-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KZ4o2H5GekjR4EYg8OFWDgPOyYxD9LpuCjVWBrNFb7T4rPhgJimri4JQmxeLOG13 mZ/8weVqw08mbsnBZSPf/g== 0000912057-99-008952.txt : 19991213 0000912057-99-008952.hdr.sgml : 19991213 ACCESSION NUMBER: 0000912057-99-008952 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991210 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HORTON D R INC /DE/ CENTRAL INDEX KEY: 0000882184 STANDARD INDUSTRIAL CLASSIFICATION: OPERATIVE BUILDERS [1531] IRS NUMBER: 752386963 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 333-72423 FILM NUMBER: 99772481 BUSINESS ADDRESS: STREET 1: 1901 ASCENSION BLVD STREET 2: STE 100 CITY: ARLINGTON STATE: TX ZIP: 76006 BUSINESS PHONE: 8178568200 MAIL ADDRESS: STREET 1: 1901 ASCENSION BLVD STREET 2: SUITE 100 CITY: ARLINGTON STATE: TX ZIP: 76006 10-K 1 FORM 10-K Dear Fellow Stockholders: Fiscal 1999 marks our 22(nd) consecutive year of growth and increased profitability. During this period of unprecedented growth, fiscal 1999 stands out as an exceptional year. In 1999, we achieved quarterly and fiscal year records in new sales contracts, sales backlog, revenues, homes closed, net income, and earnings per share. 1999's key financial and operating accomplishments include: - Record new sales contracts signed of $3,266.2 million (18,911 homes), a 29% increase over our fiscal 1998 record of $2,533.2 million (15,952 homes). - Record revenues of $3,156.2 million (18,395 homes closed), a 45% increase over our fiscal 1998 record of $2,176.9 million (13,944 homes closed). - Record net income of $159.8 million, a 71% increase over our fiscal 1998 record of $93.4 million. - Record earnings per share of $2.50, a 60% increase over our fiscal 1998 record of $1.56 per share. - Record year-end sales backlog of $1,356.5 million (7,309 homes), a 29% increase over our 1998 year-end record of $1,052.9 million (6,341 homes). - Record stockholders' equity of $797.6 million, a 45% increase over our 1998 year-end record of $549.4 million. - Providing stockholders with a 29% return on beginning stockholders' equity and a 23% return on average stockholders' equity. While the housing market in 1999 was aided by a strong economy, increased housing demand and low mortgage rates, our record results continue to be fueled by D.R. Horton's financial and operating strategies. These strategies have allowed us to differentiate our Company from others in the industry, not only in the way we operate, but also in our results. Our 22 year history of record results clearly puts us in a league of our own. In December 1999, PROFESSIONAL BUILDER magazine recognized our accomplishments and selected D.R. Horton, Inc. as the 1999 "Builder of the Year". This award honors the Company's superb financial performance, the dedication and team approach of all of our employees, the Company's entrepreneurial focus, and the quality of the homes built by the Company in 40 markets throughout the United States. It also recognizes D.R. Horton's growth strategy and proven ability to expand through start-ups and acquisitions. In fiscal 1999, D.R. Horton continued to expand and diversify its homebuilding operations. Growth was achieved through both internal expansion and acquisition. The Company increased its market share in core markets and commenced start-up operations in Columbia, South Carolina. In addition, we acquired Cambridge Homes, the largest builder in Chicago and the leading builder of active-adult communities in the Midwest. We plan to expand our active-adult operations into several new markets in fiscal 2000. As one of the nation's three largest homebuilders, with operations in 23 states and 40 markets, our brand name and reputation for quality are becoming increasingly valuable assets. We are harnessing the power of these assets to expand our activities into related businesses. Our ability to leverage the relationship with our home buyers is evident by the success achieved in our financial services (mortgage and title) operations. In 1999, our pretax income from financial services increased 84% to $13.1 million. In 1999, we significantly expanded our mortgage and title operations. We commenced mortgage operations in eight new markets and acquired Century Title Agency, a leading title insurance company in Phoenix. We now have mortgage operations in 25 markets and title operations in eight markets. We plan to expand our mortgage and title operations into our other markets in the years ahead. In addition, we continue to explore other opportunities to profitably expand our relationship with our homeowners. Although we are extremely pleased with our financial and operating performance this year, we are disappointed with the performance of our stock, which was depressed with all housing stocks. Notwithstanding our record earnings, investors became focused on a "potential" recession, a recession that never materialized. The Company took advantage of this situation and repurchased $22.4 million of its common stock under our Board-approved $100 million Stock Repurchase Program. We are making every effort to convey to investors the D.R. Horton record, and will continue to repurchase our common stock as market conditions warrant. As we enter the new millennium, the Company is extremely well-positioned to take advantage of its leadership role in the homebuilding industry. In fiscal 1999, our stockholders' equity increased 45% to $797.6 million, and our homebuilding debt to total capitalization ratio declined by 239 basis points, to 57.7%. Our solid balance sheet, consistent financial performance, risk averse operating strategies, and reduced leverage will keep improving our standing in the capital markets. In January 1999, Moody's Investors Service upgraded our senior unsecured rating to Ba1 from Ba2. To support our future growth, the Company issued $385 million of 8% senior unsecured notes in February 1999. This senior notes offering was oversubscribed and represents the largest public debt financing completed in the homebuilding industry. To augment our growth, the Company has a $775 million revolving credit facility with 15 banks, the largest facility in the homebuilding industry. We also solidified our financial services operations by increasing our mortgage company warehouse facility by $90 million to $175 million. We begin the new decade in the best financial and operating position in the history of the Company. With our sales backlog at record levels and our business model fully intact, we feel that we are well-positioned to thrive in an industry that offers many opportunities for long-term growth. Our history clearly demonstrates our ability to grow through cycles and shows that we are the most interest rate and recession proof homebuilder in the United States. We thank all D.R. Horton stockholders for supporting the building of a company with a solid foundation and an exciting future. In addition, we thank our dedicated employees, suppliers, and subcontractors. They are the backbone of this organization and provide us the ability to react quickly and make sound decisions. We look forward to a highly successful fiscal 2000 and anticipate D.R. Horton will enjoy its 23(rd) consecutive year of growth, profitability, and achieve its goal of $4 billion in revenues. We invite you to follow our progress by accessing our website at http://www.DRHORTON.com. /s/ DONALD R. HORTON Donald R. Horton CHAIRMAN OF THE BOARD - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K (MARK ONE) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________ COMMISSION FILE NUMBER 1-14122 ------------------------ D.R. HORTON, INC. (Exact name of registrant as specified in its charter) DELAWARE 75-2386963 (State of other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1901 ASCENSION BLVD., SUITE 100 76006 ARLINGTON, TEXAS (Zip Code) (Address of principal executive offices)
(817) 856-8200 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED - --------------------------------------- ----------------------------------------- Common Stock, par value $.01 per share The New York Stock Exchange 8 3/8% Senior Notes due 2004 The New York Stock Exchange 10% Senior Notes due 2006 The New York Stock Exchange 8% Senior Notes due 2009 The New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section229.405 of this chapter) 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 November 30, 1999, there were 62,511,555 shares of Common Stock, par value $.01 per share, issued and outstanding, and the aggregate market value of these shares held by non-affiliates of the registrant was approximately $682,649,000. Solely for purposes of this calculation, all directors and executive officers were excluded as affiliates of the registrant. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on January 20, 2000, are incorporated herein by reference in Part III. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS D. R. Horton, Inc. (the "Company") is a national homebuilder. As such, we construct and sell single-family homes in metropolitan areas of the Mid-Atlantic, Midwest, Southeast, Southwest and West regions of the United States. We offer high-quality homes, designed principally for first-time and move-up home buyers. Our homes generally range in size from 1,000 to 5,000 square feet and range in price from $80,000 to $600,000. For the year ended September 30, 1999, we closed 18,395 homes with an average sales price approximating $166,100. On April 20, 1998, we acquired Continental Homes Holding Corp. ("Continental"), a geographically diversified homebuilder, through the merger of Continental into Horton (the "Merger"). In the Merger, Horton issued approximately 15.5 million shares of its common stock, and Continental's outstanding convertible securities and options became convertible into and exercisable for an additional 8.2 million shares. The Merger was accounted for as a pooling of interests. Accordingly, all information for prior periods has been restated to show the combined results of Horton and Continental. We are one of the largest and most geographically diversified homebuilders in the United States, with operating divisions in 23 states and 40 markets as of September 30, 1999. The markets we operate in include: Albuquerque, Atlanta, Austin, Birmingham, Charleston, Charlotte, Chicago, Cincinnati, Columbia, Dallas/Fort Worth, Denver, Greensboro, Greenville, Hilton Head, Houston, Jacksonville, Killeen, Las Vegas, Los Angeles, Louisville, Minneapolis/St. Paul, Myrtle Beach, Nashville, New Jersey, Newport News, Orlando, Pensacola, Phoenix, Portland, Raleigh/Durham, Richmond, Sacramento, Salt Lake City, San Antonio, San Diego, St. Louis, South Florida, Tucson, suburban Washington, D.C. and Wilmington. We build homes under the following names: D.R. Horton, Arappco, Cambridge, Continental, Dobson, Mareli, Milburn, Joe Miller, Regency, RMP, SGS, Torrey and Trimark. We were incorporated in Delaware on July 1, 1991, to acquire all of the assets and businesses of 25 predecessor companies, which were residential home construction and development companies owned or controlled by Donald R. Horton. Our principal executive offices are located at 1901 Ascension Blvd., Suite 100, Arlington, Texas 76006, and the telephone number is (817) 856-8200. 1 OPERATING STRATEGY We believe that the following operating strategies have enabled us to achieve consistent growth and profitability: GEOGRAPHIC DIVERSITY From 1978 to late 1987, excluding Continental Homes' locations, our homebuilding activities were conducted in the Dallas/Fort Worth area. We then instituted a policy of diversifying geographically, entering the following markets, both through startup operations and acquisitions, in the years shown:
YEARS ENTERED MARKETS - ------------- ----------------------------------------------------------- 1987 Phoenix 1988 Atlanta, Orlando 1989 Charlotte 1990 Houston 1991 Suburban Washington, D.C. 1992 Chicago, Cincinnati, Raleigh/Durham, South Florida 1993 Austin, Los Angeles, Salt Lake City, San Diego 1994 Minneapolis/St. Paul, Las Vegas, San Antonio 1995 Birmingham, Denver, Greensboro, St. Louis 1996 Albuquerque, Pensacola 1997 Greenville, Nashville, New Jersey, Tucson 1998 Charleston, Hilton Head, Jacksonville, Killeen, Louisville, Myrtle Beach, Newport News, Portland, Richmond, Sacramento, Wilmington 1999 Columbia
We continually monitor the sales and margins achieved in each of the subdivisions in which we operate as part of our evaluation of the use of our capital. While we believe there are significant growth opportunities in our existing markets, we also intend to continue our policy of diversification by seeking to enter new markets. We believe our diversification strategy mitigates the effects of local and regional economic cycles and enhances our growth potential. Typically, we will not invest material amounts in real estate, including raw land, developed lots, models and speculative homes, or overhead in start-up operations in new markets, until such markets demonstrate significant growth potential and acceptance of our products. ACQUISITIONS As an integral component of our operational strategy of continued expansion, we continually evaluate opportunities for strategic acquisitions. We believe that expanding our operations through the acquisition of existing homebuilding companies affords us several benefits not found in start-up operations. Such benefits include: - Established land positions and inventories; - Existing relationships with land owners, developers, subcontractors and suppliers; - Brand name recognition; and - Proven product acceptance by home buyers in the market. In evaluating potential acquisition candidates, we seek homebuilding companies that have an excellent reputation, a track record of profitability and a strong management team with an entrepreneurial 2 orientation. We limit the risks associated with acquiring a going concern by conducting extensive operational, financial and legal due diligence on each acquisition and by only acquiring homebuilding companies that we believe will have an immediate positive impact on our earnings. During the last five fiscal years, we have made 14 acquisitions. We will continue to evaluate potential future acquisition opportunities that satisfy our acquisition criteria in both existing and new markets. DECENTRALIZED OPERATIONS We decentralize our homebuilding activities to give more operating flexibility to our local division presidents. We have 50 separate operating divisions, some of which are in the same market area. Generally, each operating division consists of a division president, an office manager and staff, a sales manager and sales personnel, and a construction manager and construction superintendents. We believe that division presidents, who are intimately familiar with local conditions, make better decisions regarding local operations. Our division presidents receive performance bonuses based upon achieving targeted operating levels in their operating divisions. OPERATING DIVISION RESPONSIBILITIES Each operating division is responsible for: - Site selection which involves --A feasibility study; --Soil and environmental reviews; --Review of existing zoning and other governmental requirements; and --Review of the need for and extent of offsite work required to meet local building codes. - Negotiating lot option or similar contracts; - Overseeing land development; - Planning its homebuilding schedule; - Selecting building plans and architectural schemes; - Obtaining all necessary building approvals; and - Developing a marketing plan. CORPORATE OFFICE CONTROLS The corporate office controls key risk elements through centralized: - Financing; - Cash management; - Risk management; - Accounting and management reporting; - Payment of subcontractors' invoices; - Administration of payroll and employee benefits; - Final approval of land and lot acquisitions; - Capital allocation; and - Oversight of inventory levels. 3 COST MANAGEMENT We control our overhead costs by centralized administrative and accounting functions and by limiting the number of field administrative personnel and middle level management positions. We also minimize advertising costs by participating in promotional activities, publications and newsletters sponsored by local real estate brokers, mortgage companies, utility companies and trade associations. We control construction costs through the efficient design of our homes and by obtaining favorable pricing from certain subcontractors and national vendors based on the high volume of services they perform for us. We also control construction costs by monitoring expenses on each house through our purchase order system. We control capital and overhead costs by monitoring our inventory levels through our management information systems. MARKETS We conduct homebuilding activities in five geographic regions, consisting of:
GEOGRAPHIC REGION MARKETS - ----------------- ------------------------------------------------------- Mid-Atlantic Charleston, Charlotte, Columbia, Greensboro, Greenville, Hilton Head, Myrtle Beach, New Jersey, Newport News, Raleigh/Durham, Richmond, Suburban Washington, D.C., Wilmington Midwest Chicago, Cincinnati, Louisville, Minneapolis/St. Paul, St. Louis Southeast Atlanta, Birmingham, Jacksonville, Nashville, Orlando, Pensacola, South Florida Southwest Albuquerque, Austin, Dallas/Fort Worth, Houston, Killeen, Phoenix, San Antonio, Tucson West Denver, Las Vegas, Los Angeles, Portland, Sacramento, Salt Lake City, San Diego
When entering new markets or conducting operations in existing markets, among the things we consider are: - Regional economic conditions; - Job growth; - Land availability; - Local land development process; - Consumer tastes; - Competition; and - Secondary home sales activity. 4 Our homebuilding revenues by geographic region are:
YEAR ENDED SEPTEMBER 30, ------------------------------ 1997 1998 1999 -------- -------- -------- (IN MILLIONS) Mid-Atlantic................................... $ 180.5 $ 372.2 $ 540.6 Midwest........................................ 95.9 130.4 347.1 Southeast...................................... 246.4 384.5 429.6 Southwest...................................... 694.3 789.6 1,068.0 West........................................... 350.4 478.3 733.7 -------- -------- -------- Total...................................... $1,567.5 $2,155.0 $3,119.0 ======== ======== ========
LAND POLICIES Typically, we acquire land and enter into lot option contracts to acquire developed building lots only after necessary "entitlements" have been obtained, I.E., when we have the right to begin development or construction. Before we acquire lots or tracts of land, we will, among other things, complete a feasibility study, which includes soil tests, independent environmental studies and other engineering work, and determine that all necessary zoning and other governmental entitlements required to develop and use the property for home construction have been acquired. Although we purchase and develop land primarily to support our own homebuilding activities, occasionally we sell lots and land to other developers and homebuilders. We also use lot option contracts, in which we purchase the right, but not the obligation, to buy building lots at predetermined prices on a takedown schedule commensurate with anticipated home closings. Lot option contracts generally are on a nonrecourse basis, thereby limiting our financial exposure to earnest money deposits given to property sellers. This enables us to control significant lot positions with a minimal capital investment and substantially reduces the risks associated with land ownership and development. At September 30, 1999, about 36% of our total lot position of 62,610 lots was under option contracts. A summary of our land/lot position at September 30, 1999 is:
Finished lots we own........................................ 8,786 Lots under development we own............................... 31,366 ------ Total lots owned............................................ 40,152 Lots available under lot option and similar contracts....... 22,458 ------ Total land/lot positions.................................... 62,610 ======
We limit our exposure to real estate inventory risks by: - Generally commencing construction of homes under contract only after receipt of a satisfactory down payment and, where applicable, the buyer's receipt of mortgage approval; - Limiting the number of speculative homes (homes started without an executed sales contract) built in each subdivision; - Closely monitoring local market and demographic trends, housing preferences and related economic developments, such as new job opportunities, local growth initiatives and personal income trends; - Utilizing lot option contracts, where possible; and - Limiting the size of acquired land parcels to smaller tracts of land. 5 CONSTRUCTION Our home designs are prepared by architects in each of our markets to appeal to local tastes and preferences of the community. We also offer optional interior and exterior features to enhance the basic home design and to promote our sales efforts. Substantially all of our construction work is performed by subcontractors. Our construction supervisors monitor the construction of each home, participate in material design and building decisions, coordinate the activities of subcontractors and suppliers, subject the work of subcontractors to quality and cost controls and monitor compliance with zoning and building codes. Subcontractors typically are retained for a specific subdivision pursuant to a contract that obligates the subcontractor to complete construction at a fixed price. Agreements with our subcontractors and suppliers generally are negotiated for each subdivision. We compete with other homebuilders for qualified subcontractors, raw materials and lots in the markets where we operate. Construction time for our homes depends on the weather, availability of labor, materials and supplies, size of the home, and other factors. We typically complete the construction of a home within four months. We do not maintain significant inventories of construction materials, except for work in process materials for homes under construction. Typically, the construction materials used in our operations are readily available from numerous sources. We have contracts exceeding one year with certain suppliers of our building materials that are cancellable at our option with a 30 day notice. In recent years, we have not experienced any significant delays in construction due to shortages of materials or labor. MARKETING AND SALES We market and sell our homes through commissioned employees and independent real estate brokers. We typically conduct home sales from sales offices located in furnished model homes in each subdivision. At September 30, 1999, we owned 586 model homes, which generally are not offered for sale until the completion of a subdivision. Our sales personnel assist prospective home buyers by providing them with floor plans, price information, tours of model homes and the selection of options and other custom features. We train and inform our sales personnel as to the availability of financing, construction schedules, and marketing and advertising plans. In addition to using model homes, we typically build a limited number of speculative homes in each subdivision to enhance our marketing and sales activities. Construction of these speculative homes also is necessary to satisfy the requirements of relocated personnel and independent brokers, who often represent home buyers requiring a completed home within 60 days. We sell a majority of these speculative homes while they are under construction or immediately following completion. The number of speculative homes is influenced by local market factors, such as new employment opportunities, significant job relocations, growing housing demand and the length of time we have built in the market. Depending upon the seasonality of each market, we attempt to limit our speculative homes in each subdivision. At September 30, 1999, we averaged about 5 speculative homes, in various stages of construction, in each subdivision. We advertise on a limited basis in newspapers and in real estate broker, mortgage company and utility publications, brochures, newsletters and on billboards. To minimize advertising costs, we attempt to operate in subdivisions in conspicuous locations that permit us to take advantage of local traffic patterns. We also believe that model homes play a significant role in our marketing efforts. Consequently, we expend significant effort in creating an attractive atmosphere in our model homes. Our sales contracts require a down payment of at least $500. The contracts include a financing contingency which permits customers to cancel if they cannot obtain mortgage financing at prevailing interest rates within a specified period, typically four to six weeks, and may include other contingencies, such as the sale of an existing home. We include a home sale in our sales backlog when the sales contract is signed and we have received the initial down payment. We do not recognize revenue upon the sale of a 6 home until it is closed and title passes to the home buyer. The average period between the signing of a sales contract for a home and closing is approximately three to five months. CUSTOMER SERVICE AND QUALITY CONTROL Our operating divisions are responsible for pre-closing, quality control inspections and responding to customers' post-closing needs. We believe that prompt and courteous response to home buyers' needs during and after construction reduces post-closing repair costs, enhances our reputation for quality and service, and ultimately leads to significant repeat and referral business from the real estate community and home buyers. We provide our home buyers with a limited one-year warranty on workmanship and building materials. The subcontractors who perform most of the actual construction also provide us with warranties on workmanship and are generally prepared to respond to us and the homeowner promptly upon request. In most cases, we supplement our one-year warranty by purchasing a ten-year limited warranty from a third party. To cover our potential warranty obligations, we accrue an estimated amount for future warranty costs. CUSTOMER FINANCING We provide mortgage financing services principally to purchasers of homes we build and sell. CH Mortgage, a wholly-owned subsidiary, provides mortgage banking services in Arizona, Colorado, Florida, Illinois, Kentucky, Minnesota, Nevada, New Mexico, North and South Carolina, and Texas. D.R. Horton Mortgage Company, Ltd., a joint venture formed in 1998 with a third party, presently provides services in California. On a combined basis, related mortgage banking entities provided mortgage financing services for about 65% of the homes closed during the year ended September 30, 1999 in the markets served. We anticipate expanding these mortgage activities to other markets we serve. In other markets where we currently do not provide mortgage financing, we work with a variety of mortgage lenders that make available to home buyers a range of conventional mortgage financing programs. By making information about these programs available to prospective home buyers and maintaining a relationship with such mortgage lenders, we are able to coordinate and expedite the entire sales transaction by ensuring that mortgage commitments are received and that closings take place on a timely and efficient basis. TITLE SERVICES Through our subsidiaries, Century Title, DRH Title Company of Texas, Ltd., DRH Title Company of Florida, Inc., DRH Title Company of Minnesota, Inc., Metro Title Company and Travis County Title Company, we serve as a title insurance agent by providing title insurance policies and closing services to purchasers of homes we build in the Dallas/Fort Worth, Austin, Orlando, Miami, Minneapolis, Phoenix, San Antonio and suburban Washington, D.C. markets. We assume no underwriting risk associated with these title policies. EMPLOYEES At September 30, 1999, we employed 3,355 persons, of whom 869 were sales and marketing personnel, 1,067 were executive, administrative and clerical personnel, 1,021 were involved in construction, and 398 worked in mortgage and title operations. Fewer than 25 of our employees are covered by collective bargaining agreements. Some of the subcontractors which we use are represented by labor unions or are subject to collective bargaining agreements. We believe that our relations with our employees and subcontractors are good. 7 COMPETITION The single family residential housing industry is highly competitive and we compete in each of our markets with numerous other national, regional and local homebuilders, often with larger subdivisions designed, planned and developed by such homebuilders. Our homes compete on the basis of quality, price, design, mortgage financing terms and location. GOVERNMENTAL REGULATION AND ENVIRONMENTAL MATTERS The housing, mortgage and title insurance industries are subject to extensive and complex regulations. We and our subcontractors must comply with various federal, state and local laws and regulations, including zoning, density and development requirements, building, environmental, advertising and consumer credit rules and regulations, as well as other rules and regulations in connection with our development, homebuilding, sales and financial services activities. These include requirements affecting the development process, as well as building materials to be used, building designs and minimum elevation of properties. Our homes are inspected by local authorities where required, and homes eligible for insurance or guarantees provided by the FHA and VA are subject to inspection by them. These regulations often provide broad discretion to the administering governmental authorities. This can delay or increase the cost of development or homebuilding. We also are subject to a variety of local, state and federal statutes, ordinances, rules and regulations concerning protection of health and the environment. The particular environmental laws for each site vary greatly according to location, environmental condition and the present and former uses of the site and adjoining properties. These environmental laws may result in delays, may cause us to incur substantial compliance and other costs, and can prohibit or severely restrict development and homebuilding activity in certain environmentally sensitive regions or areas. Our internal mortgage activities and title insurance agencies must also comply with various federal and state laws, consumer credit rules and regulations and other rules and regulations unique to such activities. Additionally, mortgage loans and title activities originated under the FHA, VA, FNMA and GNMA are subject to rules and regulations imposed by those agencies. ITEM 2. PROPERTIES We own a 52,000 square foot office complex, consisting of three single-story buildings of steel and brick construction, located in Arlington, Texas, that serves as the principal executive offices and houses two of the Dallas/Fort Worth divisions. We also lease approximately 312,000 square feet of space for our operating divisions under leases expiring between November 1999 and June 2006. ITEM 3. LEGAL PROCEEDINGS We are a party to routine litigation incidental to our business. Such matters, if decided adversely to us, would not, in the opinion of management, have a material adverse effect upon our financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 8 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Our common stock (the "Common Stock") is listed on the New York Stock Exchange under the symbol "DHI". The following table sets forth the high and low sales prices for the Common Stock for the periods indicated.
YEAR ENDED SEPTEMBER 30, -------------------------------------------------- 1998 1999 ---------------------- ---------------------- HIGH LOW HIGH LOW -------- -------- -------- -------- Quarter Ended December 31................................... $21 $15 $23 $10 5/8 Quarter Ended March 31...................................... 23 5/8 16 5/8 23 14 13/16 Quarter Ended June 30....................................... 24 16 5/8 20 15 3/8 Quarter Ended September 30.................................. 24 15/16 15 1/4 17 9/16 12 1/8
As of November 30, 1999, the closing price was $13.75, and there were approximately 326 holders of record. We have declared quarterly cash dividends of 2 1/4 cents per share for fiscal 1998 and 3 cents per share for fiscal 1999. The declaration of cash dividends is at the discretion of our Board of Directors and will depend upon, among other things, future earnings, cash flows, capital requirements, our general financial condition and general business conditions. We are required to comply with certain covenants contained in the bank agreements and Senior Notes indentures. The most restrictive of these requirements allows us to pay cash dividends on common stock in an amount, on a cumulative basis, not to exceed 50% of consolidated net income, as defined, subject to certain other adjustments. Pursuant to the most restrictive of these requirements, we had approximately $179.6 million available for the payment of dividends and the acquisition of our common stock at September 30, 1999. 9 ITEM 6. SELECTED FINANCIAL DATA The following selected consolidated financial data are derived from our Consolidated Financial Statements. The data should be read in conjunction with the Consolidated Financial Statements, related Notes thereto and other financial data elsewhere herein. These historical results are not necessarily indicative of the results to be expected in the future.
YEAR ENDED SEPTEMBER 30, ---------------------------------------------------- 1995 1996 1997 1998 1999 -------- -------- -------- -------- -------- INCOME STATEMENT DATA: (1)(2) Revenues ($ millions)......................... $869.5 $1,147.7 $1,578.4 $2,176.9 $3,156.2 Homebuilding revenues ($ millions)............ 862.8 1,136.3 1,567.5 2,155.0 3,119.0 Net income from continuing operations ($ millions)................................... 34.4 53.2 65.0 93.4 159.8 Net income per share from continuing operations: (4) Basic....................................... .80 1.15 1.28 1.75 2.55 Diluted..................................... .77 1.07 1.15 1.56 2.50 Cash dividends declared per common share (3)................................... -- -- .06 .09 .11
AS OF SEPTEMBER 30, ---------------------------------------------------- 1995 1996 1997 1998 1999 -------- -------- -------- -------- -------- ($ MILLIONS) BALANCE SHEET DATA: (1)(2) Inventories..................................... $574.2 $690.2 $1,024.3 $1,358.0 $1,866.1 Total Assets.................................... 705.6 841.3 1,248.3 1,667.8 2,361.8 Notes Payable................................... 402.7 420.4 650.7 854.5 1,190.6 Stockholders' Equity............................ 216.6 306.6 427.9 549.4 797.6
- ------------------------ (1) See Note C to the audited financial statements for details concerning acquisitions by the Company. (2) On April 20, 1998, Horton and Continental consummated a merger pursuant to which Continental was merged into the Company, with 2.25 shares of the Company common shares being exchanged for each outstanding share of Continental. Approximately 15.5 million Horton common shares were issued to effect the merger. The merger with Continental was treated as a pooling of interests for accounting purposes. Therefore, all financial amounts have been restated as if Continental and the Company had been combined throughout the periods presented. Prior to the merger, Continental had a fiscal year end of May 31. Accordingly, the Continental consolidated balance sheets as of May 31, 1995 and 1996 have been combined with the Company's balance sheets as of September 30, 1995 and 1996, respectively. The related Continental statements of income, stockholders' equity and cash flows for the fiscal years ended May 31, 1995 and 1996 have been combined with the Company's statements of income, stockholders' equity and cash flows for the fiscal years ended September 30, 1995 and 1996, respectively. Continental's balance sheet and the related statements of income, stockholders' equity and cash flows have been restated to conform to the Company's fiscal year end of September 30, 1997. As permitted by regulations of the Securities and Exchange Commission, Continental's four-month period ended September 30, 1996 has been omitted from the financial statements. Continental's revenues, cost of sales, income before taxes and net income for this four month period were $234.4 million, $191.6 million, $18.8 million and $11.2 million, respectively. (3) Cash dividends per common share represent those dividends declared to D.R. Horton, Inc. shareholders, unadjusted for the merger. (4) In fiscal 1998, net income includes the net effect of a $7.1 million, net of tax, provision for costs associated with the merger with Continental. The earnings per share effects were $0.13 basic and $0.11 diluted. 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS--CONSOLIDATED D.R. Horton, Inc. and subsidiaries (the "Company") provide homebuilding activities in 23 states and 40 markets through its 50 homebuilding divisions. Through its financial services activities, the Company also provides mortgage banking and title agency services in many of these same markets. On April 20, 1998, D.R. Horton, Inc. ("Horton") acquired Continental Homes Holding Corp. ("Continental"), a geographically diversified homebuilder, through the merger of Continental into Horton (the "Merger"). In the Merger, Horton issued approximately 15.5 million shares of its common stock, and Continental's outstanding convertible securities and options became convertible into or exercisable for an additional approximately 8.2 million shares. The Merger was accounted for as a pooling of interests. Accordingly, Horton's financial information for prior periods has been restated to show the combined results of Horton and Continental. In the description of business that follows, the business of Continental has been combined with Horton as though Continental had been a part of Horton throughout the periods described. YEAR ENDED SEPTEMBER 30, 1999 COMPARED TO YEAR ENDED SEPTEMBER 30, 1998 Consolidated revenues increased 45.0%, to $3,156.2 million in 1999 from $2,176.9 million in 1998 due to increases in both home and land/lot sales revenues as well as financial services revenues. Consolidated selling, general and administrative (SG&A) expenses increased by 39.0%, to $322.1 million in 1999, from $231.7 million in 1998. As a percentage of revenues, SG&A expenses decreased to 10.2% in 1999, from 10.6% in 1998. The decrease in SG&A expenses as a percentage of revenue is primarily due to the Company's cost containment efforts and the increased revenues that absorb the fixed elements of overhead. Included in SG&A expenses in 1999 is a $5.2 million charge (0.2% of revenues) for severance benefits associated with former Continental executives. Consolidated 1998 SG&A expenses exclude $11.9 million in non-recurring merger costs associated with the Continental merger. The merger costs consisted primarily of fees paid to third party investment, accounting, and legal advisors. Excluding the nonrecurring merger costs in 1998, income before income taxes increased 54.3% to $263.8 million in 1999 from $171.0 million in 1998. As a percentage of revenues, income before income taxes increased 0.5%, to 8.4%, from 7.9% in 1998 primarily due to the overall reduction in selling, general and administrative expenses as a percentage of revenues. Consolidated interest expense increased to $16.5 million in 1999 from $16.2 million in 1998. As a percentage of consolidated revenues, interest expense decreased to 0.5% in 1999 from 0.7% in 1998. A significant increase in interest costs associated with the Company's rapidly expanding financial services operations was largely offset by a reduction in homebuilding interest expense. Financial services interest expense grew from $2.2 million in 1998 to $4.4 million in 1999. Interest expense associated with homebuilding decreased to $12.0 million in 1999, from $14.0 million in 1998. The decrease in homebuilding interest expense resulted from a slightly lower overall homebuilding effective interest rate in 1999, due to the peak usage of the variable rate revolving line of credit facility coinciding with the mid-year trough in the floating rate to which it is tied. Homebuilding interest expense also declined due to the growth in active inventory outpacing the growth in interest-bearing debt. That permitted us to capitalize relatively higher amounts of incurred interest during 1999. Consolidated other income consists mainly of interest income on funds temporarily invested and, for financial services operations, on mortgage loans held for sale. Also, other income is reduced by minority interests in income of subsidiaries that are not wholly-owned. In 1999, consolidated other income was $6.9 million, down $0.7 million from 1998. Increases in interest income associated with financial services 11 mortgage loans held for sale were offset by increases in minority interests in income resulting from improved 1999 operating results of subsidiaries that are not wholly-owned. The consolidated provision for income taxes increased 58.2%, to $104.0 million in 1999, from $65.7 million in 1998, due to the corresponding increase in income before income taxes. The effective income tax rate was down 1.9% to 39.4% in 1999, compared to 41.3% in 1998, due primarily to the non-deductibility of certain merger costs in 1998. YEAR ENDED SEPTEMBER 30, 1998 COMPARED TO YEAR ENDED SEPTEMBER 30, 1997 Consolidated revenues increased 37.9% to $2,176.9 million in 1998 from $1,578.4 million in 1997 due to increases in both homebuilding and financial services revenues. Consolidated selling, general and administrative (SG&A) expenses increased 34.9% to $231.7 million in 1998 from $171.8 million in 1997. As a percentage of consolidated revenues, SG&A expenses decreased to 10.6% in 1998 from 10.9% in 1997. Consolidated 1998 SG&A expenses exclude $11.9 million in non-recurring costs associated with the Merger with Continental. Consolidated interest expense increased to $16.2 million in 1998 from $10.9 million in 1997 due to the increased interest costs associated with the Company's rapidly expanding financial services operations, increased debt levels from acquisitions and expansion of homebuilding activities. Financial services interest expense grew from $0.7 million in 1997 to $2.2 million in 1998. As a percentage of consolidated revenues, interest expense was 0.7% in both 1998 and 1997. Consolidated other income consists mainly of interest income on funds temporarily invested and, for financial services operations, on mortgage loans held for sale. In 1998, consolidated other income was $7.6 million, up $2.2 million from 1997, primarily due to larger amounts of temporarily investable funds and mortgage loans held for sale. The consolidated provision for income taxes increased 50.8%, to $65.7 million in 1998, from $43.6 million in 1997, due in part to the corresponding increase in income before income taxes. As a percentage of consolidated revenues, the income tax provision increased by 0.2% to 3.0% in 1998. The increase as a percentage of revenues was due primarily to an increase in the total effective income tax rate in 1998, from 40.2% to 41.3%, caused by the non-deductibility of certain of the 1998 merger costs and increased earnings in states with higher effective tax rates. 12 RESULTS OF OPERATIONS--HOMEBUILDING The following tables set forth certain operating and financial data for the Company's homebuilding activities:
PERCENTAGES OF HOMEBUILDING REVENUES ------------------------------------ YEARS ENDED SEPTEMBER 30, ------------------------------------ 1997 1998 1999 -------- -------- -------- Costs and expenses: Cost of sales......................................... 82.4% 81.9% 82.1% Selling, general and administrative expense........... 10.4 10.0 9.5 Interest expense...................................... 0.7 0.7 0.4 ---- ---- ---- Total costs and expenses................................ 93.5 92.6 92.0 Other (income).......................................... (0.2) (0.2) -- ---- ---- ---- Income before income taxes.............................. 6.7% 7.6% 8.0% ==== ==== ====
YEARS ENDED SEPTEMBER 30, ------------------------------------------------------------------------------ 1997 1998 1999 ---------------------- ---------------------- ---------------------- HOMES HOMES HOMES CLOSED % CLOSED % CLOSED % HOMES CLOSED* -------- -------- -------- -------- -------- -------- Mid-Atlantic.............. 843 8.4% 2,056 14.7% 2,986 16.2% Midwest................... 500 5.0% 701 5.0% 1,733 9.4% Southeast................. 1,583 15.8% 2,595 18.6% 2,648 14.4% Southwest................. 5,324 53.0% 6,145 44.1% 7,640 41.6% West...................... 1,788 17.8% 2,447 17.6% 3,388 18.4% ------ ----- ------ ----- ------ ----- 10,038 100.0% 13,944 100.0% 18,395 100.0% ====== ===== ====== ===== ====== =====
YEARS ENDED SEPTEMBER 30, ------------------------------------------------------------------------------ 1997 1998 1999 ---------------------- ---------------------- ---------------------- HOMES HOMES HOMES SOLD $ SOLD $ SOLD $ NET NEW SALES CONTRACTS* -------- -------- -------- -------- -------- -------- ($ MILLIONS) Mid-Atlantic........ 849 $ 173.0 2,384 $ 440.6 3,145 $ 602.0 Midwest............. 496 96.6 888 169.5 1,996 416.7 Southeast........... 1,705 253.3 2,608 395.2 2,751 452.5 Southwest........... 5,571 709.9 7,161 952.6 7,678 1,103.5 West................ 1,930 362.9 2,911 575.3 3,341 691.5 ------ -------- ------ -------- ------ -------- 10,551 $1,595.7 15,952 $2,533.2 18,911 $3,266.2 ====== ======== ====== ======== ====== ========
13
SEPTEMBER 30, ------------------------------------------------------------------------------ 1997 1998 1999 ---------------------- ---------------------- ---------------------- HOMES $ HOMES $ HOMES $ SALES BACKLOG* -------- -------- -------- -------- -------- -------- ($ MILLIONS) Mid-Atlantic.......... 334 $ 68.9 932 $ 180.9 1,091 $ 242.8 Midwest............... 180 35.5 419 80.5 1,134 247.2 Southeast............. 697 101.2 733 116.3 836 140.6 Southwest............. 2,027 260.8 3,043 423.9 3,081 472.9 West.................. 723 142.8 1,214 251.3 1,167 253.0 ----- ------ ----- -------- ----- -------- 3,961 $609.2 6,341 $1,052.9 7,309 $1,356.5 ===== ====== ===== ======== ===== ========
* The Company's market regions consist of the following:
MID-ALTANTIC Charleston, Charlotte, Columbia, Greensboro, Greenville, Hilton Head, Myrtle Beach, New Jersey, Newport News, Raleigh/Durham, Richmond, Suburban Washington, D.C. and Wilmington MIDWEST Chicago, Cincinnati, Louisville, Minneapolis/St. Paul and St. Louis SOUTHEAST Atlanta, Birmingham, Jacksonville, Nashville, Orlando, Pensacola and South Florida SOUTHWEST Albuquerque, Austin, Dallas/Fort Worth, Houston, Killeen, Phoenix, San Antonio and Tucson WEST Denver, Las Vegas, Los Angeles, Portland, Sacramento, Salt Lake City and San Diego
YEAR ENDED SEPTEMBER 30, 1999 COMPARED TO YEAR ENDED SEPTEMBER 30, 1998 Revenues from homebuilding activities (including land/lot sales) increased 44.7%, to $3,119.0 million (18,395 homes closed) in 1999, from $2,155.0 million (13,944 homes closed) in 1998. The Company periodically sells land or lots to others and revenues from these activities were $63.9 million in 1999, up from $16.8 million in 1998. The number of homes closed increased in all of the Company's market regions, with percentage increases ranging from 147.2% in the Midwest region to 2.0% in the Southeast region. The increases in both revenues and homes closed were due to strong housing demand, the Company's entrance into new markets, and the increases attributable to the acquisition of Cambridge Homes (January, 1999); C. Richard Dobson Builders, Inc. (February, 1998); Mareli Development & Construction Co. (May, 1998); and RMP Development, Inc. (June, 1998). In markets where the Company operated during both fiscal years, homebuilding revenues increased by 32.9%, to $2,828.1 million (17,206 homes closed). The average selling price of homes closed during 1999 was $166,100, up 8.3% from $153,300 in 1998. The increase in average selling price was due to changes in the mix of homes closed and increased selling prices. New net sales contracts increased 18.5%, to 18,911 homes ($3,266.2 million) in 1999, from 15,952 homes ($2,533.2 million) in 1998. Percentage increases in new net sales contracts were achieved in all of the Company's market regions, with increases ranging from 124.8% in the Midwest region to 5.5% in the Southeast region. The overall increase in new net sales contracts was due in part to sales achieved by Cambridge and the 1998 acquisitions, while new net sales contracts increased 8.1%, to 17,243 homes, in markets where the Company operated in both periods. The average price of a new net sales contract in 1999 was $172,700, up 8.8% over the $158,800 average in 1998. This increase was due to changes in the mix of homes sold and increased selling prices. At September 30, 1999, the Company's backlog of sales contracts was $1,356.5 million (7,309 homes), up 28.8% from the comparable amount at September 30, 1998. In markets in which the Company operated during both fiscal years, the sales contract backlog was $1,195.4 million (6,585 homes), up 11.4% from 14 1998. The average sales price of homes in sales backlog was $185,600 at September 30, 1999, up 11.8% from the $166,000 average at September 30, 1998. Cost of sales increased by 45.0%, to $2,560.7 million in 1999, from $1,765.6 million in 1998. The increase in cost of sales was primarily attributable to the increase in revenues. Cost of home sales as a percentage of home sales revenues increased to 82.0% in 1999, from 81.8% in 1998. The application of purchase accounting to homes acquired in the Cambridge acquisition, and closed subsequent to the acquisition, caused an $8.4 million increase (0.3% of revenues) in cost of goods sold for the year. Cost of land/lot sales decreased to 88.2% of land/lot sales revenues in 1999, from 94.2% in 1998. Total homebuilding cost of sales increased to 82.1% in 1999, from 81.9% in 1998. Selling, general and administrative (SG&A) expenses from homebuilding activities increased by 37.4%, to $297.3 million in 1999, from $216.4 million in 1998. As a percentage of revenues, SG&A expenses decreased to 9.5% in 1999, from 10.0% in 1998. The decrease in SG&A expenses as a percentage of revenue is primarily due to the Company's cost containment efforts and the increased revenues that absorb the fixed elements of overhead. Included in SG&A expenses in 1999, is a $5.2 million charge (0.2% of revenues) for severance benefits associated with former Continental executives. Interest expense associated with homebuilding activities decreased to $12.0 million in 1999, from $14.0 million in 1998. As a percentage of homebuilding revenues, interest expense decreased to 0.4% in 1999, from 0.7% in 1998. The decrease in homebuilding interest expense resulted from a slightly lower overall homebuilding effective interest rate in 1999, due to the peak usage of the variable rate revolving line of credit facility coinciding with the mid-year trough in the floating rate to which it is tied. Homebuilding interest expense also declined due to the growth in active inventory outpacing the growth in interest-bearing debt. That permitted us to capitalize relatively higher amounts of incurred interest during 1999. The Company follows a policy of capitalizing interest only on inventory under construction or development ("Active Inventory"). During 1999 and 1998, we expensed the portion of incurred interest and other financing costs which could not be charged to inventory. Capitalized interest and other financing costs are included in cost of sales at the time of home closings. YEAR ENDED SEPTEMBER 30, 1998 COMPARED TO YEAR ENDED SEPTEMBER 30, 1997 Revenues from homebuilding activities increased 37.5% to $2,155.0 million (13,944 homes closed) in 1998 from $1,567.5 million (10,038 homes closed) in 1997, despite a decrease in land sales from $34.8 million in 1997 to $16.8 million in 1998. The number of homes closed increased in all of the Company's market regions, with percentage increases ranging from 143.9% in the Mid-Atlantic region to 15.4% in the Southwest region. The increases in both revenues and homes closed were due to strong housing demand, the Company's entrance into new markets, and the home closings associated with the acquisitions of C. Richard Dobson Builders, Inc. (Dobson), which was acquired in February, 1998; Mareli Development & Construction Co. (Mareli) of Louisville, Kentucky, acquired in May, 1998; and RMP Development, Inc. (RMP) of Portland, Oregon, acquired in June, 1998. In markets in which the Company operated during both fiscal years, revenues increased by 26.5% to $1,939.4 million (12,591 homes closed). The average selling price of homes closed in 1998 was $153,300, substantially unchanged from 1997. New net sales contracts increased 51.2% to 15,952 homes in 1998 from 10,551 in 1997. Percentage increases in new net sales contracts ranging from 180.8% to 28.5% were achieved in the Company's market regions. The increases in new net sales contracts were due in part to sales achieved by the 1998 acquisitions. In markets in which the Company operated in both fiscal years, new net sales contracts increased 37.2%, to 14,480 homes. The average amount of new net sales contracts in 1998 was $158,800, up 5.0% from the $151,200 average in 1997. At September 30, 1998, the Company's backlog of sales contracts was $1,052.9 million (6,341 homes), up 72.8% from the comparable amount at September 30, 1997. In markets in which the Company operated during both fiscal years, the sales contract backlog was $978.9 million (5,850 homes), up 60.7% from 1997. 15 The average sales price of homes in sales backlog was $166,000 at September 30, 1998, up 7.9% from the $153,800 average at September 30, 1997. Cost of sales increased by 36.6%, to $1,765.6 million in 1998 from $1,292.6 million in 1997. The increase in cost of sales was attributable to the increase in revenues. Cost of sales as a percentage of revenues decreased by 0.5%, to 81.9% in 1998 from 82.4% in 1997, due to excellent housing demand allowing increases in selling prices in certain markets, efforts to enhance gross margins through efficiencies and materials discounts and purchase accounting adjustments in 1997 that required the Company to increase its basis in acquired inventory. Selling, general and administrative (SG&A) expenses from homebuilding activities increased by 32.8% to $216.4 million in 1998 from $163.0 million in 1997. As a percentage of revenues, SG&A expenses decreased to 10.0% in 1998 from 10.4% in 1997. The decrease in SG&A expenses as a percentage of revenues is primarily due to the Company's cost containment efforts, the increased revenues that absorb the fixed elements of overhead, and costs associated with integrating the 1997 acquisitions into the Company. Interest expense associated with homebuilding activities increased to $14.0 million in 1998 from $10.2 million in 1997 due to the increase in debt associated with the growth of the Company both internally and through acquisitions. As a percentage of homebuilding revenues, homebuilding interest expense was 0.7% in both 1998 and 1997. The Company follows a policy of capitalizing interest only on inventory under construction or development. During both 1998 and 1997, the Company expensed the portion of incurred interest and other financing costs which could not be charged to inventory. Capitalized interest and other financing costs are included in cost of sales at the time of home closings. RESULTS OF OPERATIONS--FINANCIAL SERVICES Financial services include mortgage financing and title insurance agency and closing services, primarily related to purchases of homes built and sold by the Company. Mortgage services are provided in Arizona, California, Colorado, Florida, Illinois, Kentucky, Minnesota, Nevada, New Mexico, North and South Carolina and Texas. Title agency and closing services are provided in Arizona, Florida, Minnesota, Texas and Virginia. The following table summarizes financial and other information for the Company's financial services operations:
YEAR ENDED SEPTEMBER 30, ------------------------------ 1997 1998 1999 -------- -------- -------- ($ IN THOUSANDS) FINANCIAL SERVICES: Number of loans originated.................................. 3,157 5,875 8,137 ------- ------- ------- Loan origination fees....................................... $ 3,174 $ 5,929 $ 8,702 Sale of servicing rights and gains from sale of mortgages... 4,666 9,276 16,632 Other revenues.............................................. 1,515 1,998 4,154 ------- ------- ------- Total mortgage banking revenues............................. 9,355 17,203 29,488 Title policy premiums, net.................................. 1,612 4,689 7,763 ------- ------- ------- Total revenues.............................................. 10,967 21,892 37,251 General and administrative expenses......................... 8,733 15,244 24,713 Interest expense............................................ 664 2,220 4,433 Interest/other (income)..................................... (1,396) (2,668) (4,984) ------- ------- ------- Income before income taxes.................................. $ 2,966 $ 7,096 $13,089 ======= ======= =======
16 YEAR ENDED SEPTEMBER 30, 1999 COMPARED TO YEAR ENDED SEPTEMBER 30, 1998 Revenues from financial services operations increased 70.2%, to $37.3 million in 1999, from $21.9 million in 1998. The increase in financial services revenues was due to the expansion of mortgage and title activities into new markets and growth in homebuilding operations in existing markets. The increase in financial services revenues associated with sales of servicing rights and mortgages was due to increased volume, improved hedging of loans in process and better volume pricing terms on loans sold to third party investors. SG&A expenses associated with financial services increased 62.1%, to $24.7 million in 1999, from $15.2 million in the comparable period of 1998. As a percentage of financial services revenues, SG&A expenses decreased by 3.3%, to 66.3% in 1999, from 69.6% in 1998, due to increased revenues in 1999 that resulted from 1997 and 1998 investments in new market startup expenses. YEAR ENDED SEPTEMBER 30, 1998 COMPARED TO YEAR ENDED SEPTEMBER 30, 1997 Revenues from financial services operations increased 99.6% to $21.9 million in 1998 from $11.0 million in 1997. The increase in financial services revenues was due to the rapid expansion of the Company's title agency and mortgage loan services provided to the Company's homebuilding customers. Accordingly, SG&A expenses associated with financial services increased 74.6%, to $15.2 million in 1998 from $8.7 million in 1997. As a percentage of financial services revenues, SG&A expenses decreased by 10.0% to 69.6% in 1998 from 79.6% in 1997, due primarily to higher than normal 1997 startup expenses in new markets. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES At September 30, 1999, the Company had available cash and cash equivalents of $128.6 million. Inventories (including finished homes, construction in progress, and developed residential lots and other land) at September 30, 1999, had increased by $508.1 million from September 30, 1998, due to a general increase in business activity, the expansion of operations in the Company's market areas and the acquisition of Cambridge's $110.1 million inventory. The inventory increase was financed through borrowings, issuing $55 million of common stock for the acquisition of Cambridge and by retaining earnings. The increased borrowing was partially offset by the conversion of $58.8 million of 6 7/8% convertible subordinated notes to common stock. As a result, the Company's ratio of homebuilding notes payable to total capital at September 30, 1999 decreased 2.4% to 57.7%, from 60.1% at September 30, 1998. The stockholders' equity to total assets ratio increased to 33.8% at September 30, 1999, from 32.9% at September 30, 1998. On February 4, 1999, under an existing shelf registration statement, the Company issued $385 million aggregate principal amount of 8% Senior Notes, due 2009. The proceeds of the notes were used to repay outstanding debt under our revolving credit facility and for general corporate purposes. The Company has filed a $600 million universal shelf registration statement that is presently effective and facilitates access to the capital markets. The Company has an $825 million, unsecured revolving credit facility, consisting of a $775 million four-year revolving loan and a $50 million four-year standby letter of credit that matures in 2002. Additionally, the Company has a $25 million standby letter of credit agreement in addition to a $22.5 million non-renewable letter of credit facility acquired with the Cambridge acquisition. At September 30, 1999, the Company had outstanding homebuilding debt of $1,086.3 million, of which $395 million represented advances under the revolving credit facility. Under the debt covenants associated with the revolving credit facility, at September 30, 1999, the Company had additional borrowing capacity of $443.7 million. The Company has entered into multi-year interest rate swap agreements, aggregating $200 million, that fix the interest rate on a portion of the variable rate revolving credit facility. At September 30, 1999, the financial services segment has mortgage loans held for sale of $113.8 million and loan commitments for $103.0 million at fixed rates. The Company hedges the interest rate market risk on these mortgage loans held for sale and loan commitments through the use of best-efforts whole 17 loan delivery commitments, mandatory forward commitments to sell mortgage-backed securities and the purchase of options on financial instruments. The financial services segment has a $175 million, one-year mortgage warehouse facility that is secured by mortgage loans held for sale. The warehouse facility is not guaranteed by the parent company. As of September 30, 1999, $104.4 million had been drawn under this facility. On January 28, 1999, the Company acquired the operating assets of Cambridge Properties, a partnership doing business as Cambridge Homes. In the transaction, the Company issued 2,555,911 shares of our Common Stock under our shelf registration statement, and assumed debt of approximately $103 million, which was repaid with borrowings under our revolving credit facility. On July 7, 1999, the Company acquired all the outstanding stock of Century Title Agency in Phoenix for $1.6 million in cash and the assumption of $0.8 million in trade and notes payable. The Company's rapid growth and acquisition strategy require significant amounts of cash. It is anticipated that future home construction, lot and land purchases and acquisitions will be funded through internally generated funds and existing credit facilities. Additionally, an effective shelf registration contains about 7.4 million shares of common stock issuable to effect, in whole or in part, possible future acquisitions. However, should the Company require capital in excess of that which is currently available, there can be no assurance that it will be available. During fiscal 1999, the Company's Board of Directors declared four quarterly cash dividends of $.03 per common share, the last of which is payable October 28, 1999, to stockholders of record on October 21, 1999. In November, 1998, the Company's Board of Directors approved stock and debt repurchase programs for up to $100 million each. These programs are intended to allow the Company to repurchase securities at attractive prices should favorable market conditions occur. During the fiscal year, the Company repurchased in the open market $22.4 million of its common stock, or 1,484,300 shares at an average cost of $15.09. Except for ordinary expenditures for the construction of homes, the acquisition of land and lots for development and sale of homes, at September 30, 1999, the Company had no material commitments for capital expenditures. INFLATION The Company and the homebuilding industry in general, may be adversely affected during periods of high inflation, primarily because of higher land and construction costs. Inflation also increases the Company's financing, labor and material costs. In addition, higher mortgage interest rates significantly affect the affordability of permanent mortgage financing to prospective homebuyers. The Company attempts to pass through to its customers any increases in its costs through increased sales prices and, to date, inflation has not had a material adverse effect on the Company's results of operations. However, there is no assurance that inflation will not have a material adverse impact on the Company's future results of operations. YEAR 2000 The "Year 2000" issue (Y2K) refers to potential complications that may be caused by computer hardware and software that were not designed for the change in the century. If not corrected, such computer hardware and software may cause management information systems to fail or miscalculate data. Through September 30, 1999, the Company's Year 2000 remediation efforts have focused primarily on its core business computer applications (i.e., those systems that the Company is dependent upon for the conduct of day-to-day business operations). The Company initiated and completed a comprehensive review of its core business applications to determine the adequacy of these systems to meet future business requirements. Out of this effort, a number of systems were identified for upgrade or replacement. In no 18 case was a system being replaced solely because of Year 2000 issues, although in some cases the timing of system replacements was accelerated. The costs incurred for this effort to date are less than $500,000 and are considered immaterial. Additionally, the Company has conducted inquiries as to Y2K readiness among the major third parties, including banks, telecommunications entities, vendors, subcontractors and government agencies, with which it does business. In all material cases, assurances as to Y2K readiness has been received or alternatives to the services provided are readily available at nominal incremental costs. The Company has also completed its assessment of other potential Y2K issues, including non-information technology systems. Testing of non-IT systems is more difficult to assess and repair due to embedded technology. The Company expects to incur costs to replace or repair such equipment. The Company considers these additional costs to be immaterial as some of the equipment would otherwise have been replaced through normal attrition, lease expirations or scheduled upgrades in the ordinary course of business. It is possible that the Company could encounter disruptions to its business that could have a material adverse effect on its results of operations if all systems are not Y2K compliant. Also, the Company could be materially impacted by widespread economic or financial market disruptions or by Y2K computer system failures at government agencies on which the Company is dependent for utilities, zoning, building permits and related matters. There can be no assurance that Y2K will not adversely affect the Company and its operations. A formal Y2K internal contingency plan has been prepared. MARKET RISK The Company is subject to interest rate risk on its long term debt. The Company manages its exposure to changes in interest rates by optimizing the use of variable and fixed rate debt. In addition, the Company hedges its exposure to changes in interest rates on its variable rate bank debt by entering into interest rate swap agreements to lock in a fixed interest rate for a portion of these borrowings. In connection with the Financial Services segment, mortgage loans held for sale and the associated warehouse line are subject to interest rate risk. The Company uses forward commitments to manage this interest rate risk. However, all the financial services segment's obligations are short-term in duration and repriced frequently. Accordingly, the Company does not believe that the risks associated with this segment's financing activities are material. The following table sets forth, as of September 30, 1999, the Company's long term debt obligations, principal cash flows by scheduled maturity, weighted average interest rates and estimated fair market value. In addition, the table sets forth the notional amounts and weighted average interest rates of the Company's interest rate swaps.
