pursuant to which
the Group shall sell certain of its assets to the Buyer.
E. Prior to the Effective Date, the Buyer shall have delivered to
the Sellers a copy of the resolutions adopted by the Buyer's Board approving
the execution, delivery and performance of this Agreement and the
transactions contemplated hereby and each agreement, certificate, instrument
or other document to be delivered pursuant hereto to which the Buyer is a
party.
F. At the Closing (and as a condition thereto), the Buyer and
Premier Group, Inc., a California corporation ("Premier"), and Prestige
Homes, L.P., a California limited partnership ("Prestige") shall enter into
an agreement (the "Non-Competition and Option Agreement") pursuant to which
Premier shall agree, as more particularly set forth therein, to certain
restrictions on its ability to (a) compete with the Buyer in the Homebuilding
Business, and (b) solicit certain persons for employment.
G. At the Closing (and as a condition thereto), the Buyer and
Previti shall enter into a lot option agreement (the "Lot Option Agreement")
pursuant to which the Buyer shall have the option to purchase certain real
property described therein.
H. At the Closing (and as a condition thereto), the Buyer and
Previti shall enter into an agreement (the "ROFO Agreement") pursuant to
which Previti shall grant to the Buyer an option/right of first offer with
respect to certain real property.
I. At the Closing (and as a condition thereto), the Buyer and
Previti shall enter into an option agreement (the "Park Meadows Option
Agreement") pursuant to which the Buyer shall have the option to purchase
certain real property described therein.
J. At the Closing (and as a condition thereto), the Buyer and
Previti shall enter into a consulting agreement (the "Consulting Agreement")
pursuant to which Previti shall provide certain consulting services to the
Buyer with respect to the Homebuilding Business.
K. At the Closing (and as a condition thereto), the Buyer and
Forecast Development, L.P., a California limited partnership ("Forecast
Development"), shall enter into an agreement (the "Forecast Development
Option and Purchase Agreement") pursuant to which Forecast Development shall
grant to the Buyer an option to purchase Forecast Development's ownership
interest in Premier.
L. At the Closing (and as a condition thereto), the Buyer, Previti
and the Sellers shall enter into an indemnification and release agreement
(the "Indemnification and Release Agreement") in the form attached hereto as
Exhibit A (the "Form of Indemnification and Release Agreement") pursuant to
which (i) the Buyer shall indemnify and release the Sellers with respect to
any claims with respect to the Assets and the Securities, and (ii) the
Sellers and Previti shall indemnify and release the Buyer with respect to any
claims regarding Excluded Assets.
M. Subject to the terms and conditions of this Agreement, the
Sellers desire to sell and the Buyer desires to buy all of the partnership
interests in Securities Partnership (the "Securities") at the Closing in
consideration for, among other things, the Purchase Price.
NOW, THEREFORE, IN CONSIDERATION of the mutual covenants and promises
of the Parties, the Parties to this Agreement, intending to be legally bound,
agree as follows:
SECTION 1. DEFINITIONS; PURCHASE AND SALE; CLOSING
1.1 Definitions.
1.1.1 General. For all purposes of this Agreement, except as
otherwise expressly provided herein:
(a) the terms defined in this Section 1 have the meanings
assigned to them in this Section 1 and include the plural as well as the
singular;
(b) all accounting terms not otherwise defined in this
Agreement have the meanings assigned to them under GAAP;
(c) unless otherwise specified, all references in this
Agreement to designated "Sections," subsections and other subdivisions are to
the designated Sections, subsections and other subdivisions of the body of
this Agreement;
(d) pronouns of either gender or neuter shall include, as
appropriate, the other pronoun forms;
(e) the words "herein," "hereof," "hereby" and
"hereunder" and other words of similar import refer to this Agreement as a
whole and not to any particular Section, subsection or other subdivision; and
(f) the words "made available" shall mean a document that
(i)is filed with the SEC and accessible on the SEC's website as of the
Effective Date, or (ii)has been placed in the data room accessible by the
Buyer and its representatives for purposes of conducting its due diligence
investigation on or before October 22, 2001.
1.1.2 Definitions. As used in this Agreement and the Exhibits
and Schedules delivered pursuant to this Agreement, the following definitions
shall apply:
(a) "Action" means any action, complaint, claim, demand,
accusation, petition, investigation, suit or other proceeding, whether civil,
criminal, administrative or investigative, in law or in equity, or before any
arbitrator or Governmental Entity.
(b) "Affiliate" means a Person that directly, or
indirectly through one or more intermediaries, controls, or is controlled by,
or is under common control with, a specified Person.
(c) "Affiliate Agreements" shall have the meaning set
forth in Section 2.10.1.
(d) "Agreement" means this Securities Purchase Agreement
by and among the Buyer, the Sellers and Previti, as the same may be amended
or supplemented from time to time in accordance with its terms, together with
all of the Exhibits and Schedules attached hereto or incorporated herein by
reference.
(e) "Approval" means any approval, authorization,
consent, qualification or registration, or any waiver of any of the
foregoing, required to be obtained from, or any notice, statement or other
communication required to be filed with or delivered to, any Governmental
Entity or any other Person.
(f) "Asset Purchase Agreement" shall have the meaning set
forth in Recital D.
(g) "Asset Transfer" shall have the meaning set forth in
Recital A.
(h) "Assets" shall have the meaning set forth in the
Asset Purchase Agreement.
(i) "Assignments and Assumption Agreement" shall have the
meaning set forth in Section 6.3.4.
(j) "Auditors" means Ernst & Young LLP, independent
public accountants to the Group.
(k) "Buyer" shall have the meaning set forth in the
introductory paragraph of this Agreement.
(l) "Buyer's Board" shall mean the board of directors of
the Buyer.
(m) "Change of Control" shall mean, in a transaction or
series of related transactions, (i) the liquidation, winding up, or
dissolution of the Buyer, whether voluntary or involuntary, (ii) the sale of
all or substantially all of the assets of the Buyer, (iii) the reorganization
or recapitalization of the Buyer, or (iv) the sale, merger, or consolidation
of the Buyer in which the holders of the securities of the Buyer immediately
prior to such transaction(s) hold less than fifty percent (50%) of the voting
power of the surviving entity after such transaction(s).
(n) "Closing" means the consummation of the purchase and
sale of the Securities pursuant to the terms of this Agreement.
(o) "Closing Date" shall mean January --, 2002 or such
other date as the Parties may mutually agree in writing.
(p) "Code" means the Internal Revenue Code of 1986, as
amended, and the rules and regulations promulgated thereunder.
(q) "Collateral Agreements" means, collectively, the Lot
Option Agreement, the ROFO Agreement, the Non-Competition and Option
Agreement, the Park Meadows Option Agreement, the Consulting Agreement, the
Forecast Development Option and Purchase Agreement, the Assignment and
Assumption Agreement and the Indemnification and Release Agreement.
(r) "Company Names" shall mean the registered trademarks
"Forecast," "The Forecast Group," "America's Home," "New Beginnings" and
"Homes for a New Generation."
(s) "Consolidated Forecast Entities" shall mean,
collectively, the entities listed on Schedule 1.1 (the "Consolidated Forecast
Entities") attached hereto.
(t) "Consulting Agreement" shall have the meaning set
forth in Recital J.
(u) "Contract" means any agreement, arrangement, bond,
order, commitment, franchise, indemnity, indenture, instrument, lease,
license, sales and purchase order or obligation or understanding, inclusive
of amendments, express or implied, whether or not in writing, entered into by
at least the Buyer, Previti, the Sellers or any Consolidated Forecast Entity,
as applicable, specifically excluding, however, the Collateral Agreements.
(v) "Contract Property" shall have the meaning set forth
in Section 2.27.
(w) "Controlled Entity" means any entity (i) in which the
direct or indirect beneficial ownership (as described in Rule 13d-3 under the
Exchange Act) of at least fifty-one percent (51%) of its voting securities is
held by Previti, or (ii) with respect to which Previti has the contractual
right to exercise control.
(x) "Day" shall mean Larry R. Day, a natural person.
(y) "days" shall mean calendar days, unless specifically
provided to the contrary in a particular instance in this Agreement.
(z) "Debt" shall have the meaning set forth in Section
1.8.
(aa) "Disclosure Schedule" means a disclosure schedule
attached to this Agreement and prepared by or on behalf of the Buyer or the
Sellers, as applicable, which disclosure schedules set forth with specificity
exceptions to the representations and warranties of the Buyer and the
Sellers, respectively, contained in this Agreement.
(bb) "Effective Date" means the date this Agreement is
duly authorized, executed and delivered by each Party to the other, as more
particularly set forth in the introductory paragraph of this Agreement.
(cc) "Employed Group" shall have the meaning set forth in
Section 2.5.6.
(dd) "Encumbrance" means any claim, mortgage, charge,
title restriction, title defect, easement, encumbrance, lease, covenant,
security interest, hypothecation, lien, option, pledge, rights of others, or
restriction of any kind, imposed by Contract or Law, except for any
restrictions on transfer generally arising under any applicable federal or
state securities law.
(ee) "Equity Securities" means any capital stock or other
equity interest or any securities convertible into or exchangeable for
capital stock or any other rights, warrants or options to acquire any of the
foregoing securities.
(ff) "ERISA" means the Employee Retirement Income Security
Act of 1974, as amended, and the related regulations and published
interpretations.
(gg) "Exchange Act" means the Securities Exchange Act of
1934, as amended, and the rules and regulations promulgated thereunder
(hh) "Excluded Assets" shall mean, collectively, the Hold-
Back Property and the Previti Projects.
(ii) "Excluded Employees" shall have the meaning set forth
in Section 4.2.3.
(jj) "Excluded Liabilities" shall mean any and all known
and unknown Liabilities (i)associated with the Excluded Assets or arising as
a result of or in connection with the ownership or use of the Excluded Assets
by the Sellers, including, without limitation, under any Environmental Law
and (ii)of the Sellers, Previti or any of their Affiliates relating to,
pertaining to, or arising out of the Assets with respect to income or other
Taxes for periods or portions thereof ending on or prior to the Closing Date,
including, without limitation, any Taxes arising in connection with the
consummation of the transactions contemplated hereby.
(kk) "Executive Officers" means (i)with respect to the
Sellers, collectively, Messrs. Previti, Day, Glankler and Richard Munkvold
and (ii)with respect to the Buyer, collectively, Messrs. Ara Hovnanian,
Geaton DeCesaris, Peter Reinhart and Larry Sorsby.
(ll) "Exhibit" means an exhibit attached to, or
incorporated by reference in, this Agreement.
(mm) "Final Balance Sheet" shall have the meaning set
forth in Section 1.6.2 of the Asset Purchase Agreement.
(nn) "Financial Statements" shall have the meaning set
forth in Section 2.4.1.
(oo) "Forecast Development Option and Purchase Agreement"
shall have the meaning set forth in Recital K.
(pp) "Forecast Employee Plan" shall have the meaning set
forth in Section 2.18.1.
(qq) "Forecast 401(k) Plan" shall have the meaning set
forth in Section 5.7.2.
(rr) "Forecast Homes" has the meaning set forth in the
introductory paragraph of this Agreement.
(ss) "Forecast PP2" shall have the meaning set forth in
the introductory paragraph of this Agreement.
(tt) "GAAP" means generally accepted accounting principles
in the United States, as in effect from time to time, consistently applied.
(uu) "Glankler" shall mean Frank Glankler, a natural
person.
(vv) "Governmental Entity" means any government or any
agency, bureau, board, commission, court, department, official, political
subdivision, tribunal or other instrumentality of any government, whether
federal, state or local, domestic or foreign.
(ww) "Group" has the meaning set forth in Recital A.
(xx) "Group's SEC Reports" shall have the meaning set
forth in Section 2.21.
(yy) "Hart-Scott-Rodino Act" means the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, and the related regulations
and published interpretations.
(zz) "Hold-Back Property" shall have the meaning set forth
in the Asset Purchase Agreement.
(aaa) "Homebuilding Business" shall have the meaning set
forth in the Asset Purchase Agreement.
(bbb) "Indemnifiable Claim" means any Loss for or against
which any party is entitled to indemnification as set forth in Section 8.
(ccc) "Indemnification and Release Agreement" shall have
the meaning set forth in Recital L.
(ddd) "Indemnified Party" means the party entitled to
indemnity as set forth in Section 8.
(eee) "Indemnifying Party" means the party obligated to
provide indemnification as set forth in Section 8.
(fff) "Intangible Property" means any trade secret, secret
process or other confidential information or know-how and any and all Marks.
(ggg) "Intangible Rights" shall have the meaning set forth
in Section 1.2.
(hhh) "Intercompany Obligations" shall have the meaning set
forth in Section 2.26.
(iii) "IRS" means the Internal Revenue Service or any
successor entity.
(jjj) "knowledge of the Buyer" and words of similar import
and effect shall have the meaning set forth in Section 10.12.
(kkk) "knowledge of the Sellers" and words of similar
import and effect shall have the meaning set forth in Section 10.12.
(lll) "Park Meadows Option Agreement" shall have the
meaning set forth in Recital I.
(mmm) "Land Purchase Contracts" shall have the meaning set
forth in Section 2.27.
(nnn) "Law" means any constitutional provision, statute or
other law, rule, regulation, or interpretation of any Governmental Entity and
any Order.
(ooo) "Liability" means any liability or obligation of any
kind, character or description, known or unknown, contingent or otherwise,
whether liquidated or unliquidated, secured or unsecured and/or joint or
several.
(ppp) "Loss" means any cost, damage, disbursement, expense,
liability, loss, deficiency, obligation, penalty or settlement of any kind or
nature, contingent or otherwise, that is not recaptured through insurance
proceeds or any other form of rebate, credit or reimbursement, including,
without limitation, interest or other carrying costs, penalties, reasonable
legal, accounting and other professional fees and expenses incurred in the
investigation, collection, prosecution and defense of claims and amounts paid
in settlement.
(qqq) "Lot Option Agreement" shall have the meaning set
forth in Recital G.
(rrr) "Mark" means any brand name, copyright, patent,
service mark, trademark, tradename and all registrations or application for
registration of any of the foregoing.
(sss) "material adverse effect" means, with respect to a
Person or the Homebuilding Business, as applicable, any change or effect that
has resulted or could reasonably be expected to result in Losses, together
with any other change or effect, suffered in excess of $500,000; provided,
however, that a decline or forecasted decline in general economic conditions
or matters generally affecting homebuilding businesses in one or more real
estate markets in which such Person conducts business or operates or any Real
Property is located, or homebuilding companies in general (including, without
limitation, the cost or availability of energy or energy-related products,
changes in or affecting interest rates, securities markets, accounting
principles, practices or conventions, applicable laws and regulations,
homebuilding starts, closings, building and/or permit moratoria, zoning
changes or comparable events or events in the nature of the foregoing) shall
not be deemed to have a material adverse effect.
(ttt) "Material Contract" shall have the meaning set forth
in Section 2.10.1.
(uuu) "Non-Competition and Option Agreement" shall have the
meaning set forth in Recital F.
(vvv) "Office Lease" shall have the meaning set forth in
Section 5.8.
(www) "Order" means any decree, injunction, judgment,
order, ruling, assessment or writ.
(xxx) "Party" means any party to this Agreement.
(yyy) "Permissible Condominium Projects" shall have the
meaning set forth in the Asset Purchase Agreement.
(zzz) "Permit" means any license, permit, franchise,
certificate of authority, order or any waiver of the foregoing, required to
be issued by any Governmental Entity in relation to the Securities.
(aaaa) "Person" means any association, corporation,
individual, partnership, limited liability company, trust or any other entity
or organization, including any Governmental Entity.
(bbbb) "Policies" shall have the meaning set forth in
Section 2.16.1.
(cccc) "Premier" shall have the meaning set forth in
Recital F.
(dddd) "Previti" has the meaning set forth in the
introductory paragraph of this Agreement.
(eeee) "Previti Project" shall have the meaning set forth in
the Asset Purchase Agreement.
(ffff) "Purchase Price" shall have the meaning set forth in
Section 1.3.
(gggg) "Recital" shall mean one of the introductory
paragraphs to this Agreement.
(hhhh) "Representative" shall mean Previti (and any
designee or nominee so named by Previti).
(iiii) "ROFO Agreement" shall have the meaning set
forth in Recital H.
(jjjj) "Salomon" shall mean Salomon Smith Barney Inc.
(kkkk) "Schedule" means any schedule attached to, or
incorporated by reference in, this Agreement.