YEAR ENDED SEPTEMBER 30, ----------------------------------------------------------------- FMV@ 2000 2001 2002 2003 2004 THEREAFTER TOTAL 9/30/99 -------- -------- -------- -------- -------- ---------- -------- -------- ($ IN MILLIONS) Debt: Fixed rate............... $ 5.2 $ 0 $ 0 $ 0 $149.2 $530.2 $684.6 $650.9 Average interest rate.... 5.25% -- -- -- 8.47% 8.61% 8.55% -- Variable rate............ $111.0 $ 0 $395.0 $ 0 $ 0 $ 0 $506.0 $506.0 Average interest rate.... 6.50% -- 6.26% -- -- -- 6.31% -- Interest Rate Swaps: Variable to fixed........ $200.0 $200.0 $200.0 $200.0 $200.0 $200.0 -- $ 1.5 Average pay rate......... 5.10% 5.10% 5.10% 5.10% 5.10% 5.08% -- -- Average receive rate..... 90 day LIBOR
19 SAFE HARBOR STATEMENT Certain statements contained herein, as well as statements made by the Company in periodic press releases and oral statements made by the Company's officials to analysts and stockholders in the course of presentations about the Company may be construed as "Forward-Looking Statements" as defined in the Private Securities Litigation Reform Act of 1995. Such statements may involve unstated risks, uncertainties and other factors that may cause actual results to differ materially from those initially anticipated. Such risks, uncertainties and other factors include, but are not limited to: - The Company's substantial leverage - 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 20 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE -------- Report of Independent Auditors.............................. 22 Consolidated Balance Sheets, September 30, 1998 and 1999.... 23 Consolidated Statements of Income for the three years ended September 30, 1999........................................ 24 Consolidated Statements of Stockholders' Equity for the three years ended September 30, 1999...................... 25 Consolidated Statements of Cash Flows for the three years ended September 30, 1999.................................. 26 Notes to Consolidated Financial Statements.................. 27
21 REPORT OF INDEPENDENT AUDITORS The Board of Directors D.R. Horton, Inc. We have audited the accompanying consolidated balance sheets of D.R. Horton, Inc. and subsidiaries as of September 30, 1999 and 1998, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended September 30, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of D.R. Horton, Inc. and subsidiaries, at September 30, 1999 and 1998, and the consolidated results of their operations and their cash flows for each of the three years in the period ended September 30, 1999, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP Fort Worth, Texas November 8, 1999 22 D.R. HORTON, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, ----------------------- 1998 1999 ---------- ---------- (IN THOUSANDS) ASSETS HOMEBUILDING: Cash........................................................ $ 76,754 $ 128,568 Inventories: Finished homes and construction in progress............... 717,709 952,015 Residential lots--developed and under development......... 630,252 909,586 Land held for development................................. 10,072 4,507 ---------- ---------- 1,358,033 1,866,108 Property and equipment (net)................................ 25,456 36,972 Earnest money deposits and other assets..................... 74,827 96,807 Excess of cost over net assets acquired (net)............... 56,782 112,456 ---------- ---------- 1,591,852 2,240,911 ---------- ---------- FINANCIAL SERVICES: Mortgage loans held for sale................................ 72,325 113,786 Other assets................................................ 3,658 7,111 ---------- ---------- 75,983 120,897 ---------- ---------- $1,667,835 $2,361,808 ========== ========== LIABILITIES HOMEBUILDING: Accounts payable and other liabilities...................... $ 259,005 $ 365,506 Notes payable: Unsecured: Revolving credit facility due 2002...................... 455,000 395,000 8% senior notes due 2009, net........................... -- 382,941 8 3/8% senior notes due 2004, net....................... 147,754 148,150 10% senior notes due 2006, net.......................... 147,156 147,278 6 7/8% convertible subordinated notes, net.............. 58,794 -- Other secured............................................. 17,303 12,904 ---------- ---------- 826,007 1,086,273 ---------- ---------- 1,085,012 1,451,779 ---------- ---------- FINANCIAL SERVICES: Accounts payable and other liabilities...................... 1,444 3,268 Notes payable to financial institutions..................... 28,497 104,350 ---------- ---------- 29,941 107,618 ---------- ---------- 1,114,953 1,559,397 ---------- ---------- Minority interest........................................... 3,446 4,802 ---------- ---------- STOCKHOLDERS' EQUITY Preferred stock, $.10 par value, 30,000,000 shares authorized, no shares issued.............................. -- -- Common stock, $.01 par value, 200,000,000 shares authorized, 55,836,733 shares at September 30, 1998 and 64,267,073 at September 30, 1999, issued and outstanding................ 558 643 Additional capital.......................................... 301,503 419,259 Retained earnings........................................... 247,375 400,111 Treasury stock, 0 and 1,484,300 shares, respectively, at cost...................................................... -- (22,404) ---------- ---------- 549,436 797,609 ---------- ---------- $1,667,835 $2,361,808 ========== ==========
See accompanying notes to consolidated financial statements 23 D.R. HORTON, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED SEPTEMBER 30, --------------------------------------- 1997 1998 1999 ----------- ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) HOMEBUILDING: Revenues Home sales............................................. $1,532,691 $2,138,203 $3,055,032 Land/lot sales......................................... 34,764 16,846 63,928 ---------- ---------- ---------- 1,567,455 2,155,049 3,118,960 Cost of sales Home sales............................................. 1,259,045 1,749,743 2,504,363 Land/lot sales......................................... 33,539 15,867 56,383 ---------- ---------- ---------- 1,292,584 1,765,610 2,560,746 Gross profit Home sales............................................. 273,646 388,460 550,669 Land/lot sales......................................... 1,225 979 7,545 ---------- ---------- ---------- 274,871 389,439 558,214 Selling, general and administrative expense.............. 163,034 216,444 297,348 Interest expense......................................... 10,234 14,020 12,018 Other (income)........................................... (3,981) (4,945) (1,889) ---------- ---------- ---------- 105,584 163,920 250,737 ---------- ---------- ---------- FINANCIAL SERVICES: Revenues................................................. 10,967 21,892 37,251 Selling, general and administrative expense.............. 8,733 15,244 24,713 Interest expense......................................... 664 2,220 4,433 Other (income)........................................... (1,396) (2,668) (4,984) ---------- ---------- ---------- 2,966 7,096 13,089 ---------- ---------- ---------- Merger costs............................................. -- 11,917 -- ---------- ---------- ---------- INCOME BEFORE INCOME TAXES........................... 108,550 159,099 263,826 Provision for income taxes............................... 43,588 65,719 103,999 ---------- ---------- ---------- NET INCOME........................................... $ 64,962 $ 93,380 $ 159,827 ========== ========== ========== Basic earnings per common share.......................... $ 1.28 $ 1.75 $ 2.55 ========== ========== ========== Diluted earnings per common share........................ $ 1.15 $ 1.56 $ 2.50 ========== ========== ==========
See accompanying notes to consolidated financial statements. 24 D.R. HORTON, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
TOTAL COMMON ADDITIONAL RETAINED TREASURY STOCKHOLDERS' STOCK CAPITAL EARNINGS STOCK EQUITY -------- ---------- -------- -------- ------------- (IN THOUSANDS, EXCEPT COMMON STOCK SHARE DATA) Balances at October 1, 1996................. $481 $219,640 $ 86,466 $ -- $306,587 Continental's net income for the period from June 1, 1996 through September 30, 1996.................................... -- -- 11,150 -- 11,150 Net income................................ -- -- 64,962 -- 64,962 Stock sold through public offering (3,838,800 shares)...................... 37 39,909 -- -- 39,946 Stock issued as partial consideration for acquisition (844,444 shares)............ 8 9,142 -- -- 9,150 Exercise of stock options (289,930 shares)................................. 3 2,256 -- -- 2,259 Issuances under D.R. Horton, Inc. employee benefit plans (33,350 shares)........... -- 310 -- -- 310 Repurchase of common stock................ (2) (2,626) -- -- (2,628) Dividends declared ($.06 per share to D.R. Horton stockholders).................... -- -- (3,870) -- (3,870) ---- -------- -------- -------- -------- Balances at September 30, 1997.............. 527 268,631 158,708 -- 427,866 Net income................................ -- -- 93,380 -- 93,380 Stock issued as partial consideration for acquisition (70,249 shares)............. 1 1,124 -- -- 1,125 Issuances under D.R. Horton, Inc. employee benefit plans (27,098 shares)........... -- 483 -- -- 483 Exercise of stock options (374,514 shares)................................. 4 4,429 -- -- 4,433 Conversion of convertible subordinated notes (2,586,174 shares)................ 26 26,836 -- -- 26,862 Dividends declared ($.0875 per share to D.R. Horton stockholders)............... -- -- (4,713) -- (4,713) ---- -------- -------- -------- -------- Balances at September 30, 1998.............. 558 301,503 247,375 -- 549,436 Net income................................ -- -- 159,827 -- 159,827 Stock issued as partial consideration for acquisition (2,555,911 shares).......... 26 54,974 -- -- 55,000 Issuances under D.R. Horton, Inc. employee benefit plans (11,217 shares)........... -- 150 -- -- 150 Exercise of stock options (293,869 shares)................................. 3 3,361 -- -- 3,364 Conversion of convertible subordinated notes (5,569,343 shares)................ 56 59,271 -- -- 59,327 Purchase of treasury stock (1,484,300 shares)................................. -- -- -- (22,404) (22,404) Dividends declared ($.1125 per share to D.R. Horton stockholders)............... -- -- (7,091) -- (7,091) ---- -------- -------- -------- -------- Balances at September 30, 1999.............. $643 $419,259 $400,111 $(22,404) $797,609 ==== ======== ======== ======== ========
See accompanying notes to consolidated financial statements 25 D.R. HORTON, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED SEPTEMBER 30, --------------------------------- 1997 1998 1999 --------- --------- --------- (IN THOUSANDS) OPERATING ACTIVITIES Net income.................................................. $ 64,962 $ 93,380 $ 159,827 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization............................. 7,660 9,828 20,842 Expense associated with issuance of stock under employee benefit plans........................................... 306 999 -- Changes in operating assets and liabilities: Increase in inventories................................... (171,645) (261,189) (385,552) Increase in earnest money deposits and other assets....... (11,071) (17,614) (13,521) Increase in mortgage loans held for sale.................. (14,789) (38,253) (41,461) Increase in accounts payable and other liabilities........ 22,572 87,552 88,949 --------- --------- --------- NET CASH USED IN OPERATING ACTIVITIES....................... (102,005) (125,297) (170,916) --------- --------- --------- INVESTING ACTIVITIES Net purchase of property and equipment.................... (6,894) (11,582) (17,251) Net cash paid for acquisitions............................ (53,950) (34,035) (5,571) --------- --------- --------- NET CASH USED IN INVESTING ACTIVITIES....................... (60,844) (45,617) (22,822) --------- --------- --------- FINANCING ACTIVITIES Proceeds from notes payable............................... 222,680 416,093 515,868 Repayment of notes payable................................ (242,946) (246,856) (621,469) Issuance of Senior Notes payable.......................... 167,416 -- 377,134 Repurchase of treasury stock.............................. (2,628) -- (22,404) Proceeds from common stock offerings and stock associated with certain employee benefit plans..................... 39,950 483 150 Proceeds from exercise of stock options................... 2,117 4,433 3,364 Cash dividends paid....................................... (3,523) (4,713) (7,091) --------- --------- --------- NET CASH PROVIDED BY FINANCING ACTIVITIES................... 183,066 169,440 245,552 --------- --------- --------- INCREASE / (DECREASE) IN CASH............................... 20,217 (1,474) 51,814 Cash at beginning of year................................. 58,011 78,228 76,754 --------- --------- --------- Cash at end of year....................................... $ 78,228 $ 76,754 $ 128,568 ========= ========= ========= Supplemental cash flow information: Interest paid, net of amounts capitalized............... $ 9,915 $ 15,937 $ 16,279 ========= ========= ========= Income taxes paid....................................... $ 47,563 $ 65,863 $ 99,784 ========= ========= ========= Supplemental disclosures of noncash activities: Notes payable assumed related to acquisitions........... $ 68,267 $ 61,377 $ 103,780 ========= ========= ========= Conversion of subordinated notes to common stock........ $ -- $ 26,862 $ 59,327 ========= ========= ========= Issuance of common stock related to acquisitions........ $ 9,150 $ 1,125 $ 55,000 ========= ========= =========
See accompanying notes to consolidated financial statements 26 D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS: D. R. Horton, Inc. (the Company) is a national builder that is engaged primarily in the construction and sale of single-family housing in 40 markets and 23 states in the United States. The Company designs, builds and sells single-family houses on lots developed by the Company and on finished lots which it purchases, ready for home construction. Periodically, the Company sells lots it has developed. The Company also provides title agency and mortgage brokerage services to its homebuyers. The Company does not retain or service the mortgages that it originates but, rather, sells the mortgages and related servicing rights to investors. MERGER: On April 20, 1998, the Company and Continental Homes Holding Corp. (Continental) consummated a merger pursuant to which Continental was merged into the Company, with 2.25 shares of the Company common shares exchanged for each outstanding share of Continental. Approximately 15,459,500 Horton common shares were issued to effect the merger. The merger with Continental was treated as a pooling of interests for accounting purposes. Therefore, all financial amounts have been presented as if Continental and the Company had been combined at the earliest period presented. Prior to the merger, Continental had a fiscal year end of May 31. As permitted by regulations of the Securities and Exchange Commission, Continental's operations for the four-month period ended September 30, 1996 were omitted from the statements of income and cash flows. Continental's net income for the four-month period was $11.2 million. Continental's statements of income, stockholders' equity and cash flows have been restated to conform to the Company's fiscal year end of September 30, 1997. The results of operations for the separate companies prior to combination and the combined amounts presented in the consolidated financial statements are:
SIX MONTHS YEAR ENDED ENDED SEPTEMBER 30, MARCH 31, 1997 1998 -------------- ---------- Revenue D.R. Horton, Inc................................... $ 837,280 $508,603 Continental........................................ 730,175 358,910 ---------- -------- Combined........................................... $1,567,455 $867,513 ========== ======== Net income D.R. Horton, Inc................................... $ 36,204 $ 22,574 Continental........................................ 28,758 15,242 ---------- -------- Combined........................................... $ 64,962 $ 37,816 ========== ========
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. ACCOUNTING PRINCIPLES: The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ materially from those estimates. 27 D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED) NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES --(CONTINUED) CASH: The Company considers all highly liquid investments with an initial maturity of three months or less when purchased to be cash equivalents. Amounts in transit from title companies for home closings are included in cash. COST OF SALES: Cost of sales includes home warranty costs, purchased discounts for customer financing, and sales commissions paid to third parties. EXCESS OF COST OVER NET ASSETS ACQUIRED: The excess of amounts paid for business acquisitions over the net fair value of the assets acquired and liabilities assumed is amortized using the straight-line method over the estimated benefit period, ranging from ten to twenty years. Additional consideration paid in subsequent periods under the terms of purchase agreements are included as acquisition costs. Amortization expense was $2,296,000, $3,427,000 and $9,481,000 in fiscal 1997, 1998 and 1999, respectively. Accumulated amortization was $11,635,000 and $21,116,000 at September 30, 1998 and 1999, respectively. Impairment of intangible assets is reviewed annually or when events and circumstances warrant an earlier review. Impairment is determined when estimated future undiscounted cash flows associated with an intangible asset are less than the asset's carrying value. INTEREST. The Company capitalizes interest during development and construction. Capitalized interest is charged to cost of sales as the related inventory is delivered to the home buyer. Interest costs are (in thousands):
YEAR ENDED SEPTEMBER 30, ------------------------------ 1997 1998 1999 -------- -------- -------- Capitalized interest, beginning of year........ $ 18,004 $ 28,952 $ 35,153 Interest incurred--homebuilding................ 50,505 68,216 76,543 Interest expensed Directly--homebuilding....................... (10,234) (14,020) (12,018) Amortized to cost of sales................... (29,323) (47,995) (58,153) -------- -------- -------- Capitalized interest, end of year.............. $ 28,952 $ 35,153 $ 41,525 ======== ======== ========
INVENTORIES: Finished inventories are stated at the lower of accumulated cost or fair value less costs to sell. Inventories under development or held for development are stated at accumulated costs, unless such costs would not be recovered from the cash flows generated by future disposition. In this instance, such inventories are measured at fair value, less costs of disposal. Sold units are expensed on a specific identification basis as cost of sales. Included in inventories are related interest and property taxes which are capitalized in inventory during the development and construction periods. Residential lots are transferred to construction in progress when building permits are requested. Land and development costs are allocated to individual lots on a prorata basis. EARNINGS PER SHARE: Basic earnings per share is based upon the weighted average number of shares of common stock outstanding during each year. Diluted earnings per share is based upon the weighted average number of shares of common stock outstanding during each year, adjusted for the effects of dilutive securities. 28 D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED) NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES --(CONTINUED) The following table sets forth the computation of basic and diluted earnings per share (in thousands):
YEAR ENDED SEPTEMBER 30, ------------------------------ 1997 1998 1999 -------- -------- -------- Numerator: Net income.................................... $64,962 $93,380 $159,827 Effect of dilutive securities: Interest expense associated with 6 7/8% convertible subordinated notes, net....... 3,498 3,322 -- ------- ------- -------- Numerator for diluted earnings per share after assumed conversions......................... $68,460 $96,702 $159,827 ======= ======= ======== Denominator: Denominator for basic earnings per share-- weighted-average shares..................... 50,580 53,328 62,777 Effect of dilutive securities: 6 7/8% convertible subordinated notes....... 8,172 7,633 329 Employee stock options...................... 568 1,125 849 ------- ------- -------- Denominator for diluted earnings per share-- adjusted weighted average shares and assumed conversions................................. 59,320 62,086 63,955 ======= ======= ========
Options to purchase 1,675,000 and 1,562,000 shares of common stock at various prices were outstanding during 1998 and 1999, respectively, but were not included in the computation of diluted earnings per share because the exercise prices were greater than the average market price of the common shares and, therefore, their effect would be antidilutive. MINORITY INTEREST: The Company has a joint venture arrangement on a land project whereby the Company is entitled to 55% of the profits and/or losses and is the managing partner. The financial position and results of operations of the joint venture are consolidated for financial statement purposes and the partners' equity position is disclosed as a minority interest. PROPERTY AND EQUIPMENT: Property and equipment, including model home furniture, are stated on the basis of cost. Major renewals and improvements are capitalized. Repairs and maintenance are expensed as incurred. Depreciation generally is provided using the straight-line method over the estimated useful life of the asset. Accumulated depreciation was $18,944,000 and $30,563,000 as of September 30, 1998 and 1999, respectively. REVENUE RECOGNITION: Revenue is recognized at the time of the closing of a sale, when title to and possession of the property transfer to the buyer. COMPREHENSIVE INCOME: The Company adopted Statement of Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income, during fiscal 1999. SFAS 130 requires that an enterprise classify items of other comprehensive income by their nature in a financial statement and 29 D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED) NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES --(CONTINUED) display the accumulated balance of other comprehensive income separately from retained earnings and additional capital in the equity section of its balance sheet. The Company had no items of other comprehensive income in any period presented in these consolidated financial statements. SEGMENT INFORMATION: Effective September 30, 1999, the Company adopted SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. SFAS 131 establishes new standards for segment reporting which is based on the way management organizes segments within a company for making operating decisions and assessing performance. The Company's financial reporting segments consist of homebuilding and financial services. The Company's homebuilding operations comprise the most substantial part of its business, with approximately 99% of consolidated revenues in fiscal 1997, 1998 and 1999. The homebuilding operations segment generates the majority of its revenues from the sale of completed homes with a lesser amount from the sale of land and lots. The financial services segment generates its revenues from originating and selling mortgages and collecting fees for title insurance agency and closing services. Expenditures for long-lived assets and depreciation and amortization related to the financial services segment for the years ended September 30, 1997, 1998 and 1999 were insignificant. The accounting policies of the reportable segments are described throughout this note. Assets, revenues and operating income of the Company's reportable segments are included in the consolidated balance sheets and consolidated statements of income. MORTGAGE LOANS: Mortgage loans held for sale are reported net of discounts and are stated at the lower of cost or market as determined in the aggregate, based on sale commitments or current market quotes, net of any unrealized market gains or losses on related hedge instruments Any gain or loss on the sale of loans is recognized at the time of sale. Loan origination fees, net of the related direct origination costs, are deferred as an adjustment to the carrying value of the related mortgage loans held for sale and are recognized in income upon the sale of the mortgage loans. LOAN COMMITMENTS: To meet the financing needs of its customers, the Company is party to commitments to extend credit at fixed rates. These loan commitments have no carrying value on the balance sheet and expose the Company to market risk as a result of increases in mortgage interest rates. These risks are managed by the Company's hedging activities described below. At September 30, 1998 and 1999, the Company had loan commitments of $63.5 million and $103.0 million, respectively. FORWARD CONTRACTS: The Company manages its interest rate market risk on mortgage loans held for sale and its estimated future commitments to originate and close mortgage loans at fixed prices through the use of best-efforts whole loan delivery commitments, mandatory forward commitments to sell mortgage-backed securities and the purchase of options on financial instruments. The Company estimates the portion of the locked mortgage loan pipeline that is expected to close in order to determine the amount of hedging instruments. These forward contracts are intended and effective as hedges for interest rate market risk on mortgage loans held for sale and estimated future commitments. Accordingly, gains and losses are deferred until ultimate disposition of the contract. As of September 30, 1998 and 1999, the Company had approximately $4.0 million and $104.0 million, respectively, of mandatory forward commitments outstanding which were subject to interest rate risk. 30 D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED) NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES --(CONTINUED) LONG-LIVED ASSETS: Impairment of long-lived assets is reviewed annually or when events and circumstances warrant an earlier review. In accordance with SFAS No. 121, impairment is determined when estimated future undiscounted cash flows associated with an asset are less than the asset's carrying value. STOCK-BASED COMPENSATION: The Company may, with the approval of its Board of Directors, grant stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant. The Company accounts for stock option grants in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees", and, accordingly, recognizes no compensation expense for the stock option grants. The Company has adopted the disclosure-only provisions as specified by the Statement of Financial Accounting Standard (SFAS) No. 123, "Accounting for Stock-Based Compensation." IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS: SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, was issued in June 1998. This statement addresses the accounting for and disclosure of derivative instruments, including derivative instruments embedded in other contracts (collectively referred to as "derivatives"), and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the consolidated balance sheet and measure those instruments at fair value. SFAS No. 137 was issued in June 1999, delaying until fiscal 2001 the implementation of SFAS No. 133. The Company is analyzing the implementation requirements and does not anticipate that the adoption of the statement will have a material impact on the Company's consolidated financial statements. NOTE B--NOTES PAYABLE In April, 1999, the Company filed a universal shelf registration statement with the Securities and Exchange Commission for up to $600 million of the Company's debt and equity securities. The universal shelf registration provides that securities may be offered from time to time in one or more series and in the form of senior, senior subordinated or subordinated debt, preferred stock and/or common stock. HOMEBUILDING: The Company has an $825 million unsecured revolving bank credit facility maturing in April, 2002, of which $50 million is reserved for use as standby letters of credit. Borrowings bear daily interest at rates based upon federal funds or the London Interbank Offered Rate (LIBOR) plus a spread based upon the Company's ratio of debt to tangible net worth. In addition to the stated interest rates, the revolving credit facility requires the Company to pay certain fees. The Company also has a supplemental $25 million facility with the same maturity for use as standby letters of credit in addition to a $22.5 million non-renewable letter of credit facility acquired with the Cambridge acquisition. The average interest rates of the unsecured bank debt at September 30, 1998 and 1999 were 6.2% and 6.3%, respectively. In February, 1999 the Company issued $385 million of 8% Senior Unsecured Notes. The 8% Senior Notes, which are due February 1, 2009, with interest payable semi-annually, represent unsecured obligations of the Company. The 8% Senior Notes are not redeemable except that 35% of the amount originally issued can be redeemed with proceeds of a public equity offering by the Company at a redemption price of 108% through February 1, 2002. The annual effective interest rate of the notes, after giving effect to the amortization of deferred financing costs and discount, is 8.3%. 31 D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED) NOTE B--NOTES PAYABLE --(CONTINUED) In June, 1997 the Company issued $150 million of 8 3/8% Senior Unsecured Notes. The 8 3/8% Senior Notes, which are due June 15, 2004, with interest payable semi-annually, represent unsecured obligations of the Company. The 8 3/8% Senior Notes are not redeemable except that 35% of the amount originally issued can be redeemed with proceeds of a public equity offering by the Company at a redemption price of 108.375% through June 15, 2000. The annual effective interest rate of the notes, after giving effect to the amortization of deferred financing costs and discount, is 8.7%. In April 1996, the Company issued $130,000,000 principal amount of 10% Senior Notes due April 15, 2006. In January 1997, the Company issued an additional $20,000,000 principal amount of its 10% Senior Notes due April 15, 2006. The 10% Senior Notes are redeemable at the option of the Company, in whole or in part, at any time on or after April 15, 2001 at redemption prices decreasing from 105%. The annual effective interest rate of the notes, after giving effect to the amortization of deferred financing costs and discount, is 10.2%. All series of Senior Notes are senior obligations of the Company and rank PARI PASSU in right of payment to all existing and future unsecured indebtedness of the Company. These Notes are guaranteed by the majority of the Company's subsidiaries. Upon a change of control of the Company, holders of all series of the Senior Notes have the right to require the Company to redeem such Senior Notes at a price of 101% of the par amount, along with accrued and unpaid interest. The bank credit facilities and the Senior Notes indentures contain covenants which, taken together, limit investments in inventory, stock repurchases, cash dividends and other restricted payments, incurrence of indebtedness, asset dispositions and creation of liens, and require certain levels of tangible net worth. At September 30, 1999, these covenants limit the additional debt the Company could incur to $443.7 million. The Company is required to comply with certain covenants contained in its bank agreements and its Senior Notes indentures. The most restrictive of these requirements allows the Company to pay cash dividends on its common stock in an amount not to exceed, on a cumulative basis, 50% of consolidated net income, as defined, subject to certain other adjustments. Pursuant to the most restrictive of these requirements, the Company had approximately $179.6 million available for the payment of dividends and for the acquisition by the Company of its common stock at September 30, 1999. The Company uses interest rate swap agreements to help manage a portion of its interest rate exposure. The agreements convert a notional amount of $200 million from a variable rate to a fixed rate. These agreements are cancellable by a third party during periods where LIBOR exceeds 7%. The agreements expire at dates through September, 2008. The Company does not expect non-performance by the counterparty, a major U.S. bank, and any losses incurred in the event of non-performance would not be expected to be material. Net payments or receipts under the Company's interest rate swap agreements are recorded as adjustments to interest incurred. As a result of these agreements, the Company incurred additional net interest cost of $0.3 million and $1.2 million during 1998 and 1999, respectively. In November 1998, the Company converted the remainder of its 6 7/8% convertible subordinated notes to 5.6 million shares of common stock. Maturities of homebuilding notes payable, assuming the revolving bank facility is not extended, are $11.8 million in 2000, $395.0 million in 2002, $149.3 million in 2004, and $530.2 million thereafter. 32 D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED) NOTE B--NOTES PAYABLE --(CONTINUED) FINANCIAL SERVICES: The Company has a $175 million mortgage warehouse line payable to financial institutions, secured by mortgage loans held for sale, maturing August 2000 at the Eurodollar rate plus 1%. These notes payable enable the Company's wholly-owned subsidiary, CH Mortgage Company I, Ltd. to perform its loan origination and warehousing functions. The interest rates of the mortgage warehouse line payable at September 30, 1998 and 1999 were 6.6% and 6.4%, respectively. NOTE C--ACQUISITIONS In fiscal 1997, 1998 and 1999, the Company made the following acquisitions:
COMPANY ACQUIRED DATE ACQUIRED CONSIDERATION - ---------------- ------------------------- -------------- Trimark Communities, L.L.C. (Denver) and SGS Communities, Inc. (New Jersey)............. October, December 1996 $40.8 million Torrey Group (Atlanta, Raleigh, Charlotte, Greenville S.C.)..... February 1997 $136.7 million C. Richard Dobson Builders, Inc. (Southeastern seaboard)............................ February 1998 $75.8 million Mareli Construction and Development, L.L.C. (Louisville) and RMP Properties, Inc. (Portland)... May, June 1998 $25.2 million Cambridge Properties, Century Title.................. January, July 1999 $182.8 million
Consideration includes cash paid, Company stock issued, and assumption of certain accounts payable and notes payable, which were repaid subsequent to the acquisitions. The Trimark Communities, SGS Communities and Mareli Construction acquisitions contain provisions for additional consideration to be paid annually for up to four years subsequent to the acquisition date. The additional consideration is based upon subsequent pretax income, adjusted for a preferential return to the Company. Such additional consideration will be recorded when paid as excess of cost over net assets acquired, which is amortized using the straight line method over 20 years. All of the acquired companies are involved in homebuilding and land development. The Company has accounted for these acquisitions under the purchase method and has included the operations of the acquired businesses in its Consolidated Statements of Income since their acquisition. The following unaudited pro forma summaries of combined operations were prepared to illustrate the estimated effects of the 1998 and 1999 acquisitions of Cambridge, Dobson, Mareli, and RMP as if such acquisitions had occurred on the first day of fiscal 1998. Pro forma information for 1997 and 1999 is not significantly different from historical results and is not presented. The pro forma information should be read in conjunction with the historical financial statements and notes thereto. The pro forma financial information is provided for comparative purposes only and is not necessarily indicative of the results which 33 D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED) NOTE C--ACQUISITIONS --(CONTINUED) would have been obtained if the acquisitions had been effected throughout the period. The pro forma financial information is based upon the purchase method of accounting.
YEAR ENDED SEPTEMBER 30, 1998 --------------------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) Revenues.................................................. $2,442,196 Net income................................................ 98,615 Basic earnings per common share........................... 1.76 Diluted earnings per common share......................... 1.58
NOTE D--STOCKHOLDERS' EQUITY The Company has a shelf registration statement with the Securities and Exchange Commission to issue, from time to time, up to 7.4 million shares of registered common stock in connection with future acquisitions. In November, 1998, the Board of Directors authorized the repurchase of up to $100 million each of the Company's common stock and senior debt securities, as market conditions warrant. Through September 30, 1999, the Company had repurchased $22.4 million (1,484,300 shares) of common stock in open market purchases under the stock repurchase plan. NOTE E--PROVISION FOR INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. These differences primarily relate to the capitalization of inventory costs, the accrual of warranty costs, and depreciation. The Company's deferred tax assets and liabilities are not significant. The difference between income tax expense and tax computed by applying the federal statutory income tax rate to income before taxes is due primarily to the effect of applicable state income taxes (4% to 5%) and, in 1998, certain non-deductible merger costs (1%). 34 D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED) NOTE E--PROVISION FOR INCOME TAXES --(CONTINUED) Significant components of the provision for income taxes are as follows (in thousands):
YEAR ENDED SEPTEMBER 30, ------------------------------ 1997 1998 1999 -------- -------- -------- Current: Federal....................................... $45,318 $61,897 $105,519 State......................................... 5,113 6,938 2,706 ------- ------- -------- 50,431 68,835 108,225 ------- ------- -------- Deferred: Federal....................................... (6,195) (2,788) (4,120) State......................................... (648) (328) (106) ------- ------- -------- (6,843) (3,116) (4,226) ------- ------- -------- $43,588 $65,719 $103,999 ======= ======= ========
NOTE F--EMPLOYEE BENEFIT PLANS The Company has 401(k) plans for Company employees. The Company matches portions of employees' voluntary contributions. Additional employer contributions in the form of profit sharing are at the discretion of the Company. Expenses for these Plans were $1,200,000, $1,977,000 and $2,272,000 for 1997, 1998 and 1999, respectively. The Company's Supplemental Executive Retirement Plans (SERP's) are non-qualified deferred compensation programs that provide benefits payable to certain management employees upon retirement, death, or termination of employment with the Company. Under one SERP, the Company accrues an unfunded benefit based on a percentage of the eligible employees' salaries, as well as an interest factor based upon a predetermined formula. The Company recorded $543,000, $573,000 and $648,000 of expense for this plan in 1997, 1998 and 1999, respectively. Effective January 1, 1994, the Company adopted the D.R. Horton, Inc. Stock Tenure Plan (an Employee Stock Ownership Plan), covering those employees generally not participating in the stock option or SERP benefit plans. Contributions are made at the discretion of the Company. Expenses related to Company contributions of common stock to the Plan of $309,000, $999,000 and $0 were recognized for 1997, 1998 and 1999, respectively. Further contributions to the plan have been suspended. The Company Stock Incentive Plans provide for the granting of stock options to certain key employees of the Company to purchase shares of common stock. Options are granted at exercise prices which approximate the market value of the Company's common stock at the date of the grant. Options generally expire 10 years after the dates on which they were granted. Options vest over periods of 4 to 10 years. There were 635,848 and 863,954 shares available for future grants under the Plans at September 30, 1998 and 1999, respectively. 35 D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED) NOTE F--EMPLOYEE BENEFIT PLANS --(CONTINUED) Activity under the plan is:
1997 1998 1999 -------------------- -------------------- -------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE STOCK OPTIONS OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE - ------------- --------- -------- --------- -------- --------- -------- Outstanding at beginning of year......... 2,825,501 $7.09 3,544,295 $ 8.16 4,747,614 $13.30 Granted.................................. 1,106,500 10.05 1,705,000 22.06 152,500 16.19 Exercised................................ (268,904) 4.30 (388,857) 6.46 (293,869) 7.04 Canceled................................. (118,802) 8.54 (112,824) 7.83 (464,425) 16.91 --------- ----- --------- ------ --------- ------ Outstanding at end of year............... 3,544,295 $8.16 4,747,614 $13.30 4,141,820 $13.44 ========= ===== ========= ====== ========= ====== Exercisable at end of year............... 961,718 $5.98 968,608 $ 6.80 1,122,709 $ 9.23 ========= ===== ========= ====== ========= ======
Exercise prices for options outstanding at September 30, 1999, ranged from $1.804 to $22.6875. The weighted average remaining contractual lives of those options are:
OUTSTANDING EXERCISABLE ------------------------------- ------------------------------- WEIGHTED WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE AVERAGE EXERCISE MATURITY EXERCISE MATURITY EXERCISE PRICE RANGE OPTIONS PRICE (YEARS) OPTIONS PRICE (YEARS) - -------------------- --------- -------- -------- --------- -------- -------- Less than $9............................... 1,065,031 $ 6.10 4.1 623,150 $ 5.69 3.8 $9 - $18................................... 1,667,389 10.82 7.3 353,759 10.16 6.8 More than $18.............................. 1,409,400 22.09 8.8 145,800 22.09 8.8 --------- ------ --- --------- ------ --- Total.................................. 4,141,820 $13.44 7.0 1,122,709 $ 9.23 5.4 ========= ====== === ========= ====== ===
The Company has elected to follow Accounting Principles Board Opinion No. 25, in accounting for its employee stock options. The exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, and therefore no compensation expense is recognized. SFAS No. 123 requires disclosure of pro forma income and pro forma income per share as if the fair value based method had been applied in measuring compensation expense for option awards granted in fiscal 1997, 1998 and 1999. Management believes the fiscal 1997, 1998 and 1999 pro forma amounts may not be representative of the effects of option awards on future pro forma net income and pro forma net income per share because options granted before 1996 are not considered in these calculations. Application of the fair value method, as specified by SFAS 123, would decrease net income by $398,000 ($0.01 per diluted share), $815,000 ($0.01 per diluted share) and $1,648,000 ($0.03 per diluted share) in 1997, 1998 and 1999, respectively. The weighted average fair value of grants made in 1997, 1998 and 1999 was $4.52, $10.09 and $8.85, respectively. 36 D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED) NOTE F--EMPLOYEE BENEFIT PLANS --(CONTINUED) The fair values of the options granted were estimated on the date of their grant using the Black-Scholes option pricing model based on the following weighted average assumptions:
1997 1998 1999 -------- -------- -------- Risk free interest rate............................ 6.16% 4.82% 5.78% Expected life (in years)........................... 6.7 7.0 7.0 Expected volatility................................ 34.69% 36.71% 49.50% Expected dividend yield............................ .59% .38% .70%
NOTE G--FINANCIAL INSTRUMENTS The fair values of the Company's financial instruments are based on quoted market prices, where available, or are estimated. Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instrument. These estimates are subjective in nature, involve matters of judgment and therefore, cannot be determined with precision. Estimated fair values are significantly affected by the assumptions used. The table below sets forth the carrying values and estimated fair values of the Company's financial instruments (in thousands).
SEPTEMBER 30, 1998 SEPTEMBER 30, 1999 ------------------------- ------------------------- CARRYING ESTIMATED FAIR CARRYING ESTIMATED FAIR VALUE VALUE VALUE VALUE -------- -------------- -------- -------------- HOMEBUILDING: LIABILITIES 8% Senior notes........................... $ -- $ -- $382,941 $346,500 8 3/8% Senior notes....................... 147,754 147,375 148,150 146,625 10% Senior notes.......................... 147,156 154,467 147,278 151,497 6 7/8% Convertible subordinated notes..... 58,794 89,119 -- -- Off-balance sheet financial instruments: Interest rate swaps....................... -- (422) -- 1,471 FINANCIAL SERVICES: ASSETS Mortgage loans held for sale.............. 72,325 73,013 113,786 115,607
The Company used the following methods and assumptions in estimating fair values: For cash and cash equivalents, the revolving credit facility, other notes payable, loan commitments, forward contracts, and standby letters of credit the carrying amounts reported in the balance sheet or as reported in note (A) approximate fair values due to their short maturity or floating interest rate terms, as applicable. For the senior notes and convertible subordinated notes, fair values represent quoted market prices on the exchange on which the securities are (or were) traded. For interest rate swaps and mortgage loans held for sale, the fair values are estimated based on quoted market prices for similar financial instruments. 37 D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED) NOTE H--COMMITMENTS AND CONTINGENCIES The Company is involved in lawsuits and other contingencies in the ordinary course of business. Management believes that, while the ultimate outcome of the contingencies cannot be predicted with certainty, the ultimate liability, if any, will not have a material adverse effect on the Company's financial position. In the ordinary course of business, the Company enters into option agreements to purchase land and developed lots. At September 30, 1999, cash deposits of approximately $22.7 million and promissory notes approximating $2.5 million secured the Company's performance under these agreements. Additionally, in the normal course of its business activities, the Company provides standby letters of credit and performance bonds, issued by third parties, to secure performance under various contracts. At September 30, 1999, outstanding standby letters of credit were $70.0 million and performance bonds were $206.8 million. The Company has an additional capacity of $27.5 million for standby letters of credit under its revolving credit facility. The Company leases office space under noncancellable operating leases. Minimum annual lease payments under these leases at September 30, 1999 approximate:
(IN THOUSANDS) 2000........................................................ $ 4,284 2001........................................................ 3,646 2002........................................................ 2,591 2003........................................................ 1,591 2004........................................................ 1,075 Thereafter.................................................. 998 ------- $14,185 =======
Rent expense approximated $3,177,000, $4,674,000 and $8,456,000 for 1997, 1998 and 1999, respectively. NOTE I--SUMMARIZED FINANCIAL INFORMATION The 8%, 8 3/8% and 10% Senior Notes are fully and unconditionally guaranteed, on a joint and several basis, by all of the Company's direct and indirect subsidiaries other than certain inconsequential subsidiaries. Each of the guarantors is a wholly-owned subsidiary. Summarized financial information of the Company and its subsidiaries, including the non-guarantor subsidiaries, is presented below. Additional financial information relating to the non-guarantor financial services subsidiaries is included in the accompanying primary financial statements. Cash flows for the non-guarantor financial services subsidiaries consist primarily of inflows from operating and financing activities and are not significant in any period presented below. Separate financial statements and other disclosures concerning the guarantor subsidiaries are not presented because management has determined that they are not material to investors. 38 D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED) NOTE I--SUMMARIZED FINANCIAL INFORMATION --(CONTINUED) As of and for the periods ended (in thousands): SEPTEMBER 30, 1999
NONGUARANTOR SUBSIDIARIES D.R. -------------------- HORTON, GUARANTOR FINANCIAL INTERCOMPANY INC. SUBSIDIARIES SERVICES OTHER ELIMINATIONS TOTAL ---------- ------------ --------- -------- ------------ ---------- Total assets............... $1,604,313 $1,865,148 $125,895 $31,302 $(1,264,850) $2,361,808 Total liabilities.......... 1,198,702 1,465,596 108,476 19,663 (1,228,238) 1,564,199 Revenues................... 551,696 2,540,077 37,251 27,187 -- 3,156,211 Gross profit............... 95,509 456,302 -- 6,069 334 558,214 Net income................. 7,358 144,575 7,929 78 (113) 159,827
SEPTEMBER 30, 1998
NONGUARANTOR SUBSIDIARIES D.R. -------------------- HORTON, GUARANTOR FINANCIAL INTERCOMPANY INC. SUBSIDIARIES SERVICES OTHER ELIMINATIONS TOTAL ---------- ------------ --------- -------- ------------ ---------- Total assets............... $1,169,347 $1,548,554 $ 89,097 $30,672 $(1,169,835) $1,667,835 Total liabilities.......... 906,014 1,272,398 81,820 19,301 (1,161,134) 1,118,399 Revenues................... 362,847 1,777,833 21,892 14,369 -- 2,176,941 Gross profit............... 44,553 342,300 -- 2,586 -- 389,439 Net income................. 2,140 88,128 4,418 (1,306) -- 93,380
SEPTEMBER 30, 1997
NONGUARANTOR SUBSIDIARIES D.R. -------------------- HORTON, GUARANTOR FINANCIAL INTERCOMPANY INC. SUBSIDIARIES SERVICES OTHER ELIMINATIONS TOTAL ---------- ------------ --------- -------- ------------ ---------- Total assets............... $ 620,636 $ 934,497 $ 42,038 $24,628 $ (373,476) $1,248,323 Total liabilities.......... 396,853 751,672 28,641 15,932 (372,641) 820,457 Revenues................... 286,568 1,269,391 10,967 11,496 -- 1,578,422 Gross profit............... 51,484 222,040 -- 1,347 -- 274,871 Net income................. 4,248 59,373 2,357 (1,016) -- 64,962
39 D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED) NOTE J--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) Quarterly results of operations are (in thousands, except for per share amounts):
1999 ------------------------------------------------ THREE MONTHS ENDED ------------------------------------------------ SEPTEMBER 30 JUNE 30 MARCH 31 DECEMBER 31 ------------ -------- -------- ----------- Revenues......................................... $953,550 $842,950 $699,081 $660,630 Gross margin..................................... 169,174 150,083 120,281 118,676 Net income....................................... 49,378 44,334 33,420 32,695 Basic net income per common share................ 0.78 0.69 0.53 0.54 Diluted net income per common share.............. 0.77 0.68 0.52 0.52
1998 ------------------------------------------------ THREE MONTHS ENDED ------------------------------------------------ SEPTEMBER 30 JUNE 30 MARCH 31 DECEMBER 31 ------------ -------- -------- ----------- Revenues......................................... $686,921 $613,864 $452,959 $423,197 Gross margin..................................... 123,699 109,208 80,413 76,119 Net income(1).................................... 32,476 23,088 19,492 18,324 Basic net income per common share................ 0.59 0.44 0.37 0.35 Diluted net income per common share.............. 0.53 0.39 0.33 0.31
- ------------------------ (1) The quarter ended June 30, 1998 includes the net effect of a $7.1 million, net of tax, provision for costs associated with the merger with Continental. The earnings per share effects were $0.13 basic and $0.11 diluted. 40 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item is set forth under the caption "Election of Directors" at pages 2 through 4, and the caption "Section 16(a) Beneficial Ownership Reporting Compliance" at page 16, of the registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on January 20, 2000 and incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is set forth under the caption "Executive Compensation" at page 9 through "Compensation Committee Interlocks and Insider Participation" at page 11 of the registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on January 20, 2000 and incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is set forth under the caption "Beneficial Ownership of Common Stock" at pages 7 and 8 of the registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on January 20, 2000 and incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is set forth under the caption "Executive Compensation--Transactions with Management" at page 10 of the registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on January 20, 2000 and incorporated herein by reference. 41 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: 1. FINANCIAL STATEMENTS: See Item 8 above. 2. FINANCIAL STATEMENT SCHEDULES: Schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission (the "Commission") are not required under the related instructions or are not applicable, and therefore have been omitted. 3. EXHIBITS:
EXHIBIT NUMBER EXHIBIT - --------------------- ------- 2.1 -- Agreement and Plan of Merger, dated as of December 18, 1997, by and between the Registrant and Continental Homes Holding Corp. The Registrant agrees to furnish supplementally a copy of omitted schedules to the Commission upon request(1) 3.1 -- Amended and Restated Certificate of Incorporation, as amended(2) 3.2 -- Amended and Restated Bylaws(3) 4.1 -- See Exhibits 3.1 and 3.2 4.2 -- Indenture, dated as of June 9, 1997, among the Registrant, the guarantors named therein and American Stock Transfer & Trust Company, as Trustee(4) 4.3 -- First Supplemental Indenture, dated as of June 9, 1997, among the Registrant, the guarantors named therein and American Stock Transfer & Trust Company, as Trustee(5) 4.4 -- Second Supplemental Indenture, dated as of September 30, 1997, among the Registrant, the guarantors named therein and American Stock Transfer & Trust Company, as Trustee(6) 4.5 -- Third Supplemental Indenture, dated as of April 17, 1998, among the Registrant, the guarantors named therein and American Stock Transfer & Trust Company, as Trustee(7) 4.6 -- Fourth Supplemental Indenture, dated as of April 20, 1998, among the Registrant, the guarantors named therein and American Stock Transfer & Trust Company, as Trustee(8) 4.7 -- Fifth Supplemental Indenture, dated as of August 31, 1998, among the Registrant, the guarantors named therein and American Stock Transfer & Trust Company, as Trustee(9) 4.8 -- Sixth Supplemental Indenture, dated as of February 4, 1999, among the Registrant, the guarantors named therein and American Stock Transfer & Trust Company, as Trustee(10) 4.9 -- Seventh Supplemental Indenture, dated as of August 31, 1999, among the Registrant, the guarantors named therein and American Stock Transfer & Trust Company, as Trustee(11) 4.10 -- Indenture, dated as of April 15, 1996, between Continental and First Union National Bank, as Trustee(12) 4.11 -- First Supplemental Indenture, dated as of April 20, 1998, among the Registrant, the guarantors named therein and First Union National Bank, as Trustee(13) 4.12 -- Second Supplemental Indenture, dated as of August 31, 1998, among the Registrant, the guarantors named therein and First Union National Bank, as Trustee(14)
42
EXHIBIT NUMBER EXHIBIT - --------------------- ------- 4.13 -- Third Supplemental Indenture, dated as of August 31, 1999, among the Registrant, the guarantors named therein and First Union National Bank, as Trustee(11) 10.1 -- Form of Indemnification Agreement between the Registrant and each of its directors and executive officers and schedules of substantially identical documents(15) 10.2 -- D.R. Horton, Inc. 1991 Stock Incentive Plan(16)(17) 10.2a -- Amendment No. 1 to 1991 Stock Incentive Plan(16)(17) 10.2b -- Amendment No. 2 to 1991 Stock Incentive Plan(16)(17) 10.2c -- Amendment No. 3 to 1991 Stock Incentive Plan(17)(18) 10.2d -- Amendment No. 4 to 1991 Stock Incentive Plan(17)(18) 10.2e -- Amendment No. 5 to 1991 Stock Incentive Plan(17)(19) 10.2f -- Amendment No. 6 to 1991 Stock Incentive Plan(17)(20) 10.3 -- Form of Non-Qualified Stock Option Agreement (Term Vesting)(21) 10.4 -- Form of Non-Qualified Stock Option Agreement (Performance Vesting)(22) 10.5 -- Form of Incentive Stock Option Agreement (Term Vesting)(22) 10.6 -- Form of Incentive Stock Option Agreement (Performance Vesting)(22) 10.7 -- Form of Restricted Stock Agreement (Term Vesting)(22) 10.8 -- Form of Restricted Stock Agreement (Performance Vesting)(22) 10.9 -- Form of Stock Appreciation Right Agreement (Term Vesting)(22) 10.10 -- Form of Stock Appreciation Right Agreement (Performance Vesting)(22) 10.11 -- Form of Stock Appreciation Right Notification (Tandem)(22) 10.12 -- Form of Performance Share Notification(22) 10.13 -- Form of Performance Unit Notification(22) 10.14 -- D.R. Horton, Inc. Supplemental Executive Retirement Plan No. 1(17)(23) 10.15 -- D.R. Horton, Inc. Supplemental Executive Retirement Trust No. 1(17)(23) 10.16 -- D.R. Horton, Inc. Supplemental Executive Retirement Plan No. 2(17)(23) 10.17 -- Continental Homes Holding Corp. 1988 Stock Incentive Plan (as amended and restated June 20, 1997)(17)(24) 10.18 -- Restated Continental Homes Holding Corp. 1986 Stock Incentive Plan, and the First Amendment thereto dated June 17, 1987(17)(25) 10.19 -- Form of Stock Option Agreement pursuant to Continental's 1986 and 1988 Stock Incentive Plans(26) 10.21 -- Amended and Restated Master Loan and Inter-Creditor Agreement dated as of July 1, 1999, among D.R. Horton, Inc., as Borrower; NationsBank, N.A., Bank of America National Trust and Savings Association, Fleet National Bank, Bank United, Comerica Bank, Credit Lyonnais New York Branch, Societe Generale, Southwest Agency, The First National Bank of Chicago, PNC Bank, National Association, Amsouth Bank, Bank One, Arizona, NA, First American Bank Texas, SSB, Harris Trust and Savings Bank, Sanwa Bank California, Norwest Bank Arizona, National Association, Wachovia Mortgage Company and Summit Bank, as Banks; and NationsBank, N.A., as Administrative Agent(11)
43
EXHIBIT NUMBER EXHIBIT - --------------------- ------- 10.22 -- Credit Agreement dated as of August 13, 1999, among CH Mortgage Company I, Ltd., as Borrower; U.S. Bank National Association, Residential Funding Corporation, Hibernia Bank, First Union National Bank, and National City Bank of Kentucky, as Lenders and U.S. Bank National Association, as Agent(11) 21.1 -- Subsidiaries of D.R. Horton, Inc.(11) 23.1 -- Consent of Ernst & Young LLP, Fort Worth, Texas(11) 27 -- Financial Data Schedule for year ended September 30, 1999(11)
- ------------------------ (1) Incorporated by reference from Exhibit 2.1 to the Registrant's Registration Statement on Form S-4 (Registration No. 333-44279), filed with the Commission on January 15, 1998. (2) Incorporated by reference from Exhibit 4.2 to the Registrant's registration statement (No. 333-76175) on Form S-3, filed with the Commission on April 13, 1999. (3) Incorporated by reference from Exhibit 3.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1998, filed with the Commission on February 12, 1999. (4) Incorporated by reference from Exhibit 4.1(a) to the Registrant's Registration Statement on Form S-3 (No. 333-27521), filed with the Commission on May 21, 1997. (5) Incorporated by reference from Exhibit 4.1 to the Registrant's Form 8-K/A dated April 1, 1997, filed with the Commission on June 6, 1997. (6) Incorporated by reference from Exhibit 4.4 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1997, filed with the Commission on December 8, 1997. (7) Incorporated by reference from Exhibit 4.3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, filed with Commission on May 14, 1998. (8) Incorporated by reference from Exhibit 4.4 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, filed with Commission on May 14, 1998. (9) Incorporated by reference from Exhibit 4.7 to the Registrants Annual Report on Form 10-K for the year ended September 30, 1998, filed with the Commission on December 10, 1998. (10) Incorporated by reference from Exhibit 4.1 to the Registrants Current Report on Form 8-K, dated February 2, 1999, filed with the Commission on February 2, 1999. (11) Filed herewith. (12) Incorporated by reference from Exhibit 4.1 to Continental's Annual Report on Form 10-K for the year ended May 31, 1996. The Commission file number for Continental is 1-10700. (13) Incorporated by reference from Exhibit 4.5 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, filed with Commission on May 14, 1998. (14) Incorporated by reference from Exhibit 4.10 to the Registrant's Annual Report on Form 10-K for the year ended September 30, 1998, filed with Commission on December 10, 1998. (15) Incorporated by reference from Exhibit 10.1 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1995, filed with the Commission on November 22, 1995 (file number 1-14122); and Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, filed with the Commission on August 6, 1998. (16) Incorporated by reference from the Registrant's Registration Statement on Form S-1 (No. 33-46554) declared effective by the Commission on June 4, 1992. 44 (17) Management contract or compensatory plan arrangement. (18) Incorporated by reference from the Registrant's Annual Report Form 10-K for the fiscal year ended September 30, 1994, filed with the Commission on December 9, 1994 (file number 1-14122). (19) Incorporated by reference from Exhibit 10.2e to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1995, filed with the Commission on November 22, 1995 (file number 1-14122). (20) Incorporated by reference from Exhibit 10.2f to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1997, filed with the Commission on December 8, 1997. (21) Incorporated by reference from Exhibit 10.3 to the Registrant's Registration Statement on Form S-1 (Registration No. 3-81856), filed with the Commission on July 22, 1994. (22) Incorporated by reference from the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, filed with the Commission on March 29, 1993. (23) Incorporated by reference from the Registrant's Transitional Report on Form 10-K for the period from January 1, 1993 to September 30, 1993, filed with the Commission on December 28, 1993 (file number 1-14122). (24) Incorporated by reference from Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, filed with the Commission on August 6, 1998. (25) Incorporated by reference from Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, filed with the Commission on August 6, 1998. (26) Incorporated by reference from Exhibit 10.5 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, filed with the Commission on August 6, 1998. (b) The following reports were filed on Form 8-K by the Registrant during the quarter ended September 30, 1999: None. 45 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: December 10, 1999 D.R. HORTON, INC. By /s/ DONALD R. HORTON ------------------------------------------ Donald R. Horton, CHAIRMAN OF THE BOARD