(llll) "SEC" shall mean the United States Securities
and Exchange Commission.
(mmmm) "Securities" shall have the meaning set forth
in Recital L.
(nnnn) "Securities Act" shall mean the Securities Act of
1933, as amended, and the rules and regulations promulgated thereunder.
(oooo) "Securities Partnership" shall have the meaning
set forth in Recital B.
(pppp) "Securities Transfer" shall have the meaning
set forth in Recital B.
(qqqq) "Seller" has the meaning set forth in the
introductory paragraph of this Agreement.
(rrrr) "Subsidiary" means any Person in which the
applicable Person has a direct or indirect equity or ownership interest in
excess of ten percent (10%).
(ssss) "Tax" means any foreign, federal, state, county or
local income, sales and use, excise, franchise, real and personal property,
transfer, gross receipt, capital stock, production, business and occupation,
disability, employment, payroll, severance or withholding tax or charge
imposed by any Governmental Entity, and any interest and/or penalties (civil
or criminal) or addition to tax related thereto or to the nonpayment thereof.
(tttt) "Tax Indemnitees" shall have the meaning set
forth in Section 8.1.3.
(uuuu) "Tax Proceeding" shall have the meaning set
forth in Section 5.4.1.
(vvvv) "Tax Return" means a report, return or other
information required to be supplied to a Governmental Entity with respect to
Taxes including, where permitted or required, combined or consolidated
returns for any group of entities that includes the Sellers, Previti the
Group or Securities Partnership, including any amendments thereof.
(wwww) "WARN Act" means the Worker Adjustment and
Retraining Notification Act.
(xxxx) "Wells Fargo" shall mean Wells Fargo Home Mortgage
Company.
1.2 Transfer of the Securities by the Sellers. Subject to the terms and
conditions of this Agreement, the Sellers shall sell all of the Securities
outstanding on the Closing Date to the Buyer at the Closing by executing and
delivering to the Buyer or its nominee an assignment agreement, in the form
attached hereto as Exhibit B (the "Form of Partnership Interest Assignment").
In addition, the Sellers shall assign to the Buyer those certain intangible
rights listed on Schedule 1.2 (the "Intangible Rights").
1.3 Purchase of the Securities by the Buyer. Subject to the terms and
conditions of this Agreement, the Sellers shall sell the Securities and
assign the Intangible Rights to the Buyer for a purchase price of Forty-Two
Million Five Hundred Thousand Dollars ($42,500,000) (the "Purchase Price"),
all of which shall be payable in cash.
1.4 Closing. The Closing will take place (a) at the offices of
O'Melveny & Myers LLP, 610 Newport Center Drive, Newport Beach, California
92660, at 10:00 a.m. (Pacific Time) on January --, 2002 or (b)on such other
date or at such other location as the Representative and the Buyer may
mutually agree in writing. In no case shall the Closing occur after the date
specified in Section 7.1, unless extended by the mutual written agreement of
the Parties as provided in Section 7.1. At the Closing, the Buyer shall (i)
pay the Purchase Price to the Sellers in cash by wire transfer of immediately
available federal funds to such account(s) as shall be specified in
instructions from the Representative to the Buyer at least three (3) business
days prior to the Closing, and (ii)execute any and all documents that the
Sellers and any other interested party in the transactions contemplated
hereunder shall deem necessary to perfect the intentions of the Parties to
this Agreement.
1.5 Purchase Price Allocation. Each Party agrees that (a) the Purchase
Price being paid by the Buyer for the Securities and the assignment of the
Intangible Rights shall be allocated among the Sellers as set forth in
Schedule 1.5 prepared in accordance with tax rules under Section 1060 and
Section 755 of the Code (the "Allocation of Purchase Price Among the
Sellers"), and (b)none of the Parties shall cause to be filed any Tax Return
or otherwise take any position for federal or state income Tax purposes which
is materially inconsistent with the allocations set forth in Schedule 1.5.
Each Party acknowledges that the treatment of the transactions evidenced by
this Agreement for federal income Tax purposes may not correspond to the
technical requirements for GAAP, and each Party reserves the right to report
the transactions evidenced by this Agreement for GAAP in a manner different
than the reporting for federal income Tax purposes.
1.6 Further Assurances. At any time and from time to time after the
Closing Date, upon the written request of the Buyer or the Sellers to the
other, as applicable, and without any cost or expense to the responding
Party, the Buyer and the Sellers, as applicable, shall execute and deliver
such instruments of conveyance, assignment and transfer and other documents
as the Buyer or the Seller, as applicable, may reasonably request to (a)
transfer to and vest in the Buyer (or any of its Subsidiaries), and to put
the Buyer (or any of its Subsidiaries) in possession of the Securities, or
(b) to otherwise carry out the intent and purposes of this Agreement.
1.7 Representative. Each Seller hereby appoints the Representative to
represent such Seller in connection with any part or all of the transactions
contemplated by this Agreement and to take any and all action on its behalf
under this Agreement that may be taken or received by such Seller as to any
or all of the transactions contemplated under the terms of this Agreement.
Without giving notice to any Seller, the Representative shall have full and
irrevocable authority on behalf of each Seller to (a) deal with the Buyer,
(b)accept and give notices and other communications relating to this
Agreement, (c) settle any disputes relating to this Agreement, (d) waive any
condition to the obligations of the Sellers included in this Agreement, (e)
execute any document or instrument that the Representative may deem necessary
or desirable in the exercise of the authority granted under this Section 1.7,
and (f) act in connection with all matters arising out of, based upon, or in
connection with, this Agreement and the transactions contemplated hereby.
Each Seller understands and agrees that the Representative has been appointed
as the Representative of the other Seller. The Buyer shall be entitled to
rely on the advice, information, instructions and decisions of the
Representative evidenced by a writing signed by him without any obligation
independently to verify, authenticate or seek the confirmation or approval of
the Representative's advice, information, instructions or decisions or any
other facts from any Seller or any other Person. Any certificate to be
delivered by the Sellers at the Closing may be executed and delivered by the
Representative on behalf of all of the Sellers.
1.8 Satisfaction of Debt. The Parties agree that the Buyer shall,
simultaneous with the Closing, and as a condition thereto, satisfy any and
all outstanding debt listed on Schedule 1.8 attached hereto (the "Debt")
without any credit or reduction in the Purchase Price payable to the Seller
under this Agreement or the Asset Purchase Agreement.
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE SELLERS
The Parties agree that the sale of the Securities shall be without
representation or warranty by the Sellers, express or implied, except as
specifically set forth in this Agreement. Other than with respect to the
representations and warranties contained in Sections 2.1.1, 2.1.2, 2.2 and
2.7 (as such survival is limited by Section 8.4.1), none of the
representations and warranties contained herein shall survive the Closing;
provided, however, that to the extent that the making of any such
representation or warranty constituted actual fraud (and as further limited
by Section 8.1.2) on the part of the Sellers, the Buyer's right to promptly
bring any Action against the Sellers thereunder and to such extent shall
survive the Closing and shall remain in full force and effect until the date
that is ninety (90) days after the expiration of the applicable statutory
period; provided, however, such Action shall be filed in accordance with
Section 10.10 by the Buyer within ninety (90) days after the Buyer's
knowledge thereof or the claim (and the applicable remedy) shall be
automatically waived. Except as otherwise specifically indicated on the
Seller's Disclosure Schedule as to the particular section as to which an
exception is being disclosed, the Sellers represent and warrant to the Buyer
as follows:
2.1 The Group; the Sellers.
2.1.1 Ownership at the Closing. At the Closing, each Seller
shall have good and marketable title to, and sole record and beneficial
ownership of, all of the Securities set forth opposite its name on Schedule
2.1.1 (the "Ownership Schedule"), all of which are to be transferred to the
Buyer by each Seller pursuant to this Agreement free and clear of all
Encumbrances.
2.1.2 Transfer of Unencumbered Title to the Securities. Upon the
Closing, the Sellers shall transfer to the Buyer legal and beneficial
ownership of, and all right to vote, all of the Securities, free and clear of
all Encumbrances.
2.1.3 Formation; Power and Authority. The Securities Partnership
is a duly formed and validly existing limited partnership, in good standing,
under the Laws of the State of California with the power under the California
Revised Limited Partnership Act and its partnership agreement to own, lease
and operate its properties and to carry on its business as now conducted and
is duly qualified to do business in the jurisdictions listed on the Seller's
Disclosure Schedule, except where the failure to so qualify will not have a
material adverse effect. Forecast Homes has been duly incorporated and is
validly existing in good standing under the Laws of the State of California
and has corporate power and authority to enter into this Agreement and to
consent to the transfer of the Securities to the Buyer. Forecast PP2 has
been duly formed and is validly existing in good standing as a limited
liability company under the Laws of the State of Delaware, with the power
under the limited liability company statute of the State of Delaware and its
limited liability company agreement to enter into this Agreement, perform its
obligations hereunder and to transfer, convey and sell to the Buyer at the
Closing the Securities to be sold to the Buyer by such Seller. The Sellers
are duly qualified or registered to transact business in each jurisdiction in
which they conduct businesses, except where the failure, individually or in
the aggregate, to be so qualified or registered could not reasonably be
expected to have a material adverse effect on the assets, businesses
operations, earnings, properties or condition of the Seller. The Sellers
have made available to the Buyer true, correct and complete copies of all
organizational or constituent documents of each of the Sellers and the
Consolidated Forecast Entities.
2.1.4 Authorization. The execution, delivery and performance of
this Agreement and the transactions contemplated hereby by each Seller have
been duly and validly authorized by such Seller's board of directors (or
other comparable governing body) and, if necessary, the shareholders of such
Seller, and by all other necessary corporate or partnership action on the
part of such Seller. This Agreement has been duly executed and delivered by
each Seller and constitutes the legal, valid and binding obligation of each
Seller, enforceable against each Seller in accordance with its terms, except
as may be limited by bankruptcy, insolvency, reorganization, moratorium and
other similar laws relating to or limiting creditors' rights generally and
equitable principles.
2.2 Capitalization. Schedule 2.1.1 lists the sole general partner and
the sole limited partner of the Securities Partnership, together with their
percentage interests in the Securities Partnership, as of the Effective Date.
All such interests in Securities Partnership have been duly authorized and
validly issued, free of any pre-emptive rights or other Encumbrances and are
fully paid, with no obligation to make any contribution to the capital of the
Securities Partnership or other liability attaching to the ownership of such
interests, except for the liability of the sole general partner of the
Securities Partnership under the partnership agreement of the Securities
Partnership and the California Revised Limited Partnership Act. As of the
Closing Date, there shall not be any (a) outstanding options, warrants,
Contracts or other rights to subscribe for or purchase, or Contracts or other
obligations to issue or rights to acquire, any interest in the Securities
Partnership, or to restructure or recapitalize the Securities Partnership, or
(b) outstanding Contracts to repurchase, redeem or otherwise acquire any
interest in the Securities Partnership.
2.3 Subsidiaries. Except as set forth on the Sellers' Disclosure
Schedule, Securities Partnership does not directly or indirectly own any
beneficial or record interest in any corporation, partnership, joint venture,
trust or other Person other than ordinary cash-management investments.
2.4 Financial Statements; Changes; Contingencies.
2.4.1 Audited Financial Statements. For financial reporting
purposes, the financial statements of the Group are attached to Schedule
2.4.1 (the "Financial Statements of the Group"). The Sellers have delivered
to the Buyer audited balance sheets for the Group at October 31, 2001, 2000
and 1999 and the related audited statements of operations, equity and cash
flows for the years ended October 31, 2001, 2000 and 1999 (the "Financial
Statements"). The Financial Statements have been prepared in conformity with
GAAP as applicable to an Exchange Act reporting company with registered
equity securities (except for changes, if any, required by GAAP and disclosed
therein) and present fairly, in all material respects, the financial position
of the Group at October 31, 2001, 2000 and 1999 and the results for the years
then ended.
2.4.2 No Undisclosed Liabilities. Except as set forth on
Schedule 2.4.1, to the Seller's knowledge, the Consolidated Forecast Entities
shall have no material Liabilities (contingent or otherwise) or obligations,
in each case that are required to be disclosed by GAAP, other than (a) the
Liabilities reflected in the most recent Financial Statements, (b)Liabilities
incurred since the date thereof in the ordinary course of business generally
consistent with past practices that cannot, individually, in the aggregate,
reasonably be expected to have a material adverse effect, and (c)Liabilities
specifically delineated as to nature and amount on the Seller's Disclosure
Schedule.
2.5 No Material Adverse Changes. Except as set forth on Schedule 2.4.1
and resulting from the Asset Transfer, from and after October 31, 2001, there
has not been, occurred or arisen, whether or not in the ordinary course of
business:
2.5.1 to the Sellers' knowledge, any change in or event affecting
the Consolidated Forecast Entities that has had a material adverse effect on
the Consolidated Forecast Entities, taken as a whole;
2.5.2 to the Sellers' knowledge, any strike or other labor
dispute pertaining to the Homebuilding Business;
2.5.3 to the Sellers' knowledge, any Loss (whether or not covered
by insurance) of any property of the Consolidated Forecast Entities
(including, without limitation, the Assets) that has involved a material Loss
or Losses to the Consolidated Forecast Entities, taken as a whole, or with
respect to such Property in excess of all applicable insurance coverage
(excepting deductible amounts);
2.5.4 any declaration, set aside or payment of any distribution
with respect to Securities Partnership's partnership or other equity
interests (whether in cash or in kind) or redemption, purchase or other
acquisition by Securities Partnership of any of its partnership or other
equity interests;
2.5.5 any capital expenditure (or series of related capital
expenditures) by any Consolidated Forecast Entity (a)outside the ordinary
course of business generally consistent with past practices, or (b)for assets
other than land in excess of Fifty Thousand Dollars ($50,000);
2.5.6 other than one-time bonuses paid prior to the Closing Date,
and compensation increases for individuals earning less than One Hundred
Thousand Dollars ($100,000) on an annualized basis, any (a) percentage
increase in the bonus, salaries, fringe benefits or other compensation paid
by any Consolidated Forecast Entity to any of its partners, members,
officers, managers, employees, agents or consultants (collectively, the
"Employed Group") or made any other change in the employment terms for any of
the Employed Group outside the ordinary course of business or inconsistent
with past practices, (b)grant of severance or termination pay to any present
or former member of the Employed Group outside the ordinary course of
business, (c)loan or advance of money or other property by any Consolidated
Forecast Entity to any present or former member of the Employed Group, or
(d)establishment, adoption, entrance into, material amendment or termination
of any Forecast Employee Plan. Nothing in this Section 2.5.6 shall serve to
prevent the Group, Sellers, Previti or any Consolidated Forecast Entity from
extending any existing Forecast Employee Plan, or substituting another
provider for any existing Forecast Employee Plan or other service utilized in
providing for employee payroll activities or Employee Plans;
2.5.7 any material delay or postponement of the payment of any
accounts payable or other liabilities by any Consolidated Forecast Entity in
a manner inconsistent with their ordinary course of business or any
occasional or recurring past practices;
2.5.8 any assumption, creation, guarantee or incurrence by any
Consolidated Forecast Entity of any indebtedness, whether absolute or
contingent (other than to finance the acquisition, development or
construction of real property or in the ordinary course of business generally
in accordance with past practices);
2.5.9 any settlement of any lawsuit by, or any initiation of, any
lawsuit against, any Consolidated Forecast Entity, other than those (a)
Orders or Actions that are set forth on the Sellers' Disclosure Schedule, and
(b) settlements, lawsuits and/or Actions that, individually or in the
aggregate, could not reasonably be expected to have a material adverse effect
upon the Securities Partnership, the Assets or the Consolidated Forecast
Entities, taken as a whole;
2.5.10 any change, in any material respect, in any of the
accounting practices or principles used by the Consolidated Forecast
Entities;
2.5.11 the making of any loans, advances, capital
contributions or investments made by the Consolidated Forecast Entities in or
to any Person outside the ordinary course of business generally consistent
with past practices;
2.5.12 any acquisition (by merger, consolidation or
acquisition of stock or assets) by any Consolidated Forecast Entity of any
corporation, limited liability company, partnership or other business
organization or division thereof or substantially all of the assets thereof;
2.5.13 any material settlement, material agreement or
material arrangement concerning any alleged construction defect of any home
constructed or sold by any Consolidated Forecast Entity, whether or not such
alleged defect were covered by or subject to any warranty provided by such
Consolidated Forecast Entity, involving an individual amount in excess of One
Hundred Thousand Dollars ($100,000); or
2.5.14 any Encumbrance, transfer, lease, license or other
disposition of any Asset or of the assets of any Consolidated Forecast Entity
or the making of any loans, advances, capital contributions or investments by
the Consolidated Forecast Entities in or to any Person other than in the
ordinary course of business generally in accordance with past practices.
2.6 Absence of Certain Changes. Except as set forth on Schedule 2.4.1,
from and after October 31, 2001, the Consolidated Forecast Entities have
(a)used commercially reasonable efforts to preserve their business and
goodwill, including the goodwill of their customers, employees,
subcontractors, suppliers and other Persons having material business
relations with them, and (b)maintained their intangible assets in a
commercially reasonable manner generally consistent with past practices.
2.7 Taxes.
2.7.1 Filing of Returns. Except as provided on the Sellers'
Disclosure Schedule, all Tax Returns required to be filed by or on behalf of
any Consolidated Forecast Entity have been duly and timely filed (taking into
account any extensions), and, to Previti's knowledge, such Tax Returns are
true, correct and complete in all material respects and have been prepared in
accordance with applicable Laws. Except as provided on the Sellers'
Disclosure Schedule, all Taxes (whether or not shown as payable on the Tax
Returns or on subsequent assessments with respect thereto) have been paid in
full and no other Taxes or penalties are payable by any Consolidated Forecast
Entity or the Sellers (as such Taxes related to the income of such
Consolidated Forecast Entity) with respect to items or periods covered by
such Tax Returns (whether or not shown or reportable on such Tax Returns) or
with respect to any period or portion thereof ending on or prior to the
Closing Date other than Taxes which are not yet due. Each of the
Consolidated Forecast Entities has withheld and paid over all Taxes required
to have been withheld and paid over, and complied with all information
reporting and backup withholding requirements, including maintenance of
required records with respect thereto, in connection with amounts paid or
owing to any employee, creditor, independent contractor or other third party.
Except as set forth on the Sellers' Disclosure Schedule, an extension of
time, within which to file any such Tax Return which has not been filed, has
not expired.
2.7.2 Liens. There are no liens on any of the assets of the
Consolidated Forecast Entities with respect to Taxes, other than liens for
(a)Taxes not yet due and payable, or (b)Taxes that are being contested in
good faith through appropriate procedures and/or proceedings and for which
adequate reserves have been established.
2.7.3 Tax Returns. Except as set forth on the Seller's
Disclosure Schedule, the Sellers have made available to the Buyer true and
complete copies of (a)all income tax audit reports, statements of
deficiencies, closing or other agreements received by or on behalf of the
Consolidated Forecast Entities relating to Taxes, and (b)all Tax Returns for
the Consolidated Forecast Entities for all periods from and after the Group's
1999 taxable year. None of the Consolidated Forecast Entities has ever been
a member of an affiliated group filing consolidated Tax Returns. The
Consolidated Forecast Entities do not do business in or derive income from
any state, local, territorial or foreign Taxing jurisdiction other than those
for which all Tax Returns have been furnished to the Buyer.
2.7.4 Tax Deficiencies; Audits; Statutes of Limitations. The Tax
Returns of any Consolidated Forecast Entity are not currently being audited
by a government or taxing authority with jurisdiction, nor, is any such audit
pending or threatened (either in writing or verbally, formally or
informally). No deficiencies exist or are expected to be asserted with
respect to Taxes of any Consolidated Forecast Entity. Except as set forth on
the Sellers' Disclosure Schedule, none of the Consolidated Forecast Entities
has received notice (either in writing or verbally, formally or informally)
or, to the Sellers' knowledge, expects to receive notice that it has not
filed a Tax Return or paid Taxes required to be filed or paid by it. None of
the Consolidated Forecast Entities is a party to any action or proceeding for
assessment or collection of Taxes, or, has such event been asserted or
threatened (either in writing or verbally, formally or informally) against
any Consolidated Forecast Entity or any of its assets (including, without
limitation, the Assets). No waiver or extension of any statute of
limitations is in effect with respect to Taxes or Tax Returns of any
Consolidated Forecast Entity.
2.7.5 Special Tax Status. None of the Consolidated Forecast
Entities is a "foreign person" (as that term is defined in Section 1445 of
the Code). None of the Consolidated Forecast Entities has filed a consent
under Section 341(f) of the Code concerning collapsible corporations. None
of the Consolidated Forecast Entities has made any payments, is obligated to
make any payments, or is a party to any agreement that under certain
circumstances could obligate it to make any payments that will not be
deductible under Section 280G of the Code. None of the Consolidated Forecast
Entities is required to recognize an adjustment to income under Section 481
of the Code for any Tax period following the Closing Date. None of the
Sellers or the Securities Partnership is liable for Taxes pursuant to
Treasury Regulation Section 1.1502-6 (or any comparable provision of state,
local or foreign Tax law), as a transferee or successor, by contract or
otherwise, or is currently under any contractual obligation to indemnify any
person with respect to any amount of Taxes, or is a party to any tax sharing
agreement or any other agreement providing for payments by any of the Sellers
or the Securities Partnership with respect to Taxes.
2.7.6 No Withholding. The transactions contemplated in this
Agreement are not subject to the withholding provisions of Section 3406 of
the Code, subchapter A of Chapter 3 of the Code or of any other provision of
Law.
2.7.7 Valid Partnership Status. The Securities Partnership and
any subsidiary of the Securities Partnership, if any, will, for tax purposes,
be treated as a partnership for all periods of its existence.
2.8 Compliance with Applicable Laws. Except as set forth on the
Sellers' Disclosure Schedule, to the Sellers' knowledge, (a) each
Consolidated Forecast Entity has complied and is in compliance, in all
material respects, with all applicable Laws in the conduct of its business,
including, without limitation, the Homebuilding Business, and (b)no
Governmental Entity has filed, commenced or, to the Seller's knowledge,
threatened an Action against any Consolidated Forecast Entity alleging a
failure to so comply, nor has any Governmental Entity indicated in writing an
intention to commence the same.
2.9 Absence of Unethical Business Practices. No Consolidated Forecast
Entity has directly or indirectly given or agreed to give any gift or similar
benefit to any customer, subcontractor, supplier, government employee or
other Person who was or is in a possible position to help or hinder any
Consolidated Forecast Entity, which gift or benefit might subject such
Consolidated Forecast Entity to any criminal proceedings in any material
respect.
2.10 Material Contracts.
2.10.1 The Consolidated Forecast Entities. The Sellers'
Disclosure Schedule lists each Contract (each, a "Material Contract," and
collectively, the "Material Contracts") that, as of the Effective Date:
(a) shall obligate the successor owner of any of the
Assets to pay a contractor or subcontractor an amount in excess of Two
Hundred and Fifty Thousand Dollars ($250,000) over a one (1)-year period;
(b) shall obligate the successor owner of any of the
Assets to pay to any party other than a contractor or subcontractor an amount
in excess of Fifty Thousand Dollars ($50,000) over a one (1)-year period;
(c) represents an indenture, loan or credit agreement in
excess of Fifty Thousand Dollars ($50,000), or provides for or evidences a
loan or extension of credit, a letter of credit or any security or guaranty
in excess of Fifty Thousand Dollars ($50,000) in respect thereof, to which
any Consolidated Forecast Entity or any of its properties or assets is a
party or bound;
(d) expressly limits or restricts the ability of any
Consolidated Forecast Entity or an equityholder or Affiliate thereof to
compete or otherwise to generally conduct its business in any manner or
place;
(e) provides a guaranty or indemnity (other than
indemnities that are provided in the ordinary course of business consistent
with past practice, e.g., mechanics lien indemnities, among others) by any
Consolidated Forecast Entity;
(f) other than those that are available due to
information arising in relation to a resolution of the board of directors of
any Consolidated Forecast Entity or the written approval of the president of
any Consolidated Forecast Entity, grants a power of attorney, agency or
similar authority to another Person or entity;
(g) contains a right of first refusal or first offer or
other preemptive right obligation on the part of any Consolidated Forecast
Entity, except as otherwise set forth in this Agreement (or any other related
agreements);
(h) obligates any Consolidated Forecast Entity to
construct for, or sell a residence or other building or improvement to, any
Person;
(i) represents a Contract under which any Person provides
services to any Consolidated Forecast Entity in connection with the
construction of single-family, for-sale residences or the development of real
property which is not terminable by such Consolidated Forecast Entity without
further liability on not more than thirty (30) days' notice, except as
otherwise set forth in this Agreement;
(j) represents a Contract under which any Person provides
material to any Consolidated Forecast Entity in connection with the
construction of single-family, for-sale residences or the development of real
property and which is not terminable by such Consolidated Forecast Entity
without further liability within thirty (30) days' notice or less;
(k) represents a lease Contract of at least one (1)
years' duration beyond the Effective Date in which any Consolidated Forecast
Entity is the lessor or the lessee of any personal property, or holds or
operates any equipment, machinery, vehicle or other tangible personal
property owned by a third party that is directly and currently used in
connection with the Homebuilding Business, except for the AS-400 hardware
computer system;
(l) represents (i)a sales agency, broker or finder
Contract, (ii)a loan origination or customer referral Contract that involves
an aggregate payment in excess of Fifty Thousand Dollars ($50,000), (iii)a
consulting, advisory, marketing, management and other service agreements that
are not terminable by the Consolidated Forecast Entities without further
liability on not more than thirty (30) days' notice and provides for annual
payments per individual agreement exceeding Fifty Thousand Dollars ($50,000),
or (iv)a performance, completion, surety or other bond or performance
guarantee of more than Fifty Thousand Dollars ($50,000) in each instance to
which any Consolidated Forecast Entity is a party or bound;
(m) the termination, breach, default, repudiation,
nonperformance or loss of or default in the counterparty's performance of
which could reasonably be expected to have a material adverse effect on the
Consolidated Forecast Entities, taken as a whole;
(n) is between or among or affects any Consolidated
Forecast Entity, on the one hand, and any officer, director or manager of any
Consolidated Forecast Entity, any Seller, any Controlled Entity or any of
their Affiliates on the other hand (collectively, "Affiliate Agreements");
and
(o) that relates to the development of any single-family,
for-sale residences.
True, correct and complete copies of such Material Contracts, including all
amendments and supplements, if any, have been made available to the Buyer.
2.10.2 No Breach. To the Sellers' knowledge, each
Consolidated Forecast Entity has duly performed, in all material respects,
all of its obligations arising under each Material Contract listed on the
Sellers' Disclosure Schedule to the extent that such obligations to perform
have accrued. Except as specifically set forth on the Sellers' Disclosure
Schedule, to the Sellers' knowledge, no breach or default, alleged breach or
default (or notice of same), or event which would (with the passage of time,
notice or both) constitute a breach or default thereunder in any material
respect by any Consolidated Forecast Entity, or any other party or obligor
with respect thereto, has occurred under any Material Contract or will occur
as a result of this Agreement. Except as set forth on the Sellers'
Disclosure Schedule, to the Seller's knowledge, no person shall have the
contractual right to terminate or repudiate any Material Contract on less
than twenty (20) days' notice as a result of the consummation of the
transactions contemplated by this Agreement.
2.11 Adequacy of Assets. The assets of the Securities Partnership and
the Assets include all assets and properties of every kind and description,
real, personal or mixed, tangible or intangible, the use of which is
reasonably necessary to enable the Buyer to conduct the Homebuilding Business
substantially as conducted prior to the Effective Date.
2.12 Intangible Property. The Securities Partnership has the rights
to and ownership of all Intangible Property required for use in connection
with the Homebuilding Business as conducted prior to the Effective Date. The
Consolidated Forecast Entities do not use any Intangible Property by consent
or license of any other Person (other than those governmental agencies who
may grant such rights and/or licenses) and none of the Consolidated Forecast
Entities is required to or do make any payments to others (other than those
governmental agencies who may grant such rights and/or licenses) with respect
to any Intangible Property. To the Sellers' knowledge, the Intangible
Property is not being infringed by any Person and the Intangible Property or
any use by the Consolidated Forecast Entities of any such property does not
conflict with or infringe the rights of any Person. To the Seller's
knowledge, the Consolidated Forecast Entities have taken all reasonable steps
to protect, maintain and safeguard the Intangible Property and have made all
filings and executed all agreements necessary in connection therewith,
including obtaining registrations for certain of the Company Names from the
United States Patent and Trademark Office. No Action is pending or has been
rendered, or to the Sellers' knowledge, has been threatened in writing by any
Person or Governmental Entity which would limit, cancel or question the
validity, enforceability, ownership or use of any Intangible Property,
including the Company Names. The Consolidated Forecast Entities have the
right to use, in a manner substantially consistent with occasional or
recurring past practice, all housing plans, blueprints, elevation drawings
and specifications being used by any Consolidated Forecast Entity prior to
the Effective Date in the Homebuilding Business.
2.13 Labor Relations. Except as set forth on Schedule 2.13, (a) none
of the Consolidated Forecast Entities is a party to, nor bound by, any
collective bargaining agreement, contract or other agreement or understanding
with a labor union or labor organization, nor is any such contract or
agreement presently being negotiated; (b) none of the Consolidated Forecast
Entities is the subject of any proceeding asserting that it has committed an
unfair labor practice or seeking to compel it to bargain with any labor
organization as to wages or conditions of employment, nor, to the Sellers'
knowledge, is any such proceeding threatened; (c) there is no strike, work
stoppage, slowdown or, to the Sellers' knowledge, similar labor dispute
involving the Consolidated Forecast Entities pending or threatened; (d) no
material grievance is pending or, to the Sellers' knowledge, threatened; (e)
no representation exists respecting any of the employees of the Consolidated
Forecast Entities within the past two (2) years, nor, to the Sellers'
knowledge, are there any campaigns currently being conducted to authorize
representation by any labor organizations; (f)all of the Consolidated
Forecast Entities are in material compliance with all applicable Laws,
agreements, contracts and policies relating to employment, employment
practices, wages, hours, terms and conditions of employment, except for
failures to so comply, if any, that individually or in the aggregate could
not reasonably be expected to have a material adverse effect on the
Consolidated Forecast Entities, taken as a whole; (g) no Consolidated
Forecast Entity is a party to, or otherwise bound by, any consent decree
with, or citation by, any Governmental Entity relating to employees or
employment practices; (h) each Consolidated Forecast Entity has complied in
all material respects with their material payment obligations to all
employees thereof in respect of all wages, salaries, commissions, bonuses,
benefits and other compensation due and payable to such employees under any
policy, practice, agreement, plan, program or any statute or other Law; (i)
no Consolidated Forecast Entity is liable for any material severance pay or
other payments to any employee or former employee arising from the
termination of employment under any benefit or severance policy, practice,
agreement, plan or program of the Consolidated Forecast Entities, nor will
any Consolidated Forecast Entity have any liability which exists or arises,
or may be deemed to exist or arise, under any applicable Law or otherwise, as
a result of the termination by any Consolidated Forecast Entity of any
persons employed by it on or prior to the Closing Date; (j) no Consolidated
Forecast Entity has closed any plant or facility, effectuated any layoffs of
employees or implemented any early retirement, separation or window program
within the past five (5) years that was subject to the WARN Act, nor has any
such entity planned or announced any such action or program for the future;
and (k) each Consolidated Forecast Entity is in material compliance with its
notice obligations under the WARN Act.
2.14 Minute Books. To the Seller's knowledge, the minute books of
Securities Partnership contain a complete and accurate summary of all
material actions and proceedings taken through the Effective Date by the
partners of Securities Partnership, and such minute books contain true and
complete copies of the constituent documents of Securities Partnership and
all related amendments.
2.15 Accounting Records. The Securities Partnership maintains (a)
books, records and accounts that accurately and fairly reflect their assets
and transactions, and (b) a system of internal accounting controls that have
been reviewed by the Auditors and which the Group and Securities Partnership
reasonably believe are sufficient to provide reasonable assurance that
(i)transactions are accurately and promptly recorded to permit the
preparation of fairly presented financial statements, (ii)transactions are
executed in accordance with management's general or specific authorization,
and (iii) access to the Assets is permitted only in accordance with
management's general or specific authorization.