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ DONALD R. HORTON Chairman of the Board ------------------------------------------------ (Principal Executive December 10, 1999 Donald R. Horton Officer) /s/ BRADLEY S. ANDERSON ------------------------------------------------ Director December 10, 1999 Bradley S. Anderson /s/ RICHARD BECKWITT ------------------------------------------------ President and Director December 10, 1999 Richard Beckwitt Assistant Treasurer and Interim Chief Financial /s/ SAMUEL R. FULLER Officer (Principal ------------------------------------------------ Financial Officer and December 10, 1999 Samuel R. Fuller Principal Accounting Officer) /s/ RICHARD I. GALLAND ------------------------------------------------ Director December 10, 1999 Richard I. Galland /s/ RICHARD L. HORTON ------------------------------------------------ Director December 10, 1999 Richard L. Horton /s/ TERRILL J. HORTON ------------------------------------------------ Director December 10, 1999 Terrill J. Horton /s/ FRANCINE I. NEFF ------------------------------------------------ Director December 10, 1999 Francine I. Neff /s/ SCOTT J. STONE ------------------------------------------------ Director December 10, 1999 Scott J. Stone /s/ DONALD J. TOMNITZ Vice Chairman, Chief ------------------------------------------------ Executive Officer and December 10, 1999 Donald J. Tomnitz Director
46 [THIS PAGE INTENTIONALLY LEFT BLANK] 47 CORPORATE INFORMATION D.R. Horton, Inc., one of the largest homebuilders in the United States, builds high quality single-family homes designed principally for the entry-level and move-up markets. Founded in 1978, the Company operates in 23 states and 40 markets, with a geographic presence in the Midwest, Mid-Atlantic, Southeast, Southwest, and Western regions of the United States. The Company builds and sells homes under the trade names D.R. Horton, Arappco, Cambridge, Continental, Dobson, Joe Miller, Mareli, Milburn, Regency, RMP, SGS Communities, Torrey and Trimark. Horton has established a unique marketing niche, offering a broader selection of homes that typically have more amenities and greater design flexibility than homes offered by volume builders, at prices that are generally more affordable than those charged by local custom builders. Horton homes range in size from 1,000 to 5,000 square feet and are priced from $80,000 to $600,000. For the year ended September 30, 1999, the Company closed 18,395 homes with an average sales price of approximately $166,100. THE BOARD OF DIRECTORS DONALD R. HORTON CHAIRMAN (2) BRADLEY S. ANDERSON SENIOR VICE PRESIDENT OF CB RICHARD ELLIS, INC. (1) RICHARD BECKWITT PRESIDENT (2) RICHARD I. GALLAND FORMER CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF FINA, INC. (1) (2) RICHARD L. HORTON FORMER VICE PRESIDENT--DALLAS/FORT WORTH EAST DIVISION TERRILL J. HORTON FORMER VICE PRESIDENT--DALLAS/FORT WORTH NORTH DIVISION FRANCINE I. NEFF FORMER TREASURER OF THE UNITED STATES (1) SCOTT J. STONE FORMER VICE PRESIDENT--EASTERN REGION DONALD J. TOMNITZ VICE CHAIRMAN AND CHIEF EXECUTIVE OFFICER (2) - ------------------------ (1) 1999 AUDIT COMMITTEE MEMBER (2) 1999 COMPENSATION COMMITTEE MEMBER TRANSFER AGENT AND REGISTRAR American Stock Transfer & Trust Co. New York, NY (800) 937-5449 INVESTOR RELATIONS Richard Beckwitt Trent J. Horton D.R. Horton, Inc. 1901 Ascension Blvd., Suite 100 Arlington, Texas 76006 (817) 856-8200 ANNUAL MEETING January 20, 2000 9:30 a.m. C.S.T. At the Corporate Offices of D.R. Horton, Inc. 1901 Ascension Blvd., Suite 100 Arlington, Texas 76006 PUBLIC DEBT RATINGS BB--Standard & Poors Corporation Ba1--Moody's Investors Service 48 EX-4.9 2 EXHIBIT 4.9 EXHIBIT 4.9 ================================================================================ D.R. HORTON, INC. AND THE GUARANTORS PARTY HERETO AND AMERICAN STOCK TRANSFER & TRUST COMPANY, AS TRUSTEE ------------- SEVENTH SUPPLEMENTAL INDENTURE DATED AS OF AUGUST 31, 1999 ------------- 8 3/8% SENIOR NOTES DUE 2004 AND 8% SENIOR NOTES DUE 2009 ================================================================================ SEVENTH SUPPLEMENTAL INDENTURE, dated as of August 31, 1999, and effective as of the dates set forth in Articles I and II below, to the Indenture, dated as of June 9, 1997 (as amended, modified or supplemented from time to time in accordance therewith, the "Indenture"), by and among D.R. HORTON, INC., a Delaware corporation (the "Company"), the ADDITIONAL GUARANTORS (as defined herein), the EXISTING GUARANTORS (as defined herein) and AMERICAN STOCK TRANSFER & TRUST COMPANY, as trustee (the "Trustee"). RECITALS WHEREAS, the Company and the Trustee entered into the Indenture to provide for the issuance from time to time of senior debt securities (the "Securities") to be issued in one or more series as the Indenture provides; WHEREAS, pursuant to the First Supplemental Indenture dated as of June 9, 1997 (the "First Supplemental Indenture"), among the Company, the guarantors party thereto (with the guarantors party to subsequent supplemental indentures, the "Existing Guarantors") and the Trustee, the Company issued a series of Securities designated as its 8 3/8% Senior Notes due 2004 in the aggregate principal amount of up to $250,000,000 (the "Notes"); WHEREAS, pursuant to the Sixth Supplemental Indenture dated as of February 4, 1999 (the "Sixth Supplemental Indenture"), among the Company, the Existing Guarantors and the Trustee, the Company issued a series of Securities designated as its 8% Senior Notes due 2009 in the aggregate principal amount of up to $400,000,000 (the "8% Notes"); WHEREAS, pursuant to Section 4.05 of the Indenture, if the Company organizes, acquires or otherwise invests in another Subsidiary which becomes a Restricted Subsidiary, then such Subsidiary shall execute and deliver a supplemental indenture pursuant to which such Restricted Subsidiary shall unconditionally guarantee all of the Company's obligations under the Notes on the terms set forth in the Indenture; WHEREAS, in accordance with Section 4.05 of the Indenture, the Company desires to cause certain newly organized, acquired or otherwise invested in Subsidiaries, which are deemed to be Restricted Subsidiaries according to the Indenture, to be bound by those terms applicable to a Guarantor under the Indenture (as it applies to the Securities); WHEREAS, pursuant to Section 9.05 of the Indenture, a Guarantor may merge with or into, or dissolve into, the Company or another Restricted Subsidiary and, upon such merger or dissolution, the Guarantee given by such Guarantor shall no longer have any force or effect; SEVENTH SUPPLEMENTAL INDENTURE Page 1 WHEREAS, in accordance with Section 9.05 of the Indenture, the Company has caused certain Guarantors (the "Merged Guarantors") to merge with and into, or have all their property conveyed to, the Company or certain Restricted Subsidiaries, whereupon the Guarantees given by such Merged Guarantors shall no longer have any force or effect; WHEREAS, the execution of this Seventh Supplemental Indenture has been duly authorized by the Boards of Directors of the Company and the Additional Guarantors and all things necessary to make this Seventh Supplemental Indenture a valid, binding and legal instrument according to its terms have been done and performed; NOW THEREFORE, for and in consideration of the premises, the Company, the Additional Guarantors and the Existing Guarantors covenant and agree with the Trustee for the equal and ratable benefit of the respective holders of the Securities as follows: ARTICLE I. ADDITIONAL GUARANTORS 1.1. As of the respective effective dates stated below, and in accordance with Section 4.05 of the Indenture, the following Restricted Subsidiaries (the "Additional Guarantors") hereby unconditionally guarantee all of the Company's obligations under the Securities of any Series that has the benefit of Guarantees of other Subsidiaries of the Company and the Indenture (as it relates to all such Series) on the terms set forth in the Indenture, including without limitation, Article Nine thereof, and, in the case of the Notes, Article One of the First Supplemental Indenture thereto and the Guarantees affixed thereto and, in the case of the 8% Notes, Article One of the Sixth Supplemental Indenture thereto and the Guarantees affixed thereto:
JURISDICTION OF NAME ORGANIZATION EFFECTIVE DATE - ---- --------------- -------------- Astante Luxury Communities, Inc. Delaware June 10, 1999 D.R. Horton, Inc. - Chicago Delaware March 31, 1999 D.R. Horton, Inc. - San Diego Delaware March 31, 1999 DRH Cambridge Homes, LLC Delaware July 1, 1999 DRH Land Company, Inc. California July 1, 1999 DRH Title Company of Colorado, Inc. Colorado July 1, 1999 Meadows VIII, Ltd. Delaware July 1, 1999
SEVENTH SUPPLEMENTAL INDENTURE Page 2 1.2 The Trustee is hereby authorized to add the above-named Additional Guarantors to the list of Guarantors on the Guarantees affixed to the Notes and the 8% Notes. ARTICLE II. MERGED GUARANTORS 2.1 In accordance with Section 9.05 of the Indenture, the Company and the Trustee acknowledge that the Guarantees previously given by the following Merged Guarantors no longer have any force or effect by reason of the merger of the Merged Guarantors into the Company or the Restricted Subsidiaries as indicated below: (a) D.R. Horton Denver Management Company, Inc. merged into D.R. Horton, Inc. - Denver, as of January 4, 1999. (b) Magnolia Homes Builders, Inc. merged into D.R. Horton, Inc. as of April 6, 1999. (c) S.G. Torrey Atlanta, Ltd. merged into D.R. Horton, Inc. - Torrey as of April 7, 1999. (d) Continental Ranch, Inc. merged into L&W Investments, Inc., by Agreements of Merger signed July 21, 1999 and effective as of July 31, 1999 in Delaware and September 2, 1999 in California, and the name of L&W Investments, Inc. was changed to Continental Residential, Inc. (e) D.R. Horton Los Angeles Management Company, Inc. merged into D.R. Horton Los Angeles Holding Company, Inc., as of August 5, 1999. (f) D.R. Horton San Diego Management Company, Inc. merged into D.R. Horton San Diego Holding Company, Inc., as of August 5, 1999. (g) Land Development, Inc. merged into C. Richard Dobson Builders, Inc. by Articles of Merger signed August 30, 1999, filed with the Virginia State Corporation Commission August 31, 1999, and effective on September 1, 1999. ARTICLE III. MISCELLANEOUS PROVISIONS 3.1 This Seventh Supplemental Indenture constitutes a supplement to the Indenture. The Indenture, the First Supplement Indenture, the Second Supplemental Indenture, dated as of September 30, 1997, the Third Supplemental Indenture, dated as of April 17, 1998, the Fourth Supplemental Indenture, dated as of April 20, 1998, the Fifth Supplemental Indenture, dated as of August 31, 1998, the Sixth Supplemental Indenture and this Seventh Supplemental Indenture, by and SEVENTH SUPPLEMENTAL INDENTURE Page 3 among the Company, the guarantors thereto and the Trustee, shall be read together and shall have the effect so far as practicable as though all of the provisions thereof and hereof are contained in one instrument. 3.2 The parties may sign any number of copies of this Seventh Supplemental Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. 3.3 In case any one or more of the provisions contained in this Seventh Supplemental Indenture, the Notes, or the 8% Notes shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions of this Seventh Supplemental Indenture, the Notes or the 8% Notes. 3.4 The article and section headings herein are for convenience only and shall not affect the construction hereof. 3.5 Any capitalized term used in this Seventh Supplemental Indenture that is defined in the Indenture and not defined herein shall have the meaning specified in the Indenture, unless the context shall otherwise require. 3.6 All covenants and agreements in this Seventh Supplemental Indenture by the Company, the Existing Guarantors and the Additional Guarantors shall bind each of their successors and assigns, whether so expressed or not. All agreements of the Trustee in this Seventh Supplemental Indenture shall bind its successors and assigns. 3.7 The laws of the State of New York shall govern this Seventh Supplemental Indenture, the Securities of each Series and the Guarantees. 3.8 Except as amended by this Seventh Supplemental Indenture, the terms and provisions of the Indenture shall remain in full force and effect. 3.9 This Seventh Supplemental Indenture may not be used to interpret another indenture, loan or debt agreement of the Company or a Subsidiary. Any such indenture, loan or debt agreement may not be used to interpret this Seventh Supplemental Indenture. 3.10 All liability described in paragraph 12 of the Notes, or paragraph 12 of the 8% Notes, of any director, officer, employee or stockholder, as such, of the Company is waived and released. 3.11 The Trustee accepts the modifications of the trust effected by this Seventh Supplemental Indenture, but only upon the terms and conditions set forth in the Indenture. Without limiting the generality of the foregoing, the Trustee assumes no responsibility for the correctness of the recitals herein contained which shall be taken as the statements of the Company and the Additional Guarantors, and the Trustee shall not be responsible or accountable in any way whatsoever for or with respect to the validity or execution or sufficiency of this Seventh Supplemental Indenture, and the Trustee makes no representation with respect thereto. SEVENTH SUPPLEMENTAL INDENTURE Page 4 IN WITNESS WHEREOF, the parties hereto have caused this Supplemental Indenture to be duly executed, all as of the day and year first above written. D.R. HORTON, INC. By: /s/ David J. Keller ---------------------------------------- David J. Keller Executive Vice President, Chief Financial Officer and Treasurer ADDITIONAL GUARANTORS: ---------------------- Astante Luxury Communities, Inc. D.R. Horton, Inc. - Chicago D.R. Horton, Inc. - San Diego DRH Land Company, Inc. DRH Title Company of Colorado, Inc. Meadows VIII, Ltd. By: /s/ David J. Keller ---------------------------------------- David J. Keller, Treasurer DRH Cambridge Homes, LLC By D.R. Horton, Inc. - Chicago, a member By: /s/ David J. Keller ------------------------------ David J. Keller, Treasurer SEVENTH SUPPLEMENTAL INDENTURE Page 5 EXISTING GUARANTORS ------------------- C. Richard Dobson Builders, Inc. CHI Construction Company CHTEX of Texas, Inc. Continental Homes, Inc. Continental Homes of Florida, Inc. Continental Residential, Inc. (formerly L&W Investments, Inc.) D.R. Horton, Inc. - Birmingham D.R. Horton, Inc. - Denver D.R. Horton, Inc. - Greensboro D.R. Horton, Inc. - Louisville D.R. Horton, Inc. - Minnesota D.R. Horton, Inc. - New Jersey D.R. Horton, Inc. - Portland D.R. Horton, Inc. - Sacramento D.R. Horton, Inc. - Torrey D.R. Horton Los Angeles Holding Company, Inc. D.R. Horton San Diego Holding Company, Inc. DRH Cambridge Homes, Inc. DRH Construction, Inc. DRH Tucson Construction, Inc. DRHI, Inc. KDB Homes, Inc. Meadows I, Ltd. Meadows IX, Inc. Meadows X, Inc. By: /s/ David J. Keller ---------------------------------------- David J. Keller, Treasurer CH Investments of Texas, Inc. Meadows II, Ltd. By: /s/ William K. Peck ---------------------------------------- William K. Peck, President SEVENTH SUPPLEMENTAL INDENTURE Page 6 Continental Homes of Texas, L.P. By CHTEX of Texas, Inc., its general partner By: /s/ David J. Keller ------------------------------------ David J. Keller, Treasurer D.R. Horton Management Company, Ltd. D.R. Horton - Texas, Ltd. By Meadows I, Ltd., its general partner By: /s/ Donald R. Horton ------------------------------------ Donald R. Horton Chairman of the Board SGS Communities at Grande Quay, LLC By Meadows IX, Inc., a member By: /s/ Donald R. Horton ------------------------------------ Donald R. Horton Chairman of the Board and By Meadows X, Inc., a member By: /s/ Donald R. Horton ------------------------------------ Donald R. Horton Chairman of the Board SEVENTH SUPPLEMENTAL INDENTURE Page 7 MERGED GUARANTORS IN EXISTENCE AS OF AUGUST 31, 1999 Continental Ranch, Inc. Land Development, Inc. By: /s/ Donald R. Horton ----------------------------------------- Donald R. Horton, Chairman of the Board SEVENTH SUPPLEMENTAL INDENTURE Page 8 AMERICAN STOCK TRANSFER & TRUST COMPANY, AS TRUSTEE By: /s/ Herbert J. Lemmer ------------------------------------- Name: Herbert J. Lemmer ----------------------------------- Title: Vice President ---------------------------------- SEVENTH SUPPLEMENTAL INDENTURE Page 9 EX-4.13 3 EXHIBIT 4.13 EXHIBIT 4.13 ================================================================================ D.R. HORTON, INC. AND THE GUARANTORS PARTY HERETO AND FIRST UNION NATIONAL BANK, AS TRUSTEE ----------- THIRD SUPPLEMENTAL INDENTURE DATED AS OF AUGUST 31, 1999 ----------- 10% SENIOR NOTES DUE 2006 ================================================================================ THIRD SUPPLEMENTAL INDENTURE, dated as of August 31, 1999, and effective as of the dates set forth in Articles I and II below, to the Indenture, dated as of April 15, 1996 (as amended, modified or supplemented from time to time in accordance therewith, the "Indenture"), by and among D.R. HORTON, INC., a Delaware corporation (the "Company"), the ADDITIONAL GUARANTORS (as defined herein), the EXISTING GUARANTORS (as defined herein) and FIRST UNION NATIONAL BANK, a national banking association organized and existing under the laws of the United States of America, as trustee (the "Trustee"). RECITALS WHEREAS, Continental Homes Holding Corp., a Delaware corporation ("Continental"), and the Trustee entered into the Indenture pursuant to which Continental issued $150,000,000 principal amount of 10% Senior Notes due 2006 (the "Securities"); WHEREAS, on April 20, 1998, pursuant to the laws of the State of Delaware and in accordance with the terms of the Agreement and Plan of Merger, dated as of December 18, 1998, by and between the Company and Continental, Continental was duly merged with and into the Company (the "Merger"), with the Company continuing as the surviving corporation; WHEREAS, as a result of the Merger, the Company succeeded to all obligations, duties and liabilities of Continental under the Indenture as if incurred or contracted by the Company; WHEREAS, pursuant to Section 4.16 of the Indenture, the Company is required to cause any Subsidiary with a net book value greater than $10,000,000 which is a Restricted Subsidiary to guarantee, simultaneously with its designation as a Restricted Subsidiary, the payment of the Securities pursuant to the terms of Article 10 and Exhibit B of the Indenture; WHEREAS, in accordance with Sections 4.16 and 10.03 of the Indenture, the Company desires to cause certain Subsidiaries which are deemed to be Restricted Subsidiaries according to the Indenture to guarantee the payment of the Securities; WHEREAS, pursuant to Section 10.04 of the Indenture, a Guarantor may merge with or into, or dissolve into, the Company or another Restricted Subsidiary; WHEREAS, in accordance with Section 10.04 of the Indenture, the Company has caused certain Guarantors (the "Merged Guarantors") to merge with and into, the Company or certain Restricted Subsidiaries (the "Successors"); WHEREAS, the execution of this Third Supplemental Indenture has been duly authorized by the Boards of Directors of the Company and the Additional Guarantors and all things necessary to make this Third Supplemental Indenture a valid, binding and legal instrument according to its terms have been done and performed; THIRD SUPPLEMENTAL INDENTURE Page 1 NOW THEREFORE, for and in consideration of the premises, the Company, the Additional Guarantors and the Existing Guarantors covenant and agree with the Trustee for the equal and ratable benefit of the respective holders of the Securities as follows: ARTICLE I. ADDITIONAL GUARANTOR 1.1 As of the respective effective dates stated below, and in accordance with Sections 4.16 and 10.03 of the Indenture, the following Restricted Subsidiaries (the "Additional Guarantors") hereby severally agree to be subject to and bound by the terms of the Indenture applicable to a Guarantor and hereby jointly and severally unconditionally and irrevocably guarantee on a senior basis the payment of the Securities pursuant to the terms of Article 10 of, and Exhibit B to, the Indenture:
JURISDICTION OF NAME ORGANIZATION EFFECTIVE DATE ---- --------------- -------------- Astante Luxury Communities, Inc. Delaware June 10, 1999 D.R. Horton, Inc. - Chicago Delaware March 31, 1999 D.R. Horton, Inc. - San Diego Delaware March 31, 1999 DRH Cambridge Homes, LLC Delaware July 1, 1999 DRH Land Company, Inc. California July 1, 1999 DRH Title Company of Colorado, Inc. Colorado July 1, 1999 Meadows VIII, Ltd. Delaware July 1, 1999
1.2 The Additional Guarantors shall execute and deliver a Guarantee, which shall be incorporated herein by reference in the form set forth in Exhibit B to the Indenture. ARTICLE II. MERGED GUARANTORS 2.1 In accordance with Section 10.04 of the Indenture, the Company and the Trustee acknowledge that the Guarantees previously given by the following Merged Guarantors have been assumed by the Successors by reason of the merger or dissolution of the Merged Guarantors into the Successors as indicated below: (a) D.R. Horton Denver Management Company, Inc. merged into D.R. Horton - Denver, Inc. as of January 4, 1999. THIRD SUPPLEMENTAL INDENTURE Page 2 (b) Magnolia Homes Builders, Inc. merged into D.R. Horton, Inc. as of April 6, 1999. (c) S.G. Torrey Atlanta, Ltd. merged into D.R. Horton, Inc. - Torrey as of April 7, 1999. (d) Continental Ranch, Inc. merged into L&W Investments, Inc., by Agreements of Merger signed July 21, 1999 and effective as of July 31, 1999 in Delaware and September 2, 1999 in California, and the name of L&W Investments, Inc. was changed to Continental Residential, Inc. (e) D.R. Horton Los Angeles Management Company, Inc. merged into D.R. Horton Los Angeles Holding Company, Inc., as of August 5, 1999. (f) D.R. Horton San Diego Management Company, Inc. merged into D.R. Horton San Diego Holding Company, Inc., as of August 5, 1999. (g) Land Development, Inc. merged into C. Richard Dobson Builders, Inc. by Articles of Merger signed August 30, 1999, filed with the Virginia State Corporation Commission August 31, 1999, and effective on September 1, 1999. ARTICLE III. MISCELLANEOUS PROVISIONS 3.1 This Third Supplemental Indenture constitutes a supplement to the Indenture, and the Indenture, the First Supplement Indenture thereto, the Second Supplemental Indenture thereto and this Third Supplemental Indenture shall be read together and shall have the effect so far as practicable as though all of the provisions thereof and hereof are contained in one instrument. 3.2 The parties may sign any number of copies of this Third Supplemental Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. 3.3 In the event that any provision in this Third Supplemental Indenture shall be held to be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 3.4 The article and section headings herein are for convenience only and shall not affect the construction hereof. 3.5 Any capitalized term used in this Third Supplemental Indenture and not defined herein that is defined in the Indenture shall have the meaning specified in the Indenture, unless the context shall otherwise require. THIRD SUPPLEMENTAL INDENTURE Page 3 3.6 All covenants and agreements in this Third Supplemental Indenture by the Company, the Existing Guarantors and the Additional Guarantors shall bind each of their successors and assigns, whether so expressed or not. All agreements of the Trustee in this Third Supplemental Indenture shall bind its successors and assigns. 3.7 The laws of the State of New York shall govern this Third Supplemental Indenture, the Securities of each Series and the Guarantees. 3.8 Except as amended by this Third Supplemental Indenture, the terms and provisions of the Indenture shall remain in full force and effect. 3.9 This Third Supplemental Indenture may not be used to interpret another indenture, loan or debt agreement of the Company or a Subsidiary. Any such indenture, loan or debt agreement may not be used to interpret this Third Supplemental Indenture. 3.10 All liability described in paragraph 16 of the Notes of any director, officer, employee or stockholder, as such, of the Company or any Guarantor is waived and released. 3.11 The Trustee accepts the modifications of the trust effected by this Third Supplemental Indenture, but only upon the terms and conditions set forth in the Indenture. Without limiting the generality of the foregoing, the Trustee assumes no responsibility for the correctness of the recitals herein contained which shall be taken as the statements of the Company and the Additional Guarantors, and the Trustee shall not be responsible or accountable in any way whatsoever for or with respect to the validity or execution or sufficiency of this Third Supplemental Indenture, and the Trustee makes no representation with respect thereto. IN WITNESS WHEREOF, the parties hereto have caused this Supplemental Indenture to be duly executed, all as of the day and year first above written. D.R. HORTON, INC. By: /s/ David J. Keller ----------------------------------------- David J. Keller Executive Vice President, Chief Financial Officer and Treasurer THIRD SUPPLEMENTAL INDENTURE Page 4 ADDITIONAL GUARANTORS: ---------------------- Astante Luxury Communities, Inc. D.R. Horton, Inc. - Chicago D.R. Horton, Inc. - San Diego DRH Land Company, Inc. DRH Title Company of Colorado, Inc. Meadows VIII, Ltd. By: /s/ David J. Keller --------------------------------------- David J. Keller, Treasurer DRH Cambridge Homes, LLC By D.R. Horton, Inc. - Chicago, a member By: /s/ David J. Keller ----------------------------------- David J. Keller, Treasurer EXISTING GUARANTORS ------------------- C. Richard Dobson Builders, Inc. CHI Construction Company CHTEX of Texas, Inc. Continental Homes, Inc. Continental Homes of Florida, Inc. Continental Residential, Inc. (formerly L&W Investments, Inc.) D.R. Horton, Inc. - Birmingham D.R. Horton, Inc. - Denver D.R. Horton, Inc. - Greensboro D.R. Horton, Inc. - Louisville D.R. Horton, Inc. - Minnesota D.R. Horton, Inc. - New Jersey D.R. Horton, Inc. - Portland D.R. Horton, Inc. - Sacramento D.R. Horton, Inc. - Torrey D.R. Horton Los Angeles Holding Company, Inc. D.R. Horton San Diego Holding Company, Inc. THIRD SUPPLEMENTAL INDENTURE Page 5 DRH Cambridge Homes, Inc. (formerly known as D.R. Horton Sacramento Management Company, Inc.) DRH Construction, Inc. DRH Tucson Construction, Inc. DRHI, Inc. KDB Homes, Inc. Meadows I, Ltd. Meadows IX, Inc. Meadows X, Inc. By: /s/ David J. Keller ---------------------------------------- David J. Keller, Treasurer CH Investments of Texas, Inc. Meadows II, Ltd. By: /s/ William K. Peck ---------------------------------------- William K. Peck President Continental Homes of Texas, L.P. By CHTEX of Texas, Inc., its general partner By: /s/ David J. Keller ------------------------------------ David J. Keller, Treasurer THIRD SUPPLEMENTAL INDENTURE Page 6 D.R. Horton Management Company, Ltd. D.R. Horton - Texas, Ltd. By Meadows I, Ltd., its general partner By: /s/ Donald R. Horton ----------------------------------- Donald R. Horton Chairman of the Board SGS Communities at Grande Quay, LLC By Meadows IX, Inc., a member By: /s/ Donald R. Horton ----------------------------------- Donald R. Horton Chairman of the Board and By Meadows X, Inc., a member By: /s/ Donald R. Horton ----------------------------------- Donald R. Horton Chairman of the Board THIRD SUPPLEMENTAL INDENTURE Page 7 MERGED GUARANTORS IN EXISTENCE AS OF AUGUST 31, 1999 Continental Ranch, Inc. Land Development, Inc. By: /s/ Donald R. Horton ----------------------------------------- Donald R. Horton, Chairman of the Board FIRST UNION NATIONAL BANK, AS TRUSTEE By: /s/ George J. Rayzis --------------------------------------- Name: George J. Rayzis ---------------------------------- Title: Vice President --------------------------------- THIRD SUPPLEMENTAL INDENTURE Page 8 EX-10.21 4 EXHIBIT 10.21 EXHIBIT 10.21 ================================================================================ AMENDED AND RESTATED MASTER LOAN AND INTER-CREDITOR AGREEMENT AMONG D.R. HORTON, INC., AS BORROWER; NATIONSBANK, N.A., FLEET NATIONAL BANK, BANK UNITED, COMERICA BANK, CREDIT LYONNAIS NEW YORK BRANCH, SOCIETE GENERALE, SOUTHWEST AGENCY, THE FIRST NATIONAL BANK OF CHICAGO, PNC BANK, NATIONAL ASSOCIATION, AMSOUTH BANK, BANK ONE, ARIZONA, NA, FIRST AMERICAN BANK TEXAS, SSB, HARRIS TRUST AND SAVINGS BANK, SANWA BANK CALIFORNIA, NORWEST BANK ARIZONA, NATIONAL ASSOCIATION SUMMIT BANK, AND WACHOVIA MORTGAGE COMPANY, AS BANKS; NATIONSBANK, N.A., AS ISSUING BANK FOR LETTERS OF CREDIT; AMSOUTH BANK, BANK ONE, ARIZONA, NA, PNC BANK, NATIONAL ASSOCIATION AND THE FIRST NATIONAL BANK OF CHICAGO, AS CO-AGENTS; BANK UNITED, COMERICA BANK, CREDIT LYONNAIS NEW YORK BRANCH, AND SOCIETE GENERALE, SOUTHWEST AGENCY, AS MANAGING AGENTS; FLEET NATIONAL BANK, AS DOCUMENTATION AGENT; NATIONSBANK, N.A., AS SYNDICATION AGENT; AND NATIONSBANK, N.A., AS ADMINISTRATIVE AGENT DATED AS OF JULY 1, 1999 ================================================================================
TABLE OF CONTENTS Page ---- ARTICLE 1 DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 ARTICLE 2 LOANS AND LETTERS OF CREDIT. . . . . . . . . . . . . . . . . . . . . . . 16 2.1 EXTENSION OF CREDIT . . . . . . . . . . . . . . . . . . . . . . . . 16 2.2 MANNER OF BORROWING AND DISBURSEMENT UNDER LOANS. . . . . . . . . . 17 2.3 INTEREST ON LOANS . . . . . . . . . . . . . . . . . . . . . . . . . 19 2.4 ISSUANCE AND ADMINISTRATION OF LETTERS OF CREDIT. . . . . . . . . . 19 2.5 FEES AND COMMISSIONS ON LOANS AND LETTERS OF CREDIT . . . . . . . . 23 2.6 NOTES, LOAN AND LETTERS OF CREDIT ACCOUNTS. . . . . . . . . . . . . 24 2.7 REPAYMENT OF LOANS AND LETTERS OF CREDIT. . . . . . . . . . . . . . 25 2.8 MANNER OF PAYMENT . . . . . . . . . . . . . . . . . . . . . . . . . 25 2.9 APPLICATION OF PAYMENTS . . . . . . . . . . . . . . . . . . . . . . 26 ARTICLE 3 INVENTORY AND FUNDING AVAILABILITY . . . . . . . . . . . . . . . . . . . 27 3.1 LOAN FUNDING AVAILABILITY . . . . . . . . . . . . . . . . . . . . . 27 ARTICLE 4 LOAN DISBURSEMENTS AND LETTERS OF CREDIT . . . . . . . . . . . . . . . . 30 4.1 PRIOR TO THE FIRST DISBURSEMENT OR LETTER OF CREDIT . . . . . . . . 30 4.2 SUBSEQUENT DISBURSEMENTS AND LETTERS OF CREDIT. . . . . . . . . . . 31 ARTICLE 5 BORROWER'S COVENANTS, AGREEMENTS, REPRESENTATIONS AND WARRANTIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 5.1 PAYMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 5.2 PERFORMANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 5.3 ADDITIONAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . . 32 5.4 QUARTERLY FINANCIAL STATEMENTS AND OTHER INFORMATION. . . . . . . . 32 5.5 COMPLIANCE CERTIFICATES.. . . . . . . . . . . . . . . . . . . . . . 32 5.6 ANNUAL FINANCIAL STATEMENTS AND INFORMATION; CERTIFICATE OF NO DEFAULT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 5.7 FINANCIAL AND INVENTORY COVENANTS . . . . . . . . . . . . . . . . . 33 5.8 OTHER FINANCIAL DOCUMENTATION.. . . . . . . . . . . . . . . . . . . 33 5.9 PAYMENT OF CONTRACTORS. . . . . . . . . . . . . . . . . . . . . . . 34 5.10 INSPECTION AND APPRAISAL. . . . . . . . . . . . . . . . . . . . . . 34 5.11 FEES AND EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . 34 5.12 HAZARDOUS SUBSTANCES. . . . . . . . . . . . . . . . . . . . . . . . 34 5.13 INSURANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 5.14 LITIGATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 5.15 REPORTABLE EVENT. . . . . . . . . . . . . . . . . . . . . . . . . . 35 5.16 SECURED INDEBTEDNESS. . . . . . . . . . . . . . . . . . . . . . . . 36 ARTICLE 6 DEFAULT AND REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . . 36 6.1 DEFAULTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 6.2 REMEDIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 6.3 WAIVERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 6.4 CROSS-DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 6.5 NO LIABILITY OF THE BANKS . . . . . . . . . . . . . . . . . . . . . 40 ARTICLE 7 THE ADMINISTRATIVE AGENT . . . . . . . . . . . . . . . . . . . . . . . . 41 7.1 APPOINTMENT AND AUTHORIZATION . . . . . . . . . . . . . . . . . . . 41 7.2 DELEGATION OF DUTIES. . . . . . . . . . . . . . . . . . . . . . . . 41 7.3 INTEREST HOLDERS. . . . . . . . . . . . . . . . . . . . . . . . . . 41 7.4 CONSULTATION WITH COUNSEL . . . . . . . . . . . . . . . . . . . . . 41 7.5 DOCUMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 7.6 ADMINISTRATIVE AGENT AND AFFILIATES . . . . . . . . . . . . . . . . 42 7.7 RESPONSIBILITY OF THE ADMINISTRATIVE AGENT. . . . . . . . . . . . . 42 7.8 ACTION BY ADMINISTRATIVE AGENT. . . . . . . . . . . . . . . . . . . 42 7.9 NOTICE OF DEFAULT OR EVENT OF DEFAULT . . . . . . . . . . . . . . . 43 7.10 RESPONSIBILITY DISCLAIMED . . . . . . . . . . . . . . . . . . . . . 43 7.11 INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . 44 7.12 CREDIT DECISION . . . . . . . . . . . . . . . . . . . . . . . . . . 44 7.13 SUCCESSOR ADMINISTRATIVE AGENT. . . . . . . . . . . . . . . . . . . 44 7.14 SYNDICATION AGENT . . . . . . . . . . . . . . . . . . . . . . . . . 45 7.15 DOCUMENTATION AGENT . . . . . . . . . . . . . . . . . . . . . . . . 45 7.16 MANAGING AGENTS AND CO-AGENTS . . . . . . . . . . . . . . . . . . . 45 ARTICLE 8 GENERAL CONDITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 8.1 BENEFIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 8.2 ASSIGNMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 8.3 AMENDMENT AND WAIVER. . . . . . . . . . . . . . . . . . . . . . . . 46 8.4 ADDITIONAL OBLIGATIONS AND AMENDMENTS . . . . . . . . . . . . . . . 47 8.5 CONSIDERATION OF RENEWAL. . . . . . . . . . . . . . . . . . . . . . 47 8.6 TERMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 8.7 GOVERNING LAW AND JURISDICTION. . . . . . . . . . . . . . . . . . . 47 8.8 PUBLICITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 8.9 ATTORNEYS' FEES . . . . . . . . . . . . . . . . . . . . . . . . . . 48 8.10 MANDATORY ARBITRATION . . . . . . . . . . . . . . . . . . . . . . . 48 8.11 INVALIDATION OF PROVISIONS. . . . . . . . . . . . . . . . . . . . . 49 8.12 EXECUTION IN COUNTERPARTS . . . . . . . . . . . . . . . . . . . . . 49 8.13 CAPTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 8.14 NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 8.15 FINAL AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . 55
-ii- EXHIBITS Exhibit A - Form of Acquisition Carve Out Notice Exhibit B - Commitment Ratios Exhibit C - Form of Inventory Summary Report Exhibit D - Form of Operational Carve Out Notice Exhibit E - Form of Request for Advance Exhibit F - Form of Request for Issuance of Letter of Credit Exhibit G - Form of Letter of Credit Application Exhibit H - Form of Quarterly Compliance Certificate Exhibit I - Form of Assignment and Assumption Agreement SCHEDULES Schedule 1.13 - Multi-Level Pricing Grid/Fees Schedule 1.55 - Guarantors Schedule 1.68 - Prior Letters of Credit -iii- AMENDED AND RESTATED MASTER LOAN AND INTER-CREDITOR AGREEMENT THIS AMENDED AND RESTATED MASTER LOAN AND INTER-CREDITOR AGREEMENT (this "AGREEMENT") dated as of the 1st day of July, 1999, is entered into by and among D.R. HORTON, INC., a Delaware corporation; NATIONSBANK, N.A., FLEET NATIONAL BANK, BANK UNITED, COMERICA BANK, THE FIRST NATIONAL BANK OF CHICAGO, CREDIT LYONNAIS NEW YORK BRANCH, PNC BANK, NATIONAL ASSOCIATION, AMSOUTH BANK, BANK ONE, ARIZONA, NA, SOCIETE GENERALE, SOUTHWEST AGENCY, FIRST AMERICAN BANK TEXAS, SSB, HARRIS TRUST AND SAVINGS BANK, SANWA BANK CALIFORNIA, NORWEST BANK ARIZONA, NATIONAL ASSOCIATION, SUMMIT BANK and WACHOVIA MORTGAGE COMPANY, as banks; NATIONSBANK, N.A., as issuing bank for letters of credit; AMSOUTH BANK, BANK ONE ARIZONA, NA, PNC BANK, NATIONAL ASSOCIATION and THE FIRST NATIONAL BANK OF CHICAGO, as co-agents; BANK UNITED, COMERICA BANK, CREDIT LYONNAIS NEW YORK BRANCH and SOCIETE GENERALE, SOUTHWEST AGENCY, as managing agents; FLEET NATIONAL BANK, as documentation agent; NATIONSBANK, N.A., as syndication agent for the Banks; and NATIONSBANK, N.A., as administrative agent for the Banks and the Issuing Bank. WHEREAS, the Borrower, the Banks, the Issuing Bank, the Co-Agents, the Managing Agent, the Documentation Agent, the Syndication Agent and the Administrative Agent are all parties to that certain Master Loan and Inter-Creditor Agreement dated as of April 21, 1998 (the "PRIOR AGREEMENT"); and WHEREAS, the Borrower, the Banks, the Issuing Bank, the Co-Agents, the Managing Agent, the Documentation Agent, the Syndication Agent and the Administrative Agent wish to amend and restate the Prior Agreement as provided herein; NOW THEREFORE, IN CONSIDERATION of the sum of TEN AND NO/100 DOLLARS ($10.00) in hand paid by each party to the other and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged by each of the undersigned, the undersigned hereby covenant and agree as follows: ARTICLE 1 DEFINITIONS For the purposes of this Agreement, the words and phrases set forth below shall have the following meanings: 1.1 ACQUISITION. Whether by purchase, lease, exchange, issuance of stock or other equity or debt securities, merger, reorganization or any other method, (a) any acquisition by the Borrower or any of its Restricted Subsidiaries of Inventory, (b) any acquisition by the Borrower or any of its Restricted Subsidiaries of any other Person, which Person shall then become a Subsidiary of the Borrower or any such Restricted Subsidiary or (c) any acquisition by the Borrower or any of its Restricted Subsidiaries of all or any substantial part of the assets of any other Person. 1.2 ACQUISITION CARVE OUT NOTICE. The written notice by the Borrower in substantially the form of EXHIBIT A attached hereto, delivered to the Administrative Agent and the Banks not later than the end of the fiscal quarter following the fiscal quarter in which an Acquisition is consummated notifying such Persons of the election by the Borrower to initiate a Financial Covenant Carve Out as a result of such Acquisition. Contemporaneously with the delivery of an Acquisition Carve Out Notice, the Borrower shall deliver to the Administrative Agent, the Syndication Agent and the Documentation Agent a plan of action reflecting that the Borrower will be in compliance with the covenants set forth in Sections 5.7(a), (e) and (g) hereof on or prior to the last day of the applicable Financial Covenant Carve Out and failure to deliver such plan of action shall render such Acquisition Carve Out Notice ineffective. 1.3 ACQUISITION COST. If the subject Developed Lot or Land Parcel was purchased individually, the Acquisition Cost for such Developed Lot or Land Parcel shall be the actual purchase price and closing costs approved by the Administrative Agent and paid by the Borrower or its Restricted Subsidiaries for the acquisition of such individual Developed Lot or Land Parcel excluding Administrative Costs, together with all applicable Development Costs. If the subject Developed Lot or Land Parcel was part of a larger group of Developed Lots or Land Parcels, the Acquisition Cost for such Developed Lot or Land Parcel shall be the pro rata portion of the overall actual purchase price and closing costs approved by the Administrative Agent and paid by the Borrower and its Restricted Subsidiaries for the acquisition of such larger group of Developed Lots or Land Parcels allocable to the subject Developed Lot or Land Parcel excluding Administrative Costs, together with a pro rata portion of all applicable Development Costs. 1.4 ACQUISITION SUSPENSION PERIOD. An Acquisition Suspension Period shall occur upon delivery by the Borrower to the Administrative Agent and the Banks of an Acquisition Carve Out Notice and shall continue until the earlier to occur of (a) the last day of the third fiscal quarter immediately following the fiscal quarter in which the Acquisition giving rise to such Acquisition Carve Out Notice was consummated, or (b) the last day of the Borrower's fiscal quarter in which the Leverage Ratio (determined in accordance with Section 5.7 hereof) exceeds 2.6 to 1.0. Notwithstanding the foregoing, the maximum Leverage Ratio as of the last day of each fiscal quarter during an Acquisition Suspension Period shall be 2.6 to 1.0, and failure to comply with such Leverage Ratio shall be an Event of Default. 1.5 ADJUSTED TANGIBLE NET WORTH. With respect to the Borrower and its Restricted Subsidiaries on a consolidated basis, as of any date, the sum of (a) Tangible Net Worth and (b) the lesser of (i) fifty percent (50%) of the aggregate principal amount of all subordinated debt of the Borrower and its Restricted Subsidiaries then outstanding and (ii) twenty percent (20%) of Tangible Net Worth. 1.6 ADMINISTRATIVE AGENT. NationsBank, N.A., in its capacity as Administrative Agent hereunder. -2- 1.7 ADMINISTRATIVE COSTS. Costs and expenses incurred by the Borrower or its Restricted Subsidiaries in connection with (a) the marketing and selling of Inventory which is part of the Loan Inventory and (b) the administration, management and operation of the Borrower's and its Restricted Subsidiaries' businesses (excluding, without limitation, Interest Expense and fees payable hereunder). 1.8 ADVANCE OR ADVANCES. Amounts advanced by the Banks to the Borrower pursuant to Article 2 hereof on the occasion of any borrowing or in connection with draws under Letters of Credit. 1.9 AFFILIATE. Any Person (other than a Person whose sole relationship with the Borrower is as an employee) directly or indirectly controlling, controlled by, or under common control with the Borrower. For purposes of this definition, "control" when used with respect to any Person means the direct or indirect beneficial ownership of more than twenty percent (20%) of the voting securities or voting equity or partnership interests, of such Person or the power to direct or cause the direction of the management and policies of such Person, whether by contract or otherwise. 1.10 AGREEMENT. This Master Loan and Inter-Creditor Agreement. 1.11 AGREEMENT DATE. The date as of which the Borrower, the Administrative Agent, the Syndication Agent, the Documentation Agent, the Managing Agents, the Co-Agents, the Issuing Bank and the Banks execute this Agreement. 1.12 APPLICABLE LAW. In respect of any Person, all provisions of constitutions, statutes, rules, regulations, and orders of governmental bodies or regulatory agencies applicable to such Person, including, without limitation, all orders and decrees of all courts and arbitrators in proceedings or actions to which the Person in question is a party or by which it is bound. 1.13 APPLICABLE MARGIN. The interest rate margins set forth on SCHEDULE 1.13 attached hereto applicable to the Base Rate determined based upon the Leverage Ratio for the fiscal quarter end being tested or the most recently completed fiscal quarter for which financial statements have been delivered or the Borrower's S&P/Moody's Rating, as applicable. The Applicable Margin shall be automatically adjusted as of the later to occur of the first day of the calendar month in which (a) the Borrower's quarterly compliance certificate is due or (b) the Borrower's quarterly compliance certificate is actually delivered. At all times during an Event of Default hereunder, the Applicable Margin shall be the Applicable Margins set forth at Level VI of SCHEDULE 1.13. In the event that the Borrower qualifies for more than one level of pricing, the Applicable Margin shall be based upon the highest level (with Level I being the lowest level) for which the Borrower is qualified. The Applicable Margin from the Agreement Date until the first adjustment date as provided above will be based upon the Leverage Ratio for the most recently completed fiscal quarter of the Borrower prior to the Agreement Date. -3- 1.14 AUTHORIZED SIGNATORY. With respect to the Borrower, such personnel of the Borrower as set forth in an incumbency certificate of the Borrower delivered to the Administrative Agent on the Agreement Date (or any duly executed incumbency certificate delivered after the Agreement Date) and certified therein as being duly authorized by the Borrower to execute documents, agreements, and instruments on behalf of the Borrower. 1.15 AVAILABLE LETTER OF CREDIT COMMITMENT. As of any date of determination, the Letter of Credit Commitment LESS all then outstanding Letter of Credit Obligations. 1.16 AVAILABLE LOAN COMMITMENT. As of any date of determination, an amount equal to the lesser of (a) the Loan Commitment or (b) (i) the Loan Funding Availability less (ii) the sum of (A) the principal amount of the Loans then outstanding, (B) all unreimbursed draws under any Letter of Credit and (C) the then outstanding principal balances of all other Unsecured Indebtedness. 1.17 BANKS. NationsBank, N.A.; Fleet National Bank, Bank United, Comerica Bank, Credit Lyonnais New York Branch, Societe Generale, Southwest Agency, The First National Bank of Chicago, PNC Bank, National Association, AmSouth Bank, Bank One, Arizona, NA, First American Bank Texas, SSB, Harris Trust and Savings Bank, Sanwa Bank California, Norwest Bank Arizona, National Association, Summit Bank and Wachovia Mortgage Company. An individual Bank is sometimes referred to as a "BANK." 1.18 BASE RATE. The lesser of (a)(i) the New York Federal Funds Rate plus (ii) the Applicable Margin or (b)(i) the Three-Month LIBOR PLUS (ii) the Applicable Margin. 1.19 BORROWER. D.R. Horton, Inc., a Delaware corporation. 1.20 BUSINESS DAY. A day on which none of the Banks are authorized or required to be closed and foreign exchange markets are open for the transaction of business required for this Agreement in Atlanta, Georgia. 1.21 CHANGE OF CONTROL. Either (i) any sale, lease or other transfer (in one transaction or a series of transactions) of all or substantially all of the consolidated assets of the Borrower and its Restricted Subsidiaries to any Person (other than a Restricted Subsidiary of the Borrower), provided that a transaction where the holders of all classes of Common Equity of the Borrower immediately prior to such transaction own, directly or indirectly, 50% or more of all classes of Common Equity of such Person immediately after such transaction shall not be a Change of Control; (ii) a "person" or "group" within the meaning of Section 13(d) of the Exchange Act (other than the Borrower or Donald R. Horton, his wife, children or grandchildren, or Terrill J. Horton, or any trust or other entity formed or controlled by Donald R. Horton, his wife, children or grandchildren, or Terrill J. Horton)) becomes the "beneficial owner" (as defined in Rule 13d-8 under the Exchange Act) of Common Equity of the Borrower representing more than 50% of the voting power of the Common Equity of the Borrower; (iii) Continuing Directors cease to constitute at least a majority of the Board of Directors of the Borrower; or (iv) the stockholders of the Borrower approve any plan or proposal for the liquidation or dissolution of -4- the Borrower, provided that a liquidation or dissolution of the Borrower which is part of a transaction that does not constitute a Change of Control under the proviso contained in clause (i) above shall not constitute a Change of Control. 1.22 CHANGE OF MANAGEMENT. Donald R. Horton shall cease to serve either as (a) Chairman of the Board of Directors of the Borrower or (b) President or other chief executive officer of the Borrower. 1.23 CLOSED SALES. For any calculation period, sales of Developed Lots containing Dwellings which have been closed by the Borrower and all Restricted Subsidiaries. Closed Sales shall include Developed Lots containing Dwellings owned by any Person which is or becomes a Restricted Subsidiary before or after the Agreement Date for which sales have closed during the applicable calculation period. Closed Sales shall include closings attributable to acquisitions by the Borrower and/or by its Restricted Subsidiaries or when substantially all assets owned by any Person were acquired by the Borrower and/or Restricted Subsidiaries before or after the Agreement Date. 1.24 CO-AGENTS. AmSouth Bank, Bank One, Arizona, NA, PNC Bank, National Association and The First National Bank of Chicago, in their capacities as Co-Agents hereunder. 1.25 CODE. The Internal Revenue Code of 1986, as amended. 1.26 COMMITMENTS. The aggregate amount of the Loan Commitment and the Letter of Credit Commitment. 1.27 COMMITMENT RATIOS. The percentages in which the Banks are severally bound to satisfy any of the Loan Commitment, the Letter of Credit Commitment or the Commitments as set forth on EXHIBIT B attached hereto and incorporated herein. 1.28 COMMON EQUITY. With respect to any Person, capital stock of such Person that is generally entitled to (i) vote in the election of directors of such Person, or (ii) if such Person is not a corporation, vote or otherwise participate in the selection of the governing body, partners, managers or others that will control the management or policies of such Person. 1.29 CONSTRUCTION COSTS. All costs accepted by the Administrative Agent actually incurred by the Borrower or its Restricted Subsidiaries with respect to the construction of a Dwelling as of the date of determination by the Administrative Agent, excluding (a) projected costs and costs for materials or labor not yet delivered to, provided to or incorporated into such Dwelling and (b) Administrative Costs. 1.30 CONTINENTAL HOMES MERGER. The merger of the Borrower with Continental Homes Holding Corp., a Delaware corporation. 1.31 CONTINENTAL HOMES MERGER DATE. The date on which the Continental Homes Merger is consummated. -5- 1.32 CONTINUING DIRECTOR. A director who either was a member of the board of directors of the Borrower on the Agreement Date or who became a director of the Borrower subsequent to such date and whose election, or nomination for election by the Borrower's stockholders, was duly approved by a majority of the Continuing Directors on the board of directors of the Borrower at the time of such approval, either by a specific vote or by approval of the proxy statement issued by the Borrower on behalf of the entire board of directors of the Borrower in which such individual is named as nominee for a director. 1.33 DEFAULT. Any of the events specified in Section 6.1 hereof, provided that any requirement for notice or lapse of time, or both, has been satisfied. 1.34 DEFAULT RATE. A simple per annum interest rate equal to the sum of the Base Rate, PLUS two hundred basis points (2.00%). 1.35 DEVELOPED LOTS. Subdivision lots owned by the Borrower or its Restricted Subsidiaries, subject to a recorded plat, which the Borrower has designated and the Administrative Agent has accepted to be included and are included as "Developed Lots" in the calculation of the Loan Funding Availability (exclusive of any Dwelling Lot). An individual Developed Lot is sometimes referred to herein as a "Developed Lot." 1.36 DEVELOPMENT COSTS. All costs accepted by the Administrative Agent and actually incurred by the Borrower and its Restricted Subsidiaries with respect to the development of a Land Parcel into a Developed Lot or Developed Lots as of the date of determination by the Administrative Agent, excluding (a) projected costs and costs for materials or labor not yet delivered to, provided to or incorporated into such parcel of land and (b) Administrative Costs. 1.37 DOCUMENTATION AGENT. Fleet National Bank, in its capacity as Documentation Agent hereunder. 1.38 DWELLING. A house which the Borrower or any Restricted Subsidiary has constructed or is constructing on a Developed Lot which has been designated as a Dwelling Lot. 1.39 DWELLING LOTS. Developed Lots with Dwellings which the Borrower or any Restricted Subsidiary has designated and the Administrative Agent has accepted to be included and are included as "Dwelling Lots" in the calculation of the Loan Funding Availability. The term "Dwelling Lot" includes the Dwelling located thereon. An individual Dwelling Lot is sometimes referred to herein as a "Dwelling Lot." 1.40 EBITDA. With respect to the Borrower and all Restricted Subsidiaries, earnings for the preceding twelve (12) calendar months (including without limitation dividends from Unrestricted Subsidiaries including, without limitation, net income (or loss) of any Person that accrued prior to the date that such Person becomes a Restricted Subsidiary or is merged with or into or consolidated with the Borrower or any of its Restricted Subsidiaries) before interest incurred, state and federal income taxes paid, franchise taxes paid and depreciation and -6- amortization, all in accordance with GAAP PLUS, for the twelve (12) calendar month period following the Continental Homes Merger Date, an amount not to exceed $15,000,000 (to adjust for costs associated with the Continental Homes Merger) plus non-cash write downs of any assets. 1.41 ERISA. The Employee Retirement Income Security Act of 1974, as in effect on the Agreement Date and as such Act may be amended thereafter from time to time. 1.42 ERISA AFFILIATE. (a) Any corporation which is a member of the same controlled group of corporations (within the meaning of Code Section 414(b)) as is the Borrower, (b) any other trade or business (whether or not incorporated) under common control (within the meaning of Code Section 414(c)) with the Borrower, (c) any other corporation, partnership or other organization which is a member of an affiliated service group (within the meaning of Code Section 414(m)) with the Borrower, or (d) any other entity required to be aggregated with the Borrower pursuant to regulations under Code Section 414(o). 1.43 EVENT OF DEFAULT. Any event specified in Section 6.1 hereof and any other event which with any passage of time or giving of notice (or both) would constitute such event a Default. 1.44 EXCHANGE ACT. The Securities Exchange Act of 1934, as amended. 1.45 FACILITY FEE. Those certain fees paid by the Borrower to the Banks pursuant to Section 2.5(b) hereof. 1.46 FEDERAL FUNDS EFFECTIVE RATE. As of any date, the "Federal Funds Effective Rate" for each relevant month as published in the Federal Reserve Statistical Release H.15 (519), as published by the Board of Governors of the Federal Reserve System, or any successor publication published by the Board of Governors of the Federal Reserve System. 1.47 FINANCIAL COVENANT CARVE OUT. The Borrower's compliance with either Sections 5.7(a), (e) and (g) hereof during any Acquisition Suspension Period or with Section 5.7(a) hereof during any Operational Suspension Period shall be suspended; PROVIDED, HOWEVER, that there shall be no more than one Financial Covenant Carve Out in any period of twelve (12) consecutive calendar months beginning with the month in which the Financial Covenant Carve Out was elected, and PROVIDED, FURTHER, HOWEVER, that no Financial Covenant Carve Out shall commence unless the Borrower was in compliance with all covenants for not less than one full fiscal quarter immediately preceding any such Financial Covenant Carve Out Notice. 1.48 FIXED CHARGES. The aggregate consolidated interest incurred of the Borrower and its Restricted Subsidiaries for the most recently completed four (4) fiscal quarters for which results have been reported to the Banks. 1.49 FORCE MAJEURE DELAY. A delay to the development of a Lot Under Development or a delay to the construction of a Dwelling which is caused by fire, earthquake or other Acts of -7- God, strike, lockout, acts of public enemy, riot, insurrection, or governmental regulation of the sale or transportation of materials, supplies or labor, provided that the Borrower furnishes the Administrative Agent with written notice of any such delay within ten (10) days from the commencement of any such delay and provided that the period of the Force Majeure Delay shall not exceed the period of delay caused by such event. 1.50 FUNDED NOTES PAYABLE. As of any date, the aggregate principal amounts then outstanding of all Indebtedness for Money Borrowed of the Borrower and its Restricted Subsidiaries, or any of them, in favor of any financial services providers or any seller of real property, including, without limitation, all PARI PASSU public debt, subordinated debt or convertible debt of the Borrower and its Restricted Subsidiaries, or any of them. 1.51 FUNDING PERIOD. A period commencing on the day immediately following the date that the Loan Funding Availability is established pursuant to Section 3.1(c) hereof by the Administrative Agent and ending on the date that the Loan Funding Availability next is established pursuant to Section 3.1(c) hereof by the Administrative Agent. 1.52 GAAP. As in effect as of the Agreement Date, generally accepted accounting principles consistently applied. 1.53 GOVERNMENTAL AUTHORITY. Any nation or government, any state or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. 1.54 GUARANTY OR GUARANTEED. As applied to an obligation (each a "primary obligation"), shall mean and include (a) any guaranty, direct or indirect, in any manner, of any part or all of such primary obligation, and (b) any agreement, direct or indirect, contingent or otherwise, the practical effect of which is to assure in any way the payment or performance (or payment of damages in the event of non-performance) of any part or all of such primary obligation, including, without limiting the foregoing, any reimbursement obligations as to amounts drawn down by beneficiaries of outstanding letters of credit, and any obligation of such Person (the "primary obligor"), whether or not contingent, (i) to purchase any such primary obligation or any property or asset constituting direct or indirect security therefor, (ii) to advance or supply funds (1) for the purchase or payment of such primary obligation or (2) to maintain working capital, equity capital or the net worth, cash flow, solvency or other balance sheet or income statement condition of any other Person, (iii) to purchase property, assets, securities or services primarily for the purpose of assuring the owner or holder of any primary obligation of the ability of the primary obligor with respect to such primary obligation to make payment thereof or (iv) otherwise to assure or hold harmless the owner or holder of such primary obligation against loss in respect thereof. 1.55 GUARANTORS. Those Persons set forth on SCHEDULE 1.55 attached hereto, together with each additional Restricted Subsidiary of Borrower as may from time to time deliver a Guaranty of the Loans and Letters of Credit which Guaranty is accepted by the Administrative Agent. -8- 1.56 INDEBTEDNESS. With respect to any specified Person, (a) all items, except items of (i) shareholders' and partners' equity, (ii) capital stock, (iii) surplus, (iv) general contingency or deferred tax reserves, (v) liabilities for deposits and (vi) deferred income, which in accordance with GAAP would be included in determining total liabilities as shown on the liability side of a balance sheet of such Person, (b) all direct or indirect obligations secured by any Lien to which any property or asset owned by such Person is subject, whether or not the obligation secured thereby shall have been assumed, and (c) all reimbursement obligations with respect to outstanding letters of credit. 1.57 INDEBTEDNESS FOR MONEY BORROWED. With respect to any specified Person, all money borrowed by such Person and Indebtedness represented by notes payable by such Person and drafts accepted representing extensions of credit to such Person, all obligations of such Person evidenced by bonds, debentures, notes, or other similar instruments, all Indebtedness of such Person upon which interest charges are customarily paid, and all Indebtedness of such Person issued or assumed as full or partial payment for real property or services (excluding trade payables and accruals incurred in the ordinary course of business), whether or not any such notes, drafts, obligations, or Indebtedness represent Indebtedness for money borrowed. For purposes of this definition, interest which is accrued but not paid on the original due date or within any applicable cure or grace period as provided by the underlying contract for such interest shall be deemed Indebtedness for Money Borrowed. 1.58 INTEREST EXPENSE. In respect of any period, an amount equal to the sum of the interest incurred during such period based on a stated interest rate with respect to Indebtedness for Money Borrowed of the Borrower and its Restricted Subsidiaries on a consolidated basis. 1.59 INVENTORY. All real and personal property, improvements and fixtures owned by the Borrower or the Restricted Subsidiaries, including but not limited to all Land Parcels, Lots Under Development, Development Lots and Dwelling Lots. 1.60 INVENTORY SUMMARY REPORT. The monthly written summary of the Loan Inventory, in substantially the form of EXHIBIT C attached hereto, to be prepared by the Borrower and submitted to the Administrative Agent in accordance with Section 3.1(c) hereof. 1.61 ISSUING BANK. NationsBank, N.A. (or any successor Issuing Bank appointed in accordance with the provisions of this Agreement), as issuer of the Letters of Credit. 1.62 LAND PARCELS. Parcels of land owned by the Borrower or any of its Restricted Subsidiaries which are, as of the date of determination, not scheduled for commencement of development into Developed Lots during the twelve (12) calendar months immediately following such date of determination and which the Borrower has designated as "Land Parcels". An individual Land Parcel is sometimes referred to as a "Land Parcel." 1.63 LETTER OF CREDIT BANKS. NationsBank, N.A. and Fleet National Bank. -9- 1.64 LETTER OF CREDIT COMMITMENT. The obligation of the Issuing Bank to issue Letters of Credit hereunder pursuant to the terms hereof in an aggregate face amount not to exceed $50,000,000 at any time outstanding. 1.65 LETTER OF CREDIT BANK COMMITMENT RATIO. The percentages in which the Letter of Credit Banks are severally bound to reimburse the Issuing Bank for draws under Letters of Credit pursuant to the terms hereof, as set forth on EXHIBIT B attached hereto and incorporated herein. 1.66 LETTER OF CREDIT OBLIGATIONS. At any time, the sum of (a) an amount equal to the aggregate undrawn and unexpired amount (including the amount to which any such Letter of Credit can be reinstated pursuant to the terms hereof) of the then outstanding Letters of Credit and (b) an amount equal to the aggregate drawn, but unreimbursed, drawings on any Letters of Credit. 1.67 LETTER OF CREDIT RESERVE ACCOUNT. An interest bearing account maintained by the Administrative Agent for the benefit of the Issuing Bank, the proceeds of which are maintained as cash collateral for the Letter of Credit Obligations. The amount of funds in the Letter of Credit Reserve Account shall not exceed the then outstanding Letter of Credit Obligations, and any excess shall be applied as set forth in Section 2.9 hereof. All funds in the Letter of Credit Reserve Account shall be invested in such investments as the Administrative Agent, in its sole and absolute discretion, deems appropriate. The Borrower hereby acknowledges and agrees that any interest earned on such funds shall be retained by the Administrative Agent as additional collateral for the Letter of Credit Obligations. Upon satisfaction in full of all Letter of Credit Obligations, the Administrative Agent shall pay any amounts then held in such account to the Borrower. 1.68 LETTERS OF CREDIT. Letters of credit issued for the account of the Borrower to support obligations of the Borrower or any of its Affiliates, including but not limited to earnest money payments under option contracts, project completion performance or project maintenance (but not credit enhancement), including, without limitation, those Letters of Credit issued by the Issuing Bank prior to the Agreement Date and more fully described on SCHEDULE 1.68 attached hereto. An individual Letter of Credit is sometimes referred to as a "LETTER OF CREDIT." 1.69 LEVERAGE RATIO. As of the last day of each fiscal quarter of the Borrower, the ratio of (a) the Net Funded Notes Payable of the Borrower and its Restricted Subsidiaries on a consolidated basis on such date to (b) Adjusted Tangible Net Worth of the Borrower and its Restricted Subsidiaries on a consolidated basis for the fiscal quarter end being tested. 1.70 LIEN. With respect to any property, any mortgage, lien, pledge, assignment, charge, security interest, title retention agreement, levy, execution, seizure, attachment, garnishment, or other encumbrance of any kind in the nature of any of the foregoing in respect of such property, whether or not choate, vested, or perfected. -10- 1.71 LOAN COMMITMENT. The several obligations of the Banks to advance funds in the aggregate sum of up to $775,000,000 to the Borrower pursuant to the terms hereof as such obligations may be reduced from time to time pursuant to the terms hereof. 1.72 LOAN DOCUMENTS. This Agreement, the Notes and any and all other documents evidencing the Notes or the Letters of Credit or executed in connection therewith as the same may be amended, substituted, replaced, extended or renewed from time to time. 1.73 LOAN FUNDING AVAILABILITY. The amount of Unsecured Indebtedness and unreimbursed draws under Letters of Credit which the Borrower may incur as established pursuant to Section 3.1 hereof, at any applicable time, by the Administrative Agent based on the Loan Inventory. 1.74 LOAN INVENTORY. Lots Under Development, Developed Lots and Dwelling Lots which are not encumbered by a Lien or Liens (other than any Permitted Encumbrance) and which have been designated by the Borrower and accepted by the Administrative Agent as "LOAN INVENTORY" to be utilized for the purpose of calculating the Loan Funding Availability. 1.75 LOANS. Collectively, amounts advanced by the Banks to the Borrower under the Loan Commitment pursuant to the terms of this Agreement and evidenced by the Notes. 1.76 LOTS UNDER DEVELOPMENT. Land Parcels which are, as of the date of determination, being developed into Developed Lots or which are scheduled for the commencement of development into Developed Lots within twelve (12) calendar months after the date of determination, and which the Borrower has designated and the Administrative Agent has accepted to be included and are included as "Lots Under Development" in the calculation of the Loan Funding Availability. An individual Lot Under Development is sometimes referred to as a "Lot Under Development." 1.77 MAJORITY BANKS. At any time, Banks the total of whose Commitment Ratios with respect to the Commitments exceeds fifty percent (50%) of the aggregate Commitment Ratios with respect to the Commitments of Banks entitled to vote hereunder. 1.78 MANAGING AGENTS. Bank United, Comerica Bank, Credit Lyonnais New York Branch and Societe General, Southwest Agency, in their capacities as Managing Agents. 1.79 MATURITY DATE. April 21, 2002, or such earlier date as payment of the Loans and the Letter of Credit Obligations shall be due (whether by acceleration or otherwise) as the same may be extended under Section 8.5 hereof. 1.80 MODELS. A Dwelling Lot containing a dwelling unit which is designated by the Borrower as a model unit for use in marketing and promoting the sale of Dwelling Lots. -11- 1.81 MOODY'S RATING. At any time, with respect to any Person, the rating in effect at such time assigned by Moody's Investors Service, Inc. for the long term senior unsecured debt of such Person. 1.82 NET FUNDED NOTES PAYABLE. As of any date, Funded Notes Payable on such date MINUS the Borrower's and the Restricted Subsidiaries' unrestricted cash and cash equivalents on such date in excess of $15,000,000. 1.83 NET TOTAL LIABILITIES. At any time, Total Liabilities of the Borrower and its Restricted Subsidiaries LESS cash and cash equivalents of the Borrower and its Restricted Subsidiaries. 1.84 NEW YORK FEDERAL FUNDS RATE. For any day, the rate per annum (rounded upward, if necessary, to the nearest 1/16th of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Business Day next succeeding such day. 1.85 NOTES. The promissory notes by the Borrower one each in favor of each of the Banks evidencing such Bank's pro rata share of the Loans, as well as any promissory note or notes issued by the Borrower in substitution, replacement, extension, amendment or renewal of any such promissory note or notes. An individual Note held by a Bank is sometimes referred to as a "NOTE." The combined face amount of the Notes may not exceed SEVEN HUNDRED SEVENTY-FIVE MILLION AND NO/100 DOLLARS ($775,000,000.00). 1.86 OBLIGATIONS. (a) All payment and performance obligations of the Borrower and all other obligors to the Banks, the Issuing Bank and the Administrative Agent under this Agreement and the other Loan Documents, as they may be amended from time to time, or as a result of making the Loans, and (b) the obligation to pay an amount equal to the amount of any and all damages which the Borrower is obligated to pay pursuant to the Loan Documents to, or on behalf of, the Banks, the Issuing Bank, the Co-Agents, the Managing Agents, the Documentation Agent, the Syndication Agent, the Administrative Agent, or any of them, which they may suffer by reason of a breach by any of the Borrower or any other obligor of any obligation, covenant, or undertaking with respect to this Agreement or any other Loan Document. 1.87 OPERATIONAL CARVE OUT NOTICE. The written notice by the Borrower in substantially the form of EXHIBIT D attached hereto delivered to the Administrative Agent and the Banks within sixty (60) days from the end of the fiscal quarter for which this election is made notifying such Persons of the election by the Borrower to initiate a Financial Covenant Carve Out as a result of normal operational performance. Contemporaneously with the delivery of an Operational Carve Out Notice, the Borrower shall provide to the Administrative Agent, the Syndication Agent and the Documentation Agent a plan of action reflecting that the Borrower will be in compliance with Section 5.7(a) hereof on or prior to the last day of the applicable -12- Financial Covenant Carve Out, and the failure to deliver such plan of action shall render such Operational Carve Out Notice ineffective. 1.88 OPERATIONAL SUSPENSION PERIOD. An Operational Suspension Period shall occur upon delivery by the Borrower to the Administrative Agent and the Banks of an Operational Carve Out Notice and shall continue until the earlier to occur of (a) the last day of the second fiscal quarter immediately following the fiscal quarter for which such Operational Carve Out Notice was delivered, or (b) the last day of the Borrower's fiscal quarter on which the Leverage Ratio is to be determined in accordance with Section 5.7 hereof, if on such date the Leverage Ratio (determined in accordance with Section 5.7 hereof) exceeds 2.5 to 1.0. Notwithstanding the foregoing, the maximum Leverage Ratio for the Borrower during an Operational Suspension Period shall be 2.5. to 1.0 at the end of each fiscal quarter of the Borrower, and failure to comply with such Leverage Ratio shall be an Event of Default. 1.89 OVERNIGHT FEDERAL FUNDS RATE. The rate on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day by the Federal Reserve Bank of New York. 1.90 PERMITTED ENCUMBRANCES. Liens, encumbrances, easements and other matters which (a) are in favor of the Administrative Agent, the Syndication Agent, the Documentation Agent, the Managing Agents, the Co-Agents, the Banks and the Issuing Bank to secure the Obligations, (b) are on real estate for real estate taxes not yet delinquent, (c) are for taxes, assessments, judgments, governmental charges or levies or claims the non-payment of which is being diligently contested in good faith by appropriate proceedings and for which adequate reserves have been set aside on the Borrower's books (but only so long as no foreclosure, distraint sale or similar proceedings have been commenced with respect thereto and remain unstayed for a period of thirty (30) days after their commencement), (d) are in favor of carriers, warehousemen, mechanics, laborers and materialmen incurred in the ordinary course of business for sums not yet past due or being diligently contested in good faith (if adequate reserves are being maintained by the Borrower with respect thereto), (e) are incurred in the ordinary course of business in connection with worker's compensation and unemployment insurance, or (f) are easements, rights-of-way, restrictions or similar encumbrances on the use of real property which does not interfere with the ordinary conduct of business of the Borrower or materially detract from the value of such real property. 1.91 PERSON. An individual, corporation, partnership, limited liability company, trust, or unincorporated organization, or a government or any agency or political subdivision thereof. 1.92 PLAN. An employee benefit plan within the meaning of Section 3(3) of ERISA maintained by or contributed to by the Borrower or any ERISA Affiliate. 1.93 RECONCILIATION DATE. Two (2) Business Days after the Borrower's receipt of notice from the Administrative Agent pursuant to Section 3.1(d) hereof that the outstanding principal balance of the Unsecured Indebtedness plus unpaid draws under Letters of Credit exceeds the Loan Funding Availability. -13- 1.94 REPORTABLE EVENT. Shall have the meaning set forth in Section 4043(b) of ERISA. 1.95 REQUEST FOR ADVANCE. Any certificate signed by an Authorized Signatory of the Borrower requesting an Advance hereunder which will increase the aggregate amount of the Loans outstanding, which certificate shall be denominated a "Request for Advance," and shall be in substantially the form of EXHIBIT E attached hereto. Each Request for Advance shall, among other things, (a) specify the date of the Advance, which shall be a Business Day, (b) specify the amount of the Advance, (c) state that there shall not exist, on the date of the requested Advance and after giving effect thereto, a Default or an Event of Default, and (d) state that all conditions precedent to the making of the Advance have been satisfied. 1.96 REQUEST FOR ISSUANCE OF LETTER OF CREDIT. Any certificate signed by an Authorized Signatory of the Borrower requesting that the Issuing Bank issue a Letter of Credit hereunder, which certificate shall be in substantially the form of EXHIBIT F attached hereto, and shall, among other things, (a) specify the stated amount of the Letter of Credit, (b) specify the effective date for the issuance of the Letter of Credit (which shall be a Business Day), (c) specify the date on which the Letter of Credit is to expire (which shall be a Business Day), (d) specify the Person for whose benefit such Letter of Credit is to be issued, (e) specify other relevant terms of such Letter of Credit, (f) be accompanied by a completed letter of credit application substantially similar to EXHIBIT G attached hereto or otherwise in form and substance satisfactory to the Issuing Bank, and (g) state that there shall not exist, on the date of issuance of the requested Letter of Credit and after giving effect thereto, a Default or an Event of Default. 1.97 RESTRICTED SUBSIDIARY. Any Subsidiary of the Borrower which has been designated as a Restricted Subsidiary by the Borrower and from which the Administrative Agent is required to receive a duly executed Subsidiary Guaranty, including, without limitation, the Guarantors. 1.98 S&P RATING. At any time, with respect to any Person, the rating in effect at such time assigned by Standard and Poor's Ratings Group, a division of McGraw Hill, Inc., for the long term senior unsecured debt of such Person. 1.99 S&P/MOODY'S RATING. At any time, with respect to any Person, the ratings in effect at such time assigned by Standard and Poor's Ratings Group, a division of McGraw Hill, and Moody's Investors Service, Inc. for the long term senior unsecured debt of such Person. 1.100 SPECULATIVE LOT. Any Dwelling Lots having a fully or partially constructed dwelling unit thereon which Dwelling Lot is not subject to a bona fide contract for the sale of such Dwelling Lot to a third party, excluding Developed Lots containing Dwellings used as Models. 1.101 SUBSIDIARY. As applied to any Person, (a) any corporation of which fifty percent (50%) or more of the outstanding stock (other than directors' qualifying shares) having ordinary -14- voting power to elect a majority of its board of directors, regardless of the existence at the time of a right of the holders of any class or classes of securities of such corporation to exercise such voting power by reason of the happening of any contingency, or any partnership of which fifty percent (50%) or more of the outstanding partnership interests, is at the time owned by such Person, or by one or more Subsidiaries of such Person, or by such Person and one or more Subsidiaries of such Person, and (b) any other entity which is controlled or susceptible to being controlled by such Person, or by one or more Subsidiaries of such Person, or by such Person and one or more Subsidiaries of such Person. Unless the context otherwise requires, "SUBSIDIARIES" as used herein shall mean the Subsidiaries of the Borrower. 1.102 SUBSIDIARY GUARANTY. A guaranty agreement in form and substance satisfactory to the Administrative Agent whereunder a Restricted Subsidiary guarantees the full and faithful payment and performance of all of the Obligations of the Borrower hereunder and under the other Loan Documents. 1.103 SUPER-MAJORITY BANKS. At any time, Banks the total of whose Commitment Ratios with respect to the Commitments exceeds sixty-six and two thirds percent (66-2/3%) of the aggregate Commitment Ratios with respect to the Commitments of Banks entitled to vote hereunder. 1.104 SYNDICATION AGENT. NationsBank, N.A., in its capacity as Syndication Agent hereunder. 1.105 TANGIBLE ASSETS. The difference between total assets of the Borrower and its Restricted Subsidiaries and all intangible assets of the Borrower and its Restricted Subsidiaries, all as determined in accordance with GAAP. 1.106 TANGIBLE NET WORTH. With respect to the Borrower and its Restricted Subsidiaries, the net worth of the Borrower and its Restricted Subsidiaries, as defined under GAAP, less all "intangible assets" created by Acquisitions and operations subsequent to March 1, 1998. Any non-cash writedowns of assets after March 1, 1998 will flow through the income statement of the Borrower and its Restricted Subsidiaries such that its effect on net income will be included when determining the amount of net income when used to determine Tangible Net Worth. 1.107 THIRD PARTY NOTES PAYABLE. With respect to the Borrower and its Restricted Subsidiaries, all Indebtedness for Money Borrowed other than (a) the Obligations and publicly issued Indebtedness for Money Borrowed which is PARI PASSU with the Obligations, (b) non-recourse Indebtedness, (c) Indebtedness owed to the seller of any Inventory acquired by the Borrower or its Restricted Subsidiaries, (d) Indebtedness which is structurally subordinate to the Obligations or which is convertible into equity at the option of the Borrower, (e) Indebtedness for earnest money and (f) notes payable for insurance premiums and capitalized lease obligations. -15- 1.108 THREE-MONTH LIBOR. As of any date of determination, a rate of interest per annum equal to the three (3) month London Interbank Offered Rate for deposits in United States dollars (rounded to two decimal places) in amounts comparable to the outstanding principal amount of the Loans then outstanding, which interest rate is set forth in the Wall Street Journal (Eastern Edition) on the next Business Day; PROVIDED, HOWEVER, if more than one such offered rate appears in the Wall Street Journal (Eastern Edition), the applicable rate shall be the highest thereof. 1.109 TOTAL LIABILITIES. All items required by GAAP to be set forth as "liabilities" on the Borrower's and its Restricted Subsidiaries' consolidated balance sheet. 1.110 UNRESTRICTED SUBSIDIARIES. Subsidiaries of the Borrower which are not Restricted Subsidiaries. 1.111 UNSECURED INDEBTEDNESS. Indebtedness for Money Borrowed of the Borrower and its Restricted Subsidiaries which is not secured in whole or in part by any Lien except Permitted Encumbrances (excluding capitalized lease obligations, notes payable for insurance premiums, non-recourse promissory notes for seller financing and promissory notes issued as earnest money for contracts). Each definition of an agreement in this Article 1 shall include such agreement as modified, amended, or supplemented from time to time with the prior written consent of the Majority Banks, except as provided in Section 8.3 hereof, and except where the context otherwise requires, definitions imparting the singular shall include the plural and vice versa. Except where otherwise specifically restricted, reference to a party to a Loan Document includes that party and its successors and assigns. All terms used herein which are defined in Article 9 of the Uniform Commercial Code in effect in the State of Georgia on the date hereof and which are not otherwise defined herein shall have the same meanings herein as set forth therein. All accounting terms used herein without definition shall be used as defined under GAAP as of the Agreement Date. ARTICLE 2 LOANS AND LETTERS OF CREDIT 2.1 EXTENSION OF CREDIT . Subject to the terms and conditions of, and in reliance upon the representations and warranties made in this Agreement and the other Loan Documents, the Banks agree, severally in accordance with their respective Commitment Ratios, and not jointly, to extend credit to the Borrower in an aggregate principal amount not to exceed $775,000,000 and the Issuing Bank agrees to issue Letters of Credit on behalf of the Borrower in an aggregate face amount not to exceed $50,000,000, all as provided below: -16- (a) THE LOANS. Subject to the terms and conditions of this Agreement and provided that there is no Default or Event of Default, the Banks agree, severally in accordance with their Commitment Ratios with respect to the Loan Commitment, and not jointly, upon the terms and subject to the conditions of this Agreement, to lend and re-lend to the Borrower, prior to the Maturity Date, amounts which in the aggregate at any one time outstanding do not exceed the Available Loan Commitment. Advances under the Loan Commitment may be repaid and reborrowed from time to time on a revolving basis as set forth herein. (b) THE LETTERS OF CREDIT. Subject to the terms and conditions of this Agreement and provided that there is no Default or Event of Default, the Issuing Bank agrees to issue Letters of Credit for the account of the Borrower pursuant to Section 2.4 hereof in an aggregate amount for the Borrower at any one time not to exceed the Available Letter of Credit Commitment. (c) USE OF LOAN PROCEEDS. The Administrative Agent, the Banks and the Borrower agree that the proceeds of the Loans shall be used for general corporate purposes, including, without limitation, working capital support, home construction, lot acquisition, lot development, land acquisition, asset acquisitions and stock acquisitions. 2.2 MANNER OF BORROWING AND DISBURSEMENT UNDER LOANS. (a) ADVANCES. The Borrower shall give the Administrative Agent irrevocable written notice for Advances under the Loans not later than 12:00 noon (Eastern time) on the day immediately preceding the date of the requested Advance in the form of a Request for Advance, or notice by telephone or telecopy followed immediately by a Request for Advance; PROVIDED, HOWEVER, that the failure by the Borrower to confirm any notice by telephone or telecopy with a Request for Advance shall not invalidate any notice so given. Each Advance hereunder shall be in principal amounts of not less than $100,000 and in integral multiples of $100,000. Subsequent to the initial Advance of the Loans made on the Agreement Date, the Borrower may not request, in the aggregate, more than (i) two (2) Advances in any calendar month plus (ii) four (4) additional Advances in any twelve (12) calendar month period. In any event, the Borrower may not request, in the aggregate, more than twenty-eight (28) Advances in any twelve (12) calendar month period. (b) NOTIFICATION OF BANKS. Upon receipt of a Request for Advance or notice by telephone or telecopy, the Administrative Agent shall promptly notify each Bank by telephone or telecopy of the requested Advance, the date on which the Advance is to be made, the amount of the Advance and the amount of such Bank's portion of the applicable Advance based upon such Bank's Commitment Ratio in respect to such Loan. Each Bank shall, not later than 12:00 noon (Eastern time) on the date specified in such notice, make available to the Administrative Agent at the Administrative Agent's office, or at such account as the Administrative Agent shall designate, the amount of its portion of the applicable Advance in immediately available funds. -17- (c) DISBURSEMENT. Prior to 2:00 p.m. (Eastern time) on the date of an Advance hereunder, the Administrative Agent shall, subject to the satisfaction of the conditions set forth in this Agreement, disburse the amounts made available to the Administrative Agent by the Banks in immediately available funds by (i) transferring the amounts so made available by wire transfer pursuant to the instructions of the Borrower, or (ii) in the absence of such instructions, crediting the amounts so made available to the account of the Borrower maintained with the Administrative Agent or an affiliate of the Administrative Agent. Unless the Administrative Agent shall have received notice from a Bank prior to the date of any Advance that such Bank will not make available to the Administrative Agent such Bank's ratable portion of such Advance, and so long as notice has been given as provided in Section 2.2(b) hereof, the Administrative Agent may assume that such Bank has made such portion available to the Administrative Agent on the date of such Advance and the Administrative Agent may, in its sole discretion and in reliance upon such assumption, without any obligation hereunder to do so, make available to the Borrower on such date a corresponding amount. If and to the extent such Bank shall not have so made such ratable portion available to the Administrative Agent, such Bank agrees to repay to the Administrative Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Administrative Agent for the first two (2) days that such amount is not repaid, at the Overnight Federal Funds Rate, and, thereafter, at the Overnight Federal Funds Rate PLUS four percent (4%) per annum. If such Bank shall repay to the Administrative Agent such corresponding amount, such amount so repaid shall constitute such Bank's portion of the applicable Advance for purposes of this Agreement. If such Bank does not repay such corresponding amount immediately upon the Administrative Agent's demand therefor, the Administrative Agent may notify the Borrower, and the Borrower shall immediately pay such corresponding amount to the Administrative Agent, together with all interest accrued thereon and on the same terms and conditions that would have applied to such Advance had such Bank funded its portion thereof. Any payments received by the Administrative Agent following such demand shall be applied in repayment of amounts owed to the Administrative Agent hereunder prior to any other application. The failure of any Bank to fund its portion of any Advance shall not relieve any other Bank of its obligation, if any, hereunder to fund its respective portion of the Advance on the date of such borrowing, but no Bank shall be responsible for any such failure of any other Bank. In the event that, at any time when this Agreement is not in Default, a Bank for any reason fails or refuses to fund its portion of an Advance, then, until such time as such Bank has funded its portion of such Advance, or all other Banks have received payment in full (whether by repayment or prepayment) of the principal and interest due in respect of such Advance, such non-funding Bank shall (i) be automatically deemed to have transferred to the Bank serving as Administrative Agent all of such non-funding Bank's right to vote regarding any issue on which voting is required or advisable under this Agreement or any other Loan Document, and (ii) not be entitled to receive payments of principal, interest or fees from the Borrower in respect of such Advances which such Bank failed to make. -18- 2.3 INTEREST ON LOANS. (a) PRIOR TO DEFAULT. Interest on Loans shall be computed on the basis of a hypothetical year of 360 days for the actual number of days elapsed during each calendar month and shall be payable at a simple interest rate equal to the Base Rate times the principal balance outstanding from time to time under the Notes for the number of days such principal amounts are outstanding during such calendar month. Interest then outstanding shall be due and payable in arrears as provided in Section 2.7 hereof. (b) UPON DEFAULT. Upon the occurrence and during the continuance of a Default, the Super-Majority Banks shall have the option (but shall not be required to give prior notice thereof to the Borrower to accelerate the maturity of the Loans or to exercise any other rights or remedies hereunder in connection with the exercise of this right) to charge interest on the outstanding principal balance of the Loans at the Default Rate from the date of such Default. Such interest shall be payable on the earliest of demand, the first (1st) Business Day of the next calendar month or the Maturity Date and shall accrue until the earlier of (i) waiver or cure (to the satisfaction of the Super-Majority Banks) of the Default, (ii) agreement by the Super-Majority Banks to rescind the charging of interest at the Default Rate, or (iii) payment in full of the Obligations. 2.4 ISSUANCE AND ADMINISTRATION OF LETTERS OF CREDIT. (a) Subject to the terms and conditions hereof, the Issuing Bank, on behalf of the Letter of Credit Banks, and in reliance on the agreements of the Letter of Credit Banks set forth in subsection (d) below, hereby agrees to issue one or more Letters of Credit up to an aggregate face amount equal to the Available Letter of Credit Commitment, PROVIDED, HOWEVER, that the Issuing Bank shall have no obligation to issue any Letter of Credit if a Default or Event of Default would be caused thereby; and PROVIDED FURTHER, however, that at no time shall the total Letter of Credit Obligations outstanding hereunder exceed $50,000,000. Each Letter of Credit shall (1) be denominated in U.S. dollars, and (2) expire no later than the Maturity Date. A Letter of Credit may contain provisions for automatic renewal provided that no Default or Event of Default exists on the renewal date or would be caused by such renewal and provided further that the new expiration date does not extend beyond the Maturity Date. Each Letter of Credit shall be subject to the Uniform Customs and Practices for Documentary Credits and, to the extent not inconsistent therewith, the laws of the State of Georgia and shall be in a form reasonably acceptable to the Issuing Bank. The Issuing Bank shall not at any time be obligated to issue, or cause to be issued, any Letter of Credit if such issuance would conflict with, or cause the Issuing Bank to exceed any limits imposed by, any Applicable Law. If a Letter of Credit provides that it is automatically renewable unless notice is given by the Issuing Bank that it will not be renewed, the Issuing Bank shall not be bound to give a notice of non-renewal unless directed to do so by the Letter of Credit Banks at least thirty (30) days prior to the date on which such notice of non-renewal is required to be delivered to the beneficiary of the applicable Letter of Credit pursuant to the terms thereof. The Borrower hereby agrees that upon the Maturity Date (whether by reason of acceleration or otherwise) at the request of the Administrative Agent, the Borrower shall deposit in an interest bearing account with the Administrative Agent, as cash collateral for -19- the Obligations, an amount equal to the maximum amount currently or at any time thereafter available to be drawn on all outstanding Letters of Credit, and the Borrower hereby grants to the Administrative Agent (for itself and on behalf of the Issuing Bank) a security interest in all such cash. Upon receipt of the cash collateral referred to in the preceding sentence, the obligations of the Letter of Credit Banks under this Section 2.4 shall cease; provided that, if for any reason, all or any part of such cash collateral must be surrendered or disgorged by the Administrative Agent, then such obligations shall be automatically reinstated. The terms hereof shall govern the reimbursement obligation of the Borrower with respect to the Letters of Credit. (b) The Borrower may from time to time request that the Issuing Bank issue a Letter of Credit. The Borrower shall execute and deliver to the Administrative Agent and the Issuing Bank a Request for Issuance of Letter of Credit for each Letter of Credit to be issued by the Issuing Bank, not later than 12:00 noon (Eastern time) on the fifth (5th) Business Day preceding the date on which the requested Letter of Credit is to be issued, or such shorter notice as may be acceptable to the Issuing Bank and the Administrative Agent. Upon receipt of any such Request for Issuance of Letter of Credit, subject to satisfaction of all conditions precedent thereto as set forth in Article 4 hereof, the Issuing Bank shall process such Request for Issuance of Letter of Credit and the certificates, documents and other papers and information delivered to it in connection therewith in accordance with its customary procedures and shall promptly issue the Letter of Credit requested thereby. The Issuing Bank shall furnish a copy of such Letter of Credit to the Borrower and the Administrative Agent following the issuance thereof. The Borrower shall pay or reimburse the Issuing Bank on demand for normal and customary costs and expenses incurred by the Issuing Bank in effecting payment under, amending or otherwise administering the Letters of Credit. (c) At such time as the Administrative Agent shall be notified by the Issuing Bank that the beneficiary under any Letter of Credit has drawn on the same, the Administrative Agent shall promptly notify the Borrower and each Letter of Credit Bank, by telephone or telecopy, of the amount of the draw and, in the case of each Letter of Credit Bank, such Letter of Credit Bank's portion of such draw amount as calculated in accordance with its Letter of Credit Bank Commitment Ratio. (d) The Borrower hereby agrees to immediately reimburse the Issuing Bank for amounts paid by the Issuing Bank in respect of draws under a Letter of Credit issued at the Borrower's request. In order to facilitate such repayment, the Borrower hereby irrevocably requests the Letter of Credit Banks, and the Letter of Credit Banks hereby severally agree, on the terms and conditions of this Agreement (other than as provided in Article 2 hereof with respect to the amounts of, the timing of requests for, and the repayment of Advances hereunder), with respect to any drawing under a Letter of Credit prior to the occurrence of an event described in clauses (e) or (f) of Section 6.1 hereof, to make an Advance hereunder on each day on which a draw is made under any Letter of Credit and in the amount of such draw, and to pay the proceeds of such Advance directly to the Issuing Bank to reimburse the Issuing Bank for the amount paid by it upon such draw. Each Letter of Credit Bank shall pay its share of such Advance by paying its portion of such Advance to the Administrative Agent in accordance with Section 2.2(c) hereof and its Letter of Credit Bank Commitment Ratio, without reduction for any set-off or -20- counterclaim of any nature whatsoever and regardless of whether any Default or Event of Default (other than with respect to an event described in clauses (e) or (f) of Section 6.1 hereof) then exists or would be caused thereby. If at any time that any Letters of Credit are outstanding, any of the events described in clauses (e) or (f) of Section 6.1 hereof shall have occurred, then each Letter of Credit Bank shall, automatically upon the occurrence of any such event and without any action on the part of the Issuing Bank, the Borrower, the Administrative Agent, the Banks or the Letter of Credit Banks, be deemed to have purchased an undivided participation in the face amount of all Letters of Credit then outstanding in an amount equal to such Letter of Credit Bank's Letter of Credit Bank Commitment Ratio, and each Letter of Credit Bank shall, notwithstanding such Default, upon a drawing under any Letter of Credit, immediately pay to the Administrative Agent for the account of the Issuing Bank, in immediately available funds, the amount of such Letter of Credit Bank's participation (and the Issuing Bank shall deliver to such Letter of Credit Bank a loan participation certificate dated the date of the occurrence of such event and in the amount of such Letter of Credit Bank's Letter of Credit Bank Commitment Ratio). The disbursement of funds in connection with a draw under a Letter of Credit pursuant to this Section shall be subject to the terms and conditions of Section 2.2(c) hereof. The obligation of each Letter of Credit Bank to make payments to the Administrative Agent, for the account of the Issuing Bank, in accordance with this Section 2.4 shall be absolute and unconditional and no Letter of Credit Bank shall be relieved of its obligations to make such payments by reason of noncompliance by any other Person with the terms of the Letter of Credit or for any other reason. The Administrative Agent shall promptly remit to the Issuing Bank the amounts so received from the Letter of Credit Banks. Any overdue amounts payable by any of the Letter of Credit Banks to the Issuing Bank in respect of a draw under any Letter of Credit shall bear interest, payable on demand, for the first two (2) days of such non-payment, at the Overnight Federal Funds Rate, and, thereafter, at the Overnight Federal Funds Rate PLUS four percent (4%). (e) The obligation of the Borrower to reimburse the Letter of Credit Banks for Advances made to reimburse the Issuing Bank for draws under any Letters of Credit shall be absolute, unconditional and irrevocable, and shall be paid strictly in accordance with the terms of this Agreement under all circumstances whatsoever, including, without limitation, the following circumstances: (i) Any lack of validity or enforceability of any Loan Document; (ii) Any amendment or waiver of or consent to any departure from any or all of the Loan Documents; (iii) Any improper use which may be made of any Letter of Credit or any improper acts or omissions of any beneficiary or transferee of any Letter of Credit in connection therewith; (iv) The existence of any claim, set-off, defense or any right which the Borrower may have at any time against any beneficiary or any transferee of any Letter of Credit (or Persons for whom any such beneficiary or any such transferee may be acting) or any Bank or Letter of Credit Bank (other than the defense of payment to such Bank or -21- Letter of Credit Bank in accordance with the terms of this Agreement) or any other Person (other than the Issuing Bank), whether in connection with any Letter of Credit, any transaction contemplated by any Letter of Credit, this Agreement, any other Loan Document, or any unrelated transaction; (v) Any statement or any other documents presented under any Letter of Credit proving to be insufficient, forged, fraudulent or invalid in any respect or any statement therein being untrue or inaccurate in any respect whatsoever, provided that such payment shall not have constituted gross negligence or willful misconduct of the Issuing Bank; (vi) The insolvency of any Person issuing any documents in connection with any Letter of Credit; (vii) Any breach of any agreement between the Borrower and any beneficiary or transferee of any Letter of Credit; (viii) Any irregularity in the underlying transaction with respect to which any Letter of Credit is issued, including any fraud by the beneficiary or any transferee of such Letter of Credit; or (ix) Any other circumstances arising from causes beyond the control of the Issuing Bank. (f) Each Letter of Credit Bank shall be responsible for its pro rata share (based on such Letter of Credit Bank's Letter of Credit Bank Commitment Ratio) of any and all reasonable out-of-pocket costs, expenses (including reasonable legal fees) and disbursements which may be incurred or made by the Issuing Bank in connection with the collection of any amounts due under, the administration of, or the presentation or enforcement of any rights conferred by any Letter of Credit, the Borrower's or any guarantor's obligations to reimburse or otherwise, excluding, however, any such expenses incurred by the Issuing Bank as a result of the willful misconduct or gross negligence of the Issuing Bank in determining whether a request presented under a Letter of Credit complies with the terms of the Letter of Credit. In the event the Borrower shall fail to pay such expenses of the Issuing Bank within ten (10) days after demand for payment by the Issuing Bank, each Letter of Credit Bank shall thereupon pay to the Issuing Bank its pro rata share (based on such Letter of Credit Bank's Letter of Credit Bank Commitment Ratio) of such expenses within five (5) days from the date of the Issuing Bank's notice to the Letter of Credit Banks of the Borrower's failure to pay; PROVIDED, HOWEVER, that if the Borrower or any guarantor shall thereafter pay such expense, the Issuing Bank will repay to each Letter of Credit Bank the amounts received from such Letter of Credit Bank hereunder. The Borrower hereby irrevocably requests the Letter of Credit Banks and the Letter of Credit Banks hereby severally agree subject to compliance with the terms and conditions hereof (other than as provided in Article 2 hereof with respect to the amounts of and the timing of requests for Advances hereunder), to make an Advance to the Issuing Bank, on behalf of the Borrower for reimbursement of expenses under this Section 2.4(f). -22- (g) The Borrower agrees that each Advance by the Letter of Credit Banks to reimburse the Issuing Bank for draws under any Letter of Credit or for expenses as provided in Section 2.4(f) hereof, shall be payable immediately on the date of such Advance and shall bear interest at the Base Rate until paid in full or at the Default Rate following the occurrence of a Default. (h) THE BORROWER AGREES THAT IT WILL INDEMNIFY AND HOLD HARMLESS THE ADMINISTRATIVE AGENT, THE ISSUING BANK, EACH LETTER OF CREDIT BANK AND EACH OTHER BANK AND EACH OF THEIR RESPECTIVE EMPLOYEES, REPRESENTATIVES, OFFICERS AND DIRECTORS FROM AND AGAINST ANY AND ALL CLAIMS, LIABILITIES, OBLIGATIONS, LOSSES (OTHER THAN LOSS OF PROFITS), DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES OR DISBURSEMENTS OF ANY KIND OR NATURE WHATSOEVER (INCLUDING REASONABLE ATTORNEYS' FEES, BUT EXCLUDING TAXES) WHICH MAY BE IMPOSED ON, INCURRED BY OR ASSERTED AGAINST THE ADMINISTRATIVE AGENT, THE ISSUING BANK, ANY SUCH LETTER OF CREDIT BANK OR ANY SUCH BANK IN ANY WAY RELATING TO OR ARISING OUT OF THE ISSUANCE OF A LETTER OF CREDIT, EXCEPT THAT THE BORROWER SHALL NOT BE LIABLE TO THE ADMINISTRATIVE AGENT, THE ISSUING BANK, ANY SUCH LETTER OF CREDIT BANK OR ANY SUCH BANK FOR ANY PORTION OF SUCH CLAIMS, LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES, OR DISBURSEMENTS RESULTING FROM THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF THE ADMINISTRATIVE AGENT, THE ISSUING BANK, ANY SUCH LETTER OF CREDIT BANK OR SUCH BANK, AS THE CASE MAY BE, OR ANY SUCH CLAIMS, LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES OR DISBURSEMENTS ARISING SOLELY OUT OF A CONTROVERSY AMONG THE ADMINISTRATIVE AGENT, THE ISSUING BANK, THE LETTER OF CREDIT BANKS AND THE BANKS, OR ANY OF THEM. THIS SECTION 2.4(h) SHALL SURVIVE TERMINATION OF THIS AGREEMENT. 2.5 FEES AND COMMISSIONS ON LOANS AND LETTERS OF CREDIT. (a) ADMINISTRATION FEE. The Borrower agrees to pay to the Administrative Agent, for its administrative services as administrative agent for the Banks and the Issuing Bank hereunder, a fee of $50,000.00 per annum. Such fee shall be due and payable on the Agreement Date and on each anniversary of the Agreement Date, and shall be fully earned when due and non-refundable when paid. In the event that following the payment of an annual administration fee, all obligations of the Borrower hereunder shall be fully and finally performed and this Agreement shall be terminated prior to the next anniversary of the Agreement Date, a pro rata portion of such fee shall be refunded to the Borrower, based upon the time remaining to the next anniversary of the Agreement Date. (b) FACILITY FEE ON LOANS. The Borrower agrees to pay to the Administrative Agent for the benefit of the Banks, in accordance with their respective Commitment Ratios, a facility fee for each calendar quarter based upon the S&P/Moody's Rating or the Leverage Ratio, as applicable, of the Borrower and its Restricted Subsidiaries in an amount equal to the applicable Facility Fee amount set forth on SCHEDULE 1.13 attached hereto multiplied by the Loan Commitment on the last day of the applicable calendar quarter. The Facility Fee shall be due and payable quarterly in arrears on the eighteenth (18th) day of each February, May, August and -23- November for the immediately preceding calendar quarter and on the Maturity Date. The first payment of the Facility Fee shall be due and payable on August 18, 1998, based on the S&P/Moody's Rating or the Leverage Ratio, as applicable, as of June 30, 1998, for the period from the Agreement Date through June 30, 1998. All Facility Fees shall be fully earned when due and non-refundable when paid. (c) LETTER OF CREDIT FEES. The Borrower agrees to pay to the Administrative Agent (i) for the benefit of the Issuing Bank and the Letter of Credit Banks, a fee on the stated amount of any outstanding Letters of Credit from the date of issuance through the expiration date of each such Letter of Credit in an amount equal to seven-tenths of one percent (0.7%) per annum (the "LETTER OF CREDIT FEES") and (ii) for the benefit of the Issuing Bank, an issuing fee in the amount of $100 for each Letter of Credit (which additional amount shall be due and payable on the date of issuance and renewal). The Letter of Credit Fees shall be calculated on the basis of a hypothetical year of 360 days for the actual number of days elapsed, shall be due and payable on the date of issuance and renewal of each Letter of Credit, and shall be fully earned when due and non-refundable when paid. The Administrative Agent shall, promptly after receipt of the Letter of Credit Fees, distribute such fee to the Letter of Credit Banks in accordance with their respective Letter of Credit Bank Commitment Ratios. 2.6 NOTES, LOAN AND LETTERS OF CREDIT ACCOUNTS. (a) The Loans shall be repayable in accordance with the terms and provisions set forth herein, and shall be evidenced by the Notes. Each Bank shall be issued a Note payable to the order of such Bank in accordance with the respective Commitment Ratio of such Bank. The Notes shall be issued by the Borrower to each of the Banks and shall be duly executed and delivered by Authorized Signatories. (b) Each Bank and each Letter of Credit Bank, as the case may be, may open and maintain on its books in the name of the Borrower a loan account with respect to the Loans and interest thereon and a letter of credit account with respect to its obligations pursuant to Letters of Credit. Each Bank which opens such accounts in respect of the Loans shall debit the applicable loan account for the principal amount of each Advance made by it and accrued interest thereon, and shall credit such loan account for each payment on account of principal of or interest on the Loans. Each Letter of Credit Bank which opens such accounts in respect of the Letters of Credit shall debit the applicable account for the amount of each Advance made by it and accrued interest thereon, and shall credit such account for each payment on account of principal and interest of Letter of Credit Advances. The records of each Bank and each Letter of Credit Bank, as the case may be, with respect to the accounts maintained by it shall be prima facie evidence of the Loans and Letter of Credit Obligations and accrued interest thereon, but the failure to maintain such records shall not impair the obligation of the Borrower to repay Indebtedness hereunder. (c) The Administrative Agent and Issuing Bank may maintain in accordance with their usual practice records of account evidencing the Indebtedness of the Borrower resulting from Advances under the Loans and each drawing under a Letter of Credit. In any -24- legal action or proceeding in respect of this Agreement, the entries made in such record shall be prima facie evidence, absent manifest error, of the existence and amounts of the obligations of the Borrower therein recorded. Failure of the Issuing Bank to maintain any such record shall not excuse the Borrower from the obligation to pay such Indebtedness. To the extent that the records of the Administrative Agent or Issuing Bank conflict with the records of the Banks maintained pursuant to Section 2.6(b) above, absent manifest error, the records of the Administrative Agent or Issuing Bank, as the case may be, shall control. (d) Each Advance from the Banks under this Agreement shall be made pro rata on the basis of their respective applicable Commitment Ratios. (e) Each Advance made on account of drawing under Letters of Credit shall be made pro rata by the Letter of Credit Banks on the basis of their respective Letter of Credit Bank Commitment Ratios. 2.7 REPAYMENT OF LOANS AND LETTERS OF CREDIT. (a) INTEREST. The Borrower shall pay, on the eighteenth (18th) calendar day of each month, all interest on the Loans which has accrued as of the first (1st) calendar day of such month, commencing on the eighteenth (18th) calendar day of the first (1st) full calendar month following the Agreement Date. (b) LETTERS OF CREDIT. The Borrower shall repay all draws upon the Letters of Credit immediately upon the Issuing Bank's demand therefor. The Borrower shall make certain other payments in respect of the Letter of Credit Obligations as provided in Sections 2.4(a), 2.4(g) and 3.1 hereof. (c) RECONCILIATION OF LOAN INVENTORY. The Borrower shall repay certain portions of the outstanding principal of the Loans and accrued and unpaid interest thereon upon the reconciliation of the Loan Funding Availability against the outstanding principal balance under the Notes as provided in Section 3.1 hereof. (d) MATURITY. In addition to the foregoing, a final payment of all Obligations then outstanding shall be due and payable by the Borrower on the Maturity Date. 2.8 MANNER OF PAYMENT. (a) Each payment (including any prepayment) by the Borrower on account of the principal of or interest on the Loans, fees, and any other amount owed to the Banks or the Administrative Agent under this Agreement, the Notes, or the other Loan Documents shall be made not later than 1:00 p.m. (Eastern time) on the date specified for payment under this Agreement or such other Loan Document to the Administrative Agent to an account designated by the Administrative Agent, for the account of the Banks, the Issuing Bank or the Administrative Agent, as the case may be, in lawful money of the United States of America in immediately available funds. Any payment received by the Administrative Agent after -25- 12:00 noon (Eastern time) shall be deemed received on the next Business Day for purposes of interest accrual. In the case of a payment for the account of a Bank or the Issuing Bank, then, subject to the provisions of Section 2.9 of this Agreement, the Administrative Agent will promptly thereafter distribute the amount so received in like funds to such Bank or the Issuing Bank. If the Administrative Agent shall not have received any payment from the Borrower as and when due, the Administrative Agent will promptly notify the Banks and, if appropriate, the Issuing Bank, accordingly, and the Administrative Agent shall not be obligated to make any distributions under this Section 2.8. (b) If any payment under this Agreement or any of the Notes shall be specified to be made upon a day which is not a Business Day, it shall be made on the next succeeding day which is a Business Day, and such extension of time shall in such case be included in computing interest and fees, if any, in connection with such payment. (c) The Borrower may not make payments, in the aggregate, under this Agreement (excluding any payments specifically required pursuant to the terms of this Agreement) more than (i) two (2) times in any calendar month plus (ii) four (4) additional times in any twelve (12) calendar month period. In any event, the Borrower may not make, in the aggregate, more than twenty-eight (28) payments (excluding any payments specifically required pursuant to the terms of this Agreement) under this Agreement in any twelve (12) calendar month period. (d) The Borrower agrees to pay principal, interest, fees, and all other amounts due hereunder or under the Notes and Letter of Credit Obligations without set-off or counterclaim or any deduction whatsoever. (e) THE BORROWER AGREES THAT IT WILL INDEMNIFY AND HOLD HARMLESS EACH BANK AND EACH OF THEIR RESPECTIVE EMPLOYEES, REPRESENTATIVES, OFFICERS AND DIRECTORS FROM AND AGAINST ANY AND ALL CLAIMS, LIABILITIES, OBLIGATIONS, LOSSES (OTHER THAN LOSS OF PROFITS), DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES OR DISBURSEMENTS OF ANY KIND OR NATURE WHATSOEVER (INCLUDING REASONABLE ATTORNEYS' FEES, BUT EXCLUDING TAXES) WHICH MAY BE IMPOSED ON, INCURRED BY OR ASSERTED AGAINST SUCH BANK IN ANY WAY RELATING TO OR ARISING OUT OF THE MAKING OF THE LOANS, EXCEPT THAT THE BORROWER SHALL NOT BE LIABLE TO SUCH BANK FOR ANY PORTION OF SUCH CLAIMS, LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES, OR DISBURSEMENTS RESULTING FROM THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF THE SUCH BANK OR ANY SUCH CLAIMS, LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES OR DISBURSEMENTS ARISING SOLELY OUT OF A CONTROVERSY AMONG THE BANKS. THIS SECTION 2.8(e) SHALL SURVIVE TERMINATION OF THIS AGREEMENT. 2.9 APPLICATION OF PAYMENTS. Unless otherwise specifically provided in this Agreement or the other Loan Documents, payments made to the Administrative Agent, the Letter of Credit Banks or the Banks, or any of them, or otherwise received by the Administrative Agent, the Letter of Credit Banks or the Banks, or any of them (from realization on collateral for the Obligations or otherwise), shall be applied (subject to Section 2.2(c) hereof) in the following -26- order to the extent such Obligations are then due and payable hereunder: FIRST, to the costs and expenses, if any, incurred by the Administrative Agent or the Banks, or any of them, in the collection of such amounts under this Agreement or any of the other Loan Documents, including, without limitation, any reasonable costs incurred in connection with the sale or disposition of any collateral for the Obligations; SECOND, pro rata among the Administrative Agent, the Issuing Bank and the Banks based on the total amount of fees then due and payable hereunder or under any other Loan Document and to any other fees and commissions then due and payable by the Borrower to the Banks, the Issuing Bank and the Administrative Agent under this Agreement or any Loan Document; THIRD, to any due and unpaid interest which may have accrued on the Loans, pro rata among the Banks based on the outstanding principal amount of the Loans outstanding immediately prior to such payment; FOURTH, to any amounts outstanding with respect to draws under Letters of Credit; FIFTH, to any unpaid principal of the Loans, pro rata among the Banks based on the principal amount of the Loans outstanding immediately prior to such payment; SIXTH, to the extent any Letters of Credit are then outstanding, for deposit into the Letter of Credit Reserve Account; SEVENTH, to any other Obligations not otherwise referred to in this Section 2.9 until all such Obligations are paid in full; EIGHTH, to actual damages incurred by the Administrative Agent, the Issuing Bank or the Banks, or any of them, by reason of any breach hereof or of any other Loan Documents by the Borrower or a Restricted Subsidiary; and NINTH, upon satisfaction in full of all Obligations, to the Borrower or as otherwise required by law. Notwithstanding the foregoing, after the occurrence and during the continuance of a Default or an Event of Default, payments with respect to items FOURTH, and FIFTH in the immediately preceding sentence shall be applied to such items based upon the ratio of the Obligations under each of such items to the aggregate Obligations under all of such items. If any Bank shall obtain any payment (whether involuntary or otherwise) on account of the Loans made by it in excess of its ratable share of the Loans then outstanding and such Bank's share of any expenses, fees and other items due and payable to it hereunder, such Bank shall forthwith purchase a participation in the Loans from the other Banks as shall be necessary to cause such purchasing Bank to share the excess payment ratably based on the applicable Commitment Ratios with each of them; PROVIDED, HOWEVER, that if all or any portion of such excess payment is thereafter recovered from such purchasing Bank, such purchase from each Bank shall be rescinded and such Bank shall repay to the purchasing Bank the purchase price to the extent of such recovery. The Borrower agrees that any Bank so purchasing a participation from another Bank pursuant to this Section may, to the fullest extent permitted by law, exercise all its rights of payment with respect to such participation as fully as if such Bank were the direct creditor of the Borrower in the amount of such participation so long as the Obligations are not increased. ARTICLE 3 INVENTORY AND FUNDING AVAILABILITY 3.1 LOAN FUNDING AVAILABILITY. At the designated times set forth herein, the Administrative Agent shall establish a Loan Funding Availability for the Loan Inventory and other Unsecured Indebtedness. -27- (a) CALCULATION OF LOAN FUNDING AVAILABILITY. The Loan Funding Availability shall be equal to the sum of "A" plus "B" plus "C"; PROVIDED, that during any period that the Borrower does not have (i) an S&P Rating of BBB- or better or (ii) a Moody's Rating of Baa3 or better, the sum of "A" and "B" shall not exceed (A) prior to the effectiveness of any Acquisition Carve Out, fifty percent (50%) of the Loan Funding Availability and (B) during the effectiveness of any Acquisition Carve Out, sixty-seven percent (67%) of any Loan Funding Availability. A = seventy-five percent (75%) of the sum of all Acquisition Costs for all Lots Under Development which are included in the Loan Inventory. If, after a parcel of land is designated a Lot Under Development, development of such parcel ceases for thirty (30) calendar days or more (other than by reason of a Force Majeure Delay), at the discretion of the Administrative Agent, the Loan Funding Availability for such parcel may be reduced to an amount determined by the Administrative Agent (which amount can be zero) until development of such Lot Under Development is resumed to the satisfaction of the Administration Agent. B = seventy-five percent (75%) of the sum of all Acquisition Costs for all Developed Lots included in the Loan Inventory. C = one hundred percent (100%) of the sum of all Acquisition Costs and Construction Costs for all Dwelling Lots included in the Loan Inventory. (b) DESIGNATION OF LAND PARCELS, LOTS UNDER DEVELOPMENT, DEVELOPED LOTS AND DWELLING LOTS. On or before the fifteenth (15th) calendar day of each calendar month, the Borrower shall deliver to the Administrative Agent an Inventory Summary Report in the form attached hereto as EXHIBIT C and incorporated herein. The Inventory Summary Report shall reflect Inventory that the Borrower desires to have designated as Loan Inventory. Upon the Administrative Agent's receipt of the Inventory Summary Report, the Administrative Agent may conduct inspections or reviews of the subject Inventory that the Administrative Agent deems appropriate, at the expense of the Administrative Agent except as hereinafter expressly provided. Based upon the information in the Inventory Summary Report and the other information compiled by the Administrative Agent, the Administrative Agent shall determine, in its discretion, whether a Lot Under Development, Developed Lot or Dwelling Lot not previously designated as part of the Loan Inventory shall be designated part of the Loan Inventory and, if so, whether such Lot Under Development, Developed Lot or Dwelling Lot shall be designated a Lot Under Development, Developed Lot or Dwelling Lot. (c) PERIODIC ESTABLISHMENT OF LOAN FUNDING AVAILABILITY. Within two (2) business days of the Administrative Agent's receipt of an Inventory Summary Report, the Administrative Agent shall establish the Loan Funding Availability based on the Report delivered to the Administrative Agent and information compiled by the Administrative Agent. In the event the Borrower does not submit the Inventory Summary Report in the time and manner set forth above or furnish sufficient information to the Administrative Agent to enable the Administrative Agent to establish a new Loan Funding Availability, the Administrative Agent will establish a Loan Funding Availability based on some or all of the previous information submitted to the Administrative Agent by the Borrower in the immediately -28- preceding Inventory Summary Report and the information compiled by the Administrative Agent, as required hereunder, in connection therewith, as the case may be, or other information available to the Administrative Agent. (d) RECONCILIATION. In the event that the Loan Funding Availability for a particular Funding Period is less than the then outstanding principal amount of all Unsecured Indebtedness and unpaid draws under Letters of Credit, the Administrative Agent shall notify the Borrower thereof. On or before the Reconciliation Date, the Borrower shall (i)(A) pay to the Administrative Agent a principal payment to be applied to the Loans and unpaid draws under Letters of Credit and/or (B) provide to the Administrative Agent evidence that the principal amount of other Unsecured Indebtedness has been reduced in an aggregate amount sufficient to eliminate the excess of the outstanding principal amount of the Unsecured Indebtedness and unpaid draws under Letters of Credit over the Loan Funding Availability, together with any accrued and unpaid interest on such excess or (ii) provide a revised Inventory Summary Report designating sufficient additional Inventory (which shall be acceptable to the Administrative Agent, in its discretion) as Loan Inventory to cause the Loan Funding Availability to equal or exceed the outstanding principal of all Unsecured Indebtedness and unpaid draws under Letters of Credit. (e) REMOVAL/DISAPPROVAL OF INVENTORY FOR LOAN FUNDING AVAILABILITY. If, at any time, the Administrative Agent determines, in its reasonable discretion, that any part of the Loan Inventory is not acceptable for inclusion in the calculation of the Loan Funding Availability as a result of an unforeseen material adverse change in the condition of such portion of the Loan Inventory or as a result of the existence of hazardous wastes or materials in or on any Inventory which are in violation of any warranty, representation or covenant of the Loan Documents regarding such hazardous wastes or materials, the Administrative Agent may exclude such portion of the Loan Inventory from the calculation of the Loan Funding Availability. If, after such exclusion, the then outstanding principal amount under Unsecured Indebtedness (and unpaid draws under Letters of Credit) would exceed the Loan Funding Availability, the Borrower shall pay to the Administrative Agent on the Reconciliation Date immediately following the exclusion of such Loan Inventory, a principal payment on the Loans (or provide to the Administrative Agent evidence satisfactory to the Administrative Agent that other Unsecured Indebtedness has been reduced) or unpaid draws under Letters of Credit in an amount sufficient to eliminate such excess of the aggregate outstanding principal balance of the Unsecured Indebtedness (and unpaid draws under Letters of Credit) over the Loan Funding Availability, together with accrued and unpaid interest on such excess. (f) RELEASE OF GUARANTIES. Contemporaneously with the delivery of an Inventory Summary Report, the Borrower may request the release of any Restricted Subsidiary from the Subsidiary Guaranty. In the event that the Loan Funding Availability established by the Administrative Agent pursuant to Section 3.1(e) hereof, without consideration of any Inventory owned by such Restricted Subsidiary, is equal to or greater than the amount otherwise required pursuant to Section 3.1(d) hereof, then the Administrative Agent shall, upon receipt of a certificate from the Borrower that no Default exists before and after giving effect to such release, release such Restricted Subsidiary from the Subsidiary Guaranty. -29- ARTICLE 4 LOAN DISBURSEMENTS AND LETTERS OF CREDIT 4.1 PRIOR TO THE FIRST DISBURSEMENT OR LETTER OF CREDIT. Prior to requesting the first disbursement under the Loans or Letter of Credit hereunder, the Borrower shall deliver all of the following items to the Administrative Agent, in form and substance satisfactory to the Administrative Agent. The Administrative Agent and the Banks shall have no obligation to make the first disbursement hereunder and the Issuing Bank shall have no obligation to issue the first Letter of Credit hereunder until all of these items have been so executed and/or delivered to the Administrative Agent. (a) NOTES AND SUBSIDIARY GUARANTY. A Note by the Borrower payable to the order of each Bank. A Subsidiary Guaranty from the Guarantors in favor of the Banks and Administrative Agent. (b) TAXPAYER IDENTIFICATION NUMBER. The Borrower's federal taxpayer identification number. (c) AUTHORITY DOCUMENTS OF BORROWER. Articles of Incorporation of the Borrower certified by the office of the Secretary of State in which the Borrower is incorporated; Bylaws of the Borrower certified by an officer of the Borrower; Certificate of Existence of the Borrower issued by the state in which the Borrower is incorporated; Incumbency Certificate of the Borrower reflecting the Authorized Signatories; Corporate resolutions of the Borrower certified by an officer of the Borrower and authorizing the Borrower to enter into this Agreement and execute all related documents and Loan Documents applicable to the Loans; and documentation evidencing the Borrower's qualification to do business for each state in which any part of the Loan Inventory owned by Borrower is located certified by the office of the Secretary of State of such state. (d) ATTORNEY'S OPINION. The written opinion of the Borrower's counsel (or special counsel to the Administrative Agent) in form and content acceptable to the Administrative Agent and which addresses the following matters: (i) EXISTENCE, DUE AUTHORIZATION AND EXECUTION. The Borrower is duly organized and existing as a corporation and is in good standing and qualified to do business under the laws of Borrower's state of incorporation and that the Loan Documents evidencing the Loans have been properly executed by the persons authorized to do so; (ii) ENFORCEABILITY. The Loan Documents are enforceable against the Borrower in accordance with their terms; and -30- (iii) MISCELLANEOUS. As to such other matters as the Administrative Agent or the Banks may reasonably request. Such opinions may be qualified to the extent of the knowledge of such counsel based upon reasonable investigation. (e) [RESERVED] (f) REQUEST FOR ADVANCE OR LETTER OF CREDIT. The Request for Advance that the Borrower is required to deliver pursuant to Section 2.2 hereof or the Request for Issuance of Letter of Credit that the Borrower is required to deliver in connection with any issuance of a Letter of Credit hereunder, as the case may be. (g) OTHER DOCUMENTS. Other documents that the Administrative Agent may reasonably require. (h) FEES. Payment of all fees and expenses payable on the Agreement Date to the Banks, the Letter of Credit Banks, the Issuing Bank and the Administrative Agent. (i) INSURANCE. Certificate(s) of insurance required pursuant to Section 5.13 hereof. (j) ENVIRONMENTAL INDEMNITY AGREEMENT. An environmental indemnity agreement by the Borrower in favor of the Administrative Agent, the Issuing Bank and the Banks whereby the Borrower indemnifies such Persons against any and all environmental matters with respect to the Loan Inventory. (k) CONTINENTAL HOMES. Executed merger agreement between the Borrower and Continental Homes, including evidence in form satisfactory to the Administrative Agent that the merger of Continental Homes with the Borrower is effective. 