2.16 Insurance.
2.16.1 Policies; Defaults. The Sellers' Disclosure Schedule
lists all insurance policies and bonds in excess of a face amount of One
Hundred Thousand Dollars ($100,000) with respect to the Consolidated Forecast
Entities (the "Policies"). Except as set forth on Schedule 2.16.1, to the
Sellers' knowledge, no material disagreement or dispute exists between any of
the insurers and any Consolidated Forecast Entity or any Affiliate thereof,
other than with respect to whether not the standard ISO insurance contract
provisions apply to the North American Capacity ("NAC") policy for calendar
year 2001 (it being the position of the Consolidated Forecast Entities that
it does and it being the position of NAC that it does not). The Consolidated
Forecast Entities believe that this dispute relates only to the scope of
insurance coverage and not the obligation of NAC to defend and indemnify the
Consolidated Forecast Entities, NAC having already undertaken such defense
and indemnity in a number of cases now pending, subject to defense
arrangements undertaken in accordance with applicable reservation of rights;
provided, however, nothing herein shall constitute a waiver of any
Consolidated Forecast Entity's rights against such insurers. To the Sellers'
knowledge, no Consolidated Forecast Entity is in material default under any
such Policy or bond. No Consolidated Forecast Entity has received any
written notice from any insurer (inclusive of any successors-in-interest of
such insurers or any replacement insurers) or agent of any intent to cancel
or not renew any such Policy or bond.
2.16.2 Claims. There is no material claim by any
Consolidated Forecast Entity pending under any of the Policies as to which
coverage has been denied to it in writing by any of the issuers of the
Policies covering such claim. To the Sellers' knowledge, there has been no
occurrence that may form the basis of a material claim that is by or on
behalf of any Consolidated Forecast Entity under any such Policy that has not
been made or tendered. To Seller's knowledge, no coverage as to any material
claim under any of such Policies has been denied by the underwriters of such
Policy, excluding any qualifications regarding the underwriters' reservation
of rights. All premiums currently due and payable under all the Policies
have been paid in all material respects.
2.17 Employees. The Buyer has been provided with a list of the names
of all employees (including those on leave of absence or layoff status) of
each Consolidated Forecast Entity employed as of the Effective Date engaged
in the Homebuilding Business, their job title, employment date and their
aggregate annual cash compensation (all such information shall be accurate as
of the Effective Date). As of the Effective Date, except as set forth on the
Sellers' Disclosure Schedule, (a) the Consolidated Forecast Entities do not
have any outstanding loan from or to any Affiliate, or any agent, employee,
or officer of any Consolidated Forecast Entity, and (b) no material
representations, warranties or covenants have been made to, or agreements
have been reached with, any employee in material variance with the provisions
of the employee manual with respect to their employment, compensation or
benefits. Except with respect to the Excluded Employees, no executive or
employee has given written notice as of the Effective Date of their plans to
terminate employment with any Consolidated Forecast Entity during the twelve
(12) months subsequent to the Effective Date. The Sellers' Disclosure
Schedule sets forth a list of each employee of the Group who has a
management, employment or bonus contract, or contract for personal services
between any Seller and any officer, consultant, employee, or agent of any
Seller.
2.18 Employee Benefit Plans.
2.18.1 Employee Benefit Plans, Collective Bargaining and
Employee Agreements, and Similar Arrangements.
(a) Except with respect to the Excluded Employees, the
Sellers' Disclosure Schedule contains a true and complete list of all
employee benefit, bonus, auto allowance, consulting, change in control,
fringe benefit plans and collective bargaining, employment or severance
agreements or other similar arrangements, whether or not subject to ERISA
(including any funding mechanism therefor now in effect or required in the
future as a result of the transactions contemplated by this Agreement or
otherwise), whether formal or informal, oral or written, legally binding or
not, under which any current or former member of the Employed Group has any
present or future right to benefits sponsored or maintained by any
Consolidated Forecast Entity or to which any Consolidated Forecast Entity is
a party, is required to make any contribution, or by which any of them is
bound, or with respect to which any of them has any liability or obligation,
including, without limitation, (i) any profit-sharing, deferred compensation,
bonus, stock option, stock purchase, or other equity-based compensation,
pension, retainer, consulting, retirement, severance, plant closing, loan or
loan guarantee, change in control, welfare or incentive plan, agreement or
arrangement, (ii) any plan, agreement or arrangement providing for "fringe
benefits" or perquisites to any current or former member of the Employed
Group, officers, directors or agents, including, without limitation, benefits
relating to automobiles, clubs, vacation, child care, parenting, sabbatical,
sick leave, medical, dental, hospitalization, life insurance and other types
of insurance, (iii) any written employment agreement, or (iv) any other
"employee benefit plan" (within the meaning of Sections 3(3) and 3(37) of
ERISA, including, without limitation, multiemployer plans) (each, a "Forecast
Employee Plan," and collectively, the "Forecast Employee Plans").
(b) The Sellers have made available to the Buyer true and
complete copies of (i)all material documents and existing written summary
plan descriptions (and written descriptions of any oral Forecast Employee
Plans) with respect to the plans, agreements and arrangements listed on the
Sellers' Disclosure Schedule, (ii) each trust agreement, annuity or insurance
contract, or other funding instrument, if any, pertaining to each Forecast
Employee Plan, (iii)the most recent annual report (IRS Form 5500 Series),
including all schedules to such reports, if applicable, filed with respect to
each Forecast Employee Plan for which such a filing is required, (iv) the
most recent determination letter, if applicable, and (v)the most recent plan
audits, financial statements, and accountant's opinion (with footnotes) for
each Forecast Employee Plan.
(c) To the Sellers' knowledge, other than the Auditor's
inquiries respecting certain of Previti's individually directed off-balance
sheet 401(k) retirement plan investments: (i) each Forecast Employee Plan has
been established and administered in material compliance with the applicable
provisions of ERISA (as amended through the Effective Date), the regulations
and published authorities thereunder, and all other applicable Laws; (ii)
each Consolidated Forecast Entity has administered each Forecast Employee
Plan substantially in accordance with its terms and have performed all of its
obligations under all such plans, agreements and arrangements; (iii) each
Forecast Employee Plan that is intended to be qualified within the meaning of
Section 401(a) of the Code has received a favorable determination letter as
to its qualification, and to the Sellers' knowledge, nothing has occurred,
whether by action or failure to act, that could reasonably be expected to
cause the loss of such qualification; (iv) for each Forecast Employee Plan
with respect to which Form 5500 has been filed, no material change has
occurred with respect to the matters covered by the most recent Form 5500
since the date thereof; (v) all benefits due under each Forecast Employee
Plan have been timely paid; and (vi) there are no Actions (other than routine
uncontested claims for benefits) pending or, to the Sellers' knowledge,
threatened against such plans or their assets, or arising out of such plans,
agreements or arrangements and no facts or circumstances exist that
reasonably could give rise to any such Actions.
2.18.2 Qualified Plans. None of the Forecast Employee Plans
is, and no Consolidated Forecast Entity or any member of its "Controlled
Group" (defined as any organization which is a member of a controlled group
of organizations within the meaning of Sections 414(b), (c), (m) or (o) of
the Code) has or in the past three (3) years has had any obligation with
respect to, a stock bonus, pension or profit-sharing plan within the meaning
of Section 401(a) of the Code, or an employee pension benefit plan within the
meaning of Section 3(2) of ERISA.
2.18.3 Health Plans. To the Sellers' knowledge, (a) all
group health plans of the Consolidated Forecast Entities have been operated
in substantial compliance with the group health plan continuation coverage
requirements of Section 162(k) and Section 4980B of the Code and Title I of
ERISA to the extent such requirements are applicable, and (b) except as
required by Section 4980B of the Code, no Forecast Employee Plan provides for
any post-employment coverage.
2.18.4 Other Plans. To the Sellers' knowledge, none of the
Forecast Employee Plans is, and no Consolidated Forecast Entity has in the
past three (3) years sponsored or contributed to, a multi-employer plan (as
defined in Section 3(37) of ERISA), a multiple employer plan, any plan
subject to the minimum finding provisions of ERISA or the Code or a voluntary
employees' beneficiary association as defined in Section 501(c) of the Code.
No Forecast Employee Plan provides retiree welfare benefits and no
Consolidated Forecast Entity has any obligations to provide retiree welfare
benefits.
2.18.5 Joint and Several Liability. With respect to each
current Forecast Employee Plan maintained, or contributed to by any entity
which either is currently or was previously under common control with any
Consolidated Forecast Entity as determined under Section 414 of the Code or
Section 3(5) of ERISA, to the Sellers' knowledge, no event has occurred and
no condition exists that after the Effective Date could reasonably subject
the Buyer or any Consolidated Forecast Entity, directly or indirectly, by
reason of their affiliation with any member of their controlled group to any
Tax, fine, lien, penalty or other liability (including liability under any
indemnification agreement) under applicable laws, rules and regulations
imposed by ERISA.
2.18.6 Contributions. To the Sellers' knowledge, (a) all
material contributions and material payments to or with respect to each
Forecast Employee Plan have been timely made, and (b)the Consolidated
Forecast Entities have made adequate provision for reserves to satisfy all
contributions and payments that have not been made because they are not yet
due under the terms of such Forecast Employee Plan or related arrangement,
document or applicable Law.
2.18.7 No Change in Control Triggers. Except as set forth
on the Sellers' Disclosure Schedule, no Forecast Employee Plan provides for
any accelerated payments, deemed satisfaction of goals or conditions, new or
increased benefits, forgiveness or modification of loans or vesting
conditioned in whole or in part upon a change in control of any Consolidated
Forecast Entity, or otherwise as a result of the execution of this Agreement
or the transactions contemplated by this Agreement.
2.18.8 No Benefits Increases. No agreement, commitment or
obligation exists to increase any benefits under any Forecast Employee Plan
or to adopt any new Forecast Employee Plan.
2.18.9 No Audits or Prohibited Transactions. To the
Sellers' knowledge, (a) no audit or investigation by any Governmental Entity
is pending regarding any Forecast Employee Plan, and (b)no person acting on
behalf of any Consolidated Forecast Entity dealing with any Forecast Employee
Plan has intentionally and knowingly engaged in any prohibited transactions
(within the meaning of Section 406 of ERISA or Section 4975 of the Code) or
knowingly committed any breach of a fiduciary duty.
2.18.10 No Unfunded Benefits. No Forecast Employee Plan has
any unfunded accrued benefits that are not fully reflected in the Financial
Statements (including, without limitation, any accruals or reserves or other
provisions for any liabilities that may be triggered upon any change in
control of any Consolidated Forecast Entity) and, to the Seller's knowledge,
no "reportable event" (as such term is defined in ERISA section 4043) or
"accumulated funding deficiency" (as such term is defined in ERISA section
302 and Code section 412 (whether or not waived)) has occurred with respect
to any Seller Employee Plan.
2.19 No Brokers or Finders. Other than Salomon, no agent, broker,
finder, or investment or commercial banker, or other Person or firm acting on
behalf of the Sellers in connection with the negotiation, execution or
performance of this Agreement or the transactions contemplated by this
Agreement is or will be entitled to any brokerage or finder's or similar fee
or other commission as a result of this Agreement or the transactions
contemplated hereunder; provided, however, that (a)the Buyer shall have full
responsibility for any other Person claiming through the Buyer, if any, and
(b)the Sellers shall have full responsibility for Salomon.
2.20 Accounts Receivable. Except as set forth on the Sellers'
Disclosure Schedule, the accounts and notes receivable reflected in the
Financial Statements and all accounts and notes receivable of any
Consolidated Forecast Entity arising prior to the Effective Date, other than
accounts and notes receivable from Affiliates and accounts and notes
receivable collected since then in the ordinary course of business
substantially in accordance with past practices, (a)arose from bona fide
sales or contracting transactions by the Consolidated Forecast Entities in
the ordinary course of business or substantially in accordance with past
practices, (b)represent bona fide indebtedness of the respective debtors, and
(c) to the Sellers' knowledge, are collectible in full in accordance with
their terms at their recorded amounts as of their respective due dates,
subject only to the reserve for bad debts set forth in the Financial
Statements, and are not subject to any defense or offset.
2.21 SEC Reports. The Sellers have made available to the Buyer, in
the form filed with the SEC, except to the extent permitted by Regulation S-
T, the Group's (a)Annual Report on Form 10-K for the fiscal year October 31,
2001, (b)any Current Reports on Form 8-K filed by it after October 31, 2001,
and (c)any amendments and supplements to any such reports filed by the Group
with the SEC (collectively, the "Group's SEC Reports"). The Group has timely
made all filings applicable to the Group with the SEC required by the
Exchange Act. As of their respective dates, each of the Group's SEC Reports
did not contain any untrue statement of a material fact applicable to the
Group or omit to state a material fact applicable to the Group required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
2.22 Information Generally. The information prepared by the Sellers
and thereafter made available by the Sellers to the Buyer in or pursuant to
this Agreement or in or pursuant to the Schedules or Exhibits hereto does not
and will not, as of the date provided, contain any untrue statement of a
material fact, and does not and will not, as of the date provided, omit to
state a material fact necessary to make the statements or facts contained
herein or therein, in light of the circumstances under which they were made,
not misleading.
2.23 No Conflicts; Government Approvals; Third-Party Consents. Except
as set forth on the Sellers' Disclosure Schedule, the execution, delivery and
performance of this Agreement by the Sellers and the consummation of any of
the transactions contemplated hereby will not, to the Sellers' knowledge, (a)
violate, or constitute a material breach or material default (whether upon
lapse of time or notice or both) under, or results in any material
augmentation or acceleration of rights, benefits or obligations (including
prepayment obligations, penalties, fees or charges related to any
indebtedness) of any party under, the constituent documents of any
Consolidated Forecast Entity or any Contract listed on the Sellers'
Disclosure Schedule, or (b) violate any Law or Order applicable to any
Consolidated Forecast Entity or any of its properties or assets, except for
such violations, breaches or defaults that cannot reasonably be expected,
individually or in the aggregate, to have a material adverse effect on the
Consolidated Forecast Entities taken as a whole, or the Assets. Except as
set forth on the Sellers' Disclosure Schedule, this Agreement and/or as
required under the Hart-Scott-Rodino Act, the execution and delivery of this
Agreement by the Sellers and the performance of this Agreement by the Sellers
shall not require a filing or registration with, or the issuance of any
Permit or Approval by, any other Person or Governmental Entity.
2.24 Legal Proceedings. Except as set forth on the Sellers'
Disclosure Schedule, (a) no Order or Action is pending or, to the Sellers'
knowledge, threatened against the Sellers, any Intangible Property or any
Consolidated Forecast Entity or any of the Consolidated Forecast Entities
properties or assets that, if resolved unfavorably against such property or
Person, individually or when aggregated with one or more other such Orders or
Actions, would have a material adverse effect on such Person or property or
would materially and adversely affect the Sellers' ability to materially
perform this Agreement, (b) the Sellers do not reasonably expect any of such
Orders or Actions, individually or in the aggregate, to have a material
adverse effect on the Consolidated Forecast Entities, taken as a whole,
(c)no Action is pending against the Seller or any Consolidated Forecast
Entity that would prevent the execution, delivery or performance of this
Agreement by any Seller or the transfer, conveyance and sale of the
Securities to be sold by the Sellers to the Buyer pursuant to the terms
hereof, and (d) the Seller is not a party to, subject to or bound by any Law
or Order.
2.25 Receipt of Agreements; Access to Information. The Sellers have
received and read this Agreement. The Buyer has provided the Sellers within
a reasonable time period prior to the date hereof the opportunity to obtain
information which the Buyer possesses or can acquire without unreasonable
effort or expense with respect to the Buyer, and the Sellers have received
all additional information with respect to the Buyer that they have
requested.
2.26 Intercompany Obligations. All Contracts, liabilities or other
obligations or business relationships between each Consolidated Forecast
Entity, on the one hand, and any of the Sellers, Previti or any Controlled
Entity, on the other hand (the "Intercompany Obligations"), have been, or
prior to the Effective Date shall be, reconciled with Schedule 2.26 (the
"Intercompany Obligations"), and none of the same shall appear on the Final
Balance Sheet. As of the Effective Date, other than pursuant to this
Agreement, no Consolidated Forecast Entity will have any Contract, Liability
or other obligation with or to any Affiliate or Seller (except as otherwise
contemplated under this Agreement or any other related agreements).