4.2 SUBSEQUENT DISBURSEMENTS AND LETTERS OF CREDIT. Prior to requesting subsequent disbursements under the Loans (subsequent to the first disbursement) or Letters of Credit hereunder (subsequent to the first Letter of Credit), the Borrower shall execute and deliver to the Administrative Agent all of the following items, in form and substance satisfactory to the Administrative Agent. The Administrative Agent and the Banks shall have no obligation to make further disbursements or issue additional Letters of Credit until all of these items have been properly executed and delivered to the Administrative Agent. (a) INVENTORY SUMMARY REPORT. The Inventory Summary Report that the Borrower is required to deliver pursuant to Section 3.1(b) hereof. (b) REQUEST FOR ADVANCE. The Request for Advance that the Borrower is required to deliver pursuant to Section 2.2 hereof or the Request for Issuance of Letter of Credit -31- that the Borrower is required to deliver in connection with any issuance of a Letter of Credit hereunder, as the case may be. (c) OTHER DOCUMENTS. Such other documents that the Administrative Agent may reasonably require. ARTICLE 5 BORROWER'S COVENANTS, AGREEMENTS, REPRESENTATIONS AND WARRANTIES The Borrower makes the following covenants, agreements, representations and warranties with respect to the Loan Documents and the obligations thereunder to the Banks: 5.1 PAYMENT. The Borrower shall pay when due all sums owing under this Agreement, the Notes and the other Loan Documents executed by the Borrower. 5.2 PERFORMANCE. The Borrower shall perform all Obligations under this Agreement, the Notes and the other Loan Documents executed by the Borrower. 5.3 ADDITIONAL INFORMATION. On request of the Administrative Agent, the Borrower shall deliver to the Administrative Agent and/or the Issuing Bank any documents or information with respect to the Inventory that the Administrative Agent and/or the Issuing Bank may reasonably require including, without limitation, surveys and acquisition closing documentation. 5.4 QUARTERLY FINANCIAL STATEMENTS AND OTHER INFORMATION. Within forty-five (45) days after the last day of each quarter in each fiscal year of the Borrower, except the last quarter in each such fiscal year of the Borrower, the Borrower shall deliver to the Administrative Agent the Form 10-Q of the Borrower as filed with the Securities and Exchange Commission. Within ten (10) days from the date of filing, the Borrower shall provide to the Administrative Agent a copy of every other report filed by the Borrower with the Securities and Exchange Commission under the Exchange Act and a copy of each registration statement filed by the Borrower with the Securities and Exchange Commission pursuant to the Securities Act of 1933. 5.5 COMPLIANCE CERTIFICATES. Within forty-five (45) days from the end of each fiscal quarter of the Borrower, the Borrower shall provide to the Administrative Agent a certificate signed by an Authorized Signatory of the Borrower in the form attached hereto as EXHIBIT H setting forth such calculations required to establish whether the Borrower was in compliance with Section 5.7 hereof and setting forth a list of all Guarantors as of the last day of such fiscal quarter. 5.6 ANNUAL FINANCIAL STATEMENTS AND INFORMATION; CERTIFICATE OF NO DEFAULT. Within one hundred (100) days after the end of each fiscal year of the Borrower, the Borrower shall deliver to the Administrative Agent the Form 10-K of the Borrower as filed with the -32- Securities and Exchange Commission, together with the audited consolidated financial statements of the Borrower (which shall be prepared by an independent accounting firm of recognized standing). 5.7 FINANCIAL AND INVENTORY COVENANTS. Until the Obligations are repaid in full, the Borrower shall adhere to the following financial covenants (after giving effect to any Financial Covenant Carve Out), all on a consolidated basis with the Restricted Subsidiaries and determined as of the last day of each fiscal quarter of the Borrower: (a) The Borrower shall maintain at all times a Leverage Ratio of not more than 2.25 to 1. (b) The Borrower shall maintain at all times a ratio of (i) EBITDA to (ii) Fixed Charges of not less than 2.50 to 1.0. (c) As of the Agreement Date and continuing thereafter, the Borrower shall maintain at all times a Tangible Net Worth of not less than three hundred million and no/100 dollars ($300,000,000.00), PLUS fifty percent (50%) of annual net profits for such fiscal year, PLUS fifty percent (50%) of any capital paid into the Borrower (other than stock issued in connection with an employee stock ownership plan, an employee stock option plan, an employee stock purchase plan or for an acquisition). (d) The Borrower shall not at any time permit Third Party Notes Payable to be greater than twenty percent (20%) of Tangible Assets on a consolidated basis; PROVIDED, HOWEVER, that this amount shall not be operative during any period in which the Borrower maintains (i) an S&P Rating of BBB- or better or (ii) a Moody's Rating of Baa3 or better. (e) The total number of Speculative Lots owned by the Borrower and its Restricted Subsidiaries at any given time shall not exceed fifty percent (50%) of all Closed Sales during the immediately preceding twelve (12) calendar months; PROVIDED, HOWEVER, that this total amount shall not be operative during any period in which the Borrower maintains (i) an S&P Rating of BBB- or better or (ii) a Moody's Rating of BAA3 or better. Models shall not be considered "Speculative Lots" for purposes of this Section 5.7(e). (f) [INTENTIONALLY OMITTED] (g) The costs of Developed Lots, Lots Under Development, and Land Parcels owned by the Borrower and all Restricted Subsidiaries as of the date of determination shall not exceed one hundred fifty percent (150%) of the net worth (as defined under GAAP) of the Borrower and all Restricted Subsidiaries, plus fifty percent (50%) of the aggregate principal amount of all subordinated debt of the Borrower and its Restricted Subsidiaries; PROVIDED, HOWEVER, such fifty percent (50%) does not exceed twenty percent (20%) of Tangible Net Worth. 5.8 OTHER FINANCIAL DOCUMENTATION. The Borrower shall provide to the Administrative Agent such other financial information as the Administrative Agent may -33- reasonably request from time to time to clarify or amplify the information required to be furnished to the Administrative Agent under this Agreement. 5.9 PAYMENT OF CONTRACTORS. The Borrower shall pay in a timely manner, and shall cause its Restricted Subsidiaries to pay in a timely manner, any and all contractors and subcontractors who conduct work in or on the Inventory, subject to the right of the Borrower to contest any amount in dispute, so long as the contesting of such amount is pursued diligently and in good faith. The Borrower will advise the Administrative Agent in writing immediately if the Borrower or any of its Restricted Subsidiaries receives any written notice from any contractor(s), subcontractor(s) or material furnisher(s) to the effect that said contractor(s) or material furnisher(s) have not been paid for any labor or materials furnished to or in the Inventory and such outstanding payment or payments are individually or collectively equal to or greater than one million and no/100 dollars ($1,000,000.00) per subdivision or fourteen million and no/100 dollars ($14,000,000.00) in the aggregate. The Borrower will further make available to the Administrative Agent, for inspection and copying, on demand, any contracts, bills of sale, statements, receipted vouchers or agreements, under which the Borrower claims title to any materials, fixtures or articles used in the development of the Loan Inventory or construction of improvements on the Loan Inventory including, without limitation, the Dwellings. 5.10 INSPECTION AND APPRAISAL. The Borrower shall permit the Administrative Agent and the Banks and their authorized agents to enter upon the Inventory during normal working hours and as often as they desire, for the purpose of inspecting or appraising the Loan Inventory or the construction of the Dwellings. 5.11 FEES AND EXPENSES. The Borrower shall pay when due all commitment and renewal fees and external legal fees incurred by the Administrative Agent in connection with the making of the Loans. 5.12 HAZARDOUS SUBSTANCES. The Borrower warrants and represents to the Administrative Agent, Issuing Bank and the Banks that to the best of their knowledge and belief and based on environmental assessments of the Inventory commissioned by the Borrower, except to the extent disclosed to the Administrative Agent in environmental assessments or other writings or to the extent that it would not materially and adversely affect the use and marketability of any Inventory, the Inventory has not been and is not now being used in violation of any federal, state or local environmental law, ordinance or regulation, that no proceedings have been commenced, or notice(s) received, concerning any alleged violation of any such environmental law, ordinance or regulation, and that the Inventory is free of hazardous or toxic substances and wastes, contaminants, oil, radioactive or other materials the removal of which is required or the maintenance of which is restricted, prohibited or penalized by any federal, state or local agency, authority or governmental unit except as set forth in the site assessments. The Borrower covenants that it shall neither permit any such materials to be brought on to the Inventory, nor shall it acquire real property to be added to the Loan Inventory upon which any such materials exist, except to the extent disclosed to the Administrative Agent in environmental assessments or other writings or to the extent that it would not materially and adversely affect the use and marketability of any Inventory; and if such materials are so brought or found located -34- thereon, such materials shall be immediately removed, with proper disposal, to the extent required by applicable environmental laws, ordinances and regulations, and all required environmental cleanup procedures shall be diligently undertaken pursuant to all such laws, ordinances and regulations. The Borrower further represents and warrants that the Borrower will promptly transmit to the Administrative Agent and the Banks copies of any citations, orders, notices or other materia governmental or other communications received with respect to any hazardous materials, substances, wastes or other environmentally regulated substances affecting the Inventory. Notwithstanding the foregoing, there shall not be a default of this provision should the Borrower store or use minimal quantities of the aforesaid materials, provided that: such substances are of a type and are held only in a quantity normally used in connection with the construction, occupancy or operation of comparable buildings or residential developments (such as cleaning fluids and supplies normally used in the day to day operation of residential developments), such substances are being held, stored and used in complete and strict compliance with all applicable laws, regulations, ordinances and requirements, and the indemnity set forth below shall always apply to such substances, and it shall continue to be the responsibility of the Borrower to take all remedial actions required under and in accordance with this Agreement in the event of any unlawful release of any such substance. 5.13 INSURANCE. The Borrower shall keep the Inventory comprising the Loan Inventory insured by responsible insurance companies in such amounts and against such risks as is customary for owners of similar businesses and properties in the same general areas in which the Borrower and its Restricted Subsidiaries operate or, to the customary extent (and in a manner approved by the Administrative Agent) the Borrower may be self insured. All insurance herein provided for shall be in form and with companies reasonably approved by the Administrative Agent. The Borrower shall also maintain general liability insurance, workman's compensation insurance, automobile insurance for all vehicles owned by them and any other insurance reasonably required by the Administrative Agent, to the extent commercially available at a reasonable cost. On the Agreement Date, the Borrower shall deliver to the Administrative Agent a copy of a certificate of insurance evidencing the insurance required hereunder. In addition, on the date of delivery of each report required by Section 3.1(b) hereof, the Borrower shall certify to the Administrative Agent that all insurance policies required to be maintained hereunder remain in full force and effect. 5.14 LITIGATION. The Borrower warrants and represents to the Administrative Agent, the Issuing Bank and the Banks that as of the Agreement Date, neither the Borrower nor any Restricted Subsidiary is a party to any litigation having a reasonable probability of being adversely determined to the Borrower or any Restricted Subsidiary which, if adversely determined, would impair the ability of the Borrower to carry on its business substantially as now conducted or contemplated or would materially adversely affect the financial condition, business or operations of the Borrower. 5.15 REPORTABLE EVENT. Promptly after Borrower receives notice or otherwise becomes aware thereof, the Borrower shall notify the Administrative Agent of the occurrence of any Reportable Event with respect to any Plan as to which the Pension Benefit Guaranty Corporation has not by regulation waived the requirement of Section 4043(a) of ERISA that it be -35- notified within thirty (30) days of the occurrence of such event (provided that the Borrower shall give the Administrative Agent notice of any failure to meet the minimum funding standards of Section 412 of the Code or Section 302 of ERISA, regardless of the issuance of any waivers in accordance with Section 412(d) of the Code. 5.16 SECURED INDEBTEDNESS. The Borrower shall not, and shall not permit any of its Restricted Subsidiaries to, incur or permit to exist any Indebtedness which (a) is secured in whole or in part by any of the Inventory (other than Permitted Encumbrances) or (b) contains any provision requiring the Borrower or any Restricted Subsidiary to grant to the lender thereunder any Lien at a future date or upon the occurrence of any subsequent event; except that the Borrower and its Restricted Subsidiaries may incur (i) Indebtedness in favor of a seller of Inventory to the Borrower which is secured solely by the Inventory contemporaneously acquired from such seller, (ii) Indebtedness secured solely by the Borrower's headquarters building located in Arlington, Texas or any other office building owned by the Borrower or any Restricted Subsidiary, and (iii) Indebtedness secured by any clubhouse located in any development of the Borrower or any Restricted Subsidiary. ARTICLE 6 DEFAULT AND REMEDIES 6.1 DEFAULTS. Each of the following shall constitute a Default, whatever the reason for such event and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment or order of any court or any order, rule, or regulation of any governmental or non-governmental body: (a) Any representation or warranty made under this Agreement shall prove incorrect or misleading in any material respect when made or deemed to have been made; (b) The Borrower shall default in the payment of any principal, interest or other monetary amounts payable hereunder or under the Notes, or any of them, or under the other Loan Documents which payment default (other than payment due on the Maturity Date) is not cured within thirty (30) calendar days of Borrower's receipt of notice from the Administrative Agent; (c) The Borrower shall default in the performance or observance of any other agreement or covenant contained in this Agreement not specifically referred to elsewhere in this Section 6.1, and such Event of Default shall not be cured to the Majority Banks' satisfaction within a period of ninety (90) days from the date the Borrower receives notice from the Administrative Agent with respect thereto; (d) There shall occur any Event of Default in the performance or observance of any agreement or covenant or breach of any representation or warranty contained in any of the Loan Documents (other than this Agreement or as otherwise provided in this Section 6.1 of this -36- Agreement) or any Subsidiary Guaranty, which shall not be cured to the Majority Banks' satisfaction within the applicable cure period, if any, provided for in such Loan Document or ninety (90) days from the date the Borrower receives notice from the Administrative Agent with respect thereto if no cure period is provided in such Loan Document; (e) There shall be entered a decree or order for relief in respect of the Borrower or any of its Restricted Subsidiaries under Title 11 of the United States Code, as now constituted or hereafter amended, or any other applicable federal or state bankruptcy law or other similar law, or appointing a receiver, liquidator, assignee, trustee, custodian, sequestrator, or similar official of the Borrower or any of its Restricted Subsidiaries, or of any substantial part of their respective properties, or ordering the winding-up or liquidation of the affairs of the Borrower or any of its Restricted Subsidiaries, or an involuntary petition shall be filed against the Borrower or any of its Restricted Subsidiaries, and a temporary stay entered, and (i) such petition and stay shall not be diligently contested, or (ii) any such petition and stay shall continue undismissed for a period of thirty (30) consecutive days; (f) The Borrower or any of its Restricted Subsidiaries shall file a petition, answer, or consent seeking relief under Title 11 of the United States Code, as now constituted or hereafter amended, or any other applicable federal or state bankruptcy law or other similar law, make an assignment for the benefit of creditors, or the Borrower or any of its Restricted Subsidiaries shall consent to the institution of proceedings thereunder or to the filing of any such petition or to the appointment or taking of possession of a receiver, liquidator, assignee, trustee, custodian, sequestrator, or other similar official of the Borrower or any of its Restricted Subsidiaries, or of any substantial part of their respective properties, or the Borrower or any of its Restricted Subsidiaries shall fail generally to pay their respective debts as they become due, or the Borrower or any of its Restricted Subsidiaries shall take any corporate or partnership action to authorize any such action; (g) A final judgment shall be entered by any court against the Borrower or any of its Restricted Subsidiaries for the payment of money which exceeds $1,000,000.00, which judgment is not covered by insurance or a warrant of attachment or execution or similar process shall be issued or levied against property of the Borrower or any of its Restricted Subsidiaries which, together with all other such property of the Borrower or any of its Restricted Subsidiaries subject to other such process, exceeds in value $1,000,000.00 in the aggregate, and if, within thirty (30) days after the entry, issue, or levy thereof, such judgment, warrant, or process shall not have been paid or discharged or bonded or stayed pending appeal, or if, after the expiration of any such stay, such judgment, warrant, or process shall not have been paid or discharged; (h) (1) There shall be at any time any "accumulated funding deficiency," as defined in ERISA or in Section 412 of the Code, with respect to any Plan; or (2) a trustee shall be appointed by a United States District Court to administer any Plan; or the Pension Benefit Guaranty Corporation shall institute proceedings to terminate any Plan; or (3) any of the Borrower and its ERISA Affiliates shall incur any liability to the Pension Benefit Guaranty Corporation in connection with the termination of any Plan; or (4) any Plan or trust created under any Plan of any of the Borrower and its ERISA Affiliates shall engage in a non-exempt -37- "prohibited transaction" (as such term is defined in Section 406 of ERISA or Section 4975 of the Code) which would subject the Borrower or any ERISA Affiliate to the tax or penalty on "prohibited transactions" imposed by Section 502 of ERISA or Section 4975 of the Code; and by reason of any or all of the events described in clauses (1) through (4), as applicable, the Borrower shall have incurred or is likely to incur liability in excess of $2,000,000.00 in the aggregate; (i) All or any portion of any Loan Document shall at any time and for any reason be declared by a court of competent jurisdiction in a suit with respect to such Loan Document to be null and void, or a proceeding shall be commenced by any governmental authority involving a legitimate dispute or by the Borrower or any of its Restricted Subsidiaries, having jurisdiction over the Borrower or any of its Restricted Subsidiaries, seeking to establish the invalidity or unenforceability thereof (exclusive of questions of interpretation of any provision thereof), or the Borrower or any of its Restricted Subsidiaries shall deny that it has any liability or obligation for the payment of principal or interest purported to be created under any Loan Document; (j) There shall occur any Change of Control; (k) Except for conveyances of all or any part of the Loan Inventory between the Borrower and the Guarantors there occurs any sale, lease, conveyance, assignment, pledge, encumbrance, or transfer of all or any part of the Loan Inventory or any interest therein, voluntarily or involuntarily, whether by operation of law or otherwise, except (i) in accordance with the terms of this Agreement, (ii) for execution of contracts with prospective purchasers, (iii) for Permitted Encumbrances, and (iv) in the ordinary course of business; or (l) Except in the normal course of Borrower's development of inventory into Developed Lots and construction of Dwellings thereon, without the prior written consent of Administrative Agent, Borrower grants any easement or dedication, files any plat, condominium declaration, or restriction or otherwise encumbers all or any portion of the Loan Inventory, or seeks or permits any zoning reclassification or variance, unless such action is expressly permitted by the Loan Documents or does not affect any Inventory which is part of the Loan Inventory. Notwithstanding anything contained herein to the contrary, the occurrence of any of the foregoing shall not be a Default or an Event of Default hereunder if: (i) the occurrence pertains only to specific parcel(s) within the Loan Inventory; and (ii) the affected parcel(s) is (are) removed from the Loan Inventory on or before ten (10) days in the case of a monetary occurrence and thirty (30) days in the case of a non-monetary occurrence after the occurrence or, if the Borrower is entitled to notice and cure, within the applicable notice and cure period. In the event that any such parcel is a Lot Under Development, Developed Lot or Dwelling Lot, then the Loan Funding Availability shall be immediately calculated excluding such parcel. If, as the result of such removal, the outstanding principal balance under all Unsecured Indebtedness together with any unreimbursed draws under Letters of Credit would exceed the Loan Funding Availability, the Borrower shall pay (X) to the Administrative Agent on the Reconciliation Date immediately following the removal of such Inventory from the Loan Inventory, a principal -38- payment on the Loans in an amount sufficient to eliminate such excess of the aggregate outstanding principal balance of all Unsecured Indebtedness and unreimbursed draws under Letters of Credit over the Loan Funding Availability, together with any due and unpaid interest on such excess or (Y) add additional Inventory to the Loan Inventory (which is acceptable to the Administrative Agent) in an amount sufficient to cause the Loan Funding Availability to equal or exceed the Loans and unreimbursed draws under Letters of Credit. 6.2 REMEDIES. If a Default shall have occurred and shall be continuing: (a) With the exception of a Default specified in Sections 6.1(e), (f) or (g) hereof, the Administrative Agent shall at the request, or may with the consent, of the Super-Majority Banks, by notice to the Borrower (i) declare the Notes, all interest thereon and all other amounts payable under this Agreement and the other Loan Documents to be forthwith due and payable, whereupon the Notes, all such interest and all such amounts shall become and be forthwith due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by the Borrower, (ii) terminate the Commitments, and (iii) require the Borrower to, and the Borrower shall thereupon, deposit in the Letter of Credit Reserve Account, an amount equal to the maximum amount currently or at any time thereafter to be drawn on all outstanding Letters of Credit, and the Borrower hereby pledges to the Administrative Agent, the Letter of Credit Banks and the Issuing Bank and grants to them a security interest in, all such cash as security for the Obligations. (b) Upon the occurrence of a Default under Sections 6.1(e), (f) or (g) hereof, the Commitments shall automatically terminate and such principal, interest (including without limitation, interest which would have accrued but for the commencement of a case or proceeding under the federal bankruptcy laws), Letter of Credit Obligations and other amounts payable under this Agreement or the Notes shall thereupon and concurrently therewith become due and payable, all without any action by the Administrative Agent, the Issuing Bank or the Banks or the holders of the Notes, and the Borrower shall thereupon forthwith deposit in the Letter of Credit Reserve Account an amount equal to all outstanding Letter of Credit Obligations, all without presentment, demand, protest or other notice of any kind, all of which are expressly waived, anything in this Agreement or in the Notes to the contrary notwithstanding, and the Borrower hereby pledges to the Administrative Agent, the Letter of Credit Banks and the Issuing Bank, and grants to the Administrative Agent, the Letter of Credit Banks and the Issuing Bank a security interest in, all such cash as security for the Obligations. (c) The Administrative Agent, with the concurrence of the Super-Majority Banks, shall exercise all of the post-default rights granted to it and to them under the Loan Documents or under Applicable Law. (d) The rights and remedies of the Administrative Agent, the Issuing Bank and the Banks hereunder shall be cumulative, and not exclusive. 6.3 WAIVERS. Neither a waiver of any Default or Event of Default by the Borrower hereunder nor any representation by a Bank or Banks as to the nonoccurrence or nonexistence -39- thereof shall be implied from any delay or omission by any one or all of the Banks to notify the Borrower thereof or to take action on account of such Default or Event of Default, and no express waiver shall affect any Default or Event of Default other than the matter specified in the waiver and it shall be operative only for the time and to the extent therein stated. Waivers of any covenants, terms or conditions contained herein must be in writing and shall not be construed as a waiver of any subsequent breach of the same covenant, term or condition. Any one or all of the Banks' consent or approval to or of any act by the Borrower requiring further consent or approval shall not be deemed to waive or render unnecessary the consent or approval to or of any subsequent or similar act. Any one or all of the Banks' exercise of any right or remedy or hereunder shall not in any way constitute a cure or waiver of a Default or an Event of Default, or invalidate any act done pursuant to any notice of the occurrence of a Default or an Event of Default, or prejudice the Banks in the exercise of any of their rights hereunder or under the Notes or any other Loan Documents, unless, in the exercise of said rights, the Banks realize all amounts owed to them under the Notes and other Loan Documents. 6.4 CROSS-DEFAULT. All of the Notes and other Loan Documents are "cross defaulted" such that (a) the occurrence of an Event of Default under any one of the Loan Documents shall constitute an Event of Default under this Agreement and all of the Loan Documents and (b) the occurrence of a Default under any one of the Loan Documents shall constitute a Default under this Agreement and all of the other Loan Documents. 6.5 NO LIABILITY OF THE BANKS. (a) CONSTRUCTION AND/OR DEVELOPMENT. None of the Banks, the Administrative Agent or the Issuing Bank shall be liable to any party for (i) the development of or construction upon any of the Inventory, (ii) the failure to develop or construct or protect improvements on the Inventory, (iii) the payment of any expense incurred in connection with the development of or construction upon the Inventory, (iv) the performance or nonperformance of any other obligation of the Borrower or any Restricted Subsidiary, or (v) the Banks' or the Administrative Agent's exercise of any remedy available to them. In addition, the Banks shall not be liable to the Borrower or any third party for the failure of the Banks or their authorized agents to discover or to reject materials or workmanship during the course of the Banks' inspections of the Inventory. (b) DWELLING LOTS. In addition to 6.5(a) above, none of the Banks, the Administrative Agent or the Issuing Bank shall be liable to any party for (i) the construction or completion of the Dwellings, (ii) the failure to construct, complete or protect the Dwellings, (iii) the payment of any expense incurred in connection with the construction of the Dwellings, (iv) the performance or nonperformance of any other obligation of the Borrower or any Restricted Subsidiary, or (v) the Banks' or the Administrative Agent's exercise of any remedy available to them. In addition, the Banks shall not be liable to the Borrower or any third party for the failure of the Banks or their authorized agents to discover or to reject materials or workmanship during the course of the Banks' inspections of the Dwelling Lots. (c) OTHER BANKS. The obligations of each Bank under this Agreement are separate and independent such that no action, inaction or responsibility of one Bank shall be -40- imputed to the remaining Banks. The Borrower hereby waives any claim or demand against each Bank as to the action, inaction or responsibility of another. ARTICLE 7 THE ADMINISTRATIVE AGENT. 7.1 APPOINTMENT AND AUTHORIZATION. Each Bank hereby irrevocably appoints and authorizes, and hereby agrees that it will require any transferee of any of its interest in its Loans and in its Notes irrevocably to appoint and authorize, the Administrative Agent to take such actions as its agent on its behalf and to exercise such powers hereunder as are delegated by the terms hereof, together with such powers as are reasonably incidental thereto. Neither the Administrative Agent nor any of its directors, officers, employees, or agents shall be liable to any Bank (or any transferee thereof) for any action taken or omitted to be taken by it or them hereunder or in connection herewith (including, without limitation, the granting or withholding of approval of any matter), except for its or their own gross negligence or willful misconduct. The Banks hereby each acknowledge and agree that the Administrative Agent may, absent actual knowledge to the contrary, rely upon certifications of the Borrower with respect to Inventory, financial covenant compliance, covenant compliance and all matters related thereto. The Administrative Agent shall endeavor to exercise its rights and responsibilities under this Agreement in accordance with its usual practices for borrowers similar to the Borrower, but the Administrative Agent shall not be liable to the Banks with respect to errors or omissions with respect to the foregoing unless they are the result of the gross negligence or willful misconduct of the Administrative Agent. 7.2 DELEGATION OF DUTIES. The Administrative Agent may execute any of its duties under the Loan Documents by or through agents or attorneys selected by it using reasonable care and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Administrative Agent shall not be responsible to any Bank for the negligence or misconduct of any agents or attorneys selected by it with reasonable care. 7.3 INTEREST HOLDERS. The Administrative Agent may treat each Bank, or the Person designated in the last notice filed with the Administrative Agent under this Section 7.3, as the holder of all of the interests of such Bank in its Loans and in its Notes until written notice of transfer, signed by such Bank (or the Person designated in the last notice filed with the Administrative Agent) and by the Person designated in such written notice of transfer, in form and substance satisfactory to the Administrative Agent, shall have been filed with the Administrative Agent. 7.4 CONSULTATION WITH COUNSEL. The Administrative Agent may consult with legal counsel selected by it and shall not be liable to any Bank (or transferee thereof) for any action taken or suffered by it in good faith in reliance thereon. -41- 7.5 DOCUMENTS. The Administrative Agent shall be under no duty to examine, inquire into, or pass upon the validity, effectiveness, or genuineness of this Agreement, any Note, or any instrument, document, or communication furnished pursuant hereto or in connection herewith, and the Administrative Agent shall be entitled to assume that they are valid, effective, and genuine, have been signed or sent by the proper parties, and are what they purport to be. 7.6 ADMINISTRATIVE AGENT AND AFFILIATES. The Administrative Agent and its affiliates may accept deposits from, administer depository accounts for and generally engage in any kind of business with the Borrower or any Affiliates of, or Persons doing business with, the Borrower, without any obligation to account to any Bank (or any transferee thereof) therefor. 7.7 RESPONSIBILITY OF THE ADMINISTRATIVE AGENT. The duties and obligations of the Administrative Agent under this Agreement are only those expressly set forth in this Agreement. The Administrative Agent shall be entitled to assume that no Default or Event of Default has occurred and is continuing unless it has actual knowledge, or has been notified by the Borrower, of such fact and has either determined that a Default or an Event of Default has occurred or has been notified by a Bank that such Bank considers that a Default or an Event of Default has occurred and is continuing, and such Bank shall specify in detail the nature thereof in writing. The Administrative Agent shall not be liable hereunder to any Bank (or any transferee thereof) for any action taken or omitted to be taken except for its own gross negligence or willful misconduct. The Administrative Agent shall provide each Bank with copies of such documents received from the Borrower as such Bank may reasonably request. 7.8 ACTION BY ADMINISTRATIVE AGENT. (a) Except for action requiring the approval of the Majority Banks, the Super-Majority Banks or all Banks, the Administrative Agent shall be entitled to use its discretion with respect to exercising or refraining from exercising any rights which may be vested in it by, and with respect to taking or refraining from taking any action or actions which it may be able to take under or in respect of, this Agreement, unless the Administrative Agent shall have been instructed by the Majority Banks or the Super-Majority Banks, as the case may be, to exercise or refrain from exercising such rights or to take or refrain from taking such action, provided that the Administrative Agent shall not exercise any rights under Section 6.2(a) of this Agreement without the request of the Majority Banks or the Super-Majority Banks, as the case may be. The Administrative Agent shall incur no liability to any Bank (or any transferee thereof) under or in respect of this Agreement with respect to anything which it may do or refrain from doing in the reasonable exercise of its judgment or which may seem to it to be necessary or desirable in the circumstances, except for its gross negligence or willful misconduct. (b) The Administrative Agent shall not be liable to the Banks or to any Bank in acting or refraining from acting under this Agreement in accordance with the instructions of the Majority Banks or the Super-Majority Banks, as the case may be, and any action taken or failure to act pursuant to such instructions shall be binding on all Banks. -42- (c) The Borrower shall have the right to rely upon actions and representations of the Administrative Agent in the performance of its duties hereunder (including, without limitation, representations with respect to amendments or waivers pursuant to Section 8.3 hereof), without regard to whether such actions or representations are actually authorized by the Banks or any of them and without seeking confirmation or ratification of such actions or representations. 7.9 NOTICE OF DEFAULT OR EVENT OF DEFAULT. In the event that the Administrative Agent or any Bank shall acquire actual knowledge, or shall have been notified in writing, of any Default or Event of Default, the Administrative Agent or such Bank shall promptly notify the Banks and the Administrative Agent, and the Administrative Agent shall take such action and assert such rights under this Agreement as the Majority Banks or Super-Majority Banks (as applicable) shall request in writing, and the Administrative Agent shall not be subject to any liability by reason of its acting pursuant to any such request. If the Majority Banks or Super-Majority Banks (as applicable) shall fail to request the Administrative Agent to take action or to assert rights under this Agreement in respect of any Default or Event of Default within ten (10) days (or shorter period as set forth in such notice) after their receipt of the notice of any Default or Event of Default from the Administrative Agent, or shall request inconsistent action with respect to such Default or Event of Default, the Administrative Agent may, but shall not be required to, take such action and assert such rights (other than rights under Article 6 hereof) as it deems in its discretion to be advisable for the protection of the Banks, except that, if the Majority Banks or Super-Majority Banks (as applicable) have instructed the Administrative Agent not to take such action or assert such right, in no event shall the Administrative Agent act contrary to such instructions. 7.10 RESPONSIBILITY DISCLAIMED. The Administrative Agent, in its capacity as Administrative Agent, shall be under no liability or responsibility whatsoever as Administrative Agent: (a) To the Borrower or any other Person or entity as a consequence of any failure or delay in performance by or any breach by, any Bank or Banks of any of its or their obligations under this Agreement; (b) To any Bank or Banks, as a consequence of any failure or delay in performance by, or any breach by, the Borrower or any other obligor of any of its obligations under this Agreement or the Notes or any other Loan Document; or (c) To any Bank or Banks for any statements, representations, or warranties in this Agreement, or any other document contemplated by this Agreement or any information provided pursuant to this Agreement, any other Loan Document, or any other document contemplated by this Agreement, or for the validity, effectiveness, enforceability, or sufficiency of this Agreement, the Notes, any other Loan Document, or any other document contemplated by this Agreement. -43- 7.11 INDEMNIFICATION. The Banks agree to indemnify the Administrative Agent (to the extent not reimbursed by the Borrower) pro rata according to their respective Commitment Ratios, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses (including fees and expenses of experts, agents, consultants, and counsel), or disbursements of any kind or nature whatsoever which may be imposed on, incurred by, or asserted against the Administrative Agent in any way relating to or arising out of this Agreement, any other Loan Document, or any other document contemplated by this Agreement or any action taken or omitted by the Administrative Agent under this Agreement, any other Loan Document, or any other document contemplated by this Agreement, except that no Bank shall be liable to the Administrative Agent for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses, or disbursements resulting from the gross negligence or willful misconduct of the Administrative Agent. The provisions of this Section 7.11 shall survive the termination of this Agreement. 7.12 CREDIT DECISION. Each Bank represents and warrants to each other and to the Administrative Agent that: (a) In making its decision to enter into this Agreement and to make Advances it has independently taken whatever steps it considers necessary to evaluate the financial condition and affairs of the Borrower and that it has made an independent credit judgment, and that it has not relied upon information provided by the Administrative Agent; and (b) So long as any portion of the Loans or Letter of Credit Obligations remains outstanding, it will continue to make its own independent evaluation of the financial condition and affairs of the Borrower. 7.13 SUCCESSOR ADMINISTRATIVE AGENT. Subject to the appointment and acceptance of a successor Administrative Agent (which shall be any Bank or a commercial Issuing Bank organized under the laws of the United States of America or any political subdivision thereof which has combined capital and reserves in excess of $250,000,000) as provided below, the Administrative Agent may resign at any time by giving written notice thereof to the Banks and the Borrower and may be removed at any time for cause by the Majority Banks. Upon any such resignation or removal, the Majority Banks shall have the right to appoint a successor Administrative Agent. If no successor Administrative Agent shall have been so appointed by the Majority Banks, and shall have accepted such appointment within thirty (30) days after the retiring Administrative Agent's giving of notice of resignation or the Majority Banks' removal of the retiring Administrative Agent, then the retiring Administrative Agent may, on behalf of the Banks, appoint a successor Administrative Agent which shall be any Issuing Bank or a commercial bank organized under the laws of the United States of America or any political subdivision thereof which has combined capital and reserves in excess of $250,000,000. Upon the acceptance of any appointment as Administrative Agent hereunder by a successor Administrative Agent, such successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges, duties, and obligations of the retiring Administrative Agent, and, after fully performing its obligations pursuant to Section 2.8 hereof as to all payments received by it, the retiring Administrative Agent shall be discharged from its -44- duties and obligations hereunder. After any retiring Administrative Agent's resignation or removal hereunder as Administrative Agent, the provisions of this Section 7.13 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as the Administrative Agent. 7.14 SYNDICATION AGENT. The Syndication Agent shall have no duties or obligations under this Agreement or the other Loan Documents in its capacity as Syndication Agent. 7.15 DOCUMENTATION AGENT. The Documentation Agent shall have no duties or obligations under this Agreement or the other Loan Documents in its capacity as Documentation Agent. 7.16 MANAGING AGENTS AND CO-AGENTS. The Managing Agents and the Co-Agents shall have no duties or obligations under this Agreement or the other Loan Documents in their capacities as Managing Agents and Co-Agents. ARTICLE 8 GENERAL CONDITIONS 8.1 BENEFIT. This Agreement is made and entered into for the sole protection and benefit of the Administrative Agent, the Issuing Bank and the Banks and the Borrower, their successors and assigns, and no other person or persons other than the Borrower shall have any right of action hereon or rights to the Loan proceeds at any time. None of the Administrative Agent, the Issuing Bank or the Banks shall (a) owe any duty whatsoever to any claimant for labor performed or material furnished in connection with the construction of any Dwelling or improvement on any Inventory, or (b) owe any duty to apply any undisbursed portion of the Loan to the payment of any claim, or (c) owe any duty to exercise any right or power of the Banks hereunder or arising from any Default by the Borrower. 8.2 ASSIGNMENT. The terms hereof shall be binding upon and inure to the benefit of the heirs, successors, assigns, and personal representatives of the parties hereto; provided, however, that the Borrower shall not assign this Agreement or any of its rights, interests, duties or obligations hereunder or any Loan proceeds or other monies to be advanced hereunder in whole or in part without the prior written consent of the Banks and any such assignment (whether voluntary or by operation law) without said consent shall be void and render automatically terminated any obligation of any Bank hereunder to advance any further monies pursuant to this Agreement or any other Loan Document. Any Bank may assign its rights and obligations under this Agreement, the Notes and any other Loan Documents, in whole or in part, to any other Person, provided that all of the provisions hereof shall continue in full force and effect and, in the event of such assignment, such Bank shall thereafter be relieved of all liability hereunder with respect to actions or omissions of such Bank occurring thereafter, but only to the extent of the interest so assigned and any Loan disbursements made by any assignee(s) shall be deemed made in pursuance and not in modification hereof and shall be evidenced by the -45- applicable Note and any other Loan Documents. Notwithstanding the foregoing subject to the last sentence of this Section 8.2, (i) with the prior written consent of the Administrative Agent only (which consent shall not be unreasonably withheld), a Bank may assign not less than one hundred percent (100%) of its interest, rights and obligations hereunder, and (ii) without the prior written consent of all of the other Banks, no Bank shall have the right to assign any portion of its interest, rights or obligations hereunder to any other Person unless (a) such assignment is in compliance with clause (i) of this sentence, or (b) in all other cases, (1) the assignee shall assume all of the obligations of the assigning Bank under this Agreement, to the extent of the interest so assigned and (2) following such assignment, each of the assigning Bank and the assignee shall maintain a Loan Commitment of not less than twenty-five million dollars ($25,000,000). Notwithstanding anything in this Section 8.2 to the contrary, any Bank may enter into participation agreements with any other Person, so long as such agreement does not confer any rights under this Agreement, any other Loan Document or the Subsidiary Guaranty to any purchaser thereof, or relieve such Bank from any of its Obligations under this Agreement (it being understood that all actions hereunder shall be conducted as if no such participation had been granted). All assignments permitted hereunder shall be made pursuant to an Assignment and Assumption Agreement in substantially the form of EXHIBIT I attached hereto. None of the Administrative Agent, the Syndication Agent or the Documentation Agent may assign any portion of its Loans or Loan Commitment hereunder without the prior written consent of all of the Administrative Agent, the Syndication Agent and the Documentation Agent (which consent shall not be unreasonably withheld). 8.3 AMENDMENT AND WAIVER. Neither this Agreement nor any term hereof may be amended orally, nor may any provision hereof be waived orally but only by an instrument in writing signed by the Majority Banks and, in the case of an amendment, also by the Borrower, except that in the event of: (a) any (i) amendment or waiver having a duration of more than ninety (90) days or (ii) direction to the Administrative Agent regarding termination of the Commitments, acceleration, or exercise of remedies, any action may be made only by an instrument in writing signed by the Super-Majority Banks; (b) (i) any change in the timing of, or the amount of, payments of fees due hereunder or in the method of calculating funding availability, (ii) any waiver of any Event of Default due to the failure by the Borrower to pay any sum due hereunder, (iii) any amendment of this Section 8.3 or of the definitions of Majority Banks or Super-Majority Banks, or (iv) the release of any Guarantor other than in connection with the conversion of such Guarantor to an Unrestricted Subsidiary or in accordance with Section 3.1(f) hereof, any amendment or waiver may be made only by an instrument in writing signed by each of the Banks; (c) (i) any change in the amount of the Loan Commitment, (ii) any change in the timing of or the amount of payments of principal, interest or fees due with respect to the Loans or any change in the rate of interest applied thereto, any change may be made only by an instrument signed by each of the Banks; and -46- Any amendment to accomplish any of the foregoing must also be signed by the Borrower. Each Bank hereby acknowledges and agrees that a response to any request for action by the Administrative Agent shall be made within ten (10) days from the receipt of such request and that the failure to respond within such period shall be deemed to be an acceptance by such Bank of the course of action recommended by the Administrative Agent. 8.4 ADDITIONAL OBLIGATIONS AND AMENDMENTS. The Banks shall be under no obligation to extend any loans to the Borrower other than as specifically set forth in this Agreement. Each Bank agrees that it will not enter into any financing agreement with the Borrower or any of its Restricted Subsidiaries without the consent of all of the Banks. 8.5 CONSIDERATION OF RENEWAL. The Banks agree that no later than thirty (30) calendar days prior to each anniversary of the Agreement Date, representatives of the Banks will consult with each other to determine whether the Banks are willing, in their sole and absolute discretion, to extend the Maturity Date for a period of not more than one (1) calendar year from the then current Maturity Date. Notwithstanding the foregoing, if there has occurred a Change of Management, the Banks shall not have any obligation to consult, as to any proposed extension of the Maturity Date, with any Bank which has not approved, in writing, such Change of Management. The Administrative Agent shall, within a reasonable period of time thereafter, advise the Borrower whether the Banks are willing to so extend the Maturity Date. If the Banks and the Borrower agree to so extend the Maturity Date, such agreement shall be evidenced by appropriate amendments to the Loan Documents, executed by all applicable parties. In the event that any Bank does not agree to extend the Maturity Date, the Maturity Date then in effect with respect to such Bank's Loans shall remain unchanged, and the Borrower in its sole discretion may (a) repay in full (together with all accrued interest and fees with respect thereto) such Bank's Loans, without respect to any other provisions herein, or (b) may require such Bank to assign without recourse or warranty one-hundred percent (100%) of its Loans, Loan Commitment and, in the case of Letter of Credit Banks, Letter of Credit Commitment (and such Bank hereby agrees to so assign) to a replacement bank designated by the Borrower (and acceptable to the Administrative Agent) which assignment shall be effective upon receipt by such Bank of payment in full of all Loans then outstanding, Letter of Credit Obligations, and accrued and unpaid interest and fees then outstanding to such Bank. Notwithstanding anything to the contrary contained herein, any such replacement bank assuming such Loan Commitment and/or Letter of Credit Commitment shall assume not less than one hundred percent (100%) of such assigning Bank's Loan Commitment and/or Letter of Credit Commitment. 8.6 TERMS. Whenever the context and construction require, all words used in the singular number herein shall be deemed to have been used in the plural, and vice versa, and the masculine gender shall include the feminine and neuter and the neuter shall include the masculine and feminine. 8.7 GOVERNING LAW AND JURISDICTION. This Agreement shall be construed in accordance with the laws of the State of Georgia, and such laws shall govern the interpretation, construction and enforcement hereof. For the purposes of any legal action or proceeding brought by the Administrative Agent or the Banks with respect to this Agreement or the Loan -47- Documents, the Borrower hereby irrevocably submits to the jurisdiction and venue of the Superior Court of Fulton County, Georgia, and hereby irrevocably designates and appoints CT Corporate System, 1201 Peachtree Street, N.E., Atlanta, Georgia 30361, as its authorized agent for service of process in the State of Georgia. The Borrower also hereby submits to the non-exclusive jurisdiction and venue of the United States District Court for the Northern District of Georgia for any action, suit or proceeding arising out of or relating to this Agreement or the Loan Documents. The Administrative Agent and the Banks shall for all purposes be entitled to treat such designee of Borrower as the authorized agent to receive for or on its behalf service of writs or summons or other legal process in Georgia; delivery of such service to such authorized agent shall be deemed to be made when delivered or mailed by certified mail addressed to such authorized agent, with a copy to the Borrower at the address of the Borrower last known to the Administrative Agent, sent by overnight delivery service. In the event that, for any reason, such agent or its successor shall no longer serve as agent of the Borrower to receive service of process in the State of Georgia, the Borrower shall establish a successor so to serve, and shall advise the Administrative Agent thereof, so that at all times Borrower will maintain an agent to receive service of process in the State of Georgia on its behalf with respect to this Agreement and the Loan Documents. In the event that, for any reason, service of legal process cannot be made in the manner described above, such service may be made in such other manner permitted by law. The Borrower hereby irrevocably waives any objection it might now or hereafter be entitled to make with respect to the venue of any suit, action or proceeding arising out of or relating to this Agreement and the Loan Documents which is brought in the Superior Court of Fulton County, Georgia or, at the election of the Administrative Agent, in the United States District Court for the Northern District of Georgia, and the Borrower hereby irrevocably waives any right to claim that any such suit, action or proceeding brought in any such court has been brought in an incorrect forum. 8.8 PUBLICITY. Subject to the Borrower's approval, the Administrative Agent shall have the right to incorporate the names of the Banks into signage placed upon the Loan Inventory. Each Bank shall have the right to secure printed publicity through newspaper and other media concerning the Inventory and source of financing. 8.9 ATTORNEYS' FEES. The Borrower shall pay on demand all attorneys' fees and other costs and expenses actually incurred by the Administrative Agent, the Syndication Agent, the Documentation Agent, the Managing Agents, the Co-Agents, the Issuing Bank and the Banks, or any of them, in the enforcement of or preservation of the Banks', the Administrative Agent's or the Issuing Bank's rights under this Agreement and the other Loan Documents. To the full extent permitted by applicable law, the Borrower agrees to pay interest on any fees, costs or expenses due to the Administrative Agent, the Issuing Bank and the Banks, or any of them, under this Section 8.9 which are not paid when due at the Default Rate. In the event that any Loan Document contains a provision regarding enforcement or preservation of rights which is different from this Section 8.9, this Section 8.9 shall control. 8.10 MANDATORY ARBITRATION. Any controversy or claim between or among the parties hereto arising out of or relating to this Agreement, the Loan Documents or any related instruments including any claim based on or arising from an alleged tort, shall be determined by -48- binding arbitration in accordance with the Federal Arbitration Act (or, if not applicable, the applicable state law), the Rules of Practice and Procedure for the Arbitration of Commercial Disputes of Endispute, Inc., doing business as J.A.M.S./Endispute ("J.A.M.S."), as amended from time to time, and the "Special Rules" set forth below. In the event of any inconsistency, the Special Rules shall control. Judgment upon any arbitration award may be entered in any court having jurisdiction. Any party to this Agreement may bring an action, including a summary judgment or expedited proceeding, to compel arbitration of any controversy or claim to which this provision applies in any court having jurisdiction over such action. (a) SPECIAL RULES. The arbitration shall be conducted in the City of Atlanta, Georgia and administered by J.A.M.S. who will appoint an arbitrator; if J.A.M.S. is unable or legally precluded from administering the arbitration, then the American Arbitration Association will serve. All arbitration hearings will be commenced within ninety (90) days of the demand for arbitration; further, the arbitrator shall only, upon a showing of cause, be permitted to extend the commencement of such hearing for up to an additional sixty (60) days. (b) RESERVATION OF RIGHTS. Nothing in this Loan Agreement shall be deemed to (i) limit the applicability of any otherwise applicable statutes of limitation or repose and any waivers contained in this Loan Agreement; or (ii) be a waiver by a Bank or Banks of the protection afforded to it or them by 12 U.S.C. Sec. 91 or any substantially equivalent state law; or (iii) limit the right of a Bank or Banks (A) to exercise self help remedies such as (but not limited to) setoff, or (B) to obtain from a court provisional or ancillary remedies such as injunctive relief or the appointment of a receiver. The Administrative Agent may (or at the direction of the Majority Banks) exercise such self help remedies (including, without limitation, remedies under Section 6.2 hereof), or obtain such provisional or ancillary remedies before, during or after the pendency of any arbitration proceeding brought pursuant to this Loan Agreement. Neither the exercise of self help remedies nor the institution or maintenance of provisional or ancillary remedies shall constitute a waiver of the right of any party, including the claimant in any such action to arbitrate the merits of the controversy or claim occasioning resort to such remedies. No provision in this Agreement or any Loan Documents regarding submission to jurisdiction and/or venue in any court is intended or shall be construed to be in derogation of the provisions in this Agreement. 8.11 INVALIDATION OF PROVISIONS. In the event that any one or more of the provisions of this Agreement is deemed invalid by a court having jurisdiction over this Agreement or other similar authority, the Administrative Agent, the Issuing Bank and the Banks may, in their sole discretion, terminate this Agreement in whole or in part. 8.12 EXECUTION IN COUNTERPARTS. This Agreement may be executed in multiple counterparts, each of which shall be deemed to be an original, but all of which shall constitute one and the same instrument. -49- 8.13 CAPTIONS. The captions herein are inserted only as a matter of convenience and for reference and in no way define, limit or describe the scope of this Agreement or the intent of any provision hereof. 8.14 NOTICES. All notices, requests, consents, demands and other communications required or which any party desires to give hereunder or under any other Loan Document shall, unless other specifically provided in such other Loan Document, be deemed sufficiently given or furnished if (a) in writing and delivered by personal delivery, by courier, or by registered or certified United States mail, postage prepaid, addressed to the party to whom directed at the addresses specified below (unless changed by similar notice in writing given by the particular party whose address is to be changed), (b) by telex with confirmation thereof in writing by sender pursuant to subsection (a) above, (c) facsimile to the facsimile number specified below with confirmation thereof in writing by sender pursuant to subsection (a) above, or (d) by oral communication with confirmation thereof in writing by the notifying party pursuant to subsection (a) above within three (3) business days after such oral communication. Any such notice or communication shall be deemed to have been given and to be effective either at the time of personal delivery or, in the case of courier or mail, as of the date of first attempted delivery at the address and in the manner provided herein, or, in the case of telex, when transmitted (answerback confirmed), or, in the case of facsimile, upon receipt or, in the case of oral communication, upon the effectiveness of written confirmation as hereinabove provided. Notwithstanding the foregoing, no notice of change of address shall be effective except upon receipt. This Section shall not be construed in any way to affect or impair any waiver of notice or demand provided in any Loan Document or to require giving of notice or demand to or upon any person in any situation or for any reason. BORROWER: --------- D. R. Horton, Inc. 1901 Ascension Boulevard Suite 100 Arlington, Texas 76006 Attn: David J. Keller and Ted I. Harbour Facsimile No.: (817) 856-8249 Telephone No.: (817) 856-8200 -50- AS ADMINISTRATIVE AGENT, SYNDICATION AGENT AND AS ISSUING BANK AND AS A BANK: NationsBank, N.A. 70 Mansell Court Roswell, Georgia 30076 Attn: Henry A. Dyer Facsimile No.: (770) 642-1261 Telephone No.: (770) 552-3559 With copy to: Powell, Goldstein, Frazer & Murphy 16th Floor 191 Peachtree St. N.E. Atlanta, Georgia 30303 Attn: Douglas S. Gosden Facsimile No.: (404) 572-6999 Telephone No.: (404) 572-6600 AS DOCUMENTATION AGENT AND AS A BANK: ------------------------------------- Fleet National Bank 111 Westminster Street Suite 800 Providence, Rhode Island 02903 Attn: Patrick Burns Facsimile No.: (401) 278-5166 Telephone No.: (401) 278-5961 AS A MANAGING AGENT AND AS A BANK: ---------------------------------- Bank United 3200 S.W. Freeway Suite 2000 Houston, Texas 77027 Attn: Carolynn Alexander Facsimile No.: (713) 543-6928 Telephone No.: (713) 543-7955 -51- AS A MANAGING AGENT AND AS A BANK: ---------------------------------- Comerica Bank 1 Detroit Center 500 Woodward Avenue Detroit, Michigan 48226-3256 Attn: Dave Campell Facsimile No.: (313) 222-9295 Telephone No.: (313) 222-9306 AS A MANAGING AGENT AND AS A BANK: ---------------------------------- Credit Lyonnais New York Branch 2200 Ross Avenue Suite 4400 West Dallas, Texas 75201 Attn: Sam Hill Facsimile No.: (214) 220-2323 Telephone No.: (214) 220-2300 AS A MANAGING AGENT AND AS A BANK --------------------------------- Societe Generale, Southwest Agency 2001 Ross Avenue Suite 4800 Dallas, Texas 75201 Attn: David Oldani Facsimile No.: (214) 979-1104 Telephone No.: (214) 979-2736 AS A CO-AGENT AND AS A BANK --------------------------- AmSouth Bank Commercial Real Estate, 9th Floor 1900 5th Avenue North Birmingham, Alabama 35203 Attn: Ronny Hudspeth Facsimile No.: (205) 326-4075 Telephone No.: (205) 307-4227 -52- AS A CO-AGENT AND AS A BANK --------------------------- Bank One, Arizona, N.A. c/o The First National Bank of Chicago Real Estate Finance One First National Plaza Suite 0151 Chicago, Illinois 60670-0151 Attn: Gregory A. Gilbert, Vice President Facsimile No.: (312) 732-1117 Telephone No.: (312) 732-2107 AS A CO-AGENT AND AS A BANK: ---------------------------- PNC Bank, National Association Two Tower Center 18th Floor East Brunswick, New Jersey 08816 Attn: Douglas G. Paul Facsimile No.: (732) 220-3755 Telephone No.: (732) 220-3566 AS A CO-AGENT AND AS A BANK: ---------------------------- The First National Bank of Chicago Real Estate Finance One First National Plaza Suite 0151 Chicago, Illinois 60670-0151 Attn: Gregory A. Gilbert, Vice President Facsimile No.: (312) 732-1117 Telephone No.: (312) 732-2107 -53- BANKS: ------ First American Bank Texas, SSB The Princeton Tower 14651 Dallas Parkway Suite 400 Dallas, Texas 75240 Attn: William L. Kinard Facsimile No.: (972) 419-3394 Telephone No.: (972) 419-3413 Harris Trust and Savings Bank 111 West Monroe Chicago, Illinois 60603 Attn: Greg Bins Facsimile No.: (312) 461-2968 Telephone No.: (312) 461-2203 Sanwa Bank California Real Estate Industries 4041 MacArthur Boulevard Suite 100 Newport Beach, California 92660 Attn: Russ Wakeham Facsimile No.: (714) 852-1510 Telephone No.: (714) 632-6007 Norwest Bank Arizona, National Association Commercial Real Estate Department 3300 N. Central Avenue, 2nd Floor Phoenix, Arizona 85012 Attn: Kevin Kosan Facsimile No.: (602) 248-3661 Telephone No.: (602) 248-3655 -54- Summit Bank 3 Valley Square, Suite 280 512 Township Line Road Blue Bell, Pennsylvania 19422 Attn: Brian Daniel Facsimile No.: (215) 619-4840 Telephone No. (215) 619-4832 Wachovia Mortgage Company 191 Peachtree Street, N.E. 21st Floor Atlanta, Georgia 30303 Attn: Joel Majors Facsimile No.: (404) 332-1450 Telephone No.: (404) 332-6059 8.15 FINAL AGREEMENT. THE WRITTEN LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES HERETO AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES HERETO. [THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] -55- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized officers as of the day and year set forth above. BORROWER: D.R. HORTON, INC., a Delaware corporation Date of Execution: 6-8-99 By: /s/ David J. Keller - ----------------------- ------------------------------------- Title: Treasurer ---------------------------------- ADMINISTRATIVE AGENT, SYNDICATION AGENT, DOCUMENTATION AGENT, NATIONSBANK, N.A., as Administrative MANAGING AGENTS, Agent, Syndication Agent, Issuing Bank CO-AGENTS AND BANKS: and as a Bank Date of Execution: 7-1-99 By: /s/ Henry A. Dyer - ----------------------- ------------------------------------- Title: Senior Vice President ---------------------------------- FLEET NATIONAL BANK, as Documentation Agent and as a Bank Date of Execution: 6-10-99 By: /s/ Patrick Burns - ----------------------- ------------------------------------- Title: Senior Vice President ---------------------------------- BANK UNITED, as a Managing Agent and as a Bank Date of Execution: By: /s/ Carolynn Alexander - ----------------------- ------------------------------------- Title: ---------------------------------- D.R. HORTON, INC. AMENDED AND RESTATED MASTER LOAN AND INTERCREDITOR AGREEMENT Signature Page 1 COMERICA BANK, as a Managing Agent and as a Bank Date of Execution: 6-8-99 By: /s/ David J. Campbell - ----------------------- ------------------------------------- Title: Vice President ---------------------------------- CREDIT LYONNAIS NEW YORK BRANCH, as a Managing Agent and as a Bank Date of Execution: By: /s/ Pascal Poupelle - ----------------------- ------------------------------------- Title: Executive Vice President ---------------------------------- SOCIETE GENERALE, SOUTHWEST AGENCY, as a Managing Agent and a Bank Date of Execution: 6-8-99 By: /s/ David Oldani - ----------------------- ------------------------------------- Title: Associate ---------------------------------- Date of Execution: By: - ----------------------- ------------------------------------- Title: ---------------------------------- AMSOUTH BANK, as a Co-Agent and a Bank Date of Execution: 6-14-99 By: /s/ Ronny Hudspeth - ----------------------- ------------------------------------- Title: Sr. Vice President ---------------------------------- D.R. HORTON, INC. AMENDED AND RESTATED MASTER LOAN AND INTERCREDITOR AGREEMENT Signature Page 2 BANK ONE, ARIZONA, NA, as a Co-Agent and a Bank Date of Execution: 6-9-99 By: /s/ Christopher Flynn - ----------------------- ------------------------------------- Title: Corporate Banking Officer ---------------------------------- PNC BANK, NATIONAL ASSOCIATION, as a Co-Agent and as a Bank Date of Execution: 6-14-99 By: /s/ Douglas G. Paul - ----------------------- ------------------------------------- Title: Vice President ---------------------------------- THE FIRST NATIONAL BANK OF CHICAGO, as a Co-Agent and as a Bank Date of Execution: 6-9-99 By: /s/ Christopher Flynn - ----------------------- ------------------------------------- Title: Corporate Banking Officer ---------------------------------- FIRST AMERICAN BANK TEXAS, SSB, as a Bank Date of Execution: 7-1-99 By: /s/ William L. Kinard - ----------------------- ------------------------------------- Title: Vice President ---------------------------------- D.R. HORTON, INC. AMENDED AND RESTATED MASTER LOAN AND INTERCREDITOR AGREEMENT Signature Page 3 HARRIS TRUST AND SAVINGS BANK, as a Bank Date of Execution: 6-17-99 By: /s/ Gregory M. Bins - ----------------------- ------------------------------------- Title: Managing Director ---------------------------------- SANWA BANK CALIFORNIA, as a Bank Date of Execution: 7/1/99 By: /s/ Kurt Mair - ----------------------- ------------------------------------- Title: A.V.P. ---------------------------------- NORWEST BANK ARIZONA, NATIONAL ASSOCIATION, as a Bank Date of Execution: 6/10/99 By: /s/ Kevin Kosan - ----------------------- ------------------------------------- Title: Vice President ---------------------------------- SUMMIT BANK, as a Bank Date of Execution: 6/24/99 By: /s/ Lara Hartin - ----------------------- ------------------------------------- Title: Vice President ---------------------------------- D.R. HORTON, INC. AMENDED AND RESTATED MASTER LOAN AND INTERCREDITOR AGREEMENT Signature Page 4 WACHOVIA MORTGAGE COMPANY, as a Bank Date of Execution: 6/22/99 By: /s/ Joel Majors - ----------------------- ------------------------------------- Title: Senior Vice President ---------------------------------- D.R. HORTON, INC. AMENDED AND RESTATED MASTER LOAN AND INTERCREDITOR AGREEMENT Signature Page 5
EXHIBIT B Bank Commitments DOLLAR AMOUNT OF RATIO OF DOLLAR AMOUNT OF RATIO OF LOAN LETTER OF CREDIT LETTER OF CREDIT TOTAL BANK LOAN COMMITMENT COMMITMENT COMMITMENT COMMITMENT COMMITMENTS - ---- ---------------- ------------- ---------------- ---------------- ----------- NationsBank, N.A. $180,000,000.00 180/775 $35,000,000.00 35/50 $215,000,000.00 Fleet National Bank $60,000,000.00 60/775 $15,000,000.00 15/50 $75,000,000.00 Bank United $75,000,000.00 75/775 $0.00 0 $75,000,000.00 Comerica Bank $50,000,000.00 50/775 $0.00 0 $50,000,000.00 Credit Lyonnais New York Branch $50,000,000.00 50/775 $0.00 0 $50,000,000.00 Societe Generale, Southwest Agency $50,000,000.00 50/775 $0.00 0 $50,000,000.00 The First National Bank of Chicago $40,000,000.00 40/775 $0.00 0 $40,000,000.00 PNC Bank, National Association $40,000,000.00 40/775 $0.00 0 $40,000,000.00 AmSouth Bank $40,000,000.00 40/775 $0.00 0 $40,000,000.00 Bank One, Arizona, NA $40,000,000.00 40/775 $0.00 0 $40,000,000.00 First American Bank Texas, SSB $25,000,000.00 25/775 $0.00 0 $25,000,000.00 Harris Trust and Savings Bank $25,000,000.00 25/775 $0.00 0 $25,000,000.00 Sanwa Bank California $25,000,000.00 25/775 $0.00 0 $25,000,000.00 Norwest Bank Arizona, National Association $25,000,000.00 25/775 $0.00 0 $25,000,000.00 Summit Bank $25,000,000.00 $0.00 0 $25,000,000.00 Wachovia Mortgage Company $25,000,000.00 25/775 $0.00 0 $25,000,000.00 --------------- ------ -------------- ---- ---------------- TOTALS: $775,000,000.00 100% $50,000,000.00 100% $825,000,000.00
SCHEDULE 1.13 Multi-Level Pricing Grid
======================================================================================================================= Facility Fee ------------ Leverage Ratio or S&P/Moody's Rating as of (multiply the quarter end or most recently completed quarter Applicable Margin Commitments by) - -------------------------------------------------------------------- ----------------- --------------- ======================================================================================================================= LIBOR + Federal Funds + - ----------------------------------------------------------------------------------------------------------------------- Level I less than 1.00 to 1.00 and better than BBB- or Baa3 37.5 bps 52.5 bps 12.5 bps - ----------------------------------------------------------------------------------------------------------------------- Level II 1.0 or greater but not to exceed 1.25 and BBB- or Baa3 57.5 bps 72.5 bps 17.5 bps - ----------------------------------------------------------------------------------------------------------------------- Level III greater than 1.25 but not to exceed 1.75 75 bps 90.0 bps 20.0 bps - ----------------------------------------------------------------------------------------------------------------------- Level IV greater than 1.75 but not to exceed 2.00 90 bps 105.0 bps 25.0 bps - ----------------------------------------------------------------------------------------------------------------------- Level V greater than 2.00 but not to exceed 2.25 105 bps 120.0 bps 30.0 bps - ----------------------------------------------------------------------------------------------------------------------- Level VI greater than 2.25 but not to exceed 2.60 125 bps 140.0 bps 30.0 bps =======================================================================================================================
SCHEDULE 1.55 Guarantors DRHI, Inc., a Delaware corporation D.R. Horton, Inc. - Minnesota, a Delaware corporation Meadows I, Ltd., a Delaware corporation Meadows II, Ltd., a Delaware corporation Meadows IX, Inc., a New Jersey corporation Meadows X, Inc., a New Jersey corporation D.R. Horton Denver Management Company, Inc., a Colorado corporation D.R. Horton Management Company, Ltd., a Texas limited partnership D.R. Horton, Inc. - Sacramento, a California corporation D.R. Horton Sacramento Management Company, Inc., a California corporation D.R. Horton Los Angeles Holding Company, Inc., a California corporation D.R. Horton, Inc. - Albuquerque, a Delaware corporation D.R. Horton, Inc. - Birmingham, an Alabama corporation D.R. Horton, Inc. - Denver, a Delaware corporation D.R. Horton, Inc. - Greensboro, a Delaware corporation D.R. Horton, Inc. - New Jersey, a New Jersey corporation D.R. Horton Los Angeles Management Company, Inc., a California corporation D.R. Horton San Diego Holding Company, Inc., a California corporation D.R. Horton San Diego Management Company, Inc., a California corporation D.R. Horton-Texas, Ltd., a Texas limited partnership DRH Construction, Inc., a Delaware corporation SGS Communities at Grande Quay, L.L.C., a New Jersey limited liability company D.R. Horton, Inc. - Torrey, a Delaware corporation S.G. Torrey Atlanta, Ltd., a Georgia corporation C. Richard Dobson Builders, Inc., a Virginia corporation Land Development, Inc., a Virginia corporation Continental Homes of Florida, Inc., a Florida corporation KDB Homes, Inc., a Delaware corporation Continental Homes, Inc., a Delaware corporation L&W Investments, Inc., a California corporation Continental Ranch, Inc., a Delaware corporation CHTEX of Texas, Inc., a Delaware corporation CH Investments of Texas, Inc., a Delaware corporation CHI Construction Company, an Arizona company Continental Homes of Austin, L.P., a Texas limited partnership Continental Homes of San Antonio, L.P., a Texas limited partnership Continental Homes of Dallas, L.P., a Texas limited partnership DRH New Mexico Construction, Inc., a Delaware corporation DRH Tucson Construction, Inc., a Delaware corporation EX-10.22 5 EXHIBIT 10.22 EXHIBIT 10.22 ------------- - ------------------------------------------------------------------------------- CREDIT AGREEMENT ___________________________ CH MORTGAGE COMPANY I, LTD. Borrower, U.S. BANK NATIONAL ASSOCIATION as Agent and a Lender and the other Lenders referred to herein ___________________________ August 13, 1999 - ------------------------------------------------------------------------------- TABLE OF CONTENTS ----------------- PAGE ARTICLE I GENERAL TERMS . . . . . . . . . . . . . . . . . . . . . . . . . . .1 Section 1.01 CERTAIN DEFINITIONS. . . . . . . . . . . . . . . . . . . .1 Section 1.02 OTHER DEFINITIONAL PROVISIONS. . . . . . . . . . . . . . 14 Section 1.03 EXHIBITS AND SCHEDULES . . . . . . . . . . . . . . . . . 15 Section 1.04 CALCULATIONS AND DETERMINATIONS. . . . . . . . . . . . . 15 ARTICLE II TERMS OF CREDITS . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 2.01 COMMITMENTS AND DISCRETIONARY SWINGLINE COMMITMENT . . . 15 Section 2.02 PROMISSORY NOTES . . . . . . . . . . . . . . . . . . . . 16 Section 2.03 OBTAINING LOANS; REFINANCING OF SWINGLINE LOANS. . . . . 16 Section 2.04 INTEREST; BALANCES DEFICIENCY FEES; CONTINUATIONS AND CONVERSIONS. . . . . . . . . . . . . . . . . . . . . 18 Section 2.05 FEES . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Section 2.06 MANDATORY REPAYMENTS . . . . . . . . . . . . . . . . . . 21 Section 2.07 PAYMENTS TO LENDERS. . . . . . . . . . . . . . . . . . . 21 Section 2.08 INCREASED CAPITAL REQUIREMENTS . . . . . . . . . . . . . 22 Section 2.09 PROVISIONS RELATING TO EURODOLLAR RATE ADVANCES AND BALANCE FUNDED RATE ADVANCES . . . . . . . . . . . . 22 ARTICLE III CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . . . . . . 24 Section 3.01 INITIAL BORROWING. . . . . . . . . . . . . . . . . . . . 25 Section 3.02 ALL BORROWINGS . . . . . . . . . . . . . . . . . . . . . 25 ARTICLE IV BORROWER REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . 26 Section 4.01 ORGANIZATION AND GOOD STANDING . . . . . . . . . . . . . 26 Section 4.02 AUTHORIZATION AND POWER. . . . . . . . . . . . . . . . . 27 Section 4.03 NO CONFLICTS OR CONSENTS . . . . . . . . . . . . . . . . 27 Section 4.06 FINANCIAL CONDITION OF BORROWER. . . . . . . . . . . . . 27 Section 4.07 FULL DISCLOSURE. . . . . . . . . . . . . . . . . . . . . 28 Section 4.08 NO DEFAULT . . . . . . . . . . . . . . . . . . . . . . . 28 Section 4.09 NO LITIGATION. . . . . . . . . . . . . . . . . . . . . . 28 Section 4.10 TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . 28 Section 4.11 PRINCIPAL OFFICE, ETC. . . . . . . . . . . . . . . . . . 28 Section 4.12 COMPLIANCE WITH ERISA. . . . . . . . . . . . . . . . . . 28 Section 4.13 SUBSIDIARIES . . . . . . . . . . . . . . . . . . . . . . 29 Section 4.14 INDEBTEDNESS . . . . . . . . . . . . . . . . . . . . . . 29 Section 4.15 PERMITS. . . . . . . . . . . . . . . . . . . . . . . . . 29 Section 4.16 STATUS UNDER CERTAIN FEDERAL STATUTES. . . . . . . . . . 29 Section 4.17 NO APPROVALS REQUIRED. . . . . . . . . . . . . . . . . . 29 ii Section 4.18 INDIVIDUAL MORTGAGE LOANS. . . . . . . . . . . . . . . . 29 Section 4.19 YEAR 2000 COMPLIANCE . . . . . . . . . . . . . . . . . . 31 ARTICLE V AFFIRMATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . 31 Section 5.01 FINANCIAL STATEMENT AND REPORTS. . . . . . . . . . . . . 31 Section 5.02 TAXES AND OTHER LIENS. . . . . . . . . . . . . . . . . . 32 Section 5.03 MAINTENANCE. . . . . . . . . . . . . . . . . . . . . . . 33 Section 5.04 FURTHER ASSURANCES . . . . . . . . . . . . . . . . . . . 33 Section 5.05 REIMBURSEMENT OF EXPENSES. . . . . . . . . . . . . . . . 33 Section 5.06 INSURANCE. . . . . . . . . . . . . . . . . . . . . . . . 34 Section 5.07 ACCOUNTS AND RECORDS . . . . . . . . . . . . . . . . . . 34 Section 5.08 RIGHT OF INSPECTION. . . . . . . . . . . . . . . . . . . 34 Section 5.09 NOTICE OF CERTAIN EVENTS . . . . . . . . . . . . . . . . 34 Section 5.10 PERFORMANCE OF CERTAIN OBLIGATIONS AND INFORMATION REGARDING INVESTORS. . . . . . . . . . . . . . . . . . . 35 Section 5.11 USE OF PROCEEDS; MARGIN STOCK. . . . . . . . . . . . . . 35 Section 5.12 NOTICE OF DEFAULT. . . . . . . . . . . . . . . . . . . . 35 Section 5.13 COMPLIANCE WITH LOAN DOCUMENTS . . . . . . . . . . . . . 35 Section 5.14 OPERATIONS AND PROPERTIES. . . . . . . . . . . . . . . . 35 Section 5.15 YEAR 2000 COMPLIANCE . . . . . . . . . . . . . . . . . . 35 ARTICLE VI NEGATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . 36 Section 6.01 NO MERGER. . . . . . . . . . . . . . . . . . . . . . . . 36 Section 6.02 LIMITATION ON GAAP INDEBTEDNESS AND CONTINGENT INDEBTEDNESS . . . . . . . . . . . . . . . . . . . . . . 36 Section 6.03 BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . 37 Section 6.04 LIQUIDATIONS, DISPOSITIONS OF SUBSTANTIAL ASSETS . . . . 37 Section 6.05 LOANS, ADVANCES, AND INVESTMENTS . . . . . . . . . . . . 37 Section 6.06 USE OF PROCEEDS. . . . . . . . . . . . . . . . . . . . . 37 Section 6.07 ACTIONS WITH RESPECT TO MORTGAGE COLLATERAL. . . . . . . 38 Section 6.08 TRANSACTIONS WITH AFFILIATES . . . . . . . . . . . . . . 38 Section 6.09 LIENS. . . . . . . . . . . . . . . . . . . . . . . . . . 38 Section 6.10 ERISA PLANS. . . . . . . . . . . . . . . . . . . . . . . 38 Section 6.11 CHANGE OF PRINCIPAL OFFICE; FISCAL YEAR. . . . . . . . . 38 Section 6.12 LIMITATION ON DISTRIBUTIONS AND REDEMPTIONS. . . . . . . 39 Section 6.13 TANGIBLE NET WORTH . . . . . . . . . . . . . . . . . . . 39 Section 6.14 TANGIBLE NET WORTH RATIO . . . . . . . . . . . . . . . . 39 Section 6.15 NET INCOME . . . . . . . . . . . . . . . . . . . . . . . 39 Section 6.16 CUSTODIAN. . . . . . . . . . . . . . . . . . . . . . . . 39 ARTICLE VII EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . . 39 Section 7.01 NATURE OF EVENT. . . . . . . . . . . . . . . . . . . . . 39 Section 7.02 DEFAULT REMEDIES . . . . . . . . . . . . . . . . . . . . 41 iii ARTICLE VIII INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . 42 Section 8.01 INDEMNIFICATION. . . . . . . . . . . . . . . . . . . . . 42 Section 8.02 LIMITATION OF LIABILITY. . . . . . . . . . . . . . . . . 42 ARTICLE IX AGENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Section 9.01 APPOINTMENT AND AUTHORIZATION. . . . . . . . . . . . . . 42 Section 9.02 NOTE HOLDERS . . . . . . . . . . . . . . . . . . . . . . 43 Section 9.03 CONSULTATION WITH COUNSEL. . . . . . . . . . . . . . . . 43 Section 9.04 DOCUMENTS. . . . . . . . . . . . . . . . . . . . . . . . 43 Section 9.05 AGENT AND AFFILIATES . . . . . . . . . . . . . . . . . . 43 Section 9.06 ACTION BY AGENT. . . . . . . . . . . . . . . . . . . . . 43 Section 9.07 CREDIT ANALYSIS. . . . . . . . . . . . . . . . . . . . . 44 Section 9.08 NOTICES OF EVENT OF DEFAULT, ETC . . . . . . . . . . . . 44 Section 9.09 INDEMNIFICATION. . . . . . . . . . . . . . . . . . . . . 44 Section 9.10 PAYMENTS . . . . . . . . . . . . . . . . . . . . . . . . 45 Section 9.11 SHARING OF SET-OFFS AND OTHER PAYMENTS . . . . . . . . . 45 Section 9.12 SUCCESSOR AGENT. . . . . . . . . . . . . . . . . . . . . 46 Section 9.13 NOTICE OF NEW INVESTORS . . . . . . . . . . . . . . . . 46 ARTICLE X MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . 46 Section 10.01 NOTICES. . . . . . . . . . . . . . . . . . . . . . . . . 46 Section 10.02 AMENDMENTS, ETC. . . . . . . . . . . . . . . . . . . . . 47 Section 10.03 INVALIDITY . . . . . . . . . . . . . . . . . . . . . . . 48 Section 10.04 SURVIVAL OF AGREEMENTS . . . . . . . . . . . . . . . . . 48 Section 10.05 RENEWAL, EXTENSION OR REARRANGEMENT. . . . . . . . . . . 48 Section 10.06. WAIVERS. . . . . . . . . . . . . . . . . . . . . . . . . 48 Section 10.07 CUMULATIVE RIGHTS. . . . . . . . . . . . . . . . . . . . 48 Section 10.08 CONSTRUCTION . . . . . . . . . . . . . . . . . . . . . . 49 Section 10.09 LIMITATION ON INTEREST . . . . . . . . . . . . . . . . . 49 Section 10.10 BANK ACCOUNTS; OFFSET. . . . . . . . . . . . . . . . . . 50 Section 10.11 ASSIGNMENTS, PARTICIPATIONS, COMMITMENT AMOUNT INCREASES AND NEW LENDERS. . . . . . . . . . . . . . . . 50 Section 10.12 EXHIBITS . . . . . . . . . . . . . . . . . . . . . . . . 51 Section 10.13 TITLES OF ARTICLES, SECTIONS AND SUBSECTIONS . . . . . . 52 Section 10.14 COUNTERPARTS . . . . . . . . . . . . . . . . . . . . . . 52 Section 10.15 ENTIRE AGREEMENT . . . . . . . . . . . . . . . . . . . . 52 Section 10.16 TERMINATION; LIMITED SURVIVAL. . . . . . . . . . . . . . 52 Section 10.17 CONFIDENTIALITY OF INFORMATION . . . . . . . . . . . . . 52 Section 10.18 JURY WAIVER. . . . . . . . . . . . . . . . . . . . . . . 53 iv CREDIT AGREEMENT ---------------- THIS CREDIT AGREEMENT is made and entered into as of August 13, 1999, between CH Mortgage Company I, Ltd., a Texas limited partnership ("BORROWER"), U.S. Bank National Association, as agent ("Agent") and Lenders referred to below ("Lenders"). The parties hereto hereby agree as follows: ARTICLE I --------- GENERAL TERMS ------------- Section 1.01 CERTAIN DEFINITIONS. As used in this Agreement, the following terms have the following meanings. "ADJUSTED EURODOLLAR RATE" means on any date of determination, the rate (rounded upward, if necessary, to the next higher one hundredth of one percent) determined by dividing the Eurodollar Rate for such date by 1.00 minus the Eurodollar Reserve Percentage. "ADVANCE" means (a) a Reference Rate Advance, (b) a Balance Funded Rate Advance or (c) a Eurodollar Rate Advance. "AFFILIATE" means, as to any Person, each other Person that directly or indirectly (through one or more intermediaries or otherwise) controls, is controlled by, or is under common control with, such Person. "AGENT" has the meaning assigned to such term in the preamble hereof. "AGGREGATE COMMITMENT AMOUNTS" means the total of the Commitment Amounts of the Lenders, which is $175,000,000 initially, subject to increase in accordance with Section 10.11(d), but not to exceed $250,000,000. "AGREEMENT" means this Credit Agreement, as the same may from time to time be amended, modified or supplemented. "APPLICABLE MARGIN" means, with respect to: (a) Reference Rate Advances, 0%, and (b) Eurodollar Rate Advance, 1.00% "BALANCE CALCULATION PERIOD" means each calendar month. "BALANCE FUNDED AMOUNT" means with respect to any Lender for any Balance Calculation Period, the average of the Qualifying Balances of such Lender for such Balance Calculation Period. As used in this paragraph, "QUALIFYING BALANCES"' shall mean, with respect to any Lender, for any day the lesser of (a) the amount of such Lender's Loans on such day, and (b) the sum of the collected balances in all identified non-interest bearing accounts of Borrower maintained with such Lender less (i) amounts necessary to satisfy reserve and deposit insurance requirements and (ii) amounts required to compensate such Lender for services rendered in accordance with such Lender's system of charges for services to similar accounts. "BALANCE FUNDED RATE" means a rate of 1.125% per annum. "BALANCE FUNDED RATE ADVANCE" means an outstanding Loan that bears interest as provided in Section 2.04(a)(i). "BALANCES DEFICIENCY" as defined in Section 2.04(a)(i). "BALANCES DEFICIENCY FEE" as defined in Section 2.04(a)(i). "BALANCES SURPLUS" as defined in Section 2.04(a)(i). "BORROWER" shall have the meaning assigned to such term in the preamble hereof. "BORROWER'S CONSOLIDATED TANGIBLE NET WORTH" means, as of any date, the remainder of (a) all assets of Borrower and the Restricted Subsidiaries on a Consolidated basis MINUS (b) the sum of (i) all GAAP Indebtedness and all Contingent Indebtedness of Borrower and the Restricted Subsidiaries, (ii) all assets of Borrower and the Restricted Subsidiaries which would be classified as intangible assets under GAAP, including Capitalized Servicing Rights, goodwill (whether representing the excess cost over book value of assets acquired or otherwise), patents, trademarks, trade names, copyrights, franchises, deferred charges and intercompany receivables, and (iii) investments in and advances to Unrestricted Subsidiaries PLUS (c) the Market Value of Borrower's servicing rights. "BORROWING BASE" means at any date the Collateral Value of all Eligible Mortgage Loans which have been delivered to and held by Agent or otherwise identified as Mortgage Collateral. "BORROWING BASE CERTIFICATE" means a certificate in the form attached hereto as Exhibit C. "BORROWING DATE" means the Business Day specified by Borrower in a Borrowing Request as the date on which it requests the Lender to make Loans. 2 "BUSINESS DAY" means a day, other than a Saturday or Sunday, on which commercial banks are open for business with the public in Minneapolis, Minnesota and on which the federal wire system is open. "CAPITALIZED SERVICING RIGHTS" means as of any Person, all rights to service Mortgage Loans which would be capitalized under GAAP (regardless of whether such rights result from asset securitizations, whole loan sales or originations of Mortgage Loans). "CASH EQUIVALENTS" means (a) securities Issued or directly and fully guaranteed or Insured by the United States Government or any agency or instrumentality thereof which mature within 90 days from the date of acquisition, (b) time deposits, which mature within 90 days from date of acquisition, with, and certificates of deposit, which mature within 90 days from the date of acquisition, of, Agent or any Lender or any other domestic commercial bank having capital and surplus in excess of $200,000,000, which has, or the holding company of which has, a commercial paper rating of at least A-1 or the equivalent thereof by Standard & Poor's Ratings Group (a division of McGraw Hill, Inc.) or P-1 or the equivalent thereof by Moody's Investors Service, Inc., or (c) overnight investments in money market mutual funds registered under the 1940 Act. "CHANGE OF CONTROL" means the occurrence of Parent not owning, directly or indirectly, all of the issued and outstanding ownership interests of Borrower. "CODE" means the Internal Revenue Code of 1986, as amended from time to time, together with the regulations from time to time promulgated with respect thereto. "COLLATERAL" has the meaning given to it in the Security Agreement. "COLLATERAL ACCOUNT" means account number 104756234365 of Borrower with Agent. "COLLATERAL VALUE" means: (a) with respect to each Eligible Mortgage Loan that is a Conforming Mortgage Loan and included in the Borrowing Base, ninety-eight percent (98%) of the least of: (i) the outstanding principal balance of the Mortgage Note constituting such Conforming Mortgage Loan; (ii) the amount at which an Investor has committed to purchase the Conforming Mortgage Loan pursuant to a Take-out Commitment or the weighted average commitment price under the applicable Take-Out Commitment; or (iii) at the election of the Agent, the Market Value of the Mortgage Note constituting such Mortgage Loan; and (b) with respect to each Eligible Mortgage Loan that is a Jumbo Mortgage Loan and included in the Borrowing Base, ninety-eight percent (98%) of the least of: (i) the outstanding principal balance of the Mortgage Note constituting such Jumbo Mortgage Loan; (ii) the amount at which an Investor has committed to purchase the Jumbo Mortgage Loan pursuant to a Take- 3 Out Commitment or the weighted average commitment price under the applicable Take-Out Commitment; or (iii) at the election of the Agent, the Market Value of the Mortgage Note constituting such Jumbo Mortgage Loan. (c) with respect to each Eligible Mortgage Loan that is a Nonconforming Mortgage Loan and included in the Borrowing Base, ninety-eight percent (98%) of the least of: (i) the outstanding principal balance of the Mortgage Note constituting such Nonconforming Mortgage Loan; (ii) the amount at which an Investor has committed to purchase the Nonconforming Mortgage Loan pursuant to a Take-Out Commitment or the weighted average commitment price under the applicable Take-Out Commitment; and (iii) at the election of the Agent, the Market Value of the Mortgage Note constituting such Nonconforming Mortgage Loan. "COMMITMENT" means, as to any Lender, the obligation of such Lender to make Loans to Borrower pursuant to Section 2.01 hereof in an aggregate amount not to exceed such Lender's Commitment Amount. "COMMITMENT AMOUNT" means, as to any Lender, the amount set opposite such Lender's name as its Commitment Amount on Schedule 5. "CONFIRMATION" means a Confirmation of Borrowing/Paydown/ Conversion in the form of Exhibit B. "CONFORMING MORTGAGE LOAN" means a first priority Mortgage Loan that has been FHA-insured or VA-guaranteed or that has been underwritten in accordance with Fannie Mae guidelines and/or meets all applicable requirements for sale to Fannie Mae or Freddie Mac or for guaranty by Ginnie Mae. "CONSOLIDATED" refers to the consolidation of any Person, in accordance with GAAP, with its properly consolidated subsidiaries excluding all Unrestricted Subsidiaries. References herein to a Person's Consolidated financial statements refer to the consolidated financial statements of such Person and its properly consolidated subsidiaries excluding all Unrestricted Subsidiaries. "CONTINGENT INDEBTEDNESS" of any Person at a particular date means the sum (without duplication) at such date of (a) all obligations of such Person in respect of letters of credit, acceptances, or similar obligations issued or created for the account of such Person, (b) all obligations of such Person under any contract, agreement or understanding of such Person pursuant to which such Person guarantees, or in effect guarantees, any indebtedness or other obligations of any other Person in any matter, whether directly or indirectly, contingently or absolutely, in whole or in part, (c) all liabilities secured by any Lien on any property owned by such Person, whether or not such Person has assumed or otherwise become liable for the payment thereof and (d) any liability of such Person or any Affiliate thereof in respect of unfunded vested benefits under in ERISA Plan, excluding any GAAP Indebtedness. 4 "DEBTOR LAWS" means all applicable liquidation, conservatorship, bankruptcy, moratorium, arrangement, receivership, insolvency, reorganization or similar laws from time to time in effect affecting the rights of creditors generally and general principles of equity. "DEFAULT" means any of the events specified in Section 7.01 hereof, whether or not any requirement for notice or lapse or time or any other condition has been satisfied. "DISTRIBUTION" means (a) any cash dividend or any other cash distribution made by a Person on, or in respect of, any stock, partnership interest, or other equity interest in such Person and (b) any and all funds, cash or other payments made in respect of the purchase, redemption, acquisition or retirement of any beneficial interest, stock, partnership interest, or other equity interest in such Person. "DRAWDOWN TERMINATION DATE" means the earlier of August 15, 2000, or the day on which the Notes first become due and payable in full. "ELIGIBLE MORTGAGE LOAN" means a Mortgage Loan as described in Schedule 1 attached hereto. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, together with the regulations from time to time promulgated with respect thereto. "ERISA AFFILIATION" means all members of the group of corporations and trades or businesses (whether or not incorporated) which, together with Borrower, are treated as a single employer under Section 414 of the Code. "ERISA PLAN" means any pension benefit plan subject to Title IV of ERISA or Section 412 of the Code maintained or contributed to by Borrower or any ERISA Affiliate with respect to which Borrower has a fixed or contingent liability. "EURODOLLAR BUSINESS DAY": a Business Day which is also a day for trading by and between banks in United States dollar deposits in the interbank Eurodollar market and a day on which banks are open for business in New York City. "EURODOLLAR RATE": on any date of determination, the average offered rate for deposits in United States dollars having a maturity of thirty days (rounded upward, if necessary, to the nearest 1/16 of 1%) for delivery of such deposits on such date of determination, or if such date is not a Eurodollar Business Day, on the first preceding Eurodollar Business Day, which appears on the Reuters Screen LIBO page as of 11:00 a.m., London time (or such other time as of which such rate appears), on such date of determination, or the rate for such deposits determined by Agent at such time based on such other published service of general application as shall be selected by Agent for such purpose; provided, that in lieu of determining the rate in the foregoing 5 manner, Agent may determine the rate based on rates at which thirty day United States dollar deposits are offered to the entity which is Agent in the interbank Eurodollar market at such time for delivery in immediately available dollars on the second Business Day after such date of determination in an amount approximately equal to the advance as made by the entity which is Agent to which such rate is to apply (rounded upward, if necessary, to the nearest 1/16 of 1%). "Reuters Screen LIBO page" means the display designated as page "LIBO" on the Reuters Monitor Money Rate Screen (or such other page as may replace the LIBO page on such service for the purpose of displaying London interbank offered rates of major banks for United States dollar deposits). "EURODOLLAR RATE ADVANCE": an outstanding Loan that bears interest as provided in Section 2.04(a)(iii). "EURODOLLAR RESERVE PERCENTAGE": on any date of determination, that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement for a member bank of the Federal Reserve System, with deposits comparable in amount to those held by U.S. Bank, in respect of "Eurocurrency Liabilities" (or in respect of any other category of liabilities which includes deposits by reference to which the interest rate on Eurodollar Rate Advances is determined or any category of extensions of credit or other assets which includes loans by a non-United States office of a bank to United States residents). "EVENT OF DEFAULT" means any of the events specified in Section 7.01 hereof, provided that any requirement in connection with such event for the giving of notice or the lapse of time, or the happening of any further condition, event or act has been satisfied. "FANNIE MAE" means Fannie Mae, a corporation created under the laws of the United States, and any successor thereto. "FEDERAL FUNDS RATE" means, for any day, the rate per annum (rounded upwards, if necessary, to the nearest 1/100th of one percent) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of Minneapolis on the Business Day next succeeding such day, provided that (i) if the day for which such rate is to be determined is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day, and (ii) if such rate is not so published for any day, the Federal Funds Rate for such day shall be the average rate quoted to Agent on such day on such transactions as determined by Agent. "FHA" means the Federal Housing Administration and any successor thereto. 6 "FISCAL QUARTER" means each period of three calendar months ending December 31, March 31, June 30 and September 30 of each year. "FISCAL YEAR" means each period of twelve calendar months ending September 30 of each year. "FOUR QUARTER PERIOD" means as of the end of any Fiscal Quarter, the period of four consecutive Fiscal Quarters then ended. "FREDDIE MAC" means Freddie Mac, a corporation created under the laws of the United States, and any successor thereto. "GAAP" means those generally accepted accounting principles and practices which are recognized as such by the Financial Accounting Standards Board (or any generally recognized successor) and which, in the case of Borrower, are applied for all periods after the date hereof in a manner consistent with the manner in which such principles and practices were applied to the financing statements described in Section 4.06. If any change in any accounting principle or practice is required by the Financial Accounting Standards Board (or any such successor) in order for such principle or practice to continue as a generally accepted accounting principle or practice, all reports and financial statements required hereunder with respect to Borrower or with respect to Borrower and its Consolidated subsidiaries may be prepared in accordance with such change, but all calculations and determinations to be made hereunder may be made in accordance with such change only after notice of such change is given to each Lender and Majority Lenders agree to such change insofar as it affects the accounting of Borrower. "GAAP INDEBTEDNESS" of any Person at a particular date mean the sum (without duplication) at such date of (a) all indebtedness of such Person for borrowed money or for the deferred purchase price of property or services or which is evidenced by a note, bond, debenture, or similar instrument, and (b) all obligations of such Person under any lease required by GAAP to be capitalized on the balance sheet of such Person. "GENERAL PARTNER" means the general partner of Borrower which on the date hereof is CH Mortgage Company GP, Inc., a Delaware corporation. "GINNIE MAE" means the Government National Mortgage Association, or any successor thereto. "GOOD FUNDS WIRE CLEARING ACCOUNT" means account number 104756234340 of Borrower with Agent. "GOVERNMENTAL AUTHORITY" means any nation or government, any agency, department, state or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. 7 "GOVERNMENT REQUIREMENT" means any law, statute, code, ordinance, order, rule, regulation, judgment, decree, injunction, franchise, permit, certificate, license, authorization or other direction or requirement (including, without limitation, any of the foregoing which relate to environmental standards or controls, energy regulations and occupational, safety and health standards or controls) of any arbitrator, court or other Governmental Authority, which exercises jurisdiction over Borrower and its Restricted Subsidiaries or any of its Property. "INVESTOR" means any Person listed on Schedule 2 and any other Person approved in writing by Agent who agrees to purchase Mortgage Collateral pursuant to a Take-Out Commitment. "JUMBO MORTGAGE LOAN" means a Mortgage Loan which would in all respects be a Conforming Loan but for the fact that the original unpaid principal amount of the underlying Mortgage Note is greater than $240,000 (but does not exceed $500,000). "JUMBO SUBLIMIT" means fifteen percent (15%) of the Aggregate Commitment Amounts. "LENDERS" means each signatory hereto (other than Borrower) including U.S. Bank in its capacity as a Lender hereunder rather than as Agent, and the successors of each as holder of a Note (or a portion thereof) that has been transferred in accordance with Section 10.11. "LIEN" means any mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (whether statutory or otherwise), or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including, without limitation, any conditional sale or other title retention agreement, any financing lease having substantially the same economic effect as any of the foregoing, and the filing of any financing statement under the Uniform Commercial Code or comparable law of any jurisdiction in respect of any of the foregoing). "LOAN" has the meaning given it in Section 2.01. "LOAN DOCUMENT" means any, and "LOAN DOCUMENTS" shall mean all, of this Agreement, the Notes, the Security Instruments and any and all other agreements or instruments now or hereafter executed and delivered by Borrower or any other Person in connection with, or as security for the payment or performance of any or all of the Obligations, as any of such may be renewed, amended or supplemented from time to time. "MAJORITY LENDERS" means (i) if there are less than three Lenders, Lenders collectively having Percentage Shares totaling in the aggregate one hundred percent (100%); and (ii) if there are three or more Lenders, Lenders collectively having Percentage Shares totaling in the aggregate at least sixty-six and two-thirds percent (66 2/3%). 8 "MARKET VALUE" means at any date with respect to any Mortgage Loan, the bid price quoted in writing to the Agent as of the computation date by two nationally recognized dealers selected by the Agent who at the time are making a market in similar Mortgage Loans, multiplied, in any case, by the outstanding principal amount thereof. "MATERIAL ADVERSE EFFECT" means any material adverse effect on (a) the validity or enforceability of this Agreement, the Notes or any other Loan Document, (b) the business, operations, total Property or financial condition of Borrower and its Restricted Subsidiaries on a Consolidated basis, (c) the collateral under the Security Agreement, or (d) the ability of Borrower to fulfill its obligations under this Agreement, the Notes, or any other Loan Document to which it is a party. "MAXIMUM RATE" means, with respect to each Lender, the maximum nonusurious rate of interest that such Lender is permitted under applicable law to contract for, take, charge, or receive with respect to its Loans. All determinations herein of the Maximum Rate, or of any interest rate determined by reference to the Maximum Rate, shall be made separately for each Lender as appropriate to assure that the Loan Documents are not construed to obligate any Person to pay interest to any Lender at a rate in excess of the Maximum Rate applicable to such Lender. "MORTGAGE" means a mortgage or deed of trust, on standard forms in form and substance satisfactory to Agent, securing a Mortgage Note and granting a perfected first or second priority lien on residential real property consisting of land and a single-family dwelling thereon which is completed and ready for occupancy. "MORTGAGE ASSIGNMENT" means an instrument duly executed and in recordable form assigning a Mortgage, in blank and all like intervening instruments that have been executed with respect to such Mortgage and which is in form acceptable to Agent and satisfies all Requirements of Law. "MORTGAGE COLLATERAL" all Mortgage Notes (a) which are made payable to the order of Borrower or have been endorsed (without restriction or limitation) payable to the order of Borrower, (b) in which Agent has been granted and continues to hold a perfected first priority security interest, (c) which are in form and substance acceptable to Agent in its reasonable discretion, (d) which are secured by Mortgages, and (e) with respect to Eligible Mortgage Loans, conform in all respects with all the requirements for purchase of such Mortgage Notes under the Take-Out Commitments and are valid and enforceable in accordance with their respective terms. "MORTGAGE LOAN" means a one-to-four-family mortgage loan which is evidenced by a Mortgage Note and secured by a Mortgage, together with the rights and obligations of a holder thereof and payments thereon and proceeds therefrom. "MORTGAGE NOTE" means the Note or other evidence of indebtedness evidencing the indebtedness of an Obligor under a Mortgage Loan. 9 "MORTGAGE-BACKED SECURITY" shall mean (a) any security (including, without limitation, a participation certificate) guaranteed by Ginnie Mae that represents an interest in a pool of mortgages, deeds of trust or other instruments creating a Lien on Property which is improved by a completed single family residence, including but not limited to a condominium, planned unit development or townhouse, (b) a security (including a participation certificate) issued by Fannie Mae or Freddie Mac that represent interests in such a pool, and (c) a privately-placed security representing undivided interests in or otherwise supported by such a pool. "NONCONFORMING MORTGAGE LOAN" means a Mortgage Loan that (a) is neither a Conforming Mortgage Loan nor a Jumbo Mortgage Loan,(b) generally meets Standard & Poor's Ratings Group (a division of McGraw Hill, Inc.) underwriting guidelines for Subprime Mortgage Loans, (c) has a FICO score equal to or in excess of the requirements of the Investor under the applicable Take-Out Commitment for such Mortgage Loan, (d) has a combined loan-to-value ratio of not more than 100%, and (e) has a face amount of no more than $100,000, in the case of a Mortgage Loan made pursuant to a home equity line of credit, and no more than $250,000, in the case of any other Mortgage Loan. "NONCONFORMING SUBLIMIT" means fifteen percent (15%) of the Aggregate Commitment Amounts. "NOTE" means any promissory note delivered by Borrower to a Lender pursuant to Section 2.02 in the form attached hereto as Exhibit A, and all renewals, modifications and extensions thereof. "NOTES" means collectively each Lender's Note. "OBLIGATIONS" means all present and future GAAP Indebtedness and Contingent Indebtedness, obligations, and Liabilities of Borrower to Agent or any Lender, and all renewals and extensions thereof, or any part thereof, arising pursuant to this Agreement or any other Loan Document, and all interest accrued thereon, and reasonable attorneys' fees and other costs incurred in the drafting, negotiation, enforcement or collection thereof, regardless of whether such indebtedness, obligations, and liabilities are direct, indirect, fixed, contingent, joint, several or joint and several. "OBLIGOR" means the Person or Persons obligated to pay the indebtedness which is the subject of a Mortgage Loan. "OPERATING ACCOUNT" means the non-interest bearing demand checking account established by Borrower with Agent to be used for Borrower's operations. "PARENT" means D.R. Horton, Inc., a Delaware Corporation, which owns indirectly through one or more of its wholly-owned Subsidiaries, one hundred percent (100%) of the general and limited partnership interests in Borrower. 10 "PBGC" means the Pension Benefit Guaranty Corporation or any Governmental Authority succeeding to any of its functions. "PERCENTAGE SHARE" means, with respect to any Lender (a) when used in Section 2.01, in any Borrowing Request or when no Loans are outstanding hereunder, the percentage set forth opposite such Lender's name on Schedule 5, and (b) when used otherwise, the percentage obtained by dividing (i) the sum of the unpaid principal balance of such Lender's Loans at the time in question by (ii) the sum of the aggregate unpaid principal balance of all Loans at such time. "PERSON" means any individual, corporation, partnership, joint venture, association, joint stock company, limited liability company, trust, unincorporated organization, Governmental Authority, or any other form of entity. "PROPERTY" means any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible. "REFERENCE RATE" means at the time of any determinations thereof, the rate per annum which is most recently publicly announced by U.S. Bank as its "reference rate", which may be a rate at, above or below the rate at which U.S. Bank lends to other Persons. "REFERENCE RATE ADVANCE" means an outstanding Loan that bears interest as provided in Section 2.04(a)(ii). "REGULATION D" means Regulation D issued by the Board of Governors of the Federal Reserve system as in effect from time to time. "REGULATION T" means Regulation T issued by the Board of Governors of the Federal Reserve System as in effect from time to time. "REGULATION U" means Regulation U issued by the Board of Governors of the Federal Reserve System as in effect from time to time. "REGULATION X" means Regulation X issued by the Board of Governors of the Federal Reserve System as in effect from time to time. "REGULATORY CHANGE" means any change after the date hereof in United States federal, state or foreign laws or regulations or the adoption or making after such date of any interpretations, directives or requests applying to a class of banks including any Lender under any United States federal, state or foreign laws or regulations (whether or not having the force of law) by any court or governmental or monetary authority charged with the interpretation or administration thereof. 11 "REPORTABLE EVENT" means (a) a reportable event described in Sections 4043(b)(5) or (6) of ERISA or the regulations promulgated thereunder, or (b) any other reportable event described in Section 4043(b) of ERISA or the regulations promulgated thereunder other than a reportable event not subject to the provision for 30-day notice to the PBGC pursuant to a waiver by the PBGC under Section 4043(a) of ERISA. "REQUIRED MORTGAGE DOCUMENTS" means as to any Mortgage Loan, the items described in Section 4.02 of the Security Agreement. "REQUIREMENT OF LAW" as to any Person means the charter and by-laws or other organizational or governing documents of such Person, and any law, statute, code, ordinance, order, rule, regulation judgment, decree, injunction, franchise, permit, certificate, license, authorization or other determination, direction or requirement (including, without limitation, any of the foregoing which relate to environmental standards or controls, energy regulations and occupational, safety and health standards or controls) of any arbitrator, court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its Property or to which such Person or any of its Property is subject. "RESTRICTED SUBSIDIARY" means any subsidiary of Borrower in existence on the date hereof and any Subsidiary hereafter acquired or formed by Borrower which Borrower does not designate as an Unrestricted Subsidiary. "RISK RATING" means the risk rating of a Mortgage Loan determined by the underwriting guidelines of Borrower or other applicable standards of an Investor to which such Mortgage Loan is to be sold by Borrower under a Take-Out Commitment, provided that such underwriting guidelines or other applicable standards comply with industry standards in the sole judgment of Agent. "SECURITY AGREEMENT" means the Pledge and Security Agreement of even date herewith between Borrower and Agent, as the same may from time to time be further supplemented, amended or restated. "SECURITY INSTRUMENT" means (a) the Security Agreement and (b) such other executed documents as are or may be necessary to grant to Agent a perfected first prior and continuing security interest in and to all Mortgage collateral, and any and all other agreements or instruments now or hereafter executed and delivered by Borrower in connection with, or as security for the payment or performance of, all or any of the Obligations, including Borrower's obligations under the Notes and this Agreement, as such agreements may be amended, modified or supplemented from time to time. "SUBPRIME MORTGAGE LOANS" means any loans with credit characteristics which do not fit the traditional requirements for a Risk Rating of "A" (as defined by Standard & Poor's Rating 12 Group), generally due to the overall underlying credit quality, credit bureau score, loan-to-value ratio, lack of credit history, etc. "SUBSIDIARY" means, with respect to any Person, any corporation, association, partnership, joint venture, or other business or corporate entity, enterprise or organization which is directly or indirectly (through out or more intermediaries) controlled by or owned fifty percent (50%) or more by such Person. "SWINGLINE COMMITMENT" means the discretionary revolving credit facility provided by U.S. Bank to Borrower described in Section 2.01. "SWINGLINE LOAN" means a loan made by U.S. Bank to Borrower pursuant to Section 2.10. "TAKE-OUT COMMITMENT" means with respect to any Mortgage Loan shall mean a bona fide current, unused and unexpired whole loan commitment or forward sale Mortgage-Backed Security commitment issued in favor of and held by the Company made by an Approved Investor, under which such Approved Investor agrees prior to the expiration thereof, upon the satisfaction of certain terms and conditions therein, to purchase such Mortgage Loan or related Mortgage-Backed Security at a specified price, which commitment is not subject to any term or condition which is not customary in commitments of like nature or which, in the reasonably anticipated course of events, cannot be fully complied with prior to the expiration thereof. "TERMINATION EVENT" means (a) the occurrence with respect to any ERISA Plan of a Reportable Event, (b) the withdrawal of Borrower or any ERISA Affiliate from a plan during a plan year in which it was a "substantial employer", as defined in Section 4001(a)(2) of ERISA, (c) the distribution to affected parties of a notice of intent to terminate any ERISA Plan or the treatment of any ERISA plan amendment as a termination under Section 4041 of ERISA, (d) the institution of proceedings to terminate any ERISA Plan by the PBGC under Section 4042 of ERISA, or (e) any other event or condition which might constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any ERISA Plan. "UCC" means the Texas Uniform Commercial Code, as the same may hereafter be amended. "UNRESTRICTED SUBSIDIARY" means (i) any Subsidiary of Borrower that at the time of acquisition or formation of such Subsidiary by Borrower shall be designated as an Unrestricted Subsidiary by the Board of Directors of Borrower in the manner provided below and (ii) any Subsidiary of an Unrestricted Subsidiary. The Board of Directors of the General Partner may designate any newly acquired or formed Subsidiary to be an Unrestricted Subsidiary, provided that no Default or Event of Default shall have occurred and be continuing at the time of or, after giving effect to such designation. The Board of Directors may designate any Unrestricted 13 Subsidiary to be a Restricted Subsidiary by delivering written notice of such designation to Agent together with a compliance certificate signed by the President, Accounting Director or Chief Financial Officer of General Partner which shall certify to Agent and Lenders that at the date of and, after giving effect to such designation, Borrower shall be in compliance with all covenants set forth in the Loan Documents and no Default or Event of Default shall have Occurred and be continuing. "VA" means the U.S. Department of Veterans Affairs and any successor thereto. "WET WAREHOUSING LOANS" means Eligible Mortgage Loans which are included in the Borrowing Base, but for which the Required Mortgage Documents have not been delivered to Agent. "WET WAREHOUSING SUBLIMIT" means fifty percent (50%) of the Aggregate Commitment Amounts during the last three (3) Business Days in any calendar month and the first four (4) Business Days in the next succeeding calendar month or thirty percent (30%) of the Aggregate Commitment Amounts at any other time. Section 1.02 OTHER DEFINITIONAL PROVISIONS. (a) Unless otherwise specified therein, all terms defined in this Agreement shall have the above-defined meanings when used in the Notes or any other Loan Document, certificate, report or other document made or delivered pursuant hereto. (b) Each term defined in the singular form in Section 1.01 means the plural thereof when the plural form of such term is used in this Agreement, the Notes or any other Loan Document, certificate, report or other document made or delivered pursuant hereto, and each term defined in the plural form in Section 1.01 shall mean the singular thereof when the singular form of such term is used herein or therein. (c) The words "hereof," "herein," "hereunder" and similar terms when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and section, subsection, schedule and exhibit references herein are references to sections, subsections, schedules and exhibits to this Agreement unless otherwise specified. The word "or" is not exclusive, and the word "including" (in its various forms) means "including without limitation." (d) Unless the context otherwise requires or unless otherwise provided herein the terms defined in this Agreement which refer to a particular agreement, instrument or document also refer to and include all renewals, extensions, modifications, amendments and restatements of such agreement, instrument or document, provided that nothing contained in this section shall be construed to authorize any such renewal, extension, modification, amendment or restatement. 