2.27 Land Purchase Contracts. The Sellers' Disclosure Schedule lists
all Contracts to which each Consolidated Forecast Entity is a party pursuant
to which such Consolidated Forecast Entity is obligated to or has an option
or other right to purchase any developed or undeveloped real property (the
"Contract Property") as of the Effective Date (the "Land Purchase
Contracts"). True and correct copies of all Land Purchase Contracts have
been made available to the Buyer. The Sellers' Disclosure Schedule also sets
forth an identifying description or, if available, the street address of each
parcel of Contract Property or another description thereof sufficient to
identify the Contract Property subject thereto.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE BUYER
The Parties agree that the purchase of the Securities shall be without
representation or warranty by the Buyer, express or implied, except as
specifically set forth in this Agreement. None of the representations and
warranties contained herein shall survive Closing; provided, however, that to
the extent that the making of any such representation or warranty constituted
actual fraud (and as further limited by Section 8.2) on the part of the
Buyer, the Seller's right to promptly bring an Action against the Buyer
thereunder and to such extent shall survive the Closing and shall remain in
full force and effect until the date that is ninety (90) days after the
expiration of the applicable statutory period; provided, however, such Action
shall be filed in accordance with Section 10.10 by the Seller within ninety
(90) days after the Seller's actual discovery thereof or the claim (and the
applicable remedy) shall automatically be waived. Except as otherwise
indicated on the Buyer's Disclosure Schedule as to the particular section as
to which an exception is being disclosed, the Buyer represents and warrants
to the Sellers and Previti as follows:
3.1 Organization and Related Matters. The Buyer is duly organized,
validly existing and in good standing under the laws of the jurisdiction of
its organization, with the necessary corporate power and authority (a)to own
and operate its business as now being conducted and as presently proposed to
be conducted, and (b)to execute, deliver and perform this Agreement.
3.2 Authorization. The execution, delivery and performance of this
Agreement by the Buyer have been duly and validly authorized by the Buyer's
Board and by all other necessary corporate action on the part of the Buyer,
including, without limitation, the requisite vote of the holders of the
capital stock of the Buyer, and no other corporate proceedings on the part of
the Buyer are necessary to authorize this Agreement or the transactions
contemplated hereunder. This Agreement has been duly and validly executed
and delivered by the Buyer and constitutes the legal, valid and binding
obligation of the Buyer, enforceable against the Buyer in accordance with its
terms, except as may be limited by bankruptcy, insolvency, reorganization,
moratorium and other similar laws relating to or limiting creditors' rights
generally and equitable principles.
3.3 No Conflicts; Government Approvals; Third-Party Consents. Except as
set forth on the Buyer's Disclosure Schedule, the execution, delivery and
performance of this Agreement by the Buyer will not, to the Buyer's
knowledge, violate the provisions of, or constitute a breach or default
(whether upon lapse of time and/or the occurrence of any act or event or
otherwise) under (a) the constituent documents of the Buyer or any of its
Subsidiaries, or (b) any Law or Order to which the Buyer or its Subsidiaries
or any of their assets is subject, except for such violations, breaches or
defaults that cannot reasonably be expected to be materially adverse to the
Buyer and its Subsidiaries, taken as a whole. Except as set forth with
specificity on the Buyer's Disclosure Schedule and/or as required under the
Hart-Scott-Rodino Act, the execution and delivery of this Agreement by the
Buyer and the performance of this Agreement by the Buyer will not require a
filing or registration with, or the issuance of any Permit or Approval by,
any other third party or Governmental Entity.
3.4 Investment Representation. The Buyer is acquiring the Securities
from the Sellers for the Buyer's own account, for investment purposes only
and not with a view to or for sale in connection with the public distribution
thereof. The Buyer is an "accredited investor" within the meaning of Rule
501(a) under the Securities Act, or has such knowledge and experience in
financial and business matters that the Buyer is capable of evaluating the
merits and risks of, and the Buyer is able to bear the economic risk of and
lack of liquidity inherent in, acquiring the Securities. The Buyer
acknowledges that the Securities have not been and will not be registered
under the Securities Act or qualified under any state securities or blue sky
laws. The Buyer does not currently own, beneficially or of record, any
portion of the Securities.
3.5 No Brokers or Finders. No agent, broker, finder, or investment or
commercial broker, or other person or firm acting on behalf of the Buyer in
connection with the negotiation, execution or performance of this Agreement
or the transactions contemplated by this Agreement is or will be entitled to
any brokerage or finder's or similar fee or other commission as a result of
this Agreement or the transactions contemplated hereunder; provided, however,
that (a) the Sellers shall have full responsibility for Salomon, and (b) the
Buyer shall have full responsibility for obligations to any other Person
claiming through the Buyer.
SECTION 4. COVENANTS PRIOR TO CLOSING
4.1 Access. The Sellers shall afford and cause the Securities
Partnership and the Consolidated Forecast Entities to afford the Buyer, its
agents and its attorneys reasonable access during normal business hours, upon
advance written notice and in such manner as will not unreasonably interfere
with the usual day-to-day conduct of the Securities Partnership's or the
Consolidated Forecast Entities' respective businesses, to the offices,
properties and financial records of each Consolidated Forecast Entity and the
Securities Partnership as the Buyer may reasonably request from time to time.
4.2 Preservation of Business Prior to the Closing Date. During the
period beginning on the Effective Date and ending on the Closing Date:
4.2.1 Conduct of Business. Except as otherwise set forth on the
Sellers' Disclosure Schedule, the Sellers shall cause the Consolidated
Forecast Entities and the Securities Partnership to conduct the Homebuilding
Business in the ordinary course of business.
4.2.2 Goodwill. The Sellers shall use commercially reasonable
efforts to preserve the goodwill of customers, suppliers and others having
business relations with any Consolidated Forecast Entity.
4.2.3 Employees. The Sellers and the Buyer shall consult with
each other concerning, and the Sellers shall act in a commercially reasonable
manner (at no cost to the Sellers) to assist the Buyer in seeking to keep
available to the Buyer, the services of the employees of the Consolidated
Forecast Entities and any officers of the Consolidated Forecast Entities,
other than the employees listed on Schedule 4.2.3 (the "Excluded Employees"),
whom the Sellers are free to solicit for new employment at any time;
provided, however, the Buyer understands and agrees that the Sellers cannot
assure and, therefore, are not obligated to assure, that existing employees
maintain their employee status. Following the Effective Date, neither the
Sellers nor the Consolidated Forecast Entities shall, without the Buyer's
prior written consent, (a) increase the compensation or fringe benefits or
any present or former director, officer or employee of any Consolidated
Forecast Entity (except for increases in salary or wages in the ordinary
course of business consistent with past practices and one-time bonuses paid
prior to the Closing Date), (b) grant any severance or termination pay to any
present or former director, officer or employee of any Consolidated Forecast
Entity, (c) lend or advance any money or other property to any present or
former director, officer or employee of any Consolidated Forecast Entity, or
(d) establish, adopt or enter into any Forecast Employee Plan or any plan,
agreement, program, policy, trust, fund or other arrangement that would be a
Forecast Employee Plan if it were in existence as of the date of this
Agreement.
4.3 Notification of Certain Matters. The Sellers shall give prompt
written notice to the Buyer, and the Buyer shall give prompt written notice
to the Sellers, of such Party's respective knowledge of (a) the occurrence,
or failure to occur, of any event that would be likely to cause any
representation or warranty contained in this Agreement to be untrue or
inaccurate in any material adverse respect at any time between the Effective
Date and the Closing Date, and (b) any failure of the Buyer or the Sellers,
as the case may be, to comply with or satisfy, in any material respect, any
covenant, condition or agreement to be complied with or satisfied by it under
this Agreement; provided, however, that any event, occurrence or failure of
occurrence of which a party shall notify the other party under clause (a)
above shall not be deemed a breach or default with respect to any provision
of this Agreement.
4.4 Approvals. Prior to Closing, the Sellers and the Buyer each agree
to cooperate and use commercially reasonable efforts to obtain all (and shall
promptly prepare all registrations, filings and applications, requests and
notices preliminary to all) Approvals that may be necessary to consummate the
transactions contemplated by this Agreement, including, without limitation,
the Approvals listed on the Sellers' Disclosure Schedule (which shall be
obtained at the Sellers' expense) and the Buyer's Disclosure Schedule (which
shall be obtained at the Buyer's expense). To the extent that the Approval
of a third party with respect to any material Contract is required in
connection with the transactions contemplated by this Agreement but is not
obtained prior to the Closing Date, the Sellers shall (but without limitation
on the Buyer's rights under Section 6.2 and without any cost to the Sellers)
attempt in a commercially reasonable manner to assist the Buyer in obtaining
for the Buyer the benefits of each such Contract.
4.5 No Shop. During the time period beginning on the Effective Date and
ending on the Closing Date, none of the Consolidated Forecast Entities nor
any Affiliates thereof shall directly or indirectly solicit, initiate or
participate in any negotiations with any Person other than the Buyer
concerning any merger or sale of substantially all of the assets, sale of
equity interests or similar transactions involving the Consolidated Forecast
Entities, or directly or indirectly disclose any non-public information to
any Person with respect to this transaction other than the Buyer, its
employees, advisors and other representatives. If either Party seeks to
assert a breach of the provisions under this Section 4.5, such aggrieved
Party must (a) provide the other Party with written notice of such intended
action within thirty (30) days of such aggrieved Party's knowledge of the
basis for such breach, and (b) file and serve an action within forty-five
(45) days of such aggrieved Party's knowledge of such breach.
4.6 Financial Statements. Prior to the Effective Date, each Party shall
provide the other Party with the financial statements incorporated in such
Party's (or the Group's, if applicable) Form 10-K filed with the SEC (such
financial statements shall be certified by such Party's (or the Group's, if
applicable) independent public accountants) for the three (3) fiscal years
immediately preceding the Effective Date. Prior to the Closing Date, upon
the explicit written direction of the Buyer received by the Sellers from the
Buyer prior to the Effective Date, the Sellers shall provide the Buyer with
financial statements related to the Homebuilding Business in such form and
content and for such time periods as shall be required for the Buyer's SEC
filings in connection with the Buyer's reporting to the SEC of the Buyer's
purchase of the Securities. With reference to such requirement, the Buyer
shall concurrently reference the applicable SEC requirement (including,
without limitation, the applicable rule or SEC comment) as to the content
thereof.
4.7 Intercompany Obligations. Prior to the Effective Date, the Sellers
shall cause all Intercompany Obligations to be reconciled with Schedule 2.26.
4.8 Tax Status of Securities Partnership. From the Effective Date
through the Closing Date, the Sellers shall continue to treat Securities
Partnership as a partnership for tax purposes. Any Subsidiaries of the
Securities Partnership that are partnerships will similarly continue to be
treated for tax purposes or partnerships through the Closing Date.
SECTION 5. ADDITIONAL CONTINUING COVENANTS
5.1 Non-Competition. The Sellers agree to be bound by the terms and
provisions of Section 5.1 of the Asset Purchase Agreement to the same extent
as Previti as if they were parties thereto.
5.2 Nondisclosure of Proprietary Data. Each of Previti and the Sellers
agrees that it will not, and will cause the Consolidated Forecast Entities to
not (a) divulge or otherwise disclose any trade secret or other proprietary
data concerning the business or policies of Securities Partnership as they
relate to Securities Partnership, or (b) divulge or otherwise disclose to
Persons other than the Buyer, any confidential information concerning the
business or policies of Securities Partnership as they relate to Securities
Partnership, except, in each case, (i) to the extent that such information is
or hereafter becomes lawfully obtainable from other sources, (ii) to the
extent that such information is necessary or appropriate to disclose to a
Governmental Entity having jurisdiction over the disclosing Party, (iii) as
may otherwise be required by Law, or (iv) to the extent such duty of
confidentiality is waived in writing by the Buyer.
5.3 Tax Returns.
5.3.1 Sellers' Preparation. The Sellers shall cause to be
prepared and timely filed (or provided to the Buyer for execution and filing,
if applicable) when due (taking into account all extensions properly
obtained) all Tax Returns of Securities Partnership for taxable periods
beginning before the Closing Date and ending on or prior to the Closing Date.
All Tax Returns described in this Section 5.3.1 shall be provided to the
Buyer for its information only not less than twenty (20) days prior to the
proposed filing date and shall be prepared and filed in a manner
substantially consistent with past practice and/or on the advice of the
Sellers' professional advisors or as otherwise required by Law. On such Tax
Returns, no position shall be taken, election made or method adopted without
the Buyer's written consent (which shall not be unreasonably withheld or
delayed) that is materially inconsistent with positions taken, elections made
or methods used in preparing and filing similar Tax Returns in prior periods
(provided that no positions shall be taken, elections made or methods used
which would have the effect of deferring income to periods after the Closing
Date or accelerating deductions to periods before the Closing Date).
5.3.2 Buyers' Preparation. The Buyer shall cause to be prepared
and timely filed (subject to applicable extension rights) all Tax Returns of
Securities Partnership that are not described in Section 5.3.1 above. The
relevant portion of any such Tax Return prepared by the Buyer or its
Affiliates which includes any allocation of the Purchase Price under Section
1060 or Section 755 of the Code shall be provided to the Sellers for their
review and approval (which approval shall not be unreasonably withheld or
delayed) not less than twenty (20) days prior to the proposed filing date and
shall be prepared and filed in a manner substantially similar to or
substantially consistent with past practice and/or on the advice of the
Buyer's professional advisors in keeping with the terms set out in Section
1.5 of this Agreement or as otherwise required by Law.
5.4 Tax Cooperation.
5.4.1 Tax Proceedings. After the Closing Date, the Sellers and
the Buyer shall, and shall cause their respective Affiliates to, cooperate in
a commercially reasonable manner with each other in the preparation and
filing of all Tax Returns and any Tax investigation, audit or other
proceeding with respect to the Securities Partnership (a "Tax Proceeding")
and shall provide, or cause to be provided, any records and other information
in their possession or control or in the control of their agents reasonably
requested by such other Party in connection therewith as well as access to,
and the cooperation of, their respective Auditors at each Party's request.
The Buyer shall notify the Sellers in writing promptly upon receipt by the
Buyer or any Affiliate of any notice of any pending or threatened audits or
assessments relating to Taxes with respect to the Securities Partnership
other than Taxes as to which the Sellers have no indemnification obligation
or other liability relating to Taxes. Failure to provide such notice shall
not affect the Sellers' indemnification obligations under Section 8.1.3
unless such failure materially prejudices the Sellers. The Sellers shall
have the right to control the handling and disposition of such audit and any
administrative or court proceeding relating thereto (and to employ counsel of
their choice at the shared expense of both Parties) to the extent that such
audit or proceeding could result in increased Tax liabilities of the Sellers
for the period covered by the Tax Proceeding or an increase in their
indemnification obligations to the Buyer under this Agreement; provided,
however, that the Buyer shall have the right to participate in the Tax
Proceeding and to employ counsel of its choice at its expense. The Sellers
shall not agree to any settlement concerning Taxes of the Securities
Partnership for any taxable period which would result in an increase of more
than One Million Dollars ($1,000,000) in Taxes of the Buyer or the Securities
Partnership for any taxable period ending after the Closing Date, without the
prior written consent of the Buyer. Except in the case of the Buyer to the
extent such costs are indemnified by the Sellers, the Buyer and the Sellers
shall bear their respective costs and expenses in connection with any Tax
Proceeding. Any information obtained pursuant to this Section 5.4 or
pursuant to any other Section of this Agreement providing for the sharing of
information or the review of any Tax Return or other information relating to
Taxes shall be subject to Section 10.9.
5.4.2 Interim Closing of Books. The Sellers' distributive share
of the Securities Partnership's income, gain, loss and deduction for the
taxable year of the Securities Partnership that includes the Closing Date
shall be determined on the basis of an interim closing of the books of the
Securities Partnership as of the close of business on the Closing Date and
shall not be based upon a proration of such items for the entire taxable
year.
5.5 Section 754 Election. With respect to the Tax year in which the
Closing occurs, the Securities Partnership and any of its subsidiaries which
are treated as partnerships for income tax purposes will have a valid
election under Section 754 in effect (and any comparable election under state
law).
5.6 Cooperation. After the Closing Date, the Buyer shall afford the
Sellers, and their respective accountants, counsel and other representatives,
reasonable access during normal business hours to the books and records of
the Group and/or Securities Partnership for the period prior to the Closing
Date that relate to Tax matters or any third-party claims against the Sellers
relating to the business of the Group and/or Securities Partnership during
any such periods. The Sellers, or their respective representatives, may, at
such Seller's own expense, make copies of such books and records. The Buyer
understands that there are certain 2001, 2000 and 1999 tax returns for
entities associated with the Group for which Tax Returns have not yet been
prepared, and that such tax returns are identified on the Sellers' Disclosure
Schedule. The Buyer agrees after the Closing to, upon reasonable prior
notice which may be written or oral, give the Sellers' accountants and tax
accountants access to the information needed to prepare such returns and the
Buyer shall cause Securities Partnership's accounting personnel to be made
available to the Sellers and their advisors for this purpose.