14 (e) As used herein, in the Notes or in any other Loan Document, certificate or report or other document made or delivered pursuant hereto, accounting terms relating to any Person and not specifically defined in this Agreement or therein shall have the respective meanings given to them under GAAP. Section 1.03 EXHIBITS AND SCHEDULES. All Exhibits and Schedules attached to this Agreement are a part hereof for all purposes. Section 1.04 CALCULATIONS AND DETERMINATIONS. All calculations under the Loan Documents of interest and of fees shall be made on the basis of actual days elapsed and a year of 360 days. Each determination by Agent or a Lender of amounts to be paid under Sections 2.07 and 2.08 or any other matters which are to be determined hereunder by Agent or a Lender (such as any Eurodollar Rate, Adjusted Eurodollar Rate or Business Day) shall, in the absence of manifest error, be conclusive and binding. Unless otherwise expressly provided herein or unless Agent otherwise consents all financial statements and reports furnished to Agent or any Lender hereunder shall be prepared and all financial computations and determinations pursuant hereto shall be made in accordance with GAAP. ARTICLE II TERMS OF CREDITS Section 2.01 COMMITMENTS AND DISCRETIONARY SWINGLINE COMMITMENT. (a) COMMITMENTS. Subject to the terms and conditions contained in this Agreement, each Lender agrees to make loans ("Loans") to Borrower on a revolving credit basis from time to time on any Business Day from the date of this Agreement through the Drawdown Termination Date. The aggregate principal amount of any Lender's Loans at any time outstanding (after giving effect to the other transactions contemplated by the Borrowing Request pursuant to which a Loan is requested) shall not exceed the lesser of: (i) such Lender's Percentage Share of the Borrowing Base or (ii) such Lender's Commitment Amount. At no time shall the aggregate amount of all Loans outstanding at any time exceed the lesser of (A) the Borrowing Base, and (B) the Aggregate Commitment Amounts at such time. Loans may be requested as Reference Rate Advances, Eurodollar Rate Advances, Balance Funded Rate Advances or any combination of the foregoing. (b) DISCRETIONARY SWINGLINE COMMITMENT. Upon the terms and subject to the conditions of this Agreement, until the Drawdown Termination Date, U.S. Bank, in its sole discretion, may lend to Borrower loans (each such loan, a "Swingline Loan") at such times and in such amounts as Borrower shall request, up to an aggregate principal amount at any time outstanding equal to the amount by which U.S. Bank's Commitment Amount exceeds the principal amount outstanding under U.S. Bank's Note; PROVIDED, that U.S. Bank will not make a Swingline Loan if (i) after giving effect thereto, any of the limitations set forth in Section 2.01(a) would be 15 exceeded or (ii) U.S. Bank has received written notice from Borrower or any Lender that one or more of the conditions precedent set forth in Article III for the making of a Loan have not been satisfied. Section 2.02 PROMISSORY NOTES. The Loans made by each Lender pursuant to this Article II shall be evidenced by a Note payable to the order of such Lender. Section 2.03 OBTAINING LOANS; REFINANCING OF SWINGLINE LOANS. (a) NOTICE AND MANNER OF OBTAINING LOANS. Borrower shall give Agent telephonic notice of each request for Loans not later am 1:00 p.m. (Minneapolis, Minnesota time) on the requested Borrowing Date and of each request for Swingline Loans not later than 3:00 p.m. (Minneapolis, Minnesota time) on the requested Borrowing Date. Each request for Loans or Swingline Loans shall specify the aggregate amount of Loans or Swingline Loans requested and whether such Loans to be made by each Lender are to be funded as Reference Rate Advances, Eurodollar Rate Advances or Balance Funded Rate Advances; provided, that any portion of a Loan not so designated shall be funded as a Eurodollar Rate Advance. Agent shall notify each Lender via facsimile and telephone by not later than 2:00 P.M. (Minneapolis, Minnesota time) on the date it receives such request of each request for Loans received from Borrower, of such Lenders's Percentage Share of the Loans requested and whether such Lender's Loans are to funded as Reference Rate Advances, Eurodollar Rate Advances or Balance Funded Rate Advances. Borrower, shall not later than the following Business Day, confirm any such request by delivering to Agent a Confirmation. Each request for Loans shall be irrevocable and binding on Borrower. If all conditions precedent to such Loan have been met, each Lender shall deposit into the Collateral Account in immediately available dollars by not later than 4:00 P.M. (Minneapolis, Minnesota time) on the Borrowing Date the amount of such Lender's Loan and upon receipt of such funds, Agent shall promptly make such funds available to Borrower by depositing such funds in the Good Funds Wire Clearing Account or the Operating Account, as requested by Borrower. On the Borrowing Date of requested Swingline Loans, U.S. Bank may deposit into the Collateral Account in Immediately Available Funds by not later than 4:00 p.m. (Minneapolis, Minnesota time) on the requested Borrowing Date the amount of the requested Swingline Loans. Unless Agent shall have received notice from a Lender prior to 3:00 P.M. (Minneapolis, Minnesota time) on any Borrowing Date that such Lender will not make available to Agent such Lender's Loan, Agent may in its discretion assume that such Lender has made such Loan available to Agent in accordance with this section and Agent may if it chooses, in reliance upon such assumption make such Loan available to Borrower. If and to the extent such Lender shall not so make its Loan available to Agent, such Lender shall, on demand, pay to Agent the amount of such Loan together with interest thereon, for each day from the date such amount is made available to Borrower until the date such amount is paid or repaid to Agent at the Federal Funds Rate. If such Lender does not pay such amount promptly upon Agent's demand therefor, Agent shall notify Borrower and Borrower shall immediately repay such amount to Agent together with accrued interest thereon at the applicable rate or rates provided in Section 2.04. Agent shall use its best efforts to demand any such amount from both such Lender and 16 Borrower, provided, that any failure by Agent to make any such demand on both such Lender and Borrower shall not in any manner affect such Lender's and Borrower's obligation to pay or repay such amount, with interest, as set forth herein. The failure of any Lender to make any Loan to be made by it hereunder shall not relieve any other Lender of its obligation hereunder, if any, to make its Loan, but no Lender shall be responsible for the failure of any other Lender to make any Loan to be made by such other Lender. Each request for Loans or Swingline Loans shall be deemed to be a representation by Borrower that (i) no Event of Default or Default has occurred or will exist upon the making of the requested Loans or Swingline Loans and (ii) the representations and warranties contained in Section 4 hereof and in Section 5 of the Security Agreement are true and correct with the same force and effect as if made on and as of the date of such request. (b) REFINANCING OF SWINGLINE LOANS. (i) PERMITTED REFINANCINGS OF SWINGLINE LOANS. U.S. Bank, at any time in its sole and absolute discretion, may, upon notice given to each other Lender by not later than 2:00 P.M. (Minneapolis, Minnesota time) on any Business Day, request that each Lender (including U.S. Bank) make a Loan in an amount equal to its Percentage Share of a portion of the aggregate unpaid principal amount of any outstanding Swingline Loans for the purpose of refinancing such Swingline Loans. Such Loans shall be made as Eurodollar Advances, unless Borrower specifies otherwise. (ii) MANDATORY REFINANCINGS OF SWINGLINE LOANS. Not later than 2:00 P.M. (Minneapolis time) at least on a weekly basis, U.S. Bank will notify each other Lender of the aggregate amount of Swingline Loans which are then outstanding and the amount of Loans required to be made by each Lender (including U.S. Bank) to refinance such outstanding Swingline Loans (which shall be in the amount of each Lender's Percentage Share of such outstanding Swingline Loans). Such Loans shall be made as Eurodollar Advances, unless Borrower specifies otherwise. (iii) LENDERS' OBLIGATION TO FUND REFINANCINGS OF SWINGLINE LOANS. Upon the giving of notice by U.S. Bank under Section 2.03(b)(i) or 2.03(b)(ii), each Lender (including U.S. Bank) shall make a Loan in an amount equal to its Percentage Share of the aggregate principal amount of Swingline Loans to be refinanced, and provide proceeds of such Loans, in immediately available funds, by not later than 3:00 P.M. (Minneapolis time) on the date such notice was received; PROVIDED, HOWEVER, that a Lender shall not be obligated to make any such Loan unless (A) U.S. Bank believed in good faith that all conditions to making the subject Swingline Loan were satisfied at the time such Swingline Loan was made, or (B) if the conditions to such Swingline Loan were not satisfied, such Lender had actual knowledge, by receipt of the statements furnished to it pursuant to Section 4.01 or otherwise, that any such condition had not been satisfied and failed to notify U.S. Bank in a writing received by U.S. Bank prior to the time it made such Swingline Loan that U.S. Bank was not authorized to make a 17 Swingline Loan until such condition had been satisfied, or U.S. Bank was obligated to give notice of the occurrence of an Event of Default or a Default to Lenders pursuant to Section 8.08 and failed to do so, or (C) any conditions to the making of such Swingline Loan that were not satisfied had been waived in writing by Majority Lenders prior to or at the time such Swingline Loan was made. The proceeds of Loans made pursuant to the preceding sentence shall be paid to U.S. Bank (and not to Borrower) and applied to the payment of principal of the outstanding Swingline Loans, and Borrower authorizes Agent to charge the Collateral Account or any other account (other than escrow or custodial accounts) maintained by Borrower with Agent (up to the amount available therein) in order to immediately pay U.S. Bank the principal amount of such Swingline Loans to the extent Loans made by the Lenders are not sufficient to repay in full the principal of the outstanding Swingline Loans requested or required to be refinanced. Upon the making of a Loan by a Lender pursuant to this Section 2.03(b)(iii), the amount so funded shall become due under such Lender's Note and the outstanding principal amount of the Swingline Loans shall be correspondingly reduced. If any portion of any Loan made by Lenders pursuant to this Section 2.03(b)(iii) should be recovered by or on behalf of Borrower from U.S. Bank in bankruptcy or otherwise, the loss of the amount so recovered shall be ratably shared among all Lenders in the manner contemplated by Section 9.11. Each Lender's obligation to make Loans referred to in this Section 2.03(b) shall, subject to the proviso to the first sentence of this Section 2.03(b)(iii), be absolute and unconditional and shall not be affected by any circumstance, including, without limitation, (1) any setoff, counterclaim, recoupment, defense or other right which such Lender may have against U.S. Bank, Borrower or anyone else for any reason whatsoever; (2) the occurrence or continuance of a Default or an Event of Default; (3) any adverse change in the condition (financial or otherwise) of Borrower; (4) any breach of this Agreement by Borrower, the Agent or any Lender; or (5) any other circumstance, happening or event whatsoever, whether or not similar to any of the foregoing; PROVIDED, that in no event shall a Lender be obligated to make a Loan if, after giving effect thereto, the outstanding principal balance of such Lender's Note would exceed its Commitment Amount. Section 2.04 INTEREST; BALANCES DEFICIENCY FEES; CONTINUATIONS AND CONVERSIONS. (a) INTEREST RATES; BALANCES DEFICIENCY FEES. Borrower will pay the Agent monthly in arrears, within two Business Days of each month after receipt of Agent's statement therefor, interest on the unpaid principal balance of each Advance of each Lender from time to time outstanding as follows: (i) with respect to Balance Funded Rate Advances, at the Balance Funded Rate; PROVIDED, that if for any Balance Calculation Period the Balance Funded Amount maintained by Borrower with any Lender is less than an amount equal to the average daily aggregate unpaid principal balance of the Balance Funded Rate Advances owed to such Lender during such Balance Calculation Period (such deficiency being herein 18 referred to as the "Balances Deficiency"), Borrower will pay such Lender a fee (the "Balances Deficiency Fee") for said Balance Calculation Period on the Balances Deficiency at a per annum rate equal to the average daily Eurodollar Rate PLUS Applicable Margin in effect during said Balance Calculation Period; and PROVIDED FURTHER, that if the Balance Funded Amount maintained by Borrower with any Lender for any Balance Calculation Period exceeds the weighted average daily aggregate unpaid principal balance of the Balance Funded Rate Advances owed to such Lender during such Balance Calculation Period (such excess being defined herein as the "Balances Surplus"), then such Balances Surplus, or, if Borrower and such Lender shall so agree, the charges reduction benefit for such Balances Surplus (as determined by such Lender), may be carried forward and applied to succeeding Balance Calculation Periods (but not to any Balance Calculation Period occurring in any subsequent calendar year); (ii) with respect to Reference Rate Advances, the Reference Rate PLUS the Applicable Margin, as adjusted automatically on and as of the effective date of any change in the Reference Rate; (iii) with respect to Eurodollar Rate Advance the Adjusted Eurodollar Rate PLUS the Applicable Margin, as adjusted automatically on and as of the effective date of any change in the Adjusted Eurodollar Rate; and (iv) with respect to any Obligations not paid when due (A) consisting of Balance Funded Rate Advances, a rate per annum equal to the Balance Funded Rate PLUS 4.0% per annum, (B) consisting of Eurodollar Rate Advances, a rate per annum equal to the Adjusted Eurodollar Rate PLUS 4.0% per annum, (C) consisting of Reference Rate Advances, a rate per annum equal to the Reference Rate PLUS 4.0% per annum, and (D) consisting of other Obligations, a rate per annum equal to the Reference Rate PLUS the Applicable Margin PLUS 4.0% for the period from the date such Obligations were due until the same are paid. (b) PAYMENT OF INTEREST AND FEES. Agent shall use its best efforts to provide Borrower with a statement for interest on the Notes, the facility fees with respect to the Commitments and the collateral handling fees with respect to Mortgage Loans pledged under the Pledge and Security Agreement, in each case accrued through the last day of each calendar month, on or before the third Business Day (and in any case, no later than the tenth Business Day), of the next succeeding calendar month, but shall have no liability to Borrower for its failure to do so. Interest on the Notes, facility fees and collateral handling fees accrued through the last day of each calendar month shall be due and payable on the second Business Day after the date Borrower receives such statement from Agent; PROVIDED, that interest payable at the rates provided for in Section 2.04(a)(iv) shall be payable on demand. Any Balances Deficiency Fee payable hereunder shall be due and payable quarterly after each Balance Calculation Period within two Business Days after receipt by Borrower from any Lender of a statement therefor (a copy of which shall be provided to Agent) containing the calculations made to determine such 19 Balances Deficiency Fee, which statement shall be conclusive absent manifest error. (c) DESIGNATION AND CONVERSIONS OF OUTSTANDING ADVANCES. Subject to the terms and conditions of this Agreement, Borrower shall designate, on any Borrowing Date, all or portions of the Loans to be made on such Borrowing Date as one or more Eurodollar Rate Advances, Balance Funded Rate Advances or Reference Rate Advances. Any portion of an outstanding Loan not designated as a Reference Rate Advance or a Balance Funded Rate Advance shall be funded as a Eurodollar Rate Advance. Thereafter, subject to the terms and conditions of this Agreement, Borrower shall have the option to convert all or any portion of any outstanding Advance consisting of Loans into Advances of another type (i.e., Eurodollar Rate Advances, Balance Funded Rate Advances or Reference Rate Advances); PROVIDED, HOWEVER, that (i) no Advance may be requested as or converted into a Balance Funded Rate or, [without the written consent of the Lenders to which it is owed (a copy of which shall be provided to Agent) a Balance Funded Rate Advance if an Event of Default or Default has occurred and is continuing on the proposed date of conversion, and (ii) no Advance owed to any Lender may be requested as or converted into a Balance Funded Rate Advance without the prior consent of such Lender, which shall be confirmed to Agent in writing by such Lender, if the Balance Funded Amount maintained by Borrower at such Lender is less than the aggregate amount of Balance Funded Rate Advances owed to such Lender, after giving effect to such conversion. Borrower shall provide Agent with telephonic notice of each proposed conversion not later than 1:00 P.M. (Minneapolis, Minnesota time) on the date of any conversion, which notice shall set forth the proposed date therefor. Each such notice shall specify (A) the amount to be converted, and (B) the date for the conversion. Any notice given by Borrower under this Section 2.04(c) shall be irrevocable. Borrower shall promptly confirm any such proposed conversion by delivering to Agent a duly completed and executed Confirmation. Agent shall notify each Lender affected by such proposed conversion by not later than 2:00 P.M. (Minneapolis, Minnesota time) on the date it receives such notice of the Advances of such Lender being converted and the types of Advances into which such Advances are being converted. Section 2.05 FEES. (a) The Borrower shall pay to the Agent, on behalf of each Lender, a facility fee ("Facility Fee") in the amount of .125% per annum of each Lender's Commitment Amount. The Facility Fee shall be payable monthly in arrears on the first Business Day of each month commencing September 1, 1999 and shall be computed on the basis of a 360-day year and applied to the actual number of days elapsed in such month; provided, that on September 1, 1999, the Borrower shall pay the prorated portion of the Facility Fee due from the date the Credit Agreement is executed by all parties thereto (the "Closing Date") to August 31, 1999. If the Credit Agreement terminates on any date other than the last of the then current month, the Borrower shall pay the prorated portion of the Facility Fee due from the beginning of the then current month to and including the date on which the Credit Agreement terminates. (b) The Borrower shall pay to the Agent on behalf of each Lender an upfront fee 20 ("Upfront Fee") calculated according to each Lender's Commitment Amount as follows:
Commitment Amount Upfront Fee ----------------- ----------- $45,000,000 or above .075% $30,000,000 - $44,999,999 .06% $15,000,000 - $29,999,999 .05%
The Upfront Fee shall be paid by the Borrower to the Agent, on behalf of each Lender, on or before the date of closing. (c) Borrower shall pay to the Agent for its own account, an Agent fee and collateral handling fees agreed to in that certain letter agreement dated of even date herewith between Borrower and Agent. Section 2.06 MANDATORY REPAYMENTS. The unpaid principal amount of each Note, together with all interest accrued thereon, shall be due and payable on the Drawdown Termination Date. In addition, if at any time the aggregate outstanding principal amount of all Loans exceeds the Borrowing Base, Borrower shall repay the amount of such excess within twenty-four hours after having knowledge thereof or receiving notice thereof from Agent. Section 2.07 PAYMENTS TO LENDERS. All payments of Interest on the Notes, all payments of principal, including any principal payment made with proceeds of Mortgage Collateral, and fees hereunder shall be made directly to Agent for prompt distribution to the applicable Lenders to whom such payment is owed in federal or other immediately available funds before 1:00 p.m. (Minneapolis, Minnesota time) on the respective dates when due via wire transfer to the Collateral Account. Any payment received by Agent after such time will be deemed to have been made on the next following Business Day. Should any such payment become due and payable on a day other than a Business Day, the maturity of such payment shall be extended to the next succeeding Business Day, and, in the case of a payment of principal or past due interest, interest shall accrue and be payable thereon for the period of such extension as provided in the Loan Document under which such payment is due. Each payment under a Loan Document shall be payable at the place provided therein and, if no specific place of payment is provided, shall be payable at the place of payment of the Notes. When Agent collects or receives money on account of the Obligations, Agent shall distribute the money so collected or received, and Agent and Lenders shall apply all such money so distributed, as follows: (a) first, for the payment of all Obligations which are then due, and if such money is insufficient to pay all such Obligations, (i) first to any reimbursements due Agent under Section 5.05, (ii) second to the payment of any Swingline Loans then outstanding, (iii) third to the payment of the Loans then due, and (iv) then to the partial payment of all other Obligations then 21 due in proportion to the amounts thereof, or as Lenders shall otherwise agree; (b) then for the prepayment of amounts owing under the Loan Documents if so specified by Borrower; (c) then for the prepayment of principal on the Notes, together with accrued and unpaid interest on the principal so prepaid; and (d) last, for the payment or prepayment of any other Obligations. All payments applied to principal or interest on any Note shall be applied first to any Interest then due and payable, then to principal then due and payable, and last to any prepayment of principal and interest. All distributions of amounts described in any of subsections (b), (c) or (d) above shall be made by Agent pro rata to Agent and each Lender then owed Obligations described in such subsection in proportion to all amounts owed all Lenders which are described in such subsection. Section 2.08 INCREASED CAPITAL REQUIREMENTS. In the event that, as a result of any Regulatory Change, compliance by any Lender with any applicable law or governmental rule, requirement, regulation, guideline or order (whether or not having the force of law) regarding capital adequacy has the effect of reducing the rate of return on such Lender's capital as a consequence of such Lender's Commitment or amounts outstanding under such Lender's Note to a level below that which such Lender would have achieved but for such compliance (taking into consideration such Lender's policies with respect to capital adequacy), then from time to time Borrower shall pay to such Lender, within thirty days after written demand by such Lender, such additional amount or amounts as will compensate such Lender for such reduction; PROVIDED, that Borrower shall not be obligated to pay any such additional amount (i) unless such Lender shall first have notified Borrower in writing that it intends to seek such compensation pursuant to this Section, or (ii) to the extent such additional amount is attributable to the period ending 91 days prior to the date of the first such notice with respect to such Regulatory Change (the "Excluded Period"), except to the extent any amount is attributable to the Excluded Period as a result of the retroactive application of the applicable Regulatory Change. A certificate, which shall be conclusive except for manifest error, as to the amount of any such reduction (including calculations in reasonable detail showing how such Lender computed such reduction and a statement that such Lender has not allocated to its Commitment or amounts outstanding under its Note a proportionately greater amount of such reduction than is attributable to each of its other commitments to lend or to each of its other outstanding credit extensions that are affected similarly by such compliance by such Lender, whether or not such Lender allocates any portion of such reduction to such other commitments or credit extensions) shall be furnished promptly by such Lender to Borrower. Section 2.09 PROVISIONS RELATING TO EURODOLLAR RATE ADVANCES AND BALANCE FUNDED RATE ADVANCES. 22 (a) INTEREST RATE NOT ASCERTAINABLE, ETC. If, on the date for determining the Adjusted Eurodollar Rate in respect of any Eurodollar Rate Advance, any Lender determines (which determination shall be conclusive and binding, absent error) that the Adjusted Eurodollar Rate will not adequately and fairly reflect the cost to such Lender of funding such Eurodollar Rate Advance, then such Lender shall notify Agent, and Agent shall notify Borrower, of such determination, whereupon the obligation of such Lender to make, or to convert any Advances to, Eurodollar Rate Advances shall be suspended until such Lender notifies Agent, and Agent notifies Borrower, that the circumstances giving rise to such suspension no longer exist. Outstanding Eurodollar Rate Advances owed to such Lender shall thereupon automatically be converted to bear interest at a rate equal to (i) the Federal Funds Rate PLUS 0.50%, and in such event, Borrower will thereafter be entitled to designate subsequent Advances to bear interest at the Federal Funds Rate plus 0.50%. (b) INCREASED COST. If, after the date hereof, any Regulatory Change or compliance with any request or directive (whether or not having the force of law) of any governmental authority, central bank or comparable agency: (i) shall subject any Lender to any tax, duty or other charge with respect to Eurodollar Rate Advances or Balance Funded Rate Advances, its Note, or its obligation to make Eurodollar Rate Advances or Balance Funded Rate Advances, or shall change the basis of taxation of payment to such Lender of the principal of or interest on Eurodollar Rate Advances or Balance Funded Rate Advances or any other amounts due under this Agreement in respect of Eurodollar Rate Advances or Balance Funded Rate Advances or its obligation to make Eurodollar Rate Advances or Balance Funded Rate Advances (except for changes in the rate of tax on the overall net income of such Lender imposed by the laws of the United States or any jurisdiction in which such Lender's principal office is located); or (ii) shall impose, modify or deem applicable any reserve, special deposit, capital requirement or similar requirement (including, without limitation, any such requirement imposed by the Board of Governors of the Federal Reserve System, but excluding any such requirement to the extent included in calculating the Adjusted Eurodollar Rate) against assets of, deposits with or for the account of, or credit extended by, any Lender or shall impose on any Lender or on the interbank Eurodollar market any other condition affecting Eurodollar Rate Advances or Balance Funded Rate Advances, such Lender's Note, or its obligation to make Eurodollar Rate Advances or Balance Funded Rate Advances; and the result of any of the foregoing is to increase the cost to such Lender of making or maintaining any Eurodollar Rate Advance or Balance Funded Rate Advance, or to reduce the amount of any sum received or receivable by such Lender under this Agreement or under its Note, then, within 30 days after written demand by such Lender, Borrower shall pay to such Lender such additional amount or amounts as will compensate such Lender for such increased 23 cost or reduction; PROVIDED, that Borrower shall not be obligated to pay any such additional amount (i) unless such Lender shall first have notified Borrower in writing that it intends to seek such compensation pursuant to this Section, or (ii) to the extent such additional amount is attributable to the period ending 91 days prior to the date of the first such notice with respect to such Regulatory Change (the "Excluded Period"), except to the extent any amount is attributable to the Excluded Period as a result of the retroactive application of the applicable Regulatory Change. A certificate of any Lender claiming compensation under this Section 2.09(b), setting forth the additional amount or amounts to be paid to it hereunder and stating in reasonable detail the basis for the charge and the method of computation (including a statement that such Lender has not allocated to its Commitment or amounts outstanding under its Note a proportionately greater amount of such compensation than is attributable to each of its other commitments to lend or to each of its other outstanding credit extensions that are affected by such compliance by such Lender, whether or not such Lender allocates any portion or such compensation to such other commitments or credit extensions), shall be conclusive in the absence of manifest error. In determining such amount, such Lender may use any reasonable averaging and attribution methods. Failure on the part of any Lender to demand compensation for any increased costs or reduction in amounts received or receivable with respect to any period shall not constitute a waiver of such Lender's rights to demand compensation for any increased costs or reduction in amounts received or receivable in any subsequent period. (c) ILLEGALITY. If, after the date of this Agreement, the adoption of, or any change in, any applicable law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Lender with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency shall make it unlawful or impossible for such Lender to make, maintain or fund Eurodollar Rate Advances or Balance Funded Rate Advances, such Lender shall notify Borrower and Agent, whereupon the obligation of such Lender to make or convert Advances into Eurodollar Rate Advances or Balance Funded Rate Advances, shall be suspended until such Lender notifies Borrower and Agent that the circumstances giving rise to such suspension no longer exist. If any Lender determines that it may not lawfully continue to maintain any Eurodollar Rate Advances or Balance Funded Rate Advances, all of the affected Advances shall be automatically converted as of the date of such Lender's notice to bear interest at a rate equal to the Federal Funds Rate PLUS 0.50% and, in such event, Borrower will thereafter be entitled to designate subsequent Advances to bear interest at the Federal Funds Rate plus 0.50%. ARTICLE III CONDITIONS PRECEDENT The obligation of each Lender to make Loans hereunder is subject to fulfillment of the conditions precedent stated in this Article III. 24 Section 3.01 INITIAL BORROWING. The obligation of each Lender to fund any Loan hereunder shall be subject to, in addition to the conditions precedent specified in Section 3.02, delivery to Agent of the following (each of the following documents being duly executed and delivered and in form and substance satisfactory to Agent, and, with the exception of the Notes, each in a sufficient number of originals that Agent, its counsel and each Lender may have an executed original of each document); (a) an executed counterpart of this Agreement and of all instruments, certificates and opinions referred to in this Article III not theretofore delivered (except the Borrowing Request which is to be delivered at the time provided in Subsection 3.02(a) hereof); (b) the Notes; (c) the Security Agreement dated of even date herewith, (d) a certificate of the Secretary or Assistant Secretary of General Partner setting forth (i) resolutions of its board of directors authorizing the execution, delivery, and performance of the Loan Documents to which it is a party and identifying the officers authorized to sign such instruments, (ii) specimen signatures of the officers so authorized, (iii) articles of incorporation of General Partner certified by the appropriate Secretary of State as of a recent date acceptable to the Agent in its sole discretion, (iv) bylaws of General Partner, certified as being accurate and complete and (v) limited partnership agreement of Borrower, certified as being accurate and complete; (e) a certificate of the existence and good standing for each of Borrower and General Partner in their respective states of incorporation or organization dated as of a recent date acceptable to the Agent in its sole discretion; (f) an opinion of counsel for Borrower in form and substance acceptable to Agent; (g) a Borrowing Base Certificate dated as of the date of the first Borrowing, certified by the President, Accounting Director or Chief Financial Officer of General Partner; and (h) such other documents as Agent may reasonably request at any time at or prior to the date of the initial Borrowing hereunder. Section 3.02 ALL BORROWINGS. The obligation of each Lender to fund any Loan pursuant to this Agreement is subject to the following further conditions precedent: (a) Borrower shall make a request for such Loan in accordance with Section 2.03 (and thereafter deliver to Agent a Confirmation with respect thereto, as required by Section 2.03) accompanied by the Required Mortgage Documents, if applicable; 25 (b) all Property in which Borrower has granted a Lien to Agent shall have been physically delivered to the possession of Agent or a bailee acceptable to Agent to the extent that such possession is required under this Agreement or appropriate for the purpose of perfecting the Lien of Agent in such Collateral; (c) the representations and warranties of Borrower and each Restricted Subsidiary contained in this Agreement or any Security Instrument (other than those representations and warranties which are by their terms limited to the date of the agreement in which they are initially made) shall be true and correct in all material respects on and as of the date of such Loan; (d) no Default or Event of Default shall have occurred and be continuing and no change or event which constitutes a Material Adverse Effect shall have occurred as of the date of such Loan; (e) the Collateral Account and the Operating Account shall be established and in existence; (f) the making of such Loan shall not be prohibited by any Governmental Requirement; (g) the delivery to Agent of such other documents and opinions of counsel, including such documents as may be necessary or desirable to perfect or maintain the priority of any Lien granted or intended to be granted hereunder or otherwise and including favorable written opinions of counsel with respect thereto, as Agent may reasonably request; and (h) the aggregate amount of all Loans and Swingline Loans outstanding, after giving effect to such Loan, does not exceed the lesser of (i) the Borrowing Base and (ii) the Aggregate Commitment Amount. The making of any request for any Loan or Swingline Loan by Borrower shall be deemed to constitute a representation and warranty by Borrower on the date thereof and on the date on which such Loan or Swingline Loan is made as to the facts specified in Subsections (c) and (d) of this Section 3.02. ARTICLE IV BORROWER REPRESENTATIONS AND WARRANTIES Borrower represents and warrants as follows: Section 4.01 ORGANIZATION AND GOOD STANDING. Borrower (a) is a limited partnership duly formed and existing in good standing under the laws of the jurisdiction of its formation, (b) 26 is duly qualified as a foreign limited partnership and in good standing in all jurisdictions in which its failure to be so qualified could have a Material Adverse Effect, (c) has the partnership power and authority to own its properties and assets and to transact the business in which it is engaged and is or will be qualified in the jurisdictions wherein it proposes to transact business in the future and (d) is in compliance with all Requirements of Law except to the extent that the failure to comply therewith could not, in the aggregate, have a Material Adverse Effect. Section 4.02 AUTHORIZATION AND POWER. Borrower has the requisite partnership power and authority to execute, deliver and perform the Loan Documents to which it is a party; Borrower is duly authorized to and has taken all action necessary to authorize it to, execute, deliver and perform the Documents to which it is a party and is and will continue to be duly authorized to perform such Loan Documents. Section 4.03 NO CONFLICTS OR CONSENTS. Neither the execution and delivery by Borrower of the Loan Documents, nor the consummation of any of the transactions herein or therein contemplated, nor compliance with the terms and provisions hereof or with the terms and provisions thereof, will (a) materially contravene or conflict with any Requirement of Law to which Borrower is subject, or any indenture, mortgage, deed of trust, or other agreement or instrument to which Borrower is a party or by which Borrower may be bound, or to which the Property of Borrower may be subject, or (b) result in the creation or imposition of any Lien, other than the Lien of the Security Agreement, on the Property of Borrower. All actions, approvals, consents, waivers, exemptions, variances, franchises, orders, permits, authorizations, rights and licenses required to be taken, given or obtained, as the case may be, from any Governmental Authority that are necessary in connection with the transactions contemplated by the Loan Documents have been obtained. Section 4.04 ENFORCEABLE OBLIGATIONS. This Agreement, the Notes and the other Loan Documents are the legal, valid and binding obligations of Borrower, enforceable in accordance with their respective terms, except as limited by Debtor Laws. Section 4.05 NO LIENS. Borrower has good and indefeasible title to the Mortgage Collateral free and clear of all Liens and other adverse claims of any nature, other than Liens in the Mortgage Collateral in favor of Agent. Section 4.06 FINANCIAL CONDITION OF BORROWER. Borrower has delivered to Agent and each Lender copies of its unaudited Consolidated balance sheet as of June 30, 1999; such financial statements fairly present the financial condition of Borrower as of such date and have been prepared in accordance with GAAP; as of the date thereof, there were no material obligations, liabilities or GAAP Indebtedness or Contingent Indebtedness (including material contingent and indirect liabilities and obligations or unusual forward or long-term commitments) of Borrower which are not reflected in such financial statements and no change which constitutes a Material Adverse Effect his occurred in the financial condition or business of Borrower since May 31, 1999. Borrower has also delivered to Agent and each Lender management reports for 27 the month ended June 30, 1999; such reports fairly and accurately present Borrower's commitment position, pipeline position, servicing and production as of the end of such months and for the fiscal year to date for the periods ending on such dates. Section 4.07 FULL DISCLOSURE. Each material fact or condition relating to the Loan Documents or the financial condition, business, or property of Borrower that is a Material Adverse Effect has been disclosed in writing to Agent. All information previously furnished by Borrower and its Restricted Subsidiaries to Agent in connection with the Loan Documents was and all information furnished in the future by Borrower and its Restricted Subsidiaries to Agent or Lenders will be true and accurate in all material respects or based on reasonable estimate on the date the information is stated or certified. To the best knowledge of Borrower, neither the financial statements referred to in Section 4.07 hereof, nor any Borrowing Request, officer's certificate or statement delivered by Borrower and its Restricted Subsidiaries to Agent and each Lender in connection with this Agreement, contains any untrue statement of material fact. Section 4.08 NO DEFAULT. Neither Borrower nor any Restricted Subsidiary is in default under any loan agreement, mortgage, security agreement or other material agreement or obligation to which it is a party or by which any of its Property is bound. Section 4.09 NO LITIGATION. There are no material actions, suits or legal, equitable, arbitration or administrative proceedings pending, or to the knowledge of Borrower, threatened, against Borrower or any Restricted Subsidiary the adverse determination of which could constitute a Material Adverse Effect. Section 4.10 TAXES. All tax returns required to be filed by Borrower and each Restricted Subsidiary in any jurisdiction have been filed or extended and all taxes, assessments, fees and other governmental charges upon Borrower and each Restricted Subsidiary or upon any of its properties, income or franchises have been paid prior to the time that such taxes could give rise to a Lien thereon, unless protested in good faith by appropriate proceedings and with respect to which reserves in conformity with GAAP have been established on the books of Borrower or such Restricted Subsidiary. Neither Borrower nor any Restricted Subsidiary has any knowledge of any proposed tax assessment against Borrower or any Restricted Subsidiary. Section 4.11 PRINCIPAL OFFICE, ETC. The principal office, chief executive office and principal place of business of Borrower and each Restricted Subsidiary is at the address set forth in Section 10.01. Section 4.12 COMPLIANCE WITH ERISA. None of Borrower, any Restricted Subsidiary or any ERISA Affiliate of Borrower or any Restricted Subsidiary currently maintains, contributes to, is required to contribute to or has any liability, whether absolute or contingent, with respect to an ERISA Plan. With respect to all other employee benefit plans maintained or contributed to by Borrower and each Restricted Subsidiary, Borrower and each Restricted Subsidiary is in material compliance with ERISA. 28 Section 4.13 SUBSIDIARIES. Neither Borrower nor any Restricted Subsidiary presently has any Subsidiary or owns any stock in any other corporation or association except those listed in Schedule 3. As of the date hereof, Borrower and each Restricted Subsidiary owns, directly or indirectly, the equity interest in each of its Subsidiaries which is indicated in Schedule 3. Section 4.14 INDEBTEDNESS. Borrower has no indebtedness outstanding other than the GAAP Indebtedness and Contingent Indebtedness permitted by Section 6.02. Section 4.15 PERMITS. Borrower and each Restricted Subsidiary has all permits and licenses necessary for the operation of its business. Section 4.16 STATUS UNDER CERTAIN FEDERAL STATUTES. Neither Borrower nor any Restricted Subsidiary is (a) a "holding company" or a "subsidiary company" of a "holding company" or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company", as such terms are defined in the Public Utility Holding Company Act of 1935, as amended, (b) a "public utility", as such term is defined in the Federal Power Act, as amended, (c) an "investment company", or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1949, as amended or (d) a "rail carrier", or a "person controlled by or affiliated with a rail carrier", within the meaning of Title 49, U.S.C., and neither Borrower nor any Restricted Subsidiary is a "carrier" to which 49 U.S.C. Section 11301(b)(1) is applicable. Section 4.17 NO APPROVALS REQUIRED. Other than consents and approvals previously obtained and actions previously taken, neither the execution and delivery of the Loan Documents, nor the consummation of any of the transactions contemplated hereby or thereby requires the consent or approval of the giving of notice to, or the registration, recording or filing by Borrower or any Restricted Subsidiary of any document with, or the taking of any other action in respect of, any Governmental Authority which has jurisdiction over Borrower or any Restricted Subsidiary or any of its Property, except for (a) the filing of the Mortgages, Uniform Commercial Code financing statements and other similar filings; to perfect the interest of Agent in the Collateral, and (b) such other consents, approvals, notices, registrations, filings or action as may be required in the ordinary course of business of Borrower and Restricted Subsidiaries in connection with the performance of the obligations of Borrower hereunder. Section 4.18 INDIVIDUAL MORTGAGE LOANS. Borrower hereby represents with respect to each Mortgage Note and Mortgage Loan that is part of the Collateral: (a) Borrower has good and marketable title to each Mortgage Note and Mortgage, was the sole owner thereof and had full right to pledge the Mortgage Loan to Agent free and clear of any other Lien except any such Lien which has been disclosed to Agent in writing and which is permitted hereunder; (b) To the best knowledge of Borrower, other than the permitted thirty (30) day 29 delinquency period for payments permitted by the definition of Eligible Mortgage Loan, there is no default, breach, violation or event of acceleration existing under any Mortgage or the related Mortgage Note and there is no event which, with the passage of time or with notice and/or the expiration of any grace or cure period, would constitute a default, breach, violation or event of acceleration and no such default, breach, violation or event of acceleration has been waived; (c) To the best of the knowledge of Borrower, the physical condition of the Property subject to the Mortgage has not deteriorated since the date of origination of the related secured Mortgage Loan (normal wear and tear excepted) and there is no proceeding pending for the total or partial condemnation of any Mortgaged Property; (d) Each Mortgage contains customary and enforceable provisions such as to render the rights and remedies of the holder thereof adequate for the realization against the related Property subject to the Mortgage of the benefits of the security provided thereby, including, (i) in the case of a Mortgage designated as a deed of trust, by trustee's sale, and (ii) otherwise, by judicial foreclosure; (e) Each Mortgage Loan is a first or second lien one-to-four-family loan which is not a construction loan, has been underwritten by the originator, investor or mortgage insurer thereof in accordance with such originator's, investor's or mortgage insurer's then current underwriting guidelines, and is a Conforming Loan, a Nonconforming Loan, an FHA loan, a VA loan or Jumbo Mortgage Loan; (f) Each Mortgage Note is payable in monthly installments of principal and interest, with interest payable in arrears, and no Mortgage Note provides for any extension of the original term; (g) No Mortgage Loan is a loan in respect of the purchase of a manufactured home or mobile home or the land on which a manufactured home or mobile home will be placed; no Mortgage securing a Mortgage Loan secures commercial property; (h) The origination practices used by the originator of the Mortgage Loans and the collection practices used by Borrower with respect to each Mortgage Loan have been in all material respects legal, proper, prudent and customary in the loan origination and servicing business; and (i) To the best knowledge of Borrower, each Mortgage Loan was originated in compliance with all applicable laws and no fraud or misrepresentation was committed by any Person in connection therewith. (j) Each Mortgage Loan matures within thirty (30) years after the date of origination thereof. 30 Section 4.19 YEAR 2000 COMPLIANCE. Borrower has, and has caused its Subsidiaries to, review and assess its business operations and computer systems with respect to the "year 2000 problem" (that is, that computer applications and equipment may not be able to properly perform date-sensitive functions before, during and after January 1, 2000) and, based on those reviews and inquiries, Borrower has no reason to believe that the year 2000 problem will result in a material adverse change in the business, condition (financial or otherwise), operations or prospects of Borrower and its Subsidiaries, or Borrower's ability to repay Lenders. Section 4.20 GINNIE MAE, FHA, VA, FANNIE MAE AND FREDDIE MAC ELIGIBILITY OF THE BORROWER. The Borrower is (a) an FHA-approved, non-supervised mortgagee in good standing and an eligible lender under the VA loan guaranty program, meeting all requirements of law and governmental regulation so as to be eligible to originate, purchase, hold and service FHA-insured Mortgage Loans, VA-guaranteed Mortgage Loans and conventional Mortgage Loans and to issue Mortgage-Backed Securities guaranteed by Ginnie Mae; (b) an approved seller/servicer of Mortgage Loans to Fannie Mae and to Freddie Mac in the Freddie Mac regions in which it operates, meeting all applicable Fannie Mae and Freddie Mac regulations so as to be able to service Mortgage Loans for Fannie Mae and Freddie Mac; and (c) a Fannie Mae, Freddie Mac and Ginnie Mae-approved servicer of Mortgage-Backed Securities, meeting all applicable regulations of Fannie Mae, Freddie Mac and Ginnie Mae so as to be able to service the Mortgage Loans that secure Mortgage-Backed Securities. ARTICLE V AFFIRMATIVE COVENANTS Borrower and each Restricted Subsidiary shall at all times comply with the covenants contained in this Article V, from the due hereof and for so long as any part of the Obligations or any Commitment is outstanding unless Majority Lenders have agreed otherwise. Section 5.01 FINANCIAL STATEMENT AND REPORTS. Borrower shall furnish to Agent and each Lender the following, all in form and detail reasonably satisfactory to Agent: (a) Promptly after becoming available, and in any event within ninety (90) days after the close of each Fiscal Year of Borrower, the audited balance sheet of Borrower as of the end of such year, and the audited related statements of income, partners' equity and cash flows of Borrower for such year, setting forth in each case in comparative form the corresponding figures for the preceding Fiscal Year, accompanied by the related report of independent certified public accountant of national standing prepared on a GAAP basis; (b) Promptly after becoming available, and in any event within thirty (30) days after the end of each month, including the twelfth month in the Fiscal Year of Borrower, a balance sheet of Borrower as of the end of such month and the related statements of income, partners' equity and cash flows of Borrower for such month and the period from the first day of the then 31 current fiscal year of Borrower through the end of such month, certified by the Chief Financial Officer, Accounting Director or President of General Partner to have been calculated on a GAAP basis; (c) Promptly upon receipt thereof, a copy of each other report submitted to Borrower by independent accountants in connection with any annual, interim or special audit of the books of Borrower; (d) Promptly and in any event within thirty (30) days after the end of each calendar month in each Fiscal Year of Borrower, and within fifteen (15) days after the completion of each year-end audit by Borrower's independent public accountants, a completed Officer's Certificate in the form of Exhibit D hereto, executed by the President, Chief Financial Officer or Accounting Director of General Partner; (e) Promptly and in any event within thirty (30) days after the end of each month, a Borrowing Base Certificate substantially in the form of Exhibit C hereto; (f) Promptly and in any event within thirty (30) days after the end of each month, a management report regarding (i) Borrower's pipeline and commitment position, including investor type, amount and rate of committed Mortgage Loans and expiration date and (ii) Borrower's production statistics, including type of product and or origination source (retail or correspondent) and geographic concentration in each case in form and detail as reasonably required by Agent, prepared as of the end of such month and for the Fiscal Year to date; (g) Promptly and in any event by not later than the first Business Day of each week, a commitment position report as of the last Business Day of the preceding week (delivered to Agent only); (h) Promptly upon the mailing or filing thereof, copies of all financial statements, reports and proxy statements mailed to the Parent's shareholders, and copies of all registration statements, periodic reports and other documents filed by the Parent with the Securities and Exchange Commission (or any successor thereto) or any national securities exchange; and (i) Such other information concerning the business, properties or financial condition of Borrower and its Restricted Subsidiaries as Agent or any Lender may reasonably request. Section 5.02 TAXES AND OTHER LIENS. Borrower and each Restricted Subsidiary shall pay and discharge promptly all taxes, assessments and governmental charges or levies imposed upon it or upon its income or upon any of its Property as all claims of any kind (including claims for labor, materials, supplies and rent) which, if unpaid, might become a Lien upon any or all of its Property; provided, however, Borrower and each Restricted Subsidiary shall not be required to pay any such tax, assessment, charge, levy or claim if the amount, applicability or validity thereof shall currently be contested in good faith by appropriate proceedings diligently conducted 32 by or on behalf of Borrower or such Restricted Subsidiary and if Borrower or such Restricted Subsidiary shall have set up reserves therefor adequate under GAAP. Section 5.03 MAINTENANCE. Each of Borrower and Restricted Subsidiaries shall (a) maintain its corporate or partnership existence, rights and franchises; (b) observe and comply in all material respects with all Governmental Requirements, and (c) maintain its Properties (and any Properties leased by or consigned to it or held under title retention or conditional sales contracts) in good and workable condition at all times and make all repairs, replacements, additions, betterments and improvements to its Properties as are needful and proper so that the business carried on in connection therewith may be conducted properly and efficiently at all times. Section 5.04 FURTHER ASSURANCES. Borrower shall, within three (3) Business Days after the request of Agent, cure any defects in the execution and delivery of the Notes, this Agreement or any other Loan Document and Borrower shall, at its expense, promptly execute and deliver to Agent upon request all such other and further documents, agreements and instruments in compliance with or accomplishment of the covenants and agreements of Borrower and each Restricted Subsidiary in this Agreement and in the other Loan Documents or to further evidence and more fully describe the collateral intended as security for the Notes, or to correct any omissions in this Agreement or the other Loan Documents, or more fully to state the security for the obligations set out herein or in any of the other Loan Documents, or to make any recordings, to file any notices, or obtain any consents. Section 5.05 REIMBURSEMENT OF EXPENSES. Borrower shall pay (a) all reasonable legal fees (including, without limitation, allocated costs for in-house legal service) incurred by Agent in connection with the preparation, negotiation or execution of this Agreement, the Notes and the other Loan Documents and any amendments, consents or waivers executed in connection therewith, (b) all fees, charges or taxes for the recording or filing of the Security Instruments, (c) all out-of-pocket expenses of Agent in connection with the legal administration of this Agreement, the Notes and the other Loan Documents, including courier expenses incurred in connection with the Mortgage Collateral, and (d) all amounts expended, advanced or incurred by Agent to satisfy any obligation of Borrower under this Agreement or any of the other Loan Documents or to collect the Notes, or to enforce the rights of Agent or any Lender under this Agreement or any of the other Loan Documents or to collect the Note, or to enforce the rights of Agent or any Lender under this Agreement or any of the other Loan Documents, which amounts shall include all underwriting expenses, collateral liquidation costs, court costs, attorneys' fees (including, without limitation, for trial, appeal or other proceedings), fees of auditors and accountants, and investigation expenses reasonably incurred by Agent or any Lender in connection with any such matters, together with interest at the post-maturity rate specified in the Note on each item specified in clause (a) through (d) from thirty (30) days after the date of written demand or request for reimbursement until the date of reimbursement. Section 5.06 INSURANCE. Borrower shall maintain with financially sound and reputable 33 insurers, insurance with respect to its properties and business against such liabilities, casualties, risks and contingencies and in such types and amounts as is customary in the case of Persons engaged in the same or similar businesses and similarly situated, including, without limitation, a fidelity bond or bonds with financially sound and reputable insurers with such coverage and in such amounts as is customary in the case of Persons engaged in the same or similar business and similarly situated. The improvements on the land covered by each Mortgage shall be kept continuously insured at all times by responsible insurance companies against fire and extended coverage hazard under policies, binders, letters, or certificates of insurance, with a standard mortgagee clause in favor of Borrower and its assigns. Each such policy must be in an amount equal to the lesser of the maximum insurable value of the improvements or the original principal amount of the Mortgage Note, without reduction by reason of any co-insurance, reduced rate contribution, or similar clause of the policies or binders. Upon request of Agent, Borrower shall furnish or cause to be furnished to Agent from time to time a summary of the insurance coverage of Borrower in form and satisfactory to Agent and if requested shall furnish Agent copies of the applicable policies. Section 5.07 ACCOUNTS AND RECORDS. Borrower and each Restricted Subsidiary shall keep books of record and account in true and correct entries will be made of all dealings or transactions in relation to its business and activities, in accordance with GAAP. Borrower and each Restricted Subsidiary shall maintain and implement administrative and operating procedures (including, without limitation, an ability to recreate all records pertaining to the performance of Borrower's or such Restricted Subsidiary's obligations under any servicing agreements in the event of the destruction of the originals of such records) and keep and maintain all documents, books, records, computer tapes and other information reasonably necessary or advisable for the performance by Borrower and each Restricted Subsidiary of its obligations under any servicing agreements. Section 5.08 RIGHT OF INSPECTION. Borrower shall permit authorized representatives of Agent or any Lender to examine their servicing records and books of records and account and make copies or extracts thereof and to visit and inspect any of the Properties of Borrower, all upon reasonable notice during normal business hours, provided that if no Event of Default has occurred and is continuing, such visits and Inspections at Borrower's premises shall be limited to periods of no more than two (2) consecutive days on two occasions (total of four days) during each twelve-month period. Such visits and inspections shall be at Agent's or such Lender's expense unless an Event of Default has occurred and is continuing, in which case it shall be at Borrower's expense. Borrower shall permit authorized representatives of Agent or any Lender to discuss the business, operations, assets and financial condition of Borrower and the Restricted Subsidiaries with its officers at any time. Section 5.09 NOTICE OF CERTAIN EVENTS. Borrower shall promptly notify Agent and each Lender upon (a) the receipt of any notice from, or the taking of any other action by, the holder of any promissory note, debenture or other evidence of GAAP Indebtedness and Contingent Indebtedness of Borrower or any Restricted Subsidiary with respect to a claimed default, together 34 with a detailed statement by a responsible officer of Borrower specifying the notice given or other action taken by such holder and the nature of the claimed default and what action Borrower is taking or proposes to take with respect thereto; (b) the commencement of, or any determination in, any legal, judicial or regulatory proceedings between Borrower or any Restricted Subsidiary and any Governmental Authority or any other Person which, if adversely determined, could have a Material Adverse Effect; (c) any material adverse change in the business, operations, prospects or financial condition of Borrower or any Restricted Subsidiary, including, without limitation, the insolvency of Borrower or any Restricted Subsidiary, (d) any event or condition which could have a Material Adverse Effect or (e) the occurrence of any Termination Event. Section 5.10 PERFORMANCE OF CERTAIN OBLIGATIONS AND INFORMATION REGARDING INVESTORS. Borrower shall perform and observe in all material respects each of the provisions of each Take-Out Commitment and any servicing agreement on its part to be performed or observed and will cause all things to be done which are necessary to have each item of Mortgage Collateral covered by a Take-Out Commitment comply with the requirements of such Take-Out Commitment. Borrower will deliver to Agent financial information concerning any Person Lenders are reviewing to determine whether to approve such Person as an Investor. Section 5.11 USE OF PROCEEDS; MARGIN STOCK. The proceeds of all Borrowings shall be used by Borrower solely for the origination or acquisition of Mortgage Loans in the ordinary course of Borrower's business. None of such proceeds shall be used for the purpose of purchasing or carrying any "margin stock" as defined in Regulation U, or for the purpose of reducing or retiring any GAAP Indebtedness and Contingent Indebtedness which was originally incurred to purchase or carry margin stock or for any other purpose which might constitute this transaction a "purpose credit" within the meaning of such Regulation U. Section 5.12 NOTICE OF DEFAULT. Borrower shall furnish to Agent and each Lender immediately upon becoming aware of the existence of any Default or Event of Default, a written notice specifying the nature and period of existence thereof and the action which Borrower is taking or proposes to take with respect thereto. Section 5.13 COMPLIANCE WITH LOAN DOCUMENTS. Borrower shall cause each Restricted Subsidiary to promptly comply with any and all covenants and provisions of the Loan Documents to be complied with by such Person. Section 5.14 OPERATIONS AND PROPERTIES. Borrower and each Restricted Subsidiary shall comply with all rules, regulations and guidelines applicable to it. Borrower shall act prudently and in accordance with customary industry standards in managing and operating its Property. Section 5.15 YEAR 2000 COMPLIANCE. Borrower agrees to take, and to cause each of its Subsidiaries to take, all actions reasonably necessary to ensure that the representations set forth in Section 4.19 remain true, and Borrower agrees to notify Agent promptly if, at any time during the term of this Agreement, Borrower becomes aware of facts or circumstances such that the 35 representations set forth in Section 4.19 has become or may become untrue or this Section has been or may be breached. Borrower will promptly deliver to Agent such information relating to the representation in Section 4.19 and the agreement set forth in this Section as Agent requests from time to time, including, without limitation, any information pertaining to the review and assessment set forth in Section 4.19. Section 5.16 MAINTENANCE OF QUALIFICATIONS. The Borrower will maintain its status as an FHA-approved mortgagee, as an approved lender under the VA guarantee program, as an approved seller/servicer of Mortgage Loans to Fannie Mae and to Freddie Mac in the Freddie Mac regions in which it operates and as an FHA-approved direct endorsement mortgagee, and its eligibility to issue Mortgage-Backed Securities or to service the Mortgage Loan pools formed with respect to Mortgage-Backed Securities. ARTICLE VI NEGATIVE COVENANTS Borrower and each Restricted Subsidiary shall at all times comply with the covenants contained in this Article VI, from the date hereof and for so long as any part of the Obligations or any Commitment is outstanding unless Majority Lenders have agreed otherwise: Section 6.01 NO MERGER. Borrower shall not merge or consolidate with or into any Person, if immediately prior to any such merger or consolidation a Default or Event of Default exists or would occur as a result thereof, or if as a result of any such merger or consolidation a Change of Control would occur. Section 6.02 LIMITATION ON GAAP INDEBTEDNESS AND CONTINGENT INDEBTEDNESS. At no time shall Borrower or any Restricted Subsidiary incur, create, contract, assume, have outstanding, guarantee or otherwise be or become, directly or indirectly, liable in respect of any GAAP Indebtedness or Contingent Indebtedness except: (a) the Obligations; (b) trade debt, equipment leases, loans for the purchase of equipment used in the ordinary course of Borrower's business and liens for taxes and assessments not yet due and payable owed in the ordinary course of business; (c) unsecured GAAP Indebtedness or unsecured Contingent Indebtedness owing to Parent or any Affiliate of Parent; and (d) Contingent Indebtedness to Persons other than Parent or Affiliate of Parent. Section 6.03 BUSINESS. Borrower shall not, directly or indirectly, other than through an 36 Unrestricted Subsidiary, engage in any business which differs materially from that currently engaged in by Borrower or any other business customarily engaged in by other Persons in the mortgage banking business. Section 6.04 LIQUIDATIONS, DISPOSITIONS OF SUBSTANTIAL ASSETS. Except as expressly provided below in this section, neither Borrower nor any Restricted Subsidiary shall dissolve or liquidate or sell, transfer, lease or otherwise dispose of any material portion of its property or assets or business. Borrower and the Restricted Subsidiaries may sell Mortgage Loans and the right to service Mortgage Loans in the ordinary course of their business, any Restricted Subsidiary may sell its property, assets or business to Borrower or another Restricted Subsidiary, and any Restricted Subsidiary may liquidate or dissolve if at the time thereof and immediately thereafter, Borrower and the Restricted Subsidiaries are in compliance with all covenants set forth in the Loan Documents and no Default or Event of Default shall have occurred and be continuing. Section 6.05 LOANS, ADVANCES, AND INVESTMENTS. Neither Borrower nor any Restricted Subsidiary shall make any loan (other than Mortgage Loans), advance, or capital contribution to, or investment in (including any investment in any Restricted Subsidiary, joint venture or partnership), or purchase or otherwise acquire any of the capital stock, securities, ownership interests, or evidences of indebtedness of, any Person (collectively, "Investment"), or otherwise acquire any interest in, or control of, another Person, except for the following: (a) Cash Equivalents; (b) Any acquisition of securities or evidences of indebtedness of others when acquired by Borrower in settlement of accounts receivable or other debts arising in the ordinary course of its business, so long as the aggregate amount of any such securities or evidences of indebtedness is not material to the business or condition (financial or otherwise) of Borrower; (c) Mortgage Notes acquired in the ordinary course of Borrower's business; and (d) Investment in any Subsidiary; provided that at the time any such investment is made and immediately thereafter, Borrower and the Restricted Subsidiaries are in compliance with all covenants set forth in the Loan Documents and no Default or Event of Default shall have occurred and be continuing. (e) Loans to officers or employees in an aggregate amount not to exceed $300,000. Section 6.06 USE OF PROCEEDS. Borrower shall not permit the proceeds of the Loans to be used for any purpose other than those permitted by Section 5.11 hereof. Borrower shall not, directly or indirectly, use any of the proceeds of the Loans for the purpose, whether immediate, incidental or ultimate, of buying any "margin stock" or of maintaining, reducing or retiring any GAAP Indebtedness and Contingent Indebtedness originally incurred to purchase a stock that is 37 currently any "margin stock", or for any other purpose which might constitute this transaction a "purpose credit", in each case within the meaning of Regulation U or otherwise take or permit to be taken any action which would involve a violation of Regulation U, Regulation T or Regulation X or any other regulation of the Board of Governors of the Federal Reserve System. Section 6.07 ACTIONS WITH RESPECT TO MORTGAGE COLLATERAL. Borrower shall not: (a) Compromise, extend, release, or adjust payments on any Mortgage Collateral, accept a conveyance of mortgaged property in full or partial satisfaction of any Mortgage Collateral, or release any Mortgage securing or underlying any Mortgage Collateral; (b) Agree to the amendment or termination of any Take-Out Commitment in which Agent has a security interest or to substitution of a Take-out Commitment for a Take-Out Commitment in which Agent has a security interest hereunder, if such amendment, termination or substitution may reasonably be expected (as determined by Majority Lenders in their sole discretion) to have a Material Adverse Effect; or (c) Transfer, sell, assign, or deliver any Mortgage Collateral pledged to Agent to any Person other than Agent, except pursuant to a Take-Out Commitment. Section 6.08 TRANSACTIONS WITH AFFILIATES. Borrower shall not enter into any transactions including, without limitation, any purchase, sale, lease or exchange of property or the rendering of any service, with any Affiliate other than a Restricted Subsidiary unless such transactions are otherwise permitted under this Agreement and are in the ordinary course of Borrower's business. Section 6.09 LIENS. Borrower shall not grant, create, incur, assume, permit or suffer to exist any Lien, upon any of its Mortgage Notes or Servicing Rights or any property related thereto, including but not limited to the mortgages securing such Mortgages Notes and the proceeds of the Mortgage Notes and Servicing Rights (whether or not part of the Mortgage Collateral), other than (a) Liens in an aggregate amount not to exceed $2,000,000, (b) Liens which secure payment of the Obligations, (c) such non-consensual Liens as may be deemed to arise as a matter of law pursuant to any Take-Out Commitment and (d) Liens described on Schedule 4. Section 6.10 ERISA PLANS. Neither Borrower nor any Restricted Subsidiary shall adopt or agree to maintain or contribute to ERISA Plan. Borrower and promptly notify Agent and each Lender in writing in the event an ERISA Affiliate adopts an ERISA Plan. Section 6.11 CHANGE OF PRINCIPAL OFFICE; FISCAL YEAR. Borrower shall not move its principal office, executive office or principal place of business from the address set forth in Section 10.01 or change its Fiscal Year, without prior written notice to Agent and each Lender. 