5.7 Employees and Employee Benefits.
5.7.1 Eligibility for Buyers; Recognition of Employee Service
Plans. The Buyer shall make available to employees of any Consolidated
Forecast Entity who continue employment with the Buyer access and a right to
participate in all of the benefit plans, programs, and policies sponsored by
the Buyer for the benefit of its employees generally, to the extent they
would otherwise be eligible under such plans, at benefit levels in the
aggregate that are the same as are generally applicable to other similarly
situated employees of the Buyer, including, without limitation, to receive
credit for all of their service prior to the Closing Date with any
Consolidated Forecast Entity under all employee benefit plans, programs and
policies sponsored by the Buyer for the benefit of employees generally to the
same extent such service was credited under the Forecast Employee Plans.
5.7.2 401(k) Plan. The Sellers shall cause the Group's 401(k)
Plan (the "Forecast 401(k) Plan") to be stopped immediately after the Closing
Date, except for any parallel plans that may be associated with the Forecast
401(k) Plan. The Buyers shall promptly file (and Seller's shall provide any
written consent or agreement to such action as is necessary to perfect such
termination) an application with the IRS for approval of plan termination and
shall promptly terminate the Forecast 401(k) Plan upon receipt of such
approval. The Sellers shall, with respect to all employees who are
participants in the Forecast 401(k) Plan, contribute and allocate to the
accounts of such participants all employer contributions (including matching
contributions with respect to all employee contributions and salary
deferrals) that would otherwise have been made to the Forecast 401(k) Plan
for the 2001 plan year (with respect to the time period prior to Closing
Date) but for the cessation of the Forecast 401(k) Plan, regardless of
whether or not such participants are credited with a year of service for such
plan year or are employed by the Group on the last day of the plan year.
5.7.3 Employees Generally. The Buyer acknowledges that it
intends to use commercially reasonable efforts to continue the employment of
the current non-executive employees of the Consolidated Forecast Entities for
a period of at least six (6) months after the Closing Date, provided that
nothing contained herein shall be construed as requiring the Buyer or the
Securities Partnership to continue the employment or position of any specific
Person.
5.8 Assumption of Office Lease. In the event that the assumption of the
tenant's entire interest in that certain office lease dated as of November 7,
2000 (and the amendment to such lease dated as of June 18, 2001) wherein PRF
is the landlord and the Group is the tenant for space being constructed by
Previti (the "Office Lease") is not accomplished by operation of Law at the
Closing, the Buyer shall assume the tenant's entire interest in that Office
Lease. Subject to the approval of Wells Fargo, the terms of the Office Lease
may be adjusted as it pertains to the demised premises to provide space for
offices for Previti (and/or Previti's Affiliates) and Wells Fargo. For so
long as Glankler (or his successor), as regional manager of the Buyer, is
reasonably satisfied that the prices and services of Wells Fargo are
reasonably comparable to the prices and services of the competitors of Wells
Fargo, then the Buyer shall continue to engage Wells Fargo for a period of at
least one (1) year after the Closing Date in the capacity engaged by the
Group as of immediately prior to the Closing Date.
5.9 Use of Name. The assets acquired by the Buyer under this Agreement
shall include the exclusive use of the "Forecast Homes" name; provided,
however, notwithstanding anything stated herein, Previti shall have the right
to continue to use the name "Forecast" in connection with (a) its business
arrangements with Premier Homes, Inc., and (b) all of Previti's non-
homebuilding entities. The Buyer shall have the exclusive right to use the
name "Forecast Homes" in homebuilding activities for so long as the Buyer
uses such name on a reasonably regular basis, e.g., the Buyer has failed to
use such name for a period of twelve (12) consecutive months or more. As of
the Closing Date, the Sellers shall have all intangible rights used in the
Homebuilding Business as of the Effective Date.
5.10 Change of Control. The Buyer shall not enter into any agreement
with any third party to effect or obligate itself to effect a Change of
Control unless the surviving entity of such contemplated Change of Control
transaction shall agree to assume all of the Buyer's obligations under this
Agreement (and any other related agreements).
5.11 Insurance. The Sellers and Previti shall assign the Policies for
the benefit of Buyer on or as promptly after the Closing as possible.
SECTION 6. CONDITIONS OF PURCHASE
6.1 General Conditions. The obligations of the Parties to effect the
Closing shall be subject to the following conditions, except to the extent
waived in writing by all Parties:
6.1.1 No Orders; Legal Proceedings. No Law or Order shall have
been enacted, entered, issued or enforced by any Governmental Entity, nor
shall any Action have been instituted and remain pending at what would
otherwise be the Closing Date, which prohibits or restricts or would (if
successful) prohibit or materially restrict the transactions contemplated by
this Agreement. No Governmental Entity shall have notified any Party that
consummation of the transactions contemplated by this Agreement would
constitute a violation of any Laws of any jurisdiction or that it intends to
commence proceedings to restrain or prohibit such transactions or force
divestiture or rescission, unless such Governmental Entity shall have
withdrawn such notice and abandoned any such proceedings prior to the time
which otherwise would have been the Closing Date.
6.1.2 Approvals. All Approvals required to be obtained from any
Governmental Entity to consummate the transactions contemplated by this
Agreement shall have been received or obtained on or prior to the Closing
Date.
6.1.3 Hart-Scott-Rodino Act Approvals. If applicable, all
waiting periods (and any extensions thereof) under the Hart-Scott-Rodino Act
shall have been expired or otherwise been terminated.
6.1.4 No Prohibition. No Action, suit or proceeding shall be
pending before any court or quasi-judicial or administrative agency of any
federal, state, local or foreign jurisdiction or before any arbitrator
wherein an unfavorable result would (a) prevent consummation of any of the
transactions contemplated hereby, or (b) cause any of the transactions
contemplated hereby to be rescinded following consummation.
6.1.5 Asset Purchase Agreement. All of the Closing conditions
set forth in the Asset Purchase Agreement have been satisfied or waived by
the parties thereto.
6.2 Conditions to Obligations of the Buyer. The obligations of the
Buyer to effect the Closing shall be subject to the following conditions,
except to the extent waived in writing by the Buyer:
6.2.1 Representations and Warranties and Covenants of the
Sellers. The representations and warranties of the Sellers contained in this
Agreement (as qualified by matters set forth as exceptions thereto in the
Sellers' Disclosure Schedule and as otherwise permitted by the terms of this
Agreement) shall be true in all material respects at the Effective Date and
at the Closing Date, as applicable, with the same effect as though made at
and as of such time; provided, however, that if for any reason this condition
cannot be satisfied because of an event, condition, occurrence or failure of
occurrence, or as a result of Seller's obtaining knowledge of same, between
the Option Date and the Effective Date, the fact that this condition could
not be satisfied shall not be deemed a breach of this Agreement by the
Seller. The Sellers shall have in all material respects performed all
obligations and complied with all covenants and conditions required by this
Agreement to be performed or complied with by them at or prior to the Closing
Date, and the Sellers shall have delivered to the Buyer a certificate of the
Sellers to such effect, dated the Closing Date, in the form of Exhibit C (the
"Form of the Sellers' Certificate") attached hereto.
6.2.2 Consents. The Sellers shall have obtained (and provided
satisfactory evidence to the Buyer of receipt of) any Approvals of third
parties set forth on the Sellers' Disclosure Schedule, including without
limitation, that of Premier.
6.2.3 Delivery of the Securities. The Sellers shall have
executed the Partnership Interests Assignment and shall have delivered the
Securities and/or any and all instruments representing the same to the Buyer,
free of any and all Encumbrances, along with any necessary or appropriate
stock powers or endorsements.
6.2.4 FIRPTA Affidavits. Each of the Sellers shall have executed
and delivered affidavits in a form reasonably satisfactory to the Buyer,
providing, among other things, under penalty of perjury, their respective
U.S. taxpayer identification numbers and that none of them is a "foreign
person" within the meaning of Sections 1445 and 7701 of the Code.
6.2.5 Opinion of Counsel. O'Melveny & Myers LLP, legal counsel
for the Sellers, shall have delivered to the Buyer a legal opinion
substantially in the form of Exhibit D (the "Form of OM&M Legal Opinion")
attached hereto.
6.2.6 Sellers' Certificates. The Sellers shall have caused to be
delivered to the Buyer certificates, in a form reasonably satisfactory to the
Buyer, which shall include:
(a) copies of the resolutions that the boards of
directors of the Sellers, the partners and the shareholders thereof adopting
and approving the execution, delivery, and performance of this Agreement and
each agreement, certificate, instrument and other document to be delivered
pursuant thereto to which they are party; and
(b) incumbency certificates setting forth the names,
offices, and signatures of the Persons signing on behalf of the Sellers.
6.2.7 Other. The Sellers shall have delivered to the Buyer such
other certificates as the Buyer may reasonably request to effect the
transactions contemplated hereby; provided, however, the Sellers shall not be
obligated to undertake any step which would create obligations or liabilities
not specifically set forth in this Agreement, including, without limitation,
any obligations or liabilities to any third-parties.
6.2.8 Disclosure Documents. The Sellers shall have delivered to
the Buyer copies of the Group's SEC Reports.
6.2.9 Non-Competition and Option Agreement. Premier shall have
validly executed and delivered the Non-Competition and Option Agreement.
6.2.10 Lot Option Agreement. Previti shall have validly
executed and delivered the Lot Option Agreement.
6.2.11 ROFO Agreement. Previti shall have validly executed
and delivered the ROFO Agreement.
6.2.12 Park Meadows Option Agreement. Previti shall have
validly executed and delivered the Park Meadows Option Agreement.
6.2.13 Consulting Agreement. Previti shall have validly
executed and delivered the Consulting Agreement.
6.2.14 Forecast Development Option and Purchase Agreement.
Forecast Development shall have validly executed and delivered the Forecast
Development Option and Purchase Agreement.
6.2.15 Indemnification and Release Agreement. The Sellers
and Previti shall have validly executed and delivered the Indemnification and
Release Agreement.
6.3 Conditions to Obligations of the Sellers. The obligations of the
Sellers to effect the Closing shall be subject to the following conditions,
except to the extent waived by the Sellers in writing:
6.3.1 Representations and Warranties and Covenants of the Buyer.
The representations and warranties of the Buyer herein contained (as
qualified by matters set forth as exceptions thereto in the Buyer's
Disclosure Schedule) shall be true in all material respects at the Effective
Date and at the Closing Date, as applicable, with the same effect as though
made at and as of such time; the Buyer shall have in all material respects
performed all obligations and complied with all covenants and conditions
required by this Agreement to be performed or complied with by it at or prior
to the Closing Date. The Buyer shall have delivered to the Sellers a
certificate of the Buyer to such effect, dated the Closing Date, the form of
which appears as Exhibit E (the "Form of the Buyer's Certificate") attached
hereto.
6.3.2 Consents. The Buyer shall have obtained any and all
Approvals of third parties that are necessary in order to consummate the
transactions contemplated hereby, including, without limitation, the
Approvals set forth on the Buyer's Disclosure Schedule.
6.3.3 Opinion of Counsel. Simpson Thacher & Bartlett, legal
counsel for the Buyer, shall have delivered to the Sellers a legal opinion
substantially in the form of Exhibit F (the "Form of ST&B Legal Opinion")
attached hereto.
6.3.4 Assumption of Liabilities. The Buyer shall have assumed
all of the Liabilities of each of the Consolidated Forecast Entities with
respect to the Homebuilding Business pursuant to an assignment and assumption
agreement in the form of Exhibit G (the "Form of Assignment and Assumption
Agreement") attached hereto. Nothing contained therein shall require the
Buyer to assume the Excluded Liabilities.
6.3.5 Assumption of Guarantees. The Buyer shall have assumed the
guarantees identified in Schedule 6.3.5 (the "Assumption of Guarantees") by
an instrument acceptable to the Sellers that fully and completely releases
each Seller that is a guarantor thereunder and each partner or shareholder,
as applicable, of each such Seller, from any liability under such guarantees.
6.3.6 Secretary's Certificate. The Buyer shall have delivered to
the Sellers a certificate, in a form acceptable to the Sellers, which shall
include:
(a) a long-form good standing certificate from the
Secretary of State of the State of Delaware, dated no earlier than five (5)
business days before the Closing Date, stating that the Buyer is in existence
and in good standing under the laws of the State of Delaware;
(b) a copy of the resolutions that the boards of
directors or executive committees of the Buyer adopted approving the
execution, delivery, and performance of this Agreement and the transactions
contemplated hereby and each agreement, certificate, instrument or other
document to be delivered pursuant hereto to which it is a party; and
(c) an incumbency certificate setting forth the names,
offices, and signatures of all of the officers signing on behalf of the
Buyer.
6.3.7 Purchase Price. The Buyer shall have delivered to the
Sellers the Purchase Price by wire transfer of immediately available federal
funds to such account or accounts as shall be specified in instructions from
the Representative prior to the Closing Date.
6.3.8 Office Lease. The Buyer shall have assumed the Office
Lease.
6.3.9 Other Matters. The Buyer shall have delivered to the
Sellers such other certificates, documents and instruments as the Sellers may
reasonably request to effect the transactions contemplated hereby.
6.3.10 Lot Option Agreement. The Buyer shall have validly
executed and delivered the Lot Option Agreement.
6.3.11 Non-Competition and Option Agreement. The Buyer
shall have validly executed and delivered the Non-Competition and Option
Agreement.
6.3.12 ROFO Agreement. The Buyer shall have validly
executed and delivered the ROFO Agreement.
6.3.13 Park Meadows Option Agreement. The Buyer shall have
validly executed and delivered the Park Meadows Option Agreement.
6.3.14 Consulting Agreement. The Buyer shall have validly
executed and delivered the Consulting Agreement.
6.3.15 Forecast Development Option and Purchase Agreement.
Forecast Development shall have validly executed and delivered the Forecast
Development Option and Purchase Agreement.
6.3.16 Indemnification and Release Agreement. The Buyer
shall have validly executed and delivered the Indemnification and Release
Agreement.
6.3.17 Satisfaction of Debt. The Buyer shall have satisfied
all of the Debt in accordance with Section 1.8.
SECTION 7. TERMINATION OF OBLIGATIONS; SURVIVAL
7.1 Termination of Agreement. Anything in this Agreement to the
contrary notwithstanding, this Agreement and the transactions contemplated by
this Agreement shall terminate if the Closing (including, without limitation,
the Sellers' receipt of the Purchase Price) does not occur on or before 10:00
a.m. (Pacific Time) on February 1, 2002, unless extended by mutual consent in
writing of the Buyer and the Sellers, and otherwise may be terminated at any
time before the Closing as follows and in no other manner:
7.1.1 Mutual Consent. By mutual consent in writing of the Buyer
and the Sellers.
7.1.2 Conditions to the Buyer's Performance Not Met. By the
Buyer, by written notice to the Sellers, if any event occurs or condition
exists which would render impossible the satisfaction of one or more
conditions to the obligations of the Buyer to consummate the transactions
contemplated by this Agreement as set forth in Section 6.1 or 6.2.
Notwithstanding the foregoing, the Buyer may not terminate this Agreement
pursuant to this Section 7.1.2 if such failure of condition resulted, in
whole or in part, from the breach by the Buyer of any of its obligations
under this Agreement.
7.1.3 Conditions to the Sellers' Performance Not Met. By the
Sellers, by written notice to the Buyer, if any event occurs or condition
exists which would render impossible the satisfaction of one or more
conditions to the obligation of any Seller to consummate the transactions
contemplated by this Agreement. Notwithstanding the foregoing, the Sellers
may not terminate this Agreement pursuant to this Section 7.1.3 if such
failure of condition resulted, in whole or in part, from the breach by the
Sellers of any of their obligations under this Agreement.
7.1.4 Material Breach. By the Buyer or the Sellers if there has
been a material misrepresentation or other material breach by the other in
its representations, warranties or covenants set forth in this Agreement;
provided, however, that if such breach is susceptible to cure, the breaching
Party shall have ten (10) business days after actual receipt of written
notice from the other Party of its intention to terminate this Agreement if
such breach continues in which to cure such breach.
7.2 Effect of Termination. In the event that this Agreement shall be
terminated pursuant to Section 7.1, all further obligations of the Parties
under this Agreement shall terminate without further liability of any Party
to any other, except that the obligations of the Parties contained in
Sections 10.9, 10.14 and 10.16 shall survive any such termination. A
termination under Section 7.1 shall not relieve any Party of any liability
that may otherwise exist for a willful breach of, or for any willful
misrepresentation under, this Agreement, or be deemed to constitute a waiver
of any available remedy (including specific performance if available) for any
such breach; provided, however, that the Buyer shall not have the right to
pursue any form of injunctive relief against Previti, any of the Sellers or
any of the Consolidated Forecast Entities. Additionally, no termination
shall give rise to the release of the Buyer from any loss, cost, claims,
damages or indemnities provided to the Sellers under this Agreement with
respect to any of the Buyer's (or its agents) due diligence.
7.3 Effect of Closing Over Known Unsatisfied Conditions.
7.3.1 Waiver. If either the Buyer or the Sellers elect to
proceed with the Closing, each and every such condition that is unsatisfied
at the Closing Date shall be deemed to be waived. Such decision shall, to
the extent the waiving party had knowledge as of the time of Closing with
respect thereto, constitute a waiver of any liability for breach of, or
misrepresentation under, this Agreement in connection with such unsatisfied
condition(s).
7.3.2 Effect of Waiver. If the Buyer shall waive or be deemed to
have waived any condition set forth in Section 6.1 or 6.2 in accordance with
Section 7.3.1, the Buyer shall be deemed to have (a) fully released and
forever discharged the Sellers and their Affiliates, the Representative,
partners, shareholders, officers, directors, agents and representatives from
and on account of all claims, demands or charges (known or unknown) with
respect to the waived condition and, to the extent that the Buyer had
knowledge as of the time of the Closing with respect thereto, any facts or
circumstances giving rise to or in respect of such waived condition, and (b)
waived any opinion or certificate contemplated by Section 6.1 or 6.2 with
respect to such matters. THE BUYER, AFTER CONSULTATION WITH LEGAL COUNSEL
AND WITH FULL KNOWLEDGE OF THE CONSEQUENCES OF ITS ACTIONS, WAIVES THE
PROVISIONS OF CALIFORNIA CIVIL CODE SECTION 1542, WHICH PROVIDES:
"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH
THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS
FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF
KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS
SETTLEMENT WITH THE DEBTOR."
Buyer's Initials: ---
SECTION 8. INDEMNIFICATION
8.1 Indemnification by the Sellers and Previti.
8.1.1 Ownership of the Securities. Sellers and Previti shall
jointly and severally indemnify, defend and hold harmless the Buyer and its
officers, directors, stockholders and Affiliates from and against any and all
material Losses, whether or not involving a third-party claim, directly based
upon or directly arising from any material breach of the representations or
warranties made by any Seller under Sections 2.1.1, 2.1.2 and 2.2 of this
Agreement only (and no other agreement); provided, however, that Sellers' and
Previti's indemnification obligations hereunder shall exist only with respect
to Losses of which Previti is timely notified in accordance with Section
8.3.1.
8.1.2 Indemnification for Actual Fraud. Sellers and Previti, as
to matters concerning the Consolidated Forecast Entities, shall jointly and
severally indemnify, defend and hold harmless the Buyer and its officers,
directors, stockholders and Affiliates from and against any and all Losses,
whether or not involving a third-party claim (but expressly excluding all
homeowner allegations of fraud or similar claims or class action claims),
that are not reflected in the Financial Statements or on the Seller's
Disclosure Schedule, as a result of, or based upon or arising from, any
fraudulent misrepresentation made by the Sellers in Section 2 (including,
without limitation, fraudulent misrepresentations made by the Group under
Section 2.13 of the Asset Purchase Agreement regarding actually asserted and
existing homeowner fraud claims); provided, however, that Previti's
indemnification obligations hereunder shall exist only with respect to Losses
of which Previti is timely notified in accordance with Section 8.3.1; and
provided, further, any indemnification claim hereunder shall be filed in
accordance with Section 10.10 by the Buyer within ninety (90) days after the
Buyer's discovery thereof or the claim (and the applicable remedy) shall
automatically be waived. Such fraudulent misrepresentation under this
Section 8.1.2 (a) must constitute "actual fraud" under the California Civil
Code, (b) shall be determined based only on the actual (not imputed or
constructive) knowledge of any of the Executive Officers, and (c) must be the
subject of a final, non-appealable judgment.
8.1.3 Tax Indemnification by Previti. From and after the Closing
Date, Sellers and Previti shall jointly and severally indemnify, defend and
hold the Buyer harmless from and against any and all Taxes incurred in
periods or with respect to periods prior to the Closing Date for which the
Buyer or its Affiliates or Securities Partnership (the "Tax Indemnitees") are
liable (including, without limitation, any obligation to contribute to the
payment of any Taxes determined on a consolidated, combined or unitary basis
with respect to the Securities Partnership), or that result in Encumbrances
on any assets of the Tax Indemnitees, in each case to the extent that they
are not reflected in the Final Balance Sheet:
(a) for any Tax period of the Securities Partnership that
ends on or before the Closing Date;
(b) arising from the Securities Transfer and/or the Asset
Transfer and any other transfers, exchanges or transaction related thereto
undertaken by the Seller, Securities Partnership, any former holders of
limited partnership interests in the Group, in connection with and prior to
the purchase contemplated by this Agreement and the Asset Purchase Agreement.
(c) with respect to any Tax period of the Securities
Partnership beginning before the Closing Date but ending after the Closing
Date, but only that portion of such Taxes that relates to the portion of the
Tax period ending on and including the Closing Date;
(d) arising under any Tax sharing agreement or similar
arrangement, whether or not written, as a transferee or successor by contract
or otherwise;
(e) resulting by reason of the several liability of the
Securities Partnership pursuant to Treasury Regulations Section 1.1502-6 or
by reason of the Securities Partnership having been a member of any
consolidated, combined or unitary group on or prior to the Closing Date; or
(f) resulting from the Sellers' fraudulent actions in
connection with any covenant or breach of any of its representations or
warranties relating to Taxes set forth in Sections 2.7, 5.3, 5.4 and 5.5.
Previti's indemnification obligations under this Section 8.1.3 shall
automatically terminate upon the expiration of the applicable statutory
period. Previti's liability under this Section 8.1.3 shall include any
Losses of the Tax Indemnitees incurred in responding to an examination,
audit, administrative or court proceeding, or other procedure in which a Tax
authority seeks to propose an adjustment, that if pursued successfully, would
give rise to a liability for Taxes for which a Tax Indemnitee would be
eligible for indemnification under this Section 8.1.3. For purposes of this
Section 8.1.3, in the case of any Taxes that are imposed on a periodic basis
and are payable for a Tax period that includes (but does not end on) the
Closing Date, the portion of such Tax which relates to the portion of such
Tax period ending on the Closing Date shall (i)in the case of any Taxes,
other than Taxes based upon or related to income or receipts, be deemed to be
the amount of such Tax for the entire Tax period multiplied by a fraction the
numerator of which is the number of days in the Tax period ending on the
Closing Date and the denominator of which is the number of days in the entire
Tax period, and (ii)in the case of any Tax based upon or related to income or
receipts (including franchise Taxes to the extent based upon income, receipts
or earned surplus) be deemed equal to the amount which would be payable if
the relevant Tax period ended on the Closing Date for the Sellers and
Securities Partnership.
8.2 Indemnification by the Buyer. The Buyer shall indemnify and hold
harmless Previti, the Sellers, each of the Consolidated Forecast Entities and
their officers, directors, employees, stockholders and Affiliates from and
against any material Losses, whether or not involving a third-party claim,
that are not reflected on the Buyer's Disclosure Schedule as a result of, or
based upon or arising from, any fraudulent misrepresentation made by the
Buyer under Section 3 of this Agreement; provided, however, that the Buyer's
indemnification obligations pursuant to this Section 8.2 shall exist only
with respect to Losses of which the Buyer is timely notified in accordance
with Section 8.3.1; and provided, further, any indemnification claim
hereunder shall be filed in accordance with Section 10.10 by the Seller or
such Person within sixty (60) days after such Person's actual discovery
thereof or the claim (and the applicable remedy) shall automatically be
waived. Such fraudulent misrepresentation under this Section 8.2 (a) must
constitute "actual fraud" under the California Civil Code, (b) shall be
determined based on the actual (not imputed or constructive) knowledge of the
Buyer, and (c) must be the subject of a final, non-appealable judgment.
Nothing herein shall limit the Buyer's liabilities (and indemnification
obligations) with respect to any matter pertaining to the Buyer's Shares,
including, without limitation, the disposition thereof, or any obligation of
the Buyer under Section 5.6.
8.3 Procedure.
8.3.1 Notice. Any Indemnified Party with respect to any Loss
shall give written notice to the Indemnifying Party, and such notice shall
(a) describe in reasonable detail the nature of the claim of Loss, (b)
provide a copy of all papers served (and/or delivered) with respect to such
claim (and/or any examination, audit or other procedure), if any, (c) set
forth the basis of the Indemnified Party's request for indemnification under
this Agreement, and (d) provide a waiver of any right to receive
indemnification for such Loss under the Asset Purchase Agreement. Such
notice to the Indemnifying Party shall be delivered by the Indemnified Party
within thirty (30) days of the Indemnified Party's actual knowledge of such
Loss and prior to the expiration of the applicable statutory period;
provided, however, that any delay by the Indemnified Party beyond the
aforesaid thirty (30) day period shall not waive the Indemnified Party's
claim regarding such Loss, except to the extent such delay prejudices (or
could reasonably be expected to lead to the prejudice of) the Indemnifying
Party's ability to effectively defend such claim, but in no event shall such
notice be delayed by more than ninety (90) days of the Indemnified Party's
knowledge of such Loss.
8.3.2 Defense. If any claim, demand or liability is asserted by
any third party against any Indemnified Party, the Indemnifying Party shall
have the right and shall upon the written request of the Indemnified Party,
defend any Actions brought against the Indemnified Party in respect of any
Indemnifiable Claims with counsel of its choice reasonably acceptable to the
Indemnified Party and, in the case of a Tax-related Action, tax advisors of
its choice reasonably acceptable to the Indemnified Party. In any such
action or proceeding, the Indemnified Party shall have the right to retain
its own counsel, but the fees and expenses of such counsel shall be at its
own expense unless (a) the Indemnifying Party and the Indemnified Party
mutually agree in writing to the retention of such counsel, or (b) the named
parties to any such suit, action or proceeding (including any impleaded
parties) include both the Indemnifying Party and the Indemnified Party, and
in the reasonable judgment of the Indemnified Party, representation of the
Indemnifying Party and the Indemnified Party by the same counsel would be
inadvisable due to potential conflicts of interests between them. The
Parties shall cooperate and may participate in the defense of all third-party
claims which may give rise to Indemnifiable Claims hereunder. If the
Indemnifying Party assumes the defense (i) it shall be conclusively
established for purposes of this Agreement that the claims made in the Action
are within the scope of and subject to indemnification but only if the
Indemnifying Party assumed the defense pursuant to clause (a) above and not
clause (b); and (ii) no compromise or settlement of such claims may be
effected by the Indemnifying Party without the Indemnified Party's written
consent (which consent shall not be unreasonably withheld) unless there is no
finding or admission of any violation of legal requirement or any violation
of the rights of any Person and no effect on any other claims that may be
made against the Indemnified Party, or the exclusive relief provided is
monetary damages that are paid in full by the Indemnifying Party. If written
notice is given to an Indemnifying Party of the commencement of any Action
and the Indemnifying Party does not, within twenty (20) days after the
Indemnified Party's written notice is given, give written notice to the
Indemnified Party of its election to assume the defense of such Action, the
Indemnifying Party shall be bound by any determination made in such Action or
any compromise or settlement effected by the Indemnified Party. In
connection with the defense of any claim, each Party shall make available to
the Party controlling such defense, any books, records or other documents
within its control that are reasonably requested in the course of or
necessary or appropriate for such defense.
8.3.3 Insurance Matters. The amount of any Loss for which
indemnification is provided under Section 8.1 or 8.2 shall be net of, and
subject to, any insurance proceeds received and the amount of any related
deductible with respect to such Loss under any insurance policy maintained by
the Buyer, the Securities Partnership, any Consolidated Forecast Entity or
any of the Sellers. The Parties agree that, on or prior to seeking
indemnification for a Loss from the Indemnifying Party under the Agreement,
the Indemnified Party shall use commercially reasonable efforts to recover
any insurance proceeds that may be obtainable with respect to such Loss. The
Sellers shall reasonably cooperate, at no expense to the Sellers, with the
Buyer in the Buyer's efforts to seek to obtain insurance to cover any
breaches or misrepresentations in the Sellers' representation and warranties
contained in this Agreement, if any. If such insurance proceeds or other
contributions or reductions to the amount payable by the Indemnifying Party
under this Section 8 is made available or otherwise determined after payment
by the Indemnifying Party of any amount otherwise required to be paid to an
Indemnified Party pursuant to this Section 8, the Indemnified Party shall
repay to the Indemnifying Party promptly after such determination (and in any
event within ten (10) days after determination of the Indemnifying Party's
right to receive such insurance proceeds), any amount the Indemnifying Party
would not have had to pay pursuant to this Section 8 had such determination
been made at the time of such payment.
8.3.4 Indemnification in the Asset Purchase Agreement. Any
payment to an Indemnified Party under Sections 8.1 or 8.2 otherwise due and
payable hereunder shall be decreased to the extent of any indemnification
proceeds received under Section 8 of the Asset Purchase Agreement by the
Indemnified Party with respect to the same Loss. Neither the Buyer nor the
Seller shall have any right to receive indemnification payments under both
this Agreement and the Asset Purchase Agreement for the same Loss.
8.3.5 Tax Treatment of Indemnification Payments. Any payment
under Section 8.1 shall be treated as an adjustment to the Purchase Price.
8.4 Survival.
8.4.1 The Sellers. The indemnification obligations of Previti
under Sections 8.1.1 and 8.1.2 shall survive the Closing and terminate upon
the expiration of the applicable statutory period. The indemnification
obligations of Previti under Section 8.1.3 shall survive indefinitely.
8.4.2 The Buyer. The indemnification obligations of the Buyer
under Section 8.2 shall survive the Closing and shall remain in full force
and effect for the applicable statutory period.
8.5 Limitation of Remedies. Neither Previti nor any Consolidated
Forecast Entity shall be obligated to indemnify the Buyer pursuant to Section
8.1 until the aggregate amount of Losses for which such indemnification would
otherwise be available under this Agreement and under the Asset Purchase
Agreement is in excess of Six Hundred Fifty Thousand Dollars ($650,000), in
which event Previti shall be obligated to indemnify the Buyer only for all
Losses from the first dollar. The Buyer shall not be obligated to indemnify
the Sellers and/or Previti pursuant to Section 8.2 until the aggregate amount
of all Losses for which such indemnification would otherwise be available
under this Agreement and the Asset Purchase Agreement is in excess of Six
Hundred Fifty Thousand Dollars ($650,000), in which event the Buyer shall be
obligated to indemnify the Sellers only for Losses from the first dollar;
provided, however, nothing herein shall limit the Buyer's liabilities (and
indemnification obligations) with respect to the Buyer's indemnification
obligations contained in Section 4.1 of the Asset Purchase Agreement or with
respect to any matter pertaining to the Buyer's Shares (as defined in the
Asset Purchase Agreement), including, without limitation, the disposition
thereof, or any obligation of the Buyer under Section 5.6 of the Asset
Purchase Agreement.
8.6 Sellers Jointly and Severally Liable. The Sellers and Previti
hereby agree to be jointly and severally liable for any Loss for which
Previti or Forecast Group, L.P. is liable under Section 8 of the Asset
Purchase Agreement.
SECTION 9. LIMITATION OF REMEDIES
9.1 Breach of Representations. The indemnification obligations provided
in Sections 8.1 and 8.2 shall be the sole and exclusive remedies available to
any Party from any other Party or from any of the Consolidated Forecast
Entities with respect to any Loss resulting from, or based upon or arising
from, any breach of any of the representations or warranties made under this
Agreement.
9.2 No Other Warranties. Except as expressly set forth in this
Agreement and in the Asset Purchase Agreement or the Collateral Agreements,
none of Previti, the Sellers, their counsel, sales agents, nor any of their
Affiliates or attorneys of Previti, Seller, their counsel, broker, or sales
agents, nor any other party related in any way to any of the foregoing (each,
a "Seller Party," and collectively, the "Seller Parties") have or shall be
deemed to have made any verbal or written representations, warranties,
promises or guarantees (whether express, implied, statutory or otherwise) to
the Buyer with respect to the Securities or any other matters.
9.3 No Personal Liability of Any Other Person. Except as specifically
set forth herein, no Person (including, without limitation, the Sellers)
shall have any liability to the Buyer (or any Affiliate thereof) arising
under this Agreement or in connection with the transactions contemplated
under this Agreement (or any other related agreements). Moreover,
notwithstanding anything else in this Agreement to the contrary, no officer,
director or employee of any of the Consolidated Forecast Entities shall have
any liability to the Buyer (or any Affiliate thereof) whatsoever, excepting
solely as it may pertain to Previti pursuant to Sections 5.1, 8.1.1, 8.1.2
and 8.1.3.
9.4 Failure to Perform Obligations. Except as otherwise specifically
set forth herein, the Parties agree that the performance obligations of each
of the Parties contained herein shall survive Closing, and except as
otherwise specifically set forth herein nothing contained in this Agreement
shall restrict or limit either Party's ability to bring or maintain an Action
at Law or in equity with respect thereto.
SECTION 10. GENERAL
10.1 Amendments; Waivers. This Agreement and any Schedule or Exhibit
attached hereto may be amended only by agreement in writing of all Parties.
No waiver of any provision nor consent to any exception to the terms of this
Agreement shall be effective unless in writing and signed by the Party to be
bound and then only to the specific purpose, extent and instance so provided
by an authorized representative thereof.
10.2 Schedules; Exhibits; Integration. Each Schedule and Exhibit
delivered pursuant to the terms of this Agreement shall be in writing and
shall constitute a part of this Agreement, although Schedules need not be
attached to each copy of this Agreement. This Agreement, together with such
Schedules and Exhibits, constitutes the entire agreement among the Parties
pertaining to the subject matter hereof and supersedes all prior agreements
and understandings of the Parties in connection therewith. Without limiting
the effect of the foregoing provisions of this Section 10.2, except as
expressly set forth in this Agreement, none of the Parties is making or shall
be deemed to have made any representation, warranty or covenant of any kind,
either express or implied.
10.3 Efforts; Further Assurances. Each Party shall use its
commercially reasonable efforts to cause all conditions to its obligations
hereunder to be timely satisfied and to perform and fulfill all obligations
on its part to be performed and fulfilled under this Agreement. The Parties
shall reasonably cooperate with each other in such actions and in securing
requisite Approvals. Each Party shall execute and deliver both before and
after the Closing such further certificates and other documents and take such
other actions as any other Party may reasonably request in furtherance of and
as contemplated by this Agreement to consummate or implement the transactions
contemplated hereby or to evidence such events or matters. Nothing herein
shall modify, amend or extend the Closing Date.
10.4 Governing Law. This Agreement, the legal relations between the
Parties and any Action, whether contractual or non-contractual, instituted by
any Party with respect to matters arising under or growing out of or in
connection with or in respect of this Agreement, including, without
limitation, the negotiation, execution, interpretation, coverage, scope,
performance, breach, termination, validity, or enforceability of this
Agreement, shall be governed by and construed in accordance with the Laws of
the State of California applicable to contracts made and performed in such
State and without regard to conflicts of law doctrines.
10.5 Transfer; Successors and Assigns. The Buyer may not assign or
transfer this Agreement or any of the rights hereunder without the Sellers'
prior written consent, which consent shall not be required in the case of a
proposed assignment or transfer to an Affiliate of the Buyer so long as the
Buyer (a) provides complete copies of all relevant documentation, (b) remains
fully liable under this Agreement without any further documentation, and (c)
unconditionally guarantees (i) any and all of the obligations and performance
of the proposed assignee under this Agreement, and (ii) any and all of the
Buyer's obligations under the Asset Purchase Agreement and the Collateral
Agreements. In the event the Sellers consents to any such assignment or
transfer, the Sellers may elect in their sole discretion, to pursue any of
its remedies solely against the Buyer, or against the Buyer and the assignee
or transferee. Any attempted assignment in violation of this Section 10.5
shall be void.
10.6 Headings. The Table of Contents and the descriptive headings of
the Sections, subsections and other subdivisions of this Agreement and of the
Exhibits and Schedules are for convenience only and do not constitute a part
of this Agreement.
10.7 Counterparts. This Agreement may be executed in any number of
identical counterparts, each of which when executed and delivered shall be an
original, but all such counterparts shall constitute but one and the same
instrument. Any signature page of this Agreement may be detached from any
counterpart without impairing the legal effect of any signatures thereof, and
may be attached to another counterpart, identical in form thereto, but having
attached to it one or more additional signature pages. Delivery by any Party
or its respective representatives of telecopied (counterpart) signature pages
shall be as binding an execution and delivery of this Agreement by such Party
as if the other Party had received the actual physical copy of the entire
Agreement with an ink signature from such Party.
10.8 Publicity and Reports. The Sellers and the Buyer shall coordinate
all publicity relating to the transactions contemplated by this Agreement and
no Party shall issue any press release, publicity statement or other public
notice relating to this Agreement, or the transactions contemplated by this
Agreement, without consulting with, and receiving approval from (which
approval shall not be unreasonably withheld or delayed), the other Party,
except to the extent that a particular action is required by applicable Law
or the rules or regulations of any national securities exchange; provided,
however, in such instance, the applicable Party shall use commercially
reasonable efforts to inform the other Party of such action in writing in
advance.
10.9 Confidentiality. All information disclosed by any Party (or its
representatives) whether before or after the Effective Date, in connection
with the transactions contemplated by, or the discussions and negotiations
preceding, this Agreement to any other Party (or its representatives) shall
be kept confidential by such other Party and its representatives and shall
not be used by any such Persons other than as contemplated by this Agreement,
except (a) to the extent that such information was known by the recipient
when received, (b) to the extent that such information is or hereafter
becomes lawfully obtainable from other sources, (c) to the extent that such
information is necessary or appropriate to disclose to a Governmental Entity
having jurisdiction over the disclosing Party, (d) as may otherwise be
required by Law, or (e) to the extent such duty of confidentiality is waived
in writing by the other Party. If a Party discloses any information related
to this Agreement or the transactions contemplated hereunder pursuant to any
of clauses (a) through (e) above, then such Party shall provide the other
Party with written notice of such disclosure. If this Agreement is
terminated in accordance with its terms, each Party shall return upon written
request from the other Party all documents (and reproductions thereof)
received by it or its representatives from such other Party (and, in the case
of reproductions, all such reproductions made by the receiving Party) that
include information not within exceptions (a) through (e) above, unless the
recipients provide assurances reasonably satisfactory to the requesting Party
that such documents have been destroyed.
10.10 Appointment of Referee; Waiver of Jury Trial. Any Action brought
to interpret or enforce this Agreement may be tried by the reference
procedures set forth in California Code of Civil Procedure Section 638 et
seq. upon motion by any party to the appropriate Superior Court. A single
referee that is an active judge shall be appointed by the presiding judge of
the appropriate Superior Court, and the Action shall be placed on the
expedited reference calendar. Each of the Sellers and the Buyer hereby
waives the right to trial by jury. During the pendency of the expedited
reference proceeding, the Sellers and the Buyer shall each pay one-half of
the cost of the referee. Upon the conclusion of the referenced proceeding,
the losing party shall pay all remaining unpaid costs of the referenced
proceeding and shall reimburse the prevailing party (as shall be determined
by the referee) for such costs previously paid by the prevailing party. Such
reimbursement shall be included in any judgment or final order issued in the
referenced proceeding, which judgment or Order shall be final, binding and
non-appealable.
10.11 Parties in Interest. This Agreement shall be binding upon and
inure to the benefit of each Party, and nothing in this Agreement, express or
implied, is intended to confer upon any other Person any rights or remedies
of any nature whatsoever under or by reason of this Agreement, except for
Section 10.5 (which is intended to be for the benefit of the persons provided
for therein and may be enforced by such persons).
10.12 Knowledge Convention. Statements in this Agreement or in any
Schedule, Exhibit, certificate or other documents delivered to any Party
pursuant to this Agreement made "to the Sellers' knowledge" or "to the
applicable tax paying Seller's knowledge" (or words of similar intent or
effect) shall be deemed to be made to the actual (not implied or
constructive) knowledge of the applicable Executive Officers and shall not
include any other Person's knowledge. The reference to the foregoing
individuals' names shall not imply and shall not give rise to any personal
liability of such persons. Statements in this Agreement or in any Schedule,
Exhibit, certificate or other documents delivered to any Party pursuant to
this Agreement stating the "Sellers' expectations" (or words of similar
intent or effect) shall be deemed to refer to the actual expectations of
Previti and shall not include any other Person's expectations or any
guarantee thereof.
10.13 Notices. Except as otherwise expressly provided herein, all
notices, requests, approvals, consents and demands to or upon the respective
Parties hereto to be effective shall be in writing (and shall be delivered by
hand, or nationally recognized courier service), and shall be deemed to have
been duly given or made when delivered by hand, or, in the case of a
nationally recognized courier service, one (1) business day after delivery to
such courier service, addressed as follows, or to such other address as may
be hereafter notified by the respective Parties hereto:
If to the Buyer, to:
Hovnanian Enterprises, Inc.
10 Highway 35
P.O. Box 500
Red Bank, New Jersey 07701
Attn: Peter Reinhart, Esq.
Telephone: (732) 747-7800
Telecopy: (732) 747-6835
and:
Hovnanian Enterprises, Inc.
1802 Brightseat Road
Landover, Maryland 20785-4235
Attn: Mr. Geaton A. DeCesaris Jr.
Telephone: (301) 772-8900
Telecopy: (301) 772-1380
with a copy to:
Simpson Thacher & Bartlett
10 Universal City Plaza
Suite 1850
Los Angeles, California 94608
Attn: Daniel Clivner, Esq.
Telephone: (818) 755-9613
Telecopy: (818) 755-7009
If to one or more Sellers, to:
10670 Civic Center Drive
Rancho Cucamonga, California 91730
Attn: Mr. James P. Previti (marked "Woodlands - Personal &
Confidential" and sent only after personal (not voice-mail)
notice to Mr. Previti)
Telephone: (909) 987-7788
Telecopy: (909) 980-7305
with a copy to:
10670 Civic Center Drive
Rancho Cucamonga, California 91730
Attn: Larry R. Day, Esq. (marked "Woodlands - Personal &
Confidential" and sent only after personal (not voice-mail)
notice to Mr. Day)
Telephone: (909) 987-7788
Telecopy: (909) 987-8958
and:
O'Melveny & Myers LLP
Embarcadero Center West
275 Battery Street, Suite 2600
San Francisco, California 94111-3305
Attn: Peter T. Healy, Esq.
Telephone: (415) 984-8833
Telecopy: (415) 984-8701
10.14 Expenses. Except as otherwise expressly set forth herein, the
Sellers and the Buyer shall each pay their own expenses incident to the
negotiation, preparation and performance of this Agreement and the
transactions contemplated hereby, including, without limitation, the fees,
expenses and disbursements of their respective advisors, accountants,
auditors and counsel. Each Seller's expenses incurred prior to the Closing
and not otherwise specifically allocated by this Agreement shall be paid by
the Sellers or by its Affiliates.
10.15 Remedies; Waiver. To the extent permitted by Law, all rights and
remedies existing under this Agreement are cumulative to and not exclusive
of, any rights or remedies otherwise available under applicable Law. No
failure on the part of any Party to exercise or delay in exercising any right
hereunder shall be deemed a waiver thereof, nor shall any single or partial
exercise preclude any further or other exercise of such or any other right.
10.16 Attorneys' Fees. In the event of any Action by any Party arising
under or out of, in connection with or in respect of, this Agreement or the
transactions contemplated hereby, the prevailing Party shall be entitled to
reasonable attorney's fees, costs and expenses incurred in such Action.
Attorney's fees incurred in enforcing any judgment in respect of this
Agreement are recoverable as a separate item. The Parties intend that the
preceding sentence be severable from the other provisions of this Agreement,
survive any judgment and, to the maximum extent permitted by law, not be
deemed merged into such judgment.
10.17 Representation by Counsel; Interpretation. The Sellers and the
Buyer each acknowledge that each Party has been represented by counsel in
connection with this Agreement and the transactions contemplated by this
Agreement. Accordingly, any rule of Law, including, without limitation,
Section 1654 of the California Civil Code, or any legal decision that would
require interpretation of any claimed ambiguities in this Agreement against
the Party that drafted it has no application and is expressly waived. The
provisions of this Agreement shall be interpreted in a reasonable manner to
effect the intent of the Buyer and the Sellers.
10.18 Severability. If any provision of this Agreement is determined
to be invalid, illegal or unenforceable by any Governmental Entity, the
remaining provisions of this Agreement shall remain in full force and effect
provided that the economic and legal substance of the transactions
contemplated is not affected in any manner materially adverse to any Party.
In the event of any such determination, the Parties agree to negotiate in
good faith to modify this Agreement to fulfill as closely as possible the
original intents and purposes hereof. To the extent permitted by Law, the
Parties hereby to the same extent waive any provision of Law that renders any
provision hereof prohibited or unenforceable in any respect.
10.19 No Offset. Notwithstanding anything in this Agreement to the
contrary, neither the Buyer nor anyone claiming through the Buyer shall have
any rights of offset under this Agreement or otherwise, in the event of any
breach hereunder by the Sellers (or any Seller) or Previti, or any Affiliate
thereof, including, without limitation, any right of offset or excuse to
Buyer's performance respecting Buyer's obligations hereunder or under the
Asset Purchase Agreement or any of the Collateral Agreements.
10.20 No Offset by the Sellers or Previti. Notwithstanding anything in
this Agreement to the contrary but expressly excepting any actions and/or
inactions of the Buyer or its directors, officers, employees, representatives
or agents that are directly related to the obligations of the Seller, Previti
or anyone claiming through any of them, none of the Sellers, Previti nor
anyone claiming through them shall have any rights of offset under this
Agreement or otherwise, in the event of any breach hereunder or under the
Asset Purchase Agreement or any of the Collateral Agreements.
10.21 Cross Default with Asset Purchase Agreement.
10.21.1 Effectiveness of this Agreement. This Agreement
shall not be operable or effective unless and until the Buyer, The Group and
Previti validly execute and deliver to the other parties thereto the Asset
Purchase Agreement.
10.21.2 Default by Buyer. A default by the Buyer under the
Asset Purchase Agreement shall constitute a default by the Buyer under this
Agreement.
10.21.3 Default by the Sellers or Previti. A default by the
Sellers and/or Previti under the Asset Purchase Agreement shall constitute a
default by the Sellers and/or Previti, as applicable, under this Agreement.
10.21.4 Termination. In the event the Asset Purchase
Agreement is terminated pursuant to the terms thereof, this Agreement shall
be deemed terminated as of the date of such termination of the Asset Purchase
Agreement, at which time this Agreement shall be of no further force or
effect, except with respect to those obligations which, pursuant to the
express provisions of this Agreement, are to survive the termination of
Agreement.
(Signature pages follow.)
IN WITNESS WHEREOF, the Parties have executed this Agreement as of the
Effective Date.
"BUYER"
HOVNANIAN ENTERPRISES, INC., a Delaware
corporation
By: /S/Geaton DeCesaris, Jr.
Its: President of Homebuilding
Operations
"SELLERS"
FORECAST PP2, LLC, a Delaware limited
liability company
By: /S/Larry R. Day
Its: Executive Vice President
FORECAST HOMES, INC., a California
corporation
By: /S/Larry R. Day
Its: Executive Vice President
"PREVITI"
JAMES P. PREVITI, an individual
CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-4 No. 333-52090, Form S-3 No. 333-68528, Form S-3 No. 333-75939, Form S-3 No. 333-90567, Form S-3 No. 333-87861, and form S-3 No. 333-51991) of Hovnanian Enterprises, Inc. and in the related Prospectuses and in the Registration Statement (Form S-8 No. 333-92977) pertaining to the 1999 Stock Incentive Plan of Hovnanian Enterprises, Inc. and in the Registration Statements (Form S-8 No. 333-56972, Form S-8 No. 033-36098, and Form S-8 No. 002-92773) pertaining to the 1983 Stock Option Plan of Hovnanian Enterprises, Inc and in the Registration Statement (Form S-8 No. 333-56640) pertaining to the Washington Homes Employee Stock Option Plan of our report dated December 11, 2001, with respect to the consolidated financial statements of Hovnanian Enterprises, Inc. included in this Annual Report (Form 10-K) for the year ended October 31, 2001. /s/Ernst & Young LLP New York, New York January 18, 2002