38 Section 6.12 LIMITATION ON DISTRIBUTIONS AND REDEMPTIONS. Borrower will not make any Distribution, except as expressly provided in this section. Distributions may be made by Borrower, within sixty (60) days after the end of each Fiscal Quarter ending March 31 and September 30, to the extent that the aggregate value of all Distributions Made by Borrower in the Four Quarter Period ending on the last day of such Fiscal Quarter does not exceed Borrower's profit for such Four Quarter Period, so long as (a) no Default or Event of Default exists at the time such Distribution is made, or will occur as a result of the making thereof and (b) such Distribution will not reduce Borrower's Consolidated Tangible Net Worth to less than $14,600,000. Section 6.13 TANGIBLE NET WORTH. As of the end of each calendar month, Borrower's Consolidated Tangible Net Worth shall not be less than $14,600,000. Section 6.14 TANGIBLE NET WORTH RATIO. The ratio of (i) the sum of GAAP Indebtedness and Contingent Indebtedness to (ii) Borrower's Consolidated Tangible Net Worth shall not be more than 12.0 to 1.0 as of the end of each calendar month. Section 6.15 NET INCOME. As of the end of each Fiscal Quarter, Borrower's Consolidated income, calculated in accordance with GAAP, for the two consecutive Fiscal Quarters then ended shall not be less than $1.00. Section 6.16 CUSTODIAN. Borrower will not appoint any collateral agent or custodian for its Mortgage Loans other than U.S. Bank. Section 6.17 PAYMENTS TO PARENT. Upon the occurrence and continuation of an Event of Default, Borrower shall not make any payment on any indebtedness owed by it to Parent or any Affiliate of Parent. ARTICLE VII EVENTS OF DEFAULT Section 7.01 NATURE OF EVENT. An Event of Default shall exist if any one or more of the following occurs: (a) Borrower fails to make any payment of principal of or interest on any Note or any fee or other amount required to be paid to Agent or any Lender pursuant to this Agreement or any other Loan Document within two (2) calendar days after notice of such failure is given by Agent to Borrower; (b) Default is made in the due observance or performance by Borrower or any of its Restricted Subsidiaries of any covenant or agreement set forth in Article VI or Section 5.01 and such default continues unremedied for thirty (30) calendar days; 39 (c) Default is made in the due observance or performance by Borrower or any of its Restricted Subsidiaries of any covenant or agreement set forth in any Loan Document (other than as referred to in subsections (a) or (b) above) and such default continues unremedied for thirty (30) calendar days after notice of such default is given by Agent to Borrower; (d) Any material statement, warranty or representation by or on behalf of Borrower contained in any Loan Document or in any Borrowing Request, proves to have been incorrect or misleading in any material respect as of the date made or deemed made; (e) Borrower or any Restricted Subsidiary: (i) suffers the entry against it of a judgment, decree or order for relief by a court of competent jurisdiction in an involuntary proceeding commenced under any applicable bankruptcy, insolvency or other similar law of any jurisdiction now or hereafter in effect, including the federal Bankruptcy Code, as from time to time amended, or has any such proceeding commenced against it which remains undismissed for a period of sixty (60) days; or (ii) commences a voluntary case under any applicable bankruptcy, insolvency or similar law now or hereafter in effect, including the federal Bankruptcy Code, as from time to time amended; or applies for or consents to the entry of any order for relief in an involuntary case under any such law; or makes a general assignment for the benefit of creditors; or fails generally to pay (or admits in writing its inability to pay) its debts as such debts become due; or takes partnership action, corporate action or other action to authorize any of the foregoing; or (iii) suffers the appointment of or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator, or similar official of all or a substantial part of its assets or of any part of the Mortgage Collateral in a proceeding brought against or initiated by it, and such appointment or taking possession is neither made ineffective nor discharged within sixty (60) days after the making thereof, or such appointment or taking possession is it any time consented to, requested by, or acquiesced to by it; or (iv) suffers the entry against it of a final judgment for the payment of money in excess of $500,000 (not covered by insurance satisfactory to Agent in its discretion), unless the same is discharged within thirty (30) days after the date of carry thereof or an appeal or appropriate proceeding for review thereof is taken within such period and a stay of execution pending such appeal is obtained; or (v) suffers a writ or warrant of attachment or any similar process to be issued by any court against all or any substantial part of its assets or any pan of the Mortgage Collateral; 40 provided, however, if any event set forth in this Section 7.01(e) occurs with respect to any Restricted Subsidiary, the occurrence of such event shall not constitute an Event of Default unless it could have a Materially Adverse Effect. (f) Borrower or any Restricted Subsidiary fails to make when due or within any applicable grace period (after giving effect to any applicable notice requirement), any payment on any GAAP Indebtedness and Contingent Indebtedness (other than the Obligations); or any event or condition occurs under any provision contained in any agreement under which such obligation is governed, evidenced or secured (or any other material breach or default under such obligation or agreement occurs) if a Material Adverse Effect is caused thereby; (g) Any Loan Document shall for any reason cease to be in full force and effect, or be declared null and void or unenforceable in whole or in part as the result of any action initiated by any Person other than Agent or any Lender; or the validity or enforceability of any such document shall be challenged or denied by any Person other than Agent or any Lender; (h) Either (i) any "accumulated funding deficiency" (as defined in Section 412(a) of the Code in excess of $25,000 exists with respect to any ERISA Plan, whether or not waived by the Secretary of the Treasury or his delegate, or (ii) any Termination Event occurs with respect to any ERISA Plan and the then current value of such ERISA Plan's benefits guaranteed under Title IV of ERISA exceeds the then current value of such ERISA Plan's assets available for the payment of such benefits by more than $10,000 (or in the case of a Termination Event involving the withdrawal of a substantial employer, the withdrawing employer's proportionate share of such excess exceeds such amount) or (iii) Borrower or any of its Restricted Subsidiaries or any ERISA Affiliate withdraws from a multiemployer plan resulting in liability under Title IV of ERISA of an amount in excess of $10,000; or (i) A Change of Control occurs. Section 7.02 DEFAULT REMEDIES. Upon the occurrence of an Event of Default, Agent may (and upon written instructions from Majority Lenders, Agent shall) declare the Commitments to be terminated and/or declare the entire principal and all interest accrued on the Notes to be, and the Notes, together with all Obligations, shall thereupon become, forthwith due and payable, without any presentment, demand, protest, notice of protest and nonpayment, notice of acceleration or of intent to accelerate or other notice of any kind, all of which hereby are expressly waived. Notwithstanding the foregoing, if an Event of Default specified in Subsections 7.01(e)(i), (ii) or (iii) above occurs with respect to Borrower, the Commitments shall automatically and immediately terminate and the Notes and all other Obligations shall become automatically and immediately due and payable, both as to principal and interest, without any action by Agent or any Lender and without presentment, demand, protest, notice of protest and nonpayment, notice of acceleration or of intent to accelerate, or any other notice of any kind, all of which are hereby expressly waived, anything contained herein or in any Notes to the contrary notwithstanding. 41 ARTICLE VIII INDEMNIFICATION Section 8.01 INDEMNIFICATION. Borrower agrees to indemnify Agent and each Lender and each director, officer, agent, attorney, employee, representative and Affiliate of Agent and each Lender (each in "Indemnified Party"), upon demand, from and against any and all liabilities, obligations, claims, losses, damages, penalties, actions, judgments, Suits, costs, expenses or disbursements (including reasonable fees of attorneys, accountants, experts and advisors) of any kind or nature whatsoever (in this Section 8.01 collectively called "liabilities and costs") which to any extent (in whole or in part) may be imposed on, incurred by, or asserted against any Indemnified Party growing out of, resulting from or in any other way associated with any of the Mortgage Collateral, the Loan Documents and the transactions and events (including the enforcement or defense thereof) at any time associated therewith or contemplated therein. THE FOREGOING INDEMNIFICATION SHALL APPLY WHETHER OR NOT SUCH LIABILITIES AND COSTS ARE IN ANY WAY OR TO ANY EXTENT OWED, IN WHOLE OR IN PART, UNDER ANY CLAIM OR THEORY OF STRICT LIABILITY, OR ARE CAUSED IN WHOLE OR PART, BY ANY NEGLIGENT ACT OR OMISSION OF ANY KIND BY SUCH INDEMNIFIED PARTY, provided only that such Indemnified Party shall be not entitled under this section to receive Indemnification for that portion, if any, of any liabilities and costs which is proximately caused by its own individual gross negligence or willful misconduct. The foregoing provisions of this Section 8.01 shall not apply to liabilities and costs incurred by any Lender (unless such Lender is Agent) which may be imposed on or asserted against such Lender by any other Lender. Section 8.02 LIMITATION OF LIABILITY. None of Agent, Lenders, their directors, officers, agents or employees shall be liable for any action taken or omitted to be taken by it or them under or in connection with this Agreement. THE FOREGOING EXCULPATION SHALL APPLY TO ANY NEGLIGENT ACT OR OMISSION OF ANY KIND BY ANY SUCH PERSON, PROVIDED THAT SUCH PERSON SHALL BE LIABLE FOR ITS OWN INDIVIDUAL GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. ARTICLE IX AGENT Section 9.01 APPOINTMENT AND AUTHORIZATION. Each Lender appoints and authorizes Agent to take such actions as agent on its behalf and to exercise such powers under this Agreement and the other Loan Documents as are delegated to Agent by the terms hereof and thereof, together with such powers as are reasonably incidental thereto. Neither Agent nor any of its directors, officers or employees shall be liable for any action taken or omitted to be taken by it 42 or them under or in connection with this Agreement or the other Loan Documents, WHETHER OR NOT AMOUNTING TO SIMPLE NEGLIGENCE, except for its or their own gross negligence or willful misconduct; PROVIDED, HOWEVER, that Agent shall be protected in acting or refraining from acting upon the instruction of the requisite Lenders under Section 9.06; and PROVIDED, FURTHER, that Agent shall not be required to take any action that exposes it to personal liability or is contrary to any Loan Document, other agreement or applicable law. Agent shall act as an independent contractor in performing its obligations as Agent hereunder and under the other Loan Documents and nothing herein contained shall be deemed to create a fiduciary relationship among or between Agent, Borrower or Lenders. Section 9.02 NOTE HOLDERS. Agent may treat the payee of any Note as the holder thereof until written notice of transfer shall have been filed with it signed by such payee. Section 9.03 CONSULTATION WITH COUNSEL. Agent may consult with legal counsel selected by it and shall not be liable for any action taken or suffered in good faith by it in accordance with the advice of such counsel. Section 9.04 DOCUMENTS. Agent shall not be under a duty to examine into or pass upon the validity, effectiveness, genuineness or value of the Notes, the other Loan Documents or any other instrument or document furnished pursuant thereto or thereunder. Agent makes no representation or warranty to any Lender, nor shall Agent be responsible for any representations, warranties or statements made in connection with this Agreement or any other Loan Document. Agent shall be entitled to assume that this Agreement and the other Loan Documents are valid, effective and genuine and what they purport to be. Agent (i) shall execute and deliver the Security Agreement, whereupon each provision thereof which is contemplated to be binding upon Lenders shall be binding upon Lenders and each of them; and (ii) shall not waive, amend or otherwise modify any provision of the Pledge and Security Agreement without the written consent of Lenders required pursuant to Section 10.02. Section 9.05 AGENT AND AFFILIATES. With respect to its Commitments and the Loans made by it in its capacity as a Lender, the entity that is Agent shall have the same rights and powers under this Agreement and the other Loan Documents as any other Lender and may exercise the same as though it were not Agent, and the entity that is Agent and its Affiliates may accept deposits from, lend money to and generally engage in any kind of business with Borrower or any Subsidiary as if it were not Agent. Section 9.06 ACTION BY AGENT. Agent shall be entitled to use its discretion with respect to exercising or refraining from exercising any rights which may be vested in it by, or with respect to taking or refraining from taking any action or actions which it may be able to take under or in respect of, this Agreement and the other Loan Documents. Agent shall incur no liability under or in respect of this Agreement or any of the other Loan Documents by acting upon any notice, consent, certificate, warranty or other paper or instrument believed by it to be genuine or authentic or to be signed by the proper party or parties, or with respect to anything which it may do or 43 refrain from doing in the reasonable exercise of its judgment, or which may seem to it to be necessary or desirable in the premises. Agent may employ agents and attorneys-in-fact in carrying out its responsibilities under the Loan Documents, and shall not be responsible for the negligence or misconduct of any such agents or attorneys-in-fact as long as Agent was not grossly negligent in selecting or directing such agents or attorneys-in-fact, EVEN IF SUCH SELECTION AMOUNTED TO SIMPLE NEGLIGENCE. Section 9.07 CREDIT ANALYSIS. Each Lender has made, and shall continue to make, its own independent investigation or evaluation of the operations, business, property and condition, financial and otherwise, of Borrower in connection with its Commitments and Loans and has made its own appraisal of the creditworthiness of Borrower. Except as explicitly provided herein, Agent has no duty or responsibility, either initially or on a continuing basis, to provide any Lender with any credit or other information with respect to such operations, business, property, condition or creditworthiness, whether such information comes into its possession on or before the first Event of Default or at any time thereafter. Section 9.08 NOTICES OF EVENT OF DEFAULT, ETC. In the event that any Lender shall have acquired actual knowledge of any Event of Default or Default, other than as a result of its receipt of financial statements delivered to it pursuant to Section 5.01, such Lender shall promptly give notice thereof to Agent. Agent shall, promptly upon receipt of any such notice provide a copy thereof to the other Lenders. Upon receipt from any Lender of a request that Agent give notice to Borrower of the occurrence of an Event of Default or Default under Article 7, Agent shall promptly forward such request to the other Lenders and will take such action and assert such rights under this Agreement and the other Loan Documents as Majority Lenders shall direct in writing. Section 9.09 INDEMNIFICATION. Each Lender agrees to indemnify Agent (to the extent not reimbursed by Borrower), ratably according to its Percentage Share, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by or asserted against Agent in any way relating to or arising out of this Agreement or the other Loan Documents or any action taken or omitted by Agent under this Agreement or the other Loan Documents, WHETHER OR NOT AGENT'S SIMPLE NEGLIGENCE CAUSES THE SAME IN WHOLE OR IN PART; PROVIDED that no Lender shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from Agent's gross negligence or willful misconduct. Without limitation of the foregoing, each Lender agrees to reimburse Agent promptly upon demand for its Percentage Share (determined under clause (l) of the definition thereof) of any out-of-pocket expenses (including counsel fees) incurred by Agent in connection with the preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement and the other Loan Documents, to the extent that Agent is not reimbursed for such expenses by Borrower, WHETHER OR NOT SUCH OUT-OF-POCKET EXPENSES RESULTED, IN WHOLE OR IN PART, FROM AGENT'S SIMPLE NEGLIGENCE; PROVIDED, 44 that no Lender shall be liable for any portion of any such expenses resulting from Agent's gross negligence or willful misconduct. Section 9.10 PAYMENTS. All payments of principal of the Notes and all other funds received by Agent in respect of any payments made by Borrower pursuant to this Agreement, the Notes or the other Loan Documents, other than payments under Sections 2.08 and 2.09, and subject to the effect of Section 9.11, shall be distributed forthwith by Agent (in like currency and funds) to Lenders on the date received or deemed received pursuant to Section 2.07, in accordance with Section 2.04(b) in the case of payments of interest and Balances Deficiency Fees, and ratably according to each Lender's Percentage Share in the case of any other payment received by Agent. If Agent does not make any such distribution (or provide Federal Reserve Bank reference numbers for the wire transfer of the amount thereof) on the date any such payment is received or deemed received pursuant to Section 2.07, Agent will pay interest to each Lender entitled to receive a portion of such distribution on the amount distributable to it at the Federal Funds Rate from such date until the date such distribution is made, such interest to be payable with such distribution. Notwithstanding any of the foregoing or any other provision of this Agreement, upon and after the occurrence of an Event of Default or Default, (a) all proceeds received by Agent from the sale or other disposition of the Collateral shall be applied in accordance with Section 17 of the Security Agreement. Section 9.11 SHARING OF SET-OFFS AND OTHER PAYMENTS. The Agent agrees, and each Lender agrees, that if it shall, whether through the exercise of rights under Security Instruments or rights of banker's lien, set-off, or counterclaim against Borrower or otherwise, obtain payment of a portion of the aggregate Obligations owed to it which, taking into account all distributions made by Agent under Section 2.07, causes Agent or such Lender to have received more than it would have received had such payment been received by Agent and distributed pursuant to Section 2.07, then (a) it shall be deemed to have simultaneously purchased and shall be obligated to purchase interests in the Obligations as necessary to cause Agent and all Lenders to share all payments as provided for in Section 2.07, and (b) such other adjustments shall be made from time to time as shall be equitable to ensure that Agent and all Lenders share all payments of Obligations as provided in Section 2.07; provided, however, that nothing herein contained shall in any way affect the right of Agent or any Lender to obtain payment (whether by exercise of rights of banker's lien, set-off or counterclaim or otherwise) of indebtedness other than the Obligations. Borrower expressly consents to the foregoing arrangements and agrees that any holder of any such interest or other participation in the Obligations, whether or not acquired pursuant to the foregoing arrangements, may to the fullest extent permitted by law exercise any and all rights of banker's lien, set-off, or counterclaim as fully as if such holder were a holder of the Obligations in the amount of such interest or other participation. If all or any part of any funds transferred pursuant to this section is thereafter recovered from a Lender under this section which received the same, the purchase provided for in this section shall be deemed to have been rescinded to the extent of such recovery, together with interest, if any, if interest is required pursuant to court order to be paid on account of the possession of such funds prior to such recovery. 45 Section 9.12 SUCCESSOR AGENT. Agent may resign at any time by giving ten days written notice thereof to Lenders and Borrower. The Majority Lenders may remove Agent for acts constituting gross negligence or willful misconduct by giving notice thereto to Agent, Lenders and Borrower. Upon any such resignation or removal, the Borrower shall have the right to appoint a successor Agent, which successor Agent shall be reasonably acceptable to Majority Lenders; provided, however if an Event of Default has occurred and is continuing or if no successor Agent shall have been so appointed by Borrower and so accepted by Majority Lenders within 15 days after the retiring Agent's giving of notice of its resignation of Agent or after the Majority Lenders' giving of notice of the removal of such Agent, then the Majority Lenders shall have the right to appoint a successor Agent, which successor Agent shall be reasonably acceptable to Borrower (unless an Event of Default has occurred and is continuing). If no successor Agent shall have be so appointed by the Majority Lenders and so accepted by the Borrower within 30 days after the retiring Agent's giving of notice of its resignation of Agent or after the Majority Lenders' giving of notice of the removal of such Agent, then the retiring Agent or the Agent being removed, as the case may be, may, on behalf of Lenders, appoint an Agent or custodian which shall be a Lender or a commercial bank organized under the laws of the United States of America or of any State thereof and having a combined capital and surplus of at least $100,000,000 and which shall be reasonably acceptable to Borrower (unless an Event of Default has occurred and is continuing). Any such resignation or removal shall be effective upon the appointment of a successor Agent. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent or the Agent being removed, as the case may be, shall be discharged from its duties and obligations, under this Agreement and the other Loan Documents. After any Agent's resignation or removal hereunder, the provisions of this Section 9 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was acting as Agent under this Agreement and any other Loan Document. Section 9.13 NOTICE OF NEW INVESTORS. Agent shall use reasonable efforts to provide prompt notice to each Lender (which notice may be telephonic) of its approval of any new Investor after the date hereof; PROVIDED, HOWEVER, that Agent shall have no liability to any Lender or other Person for its failure to provide the notice described in this Section 9.13. ARTICLE X MISCELLANEOUS Section 10.01 NOTICES. Any notice or request required or permitted to be given under or in connection with this Agreement, the Notes or the other Loan Documents (except as may otherwise be expressly required therein) shall be in writing and shall be mailed by first class or express mail, postage prepaid, or sent by telex, telegram, telecopy or other similar form of rapid transmission, confirmed by mailing (by first class or express mail, postage prepaid) written confirmation at substantially the same time as such rapid transmission, or personally delivered to 46 an officer of the receiving party. All such communications shall be mailed, sent or delivered to the parties hereto at their respective addresses as follows: Borrower: CH Mortgage Company I, Ltd. 4515 Seton Center Parkway, Suite 100 Austin, Texas 78759 Attn: Randall C. Present Jim Dolph FAX: (512) 345-7348 FAX: (512) 345-8758 TEL: (512) 345-4663 TEL: (512) 345-4656 ext. 1390 With copies to: David J. Keller Ted I. Harbour 1901 Ascension Blvd., Suite 100 Arlington, Texas 76006 FAX: (817) 856-8249 TEL: (817) 856-8200 Agent: U.S. Bank National Association 601 Second Avenue South Minneapolis, Minnesota 55402 Attn: Kathleen M. Connor FAX: (612) 973-0826 TEL: (612) 973-0306 or at such other addresses or to such individual's or department's attention as any party may have furnished the other party in writing. Any communication so addressed and mailed shall be deemed to be given when so mailed, except that requests for loans, Confirmations and other communications related thereto shall not be effective until actually received by Agent or Borrower, as the case may be; and any notice so sent by rapid transmission shall be deemed to be given when receipt of such transmission is acknowledged, and any communication so delivered in person shall be deemed to be given when receipted for by, or actually received by, an authorized officer of Borrower or Agent, as the case may be. Section 10.02 AMENDMENTS, ETC. No amendment or waiver of any provision of this Agreement, the Security Instruments, the Notes, or any other Loan Document, nor consent to any departure by Borrower or any Restricted Subsidiary from the terms thereof, shall in any event be effective unless (a) the same shall be in writing and signed by (i) if such party is Borrower, by Borrower, (ii) if such party is Agent, by Agent and (iii) if such party is a Lender, by such Lender or by Agent on behalf of Lenders with the written consent of Majority Lenders (or without further consent than that already provided herein in the circumstances provided in Section 10.16) and (b) in the case of an amendment other than the first and second amendment and other than annual 47 renewals or temporary extensions related to annual renewals, the Agent, on behalf of each Lender executing such amendment, shall have received an amendment fee from the Borrower in the amount of one thousand five hundred dollars ($1,500) for each Lender executing such amendment. Notwithstanding the foregoing or anything to the contrary herein, Agent shall not, without the prior consent of each individual Lender, execute and deliver on behalf of such Lender any waiver or amendment which would: (i) waive any of the conditions specified in Article III (provided that Agent may in its discretions withdraw any request it has made under Section 3.02(g)), (ii) increase the Percentage Share of the Commitment of such Lender or subject such Lender to any additional obligations, (iii) reduce any fees hereunder, or the principal of, or interest on, such Lender's Note, (iv) amend the definition herein of "Majority Lenders" or otherwise change the aggregate amount of Percentage Shares which is required for Agent, Lenders or any of them to take any particular action under the Loan Documents, (v) release Borrower from its obligation to pay such Lender's Note, (vi) amend the definitions of "Collateral Value," "Drawdown Termination Date," and "Mortgage Collateral," (vii) release any Collateral except in accordance with and pursuant to the Loan Documents, or (viii) change the date on which any payments of principal, interest or fees are due hereunder. Section 10.03 INVALIDITY. In the event that any one or more of the provisions contained in the Notes, this Agreement or any other Loan Document shall, for any reason, be held invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of such document. Section 10.04 SURVIVAL OF AGREEMENTS. All covenants and agreements herein and in any other Loan Document not fully performed before the date hereof or the date thereof, and all representations and warranties herein or therein, shall survive until payment in full of the Obligations and termination of the Commitments. Section 10.05 RENEWAL, EXTENSION OR REARRANGEMENT. All provisions of this Agreement and of the other Loan Documents shall apply with equal force and effect to each and all promissory notes hereafter executed which In whole or in part represent a renewal, extension for any period, increase or rearrangement of any part of the Obligations originally represented by the Notes or of any part of such other Obligations. Section 10.06. WAIVERS. No course of dealing on the part of Agent or any Lender, or any of its employees, consultants or agents, nor any failure or delay by Agent or such Lender with respect to exercising any right, power or privilege of Agent or any Lender under the Notes, this Agreement or any other Loan Document shall operate as a waiver thereof, except as otherwise provided in Section 10.02 hereof. Section 10.07 CUMULATIVE RIGHTS. The rights and remedies of Agent and each Lender under the Notes, this Agreement, and any other Loan Document shall be cumulative, and the exercise or partial exercise of any such right or remedy shall not preclude the exercise of any other right or remedy. 48 Section 10.08 CONSTRUCTION. THE VALIDITY, CONSTRUCTION AND ENFORCEABILITY OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF MINNESOTA, WITHOUT GIVING EFFECT TO CONFLICT OF LAWS PRINCIPLES THEREOF, BUT GIVING EFFECT TO FEDERAL LAWS OF THE UNITED STATES APPLICABLE TO NATIONAL BANKS AND OTHER BANKS. Section 10.09 LIMITATION ON INTEREST. Agent, Lenders, Borrower, each Restricted Subsidiary and any other parties to the Loan Documents intend to contract in strict compliance with applicable usury law from time to time in effect. In furtherance thereof such Persons stipulate and agree that none of the terms and provisions contained in the Loan Documents shall ever be construed to create a contract to pay, for the use, forbearance or detention of money, interest in excess of the maximum amount of interest permitted to be charged by applicable law from time to time in effect. None of Borrower, any Restricted Subsidiary, any present or future guarantors, endorsers, or other Persons hereafter becoming liable for payment of any Obligation shall ever be liable for unearned interest thereon or shall ever be required to pay interest thereon in excess of the maximum amount that may be lawfully charged under applicable law from time to time in effect, and the provisions of this section shall control over all other provisions of the Loan Documents which may be in conflict or apparent conflict herewith. Agent and Lenders expressly disavow any intention to charge or collect excessive unearned interest or finance charges in the event the maturity of any Obligation is accelerated, if (a) the maturity of any Obligation is accelerated for any reason, (b) any Obligation is prepaid and as a result any amounts held to constitute interest are determined to be in excess of the legal maximum, or (c) Agent or any Lender or any other holder of any or all of the Obligations shall otherwise collect moneys which are determined to constitute interest which would otherwise increase the interest on any or all of the Obligations to an amount in excess of that permitted to be charged by applicable law then in effect, then all such sums determined to constitute interest in excess of such legal limit shall, without penalty, be promptly applied to reduce the then outstanding principal of the related Obligations or, at Agent's or such Lender's or such holder's option, promptly returned to Borrower and each Restricted Subsidiary or the other payor thereof upon such determination. In determining whether or not the interest paid or payable, under any specific circumstance, exceeds the maximum amount permitted under applicable law, Agent, Lenders and Borrower and Restricted Subsidiaries (and any other payors thereof) shall to the greatest extent permitted under applicable law, (i) characterize any non-principal payment as an expense, fee or premium rather than as interest, (ii) exclude voluntary prepayments and the effects thereof, and (iii) amortize, prorate, allocate, and spread the total amount of interest throughout the entire contemplated term of the instruments evidencing the Obligations in accordance with the amounts outstanding from time to time thereunder and the legal rate of interest from time to time in effect under applicable law in order to lawfully charge the maximum amount of interest permitted under applicable law. In the event applicable law provides for an interest ceiling under Section 303 of the Texas Finance Code, that ceiling shall be the weekly rate ceiling. Section 10.10 BANK ACCOUNTS; OFFSET. To secure the repayment of the Obligations 49 Borrower hereby grants to Agent, each Lender and to each financial institution which hereafter acquires a participation or other interest in the Loans or Notes (in this section called a "Participant") a security interest, a lien, and a right of offset, each of which shall be in addition to all other interest, liens, and rights of Agent, say Lender or Participant at common law, under the Loan Documents, or otherwise, and each of which shall be upon and against (a) any and all moneys, securities or other property (and the proceeds therefrom) of Borrower now or hereafter held or received by or in transit to Agent, any Lender or Participant from or for the account Borrower, whether for safekeeping, custody pledge, transmission, collection or otherwise, (b) any and all deposits (general or special, time or demand, provisional or final) of Borrower with Agent, any Lender or Participant, and (c) any other credits and claims of Borrower at any time existing against Agent, any Lender or Participant, including claims under certificates of deposit. Upon the occurrence of any Event of Default, each of Agent, Lenders and Participants is hereby authorized to foreclose upon, offset, appropriate, and apply, at any time and from time to time, without notice to Borrower, any and all items hereinabove referred to against the Obligations then due and payable. Section 10.11 ASSIGNMENTS, PARTICIPATIONS, COMMITMENT AMOUNT INCREASES AND NEW LENDERS. (a) ASSIGNMENTS. Each Lender shall have the right to sell, assign or transfer all or any part of such Lender's Note, Loans and rights and the associated rights and obligations under all Loan Documents to one or more financial institutions, pension plans, investment funds, or similar purchasers; PROVIDED, that each such sale, assignment, or transfer shall be with the consent of Agent, and the assignee, transferee or recipient shall have, to the extent of such sale, assignment, or transfer, the same rights, benefits and obligations as it would if it were such Lender and a holder of such Note, including, without limitation, the right to vote on decisions requiring consent or approval of all Lenders or Majority Lenders and the obligation to fund its Percentage Share of any Loan directly to Agent; PROVIDED FURTHER, that (i) each Lender in making each such sale, assignment, or transfer must dispose of a pro rata portion of each Loan made by such Lender, (ii) each such sale, assignment, or transfer shall be in a principal amount not less than $15,000,000, (iii) each Lender shall at all times maintain Loans then outstanding in an aggregate amount at least equal to $15,000,000, (iv) each Lender may not offer to sell its Note and Loan or Interests therein in violation of any securities laws, and (v) no such assignments shall become effective until (1) the assigning Lender delivers to Agent copies of all written assignments and other documents evidencing any such assignment or related thereto and (2) the assignee Lender becomes a party to this Agreement. Notwithstanding the provisions of clauses (ii) and (iii) above, a Lender may make a sale, assignment or transfer, or maintain Loans then outstanding, in an amount which is less than that required above provided that Borrower and such Lender have agreed to modify such requirements and have delivered to Agent prior written evidence of their agreement to make such modification, An assignment fee in the amount of $2,500 for each such assignment will be payable to Agent by assignor or assignee. Within five (5) Business Days after its receipt of notice that Agent has received copies of any assignment and the other documents relating thereto, the assignee shall notify Borrower of the outstanding principal balance of the Notes payable to such 50 Lender and shall execute and deliver to Agent (for delivery to the relevant assignee) new Notes evidencing such assignee's assigned Loans and, if the assignor Lender has retained a portion of its Loans, replacement Notes in the principal amount of the Loans retained by the assignor Lender (such Notes to be in exchange for, but not in payment of, the Notes held by such Lender). (b) PARTICIPANTS. Each Lender shall have the right to grant participations in all or any part of such Lender's Note, Loans and the associated rights and obligations under all Loan Documents to one or more pension plans, investment funds, financial institutions or similar purchasers; provided that (i) each Lender granting a participation shall retain the right to vote hereunder, and no participant shall be entitled to vote hereunder on decisions requiring consent or approval of Majority Lenders (except as set forth in (iii) below), (ii) each Lender and Borrower shall be entitled to deal with the Lender granting a participation in the same manner as if no participation had been granted, and (iii) no participant shall ever have any right by reason of its participation to exercise any of the rights of Lenders hereunder, except that any Lender may agree with any participant that such Lender will not, without the consent of such participant, consent to any amendment or waiver described in Section 10.02 requiring approval of 100% of Lenders. (c) DISTRIBUTION OF INFORMATION. It is understood and agreed that any Lender may provide to assignees and participants and prospective assignees and participants financial information and reports and data concerning Borrower's properties and operations which was provided to such Lender pursuant to this Agreement. (d) COMMITMENT AMOUNT INCREASES; NEW LENDERS. From time to time, Borrower may agree, with the prior written consent of Agent, to (i) permit a Lender to increase its Commitment Amount, or (ii) add a bank chartered under the laws of the United States or any State thereof, an insurance company, another lender or a mutual fund (a "New Lender") as a "Lender" under this Agreement with a Commitment, for the purpose of increasing the Aggregate Commitment Amounts; PROVIDED that upon giving effect to any such new Commitment, the Commitment Amount of the New Bank shall not be less than $15,000,000; and PROVIDED, FURTHER, that the Aggregate Commitment Amounts, after giving effect to any such increase, shall not exceed $250,000,000. Borrower and each Lender increasing its Commitment Amount or New Lender shall agree on the date as of which the increased Commitment Amount or New Lender's Commitment Amount shall become effective, and each New Lender shall execute and deliver an instrument in the form prescribed by Agent to evidence its agreement to be bound by this Agreement and the other Loan Documents. Upon the effective date of an increase in any Lender's Commitment Amount or inclusion of a New Lender as a Lender under this Agreement, Agent shall deliver to Borrower and each Lender a revised Schedule 5 reflecting the revised Aggregate Commitment Amounts and the Borrower shall execute and deliver to such Lender or such New Bank a Note increasing its Commitment Amount. Section 10.12 EXHIBITS. The exhibits attached to this Agreement are incorporated herein and shall be considered a part of this Agreement for the purposes stated herein, except that in the event of any conflict between any of the provisions of such exhibits and the provisions of this 51 Agreement, the provisions of this Agreement shall prevail. Section 10.13 TITLES OF ARTICLES, SECTIONS AND SUBSECTIONS. All tides or headings to articles, have any effect or meaning with respect to the other content of such articles, sections, subsections or other divisions, such other content being controlling as to the agreement between the parties hereto. Section 10.14 COUNTERPARTS. This Agreement may be executed in counterparts, and it shall not be necessary that the signatures of both of the Parties hereto be contained on any one counterpart hereof; each counterpart shall be deemed an original, but all counterparts together shall constitute one and the same instrument. Section 10.15 ENTIRE AGREEMENT. THE NOTES, THIS AGREEMENT, AND THE OTHER LOAN DOCUMENTS EXECUTED AND DELIVERED AS OF EVEN DATE HEREWITH REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES HERETO AND THERETO AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES. Section 10.16 TERMINATION; LIMITED SURVIVAL. In its sole and absolute discretion Borrower may at any time that no Obligations are owing elect in a notice delivered to Agent to terminate this Agreement. Upon receipt by Agent of such a notice, if no Obligations are then owing, this Agreement and all other Loan Documents shall thereupon be terminated and the parties thereto released from all prospective obligations thereunder. Notwithstanding the foregoing or anything herein to the contrary, any waivers or admissions made by any Person in any Loan Documents, any Obligations, and any obligations which any Person may have to indemnify or compensate Agent and any Lender shall survive any termination of this Agreement or any other Loan Document. At the request and expense of Borrower, Agent shall prepare and execute all necessary instruments to reflect and effect such termination of the Loan Documents. Agent is hereby authorized to execute all such instruments on behalf of all Lenders, without the joinder of or further action by any Lender. Section 10.17 CONFIDENTIALITY OF INFORMATION. The Agent and Lenders shall use reasonable efforts to assure that information about the Borrower and its operations, affairs and financial condition and about the borrowers under the Mortgage Loans and their financial condition, not generally disclosed to the public or to trade and other creditors, which is furnished to the Agent and any Lender pursuant to the provisions hereof is used only for the purposes of this Agreement and any other relationship between the Agent or any Lender and the Borrower and shall not be divulged to any Person other than the Agent and the Lenders, their Affiliates and their respective officers, directors, employees and agents, except: (a) to their attorneys and accountants, (b) in connection with the enforcement of the rights of the Agent and the Lenders hereunder and under the Notes and the Security Agreement or otherwise in connection with applicable litigation, (c) in connection with assignments and participations and the solicitation of prospective assignees 52 and participants referred to in the immediately preceding Section, and (d) as may otherwise be required or requested by any regulatory authority having jurisdiction over the Agent or any Lender or by any applicable law, rule, regulation or judicial process, the opinion of the Agent's or any Lender's counsel concerning the making of such disclosure to be binding on the parties hereto. Neither the Agent nor any Lender shall incur any liability to the Borrower by reason of any disclosure permitted by this Section 10.17. SECTION 10.18 JURY WAIVER. BORROWER, AGENT AND EACH LENDER HEREBY VOLUNTARILY, KNOWINGLY, IRREVOCABLY AND UNCONDITIONALLY WAIVE ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE WHETHER BASED UPON CONTRACT, TORT OR OTHERWISE) BETWEEN OR AMONG Borrower, AGENT OR ANY LENDER ARISING OUT OF OR IN ANY WAY RELATED TO THIS DOCUMENT, ANY OTHER RELATED DOCUMENT, OR ANY RELATIONSHIP BETWEEN AGENT OR ANY LENDER AND BORROWER. THIS PROVISION IS A MATERIAL INDUCEMENT TO AGENT AND LENDERS TO PROVIDE THE FINANCING DESCRIBED HEREIN OR IN THE OTHER LOAN DOCUMENTS. [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK] 53 IN WITNESS WHEREOF, the parties hereto have caused this instrument to be duly executed as of the date first above written. CH MORTGAGE COMPANY I, LTD. By: CH Mortgage Company GP, Inc., its General Partner By: /s/ James D. Dolph ------------------------------------- James D. Dolph Chief Financial Officer, Vice President and Assistant Secretary U.S. BANK NATIONAL ASSOCIATION, as Agent and Lender By: /s/ Kathleen M. Connor ------------------------------------- Kathleen M. Connor Vice President RESIDENTIAL FUNDING CORPORATION By: /s/ Thomas M. Clement ------------------------------------- Thomas M. Clement Director HIBERNIA BANK By: /s/ Ed Santos ------------------------------------- Edward K. Santos Vice President S-1 FIRST UNION NATIONAL BANK By: /s/ Carolyn Eskridge ------------------------------------- Carolyn Eskridge Senior Vice President, Specialty Finance NATIONAL CITY BANK OF KENTUCKY By: /s/ Kelly Moyer ------------------------------------- Kelly Moyer Assistant Vice President S-2 SCHEDULE 1 ELIGIBLE MORTGAGE LOAN "Eligible Mortgage Loan" means a Mortgage Loan with respect to which each of the following statements is accurate and complete (and Borrower by including such Mortgage Loan in any computation of the Borrowing Base shall be deemed to so represent to Agent and Lenders at and as of the date of such computation): (i) Such Mortgage Loan is a binding and valid obligation of the Obligor thereon, in full force and effect and enforceable in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization or other similar terms affecting creditor's rights in general and by general principles of equity; (ii) Such Mortgage Loan is genuine in all respects as appearing on its face and as represented in the books and records of Borrower, and all information set forth therein is true and correct; (iii) To the best knowledge of Borrower, such Mortgage Loan is free of any default (other than as permitted by subparagraph (iv) below) of any party thereto (including Borrower), counterclaims, offsets and defenses, including the defense of usury, and from any rescission, cancellation or avoidance, and all right thereof, whether by operation of law or otherwise; (iv) No payment under such Mortgage Loan is more than thirty (30) days past due the payment due date set forth in the underlying Mortgage Note and Mortgage; (v) Such Mortgage Loan contains the entire agreement of the parties thereto with respect to the subject matter thereof, has not been modified or amended in any respect not expressed in writing therein and is free of concessions or understandings with the Obligor thereon of any kind not expressed in writing therein; (vi) Such Mortgage Loan is in all respects in accordance with all Requirements of Law applicable thereto, including, without limitation, the federal Consumer Credit Protection Act and the regulations promulgated thereunder and all applicable usury laws and restrictions, and all notices, disclosures and other statements or information required by law or regulation to be given, and any other act required by law or regulation to be performed, in connection with such Mortgage Loan have been given and performed as required; (vii) All advance payments and other deposits on such Mortgage Loan have been paid in cash, and no part of said sums has been loaned, directly or indirectly, by Borrower to the Obligor, and, other than as disclosed to Agent in writing, there have been no prepayments; (viii) Such Mortgage Loan was originated, purchased by Borrower or converted from a variable rate Mortgage Loan to a fixed rate Mortgage Loan, whichever is latest not more than ninety (90) days prior to the inclusion of such Mortgage Loan in any computation of the Borrowing Base and matures within 30 years after such date of origination; (ix) At all times such Mortgage Loan will be free and clear of all Liens, except in favor of Agent for the benefit of Lenders and any other Lien which has been disclosed to Agent in writing and is permitted hereunder; (x) The Property covered by such Mortgage Loan is insured against loss or damage by fire and all other hazards normally included within standard extended coverage in accordance with the provisions of such Mortgage Loan with Borrower named as a loss payee thereon; (xi) The Required Mortgage Documents have been delivered to Agent prior to the inclusion of such Mortgage Loan in any computation of the Borrowing Base or, if such items have not been delivered to Agent on or prior to the date such Mortgage Loan is first included in any computation of the Borrowing Base, (1) Borrower has agreed to pledge and deliver all Required Mortgage Documents pursuant to an Agreement to Pledge delivered to Agent prior to such inclusion, and (2) the Collateral Value of such Mortgage Loan when added to the Collateral Value of all other Mortgage Loans for which Agent has not received the Required Mortgage Documents does not exceed the Wet Warehousing Sublimit, PROVIDED THAT, all Required Documents with respect to such Mortgage Loan shall be delivered to Agent within seven (7) Business Days after the date of the Borrowing Request with respect thereto and all other documents requested by Agent pursuant to Section 4.02 of the Security Agreement shall be delivered to Agent within five Business Days after such request. (xii) If such Mortgage Loan is included in the Borrowing Base and has been withdrawn from the possession of Agent on terms and subject to conditions set forth in the Security Agreement: (1) If such Mortgage Loan was withdrawn by Borrower for purposes of correcting clerical or other non-substantive documentation problems, the promissory note and other documents relating to such Mortgage Loan are returned to Agent within twenty-one (21) calendar days from the date of withdrawal; and the Collateral Value of such Mortgage Loan when added to the Collateral Value of other Mortgage Loans which have been similarly released to Borrower and have not been returned does not exceed $2,500,000; (2) If such Mortgage Loan was shipped by Agent directly to a permanent investor for purchase or to a custodian for the formation of a pool, the -2- full purchase price therefor has been received by Agent (or such Mortgage Loan has been returned to Agent) within forty-five (45) days days (seventy-five (75) days in the case if such Mortgage Loan is included in a housing bond program) from the date of shipment by Agent. (xiii) If such Mortgage Loan is a Jumbo Mortgage Loan, the Collateral Value of such Mortgage Loan when added to the Collateral Value of all other Jumbo Mortgage Loans does not exceed the Jumbo Sublimit. (xiv) If such Mortgage Loan is a Nonconforming Mortgage Loan, the Collateral Value of such Mortgage Loan when added to the Collateral Value of all the Nonconforming Mortgage Loans does not exceed the Nonconforming Sublimit; (xv) Such Mortgage Loan has not been included in the Borrowing Base for more than (A) ninety (90) days, if such Mortgage Loan is a Nonconforming Mortgage Loan, (B) one hundred twenty (120) days, if such Mortgage Loan is a Jumbo Mortgage Loan, (C) one hundred twenty (120) days, if such Mortgage Loan is a Conforming Mortgage Loan or (D) one hundred eighty (180) days, if such Mortgage Loan is included in a housing bond program; (xvi) Such Mortgage Loan is covered by a Take-Out Commitment which is in full force and effect, and Borrower and such Mortgage Loan are in full compliance therewith; (xvii) Such Mortgage Loan is secured by a first or second Mortgage on Property consisting of a completed one-to-four unit single family residence which is not used for commercial purposes and which is not a construction loan; and (xviii) The face amount of the Mortgage Note underlying such Mortgage Loan does not exceed $500,000. Agent may, in its discretion, waive one or more of the foregoing eligibility requirements with respect to any Mortgage Loan, provided that the aggregate Collateral Value of all Mortgage Loans with respect to which such eligibility requirements have been waived shall not at any time exceed $1,000,000. -3- SCHEDULE 2 INVESTORS Norwest 100 N. Walnut Creek #E Mansfield, TX 76063 817-477-1090 - Jennifer Eggan; Peggy Baker Countrywide 6400 Legacy Drive Plano, TX 75024 800-669-3333 X3054 - Abbie Tidmore; Steve Remington Homeside Lending 2222 Cottondale Lane #310 Little Rock, AR 72202 501-664-4411- Brad Burney 414-777-3023 - Mary O'Connell RBMG 7809 Park Lane Road Columbia, SC 29223 800-290-9719 - Charles White Principal 711 High Street Des Moines, IA 50392 800-648-3788 - Keith Anderson; Ken Loder Leader Mortgage (Bond) 55 Weston Road #208 Ft. Lauderdale, FL 33326 888-643-7974 - Christina Gilson First Nationwide 14651 Dallas Parkway #250 Dallas, TX 75240 972-770-3746 - Tim Fisher -1- Fleet Mortgage 11200 W. Parkland Ave. Milwaukee, WI 53224 414-359-8341 - Terry Rentmeester 414-359-8238 - Mary Stern Chase MMC 99 Trophy Club Drive Trophy Club, TX 76262 817-430-5891 - Dave Stewart; Rocky Barajas; Julie Walker PHH 11000 Commerce Mt. Laurel, NJ 08054 888-467-1524 X92833 - Tim Hickey Bank of America 1201 Main Street, 9th Floor Dallas, TX 75263 214-743-9968 - Lynda Dagulo GMAC-RFC 14850 Quorum Drive #450 Dallas, TX 75240 972-455-1851 - Richard Bitner Ohio Savings 1801 E. 9th St. #200 Cleveland, OH 44114 713-355-2548 - Barbara Fisher Sebring Capital 16610 Dallas Parkway #200 Dallas, TX 75248 512-459-4442 - Ben Richards Fidelity Funding 12770 Merit Drive, 6th Floor Dallas, TX 75251 800-301-2173 X4341 - William Rhinehart -2- Guarantee Federal 8333 Douglas Avenue Dallas, TX 75225 888-540-4363 X2131 - TBD Fannie Mae 13455 Noel Road/Galleria Tower Suite #600 Dallas, TX 75240 972-773-7352 - Bruce Petty Freddie Mac 8520 Jones Branch Drive McLean, VA 22102 703-918-5017 - John Ball -3- SCHEDULE 3 SUBSIDIARIES D.R. Horton, Inc. - Los Angeles, a Delaware corporation (100% interest held by Borrower) DRH Mortgage Company, LLC, a Texas limited liability company (50% interest held by D.R. Horton, Inc. - Los Angeles) SCHEDULE 4 PERMITTED LIENS NONE SCHEDULE 5
COMMITMENT AMOUNTS AND PERCENTAGE SHARES Commitment Percentage Amount Share ---------- ---------- U.S. Bank National Association $ 50,000,000 28.57% Residential Funding Corporation $ 50,000,000 28.57% Hibernia Bank $ 30,000,000 17.14% First Union National Bank $ 30,000,000 17.14% National City Bank of Kentucky $ 15,000,000 8.57% ----------- ----- Total $175,000,000 100.00%
EXHIBIT A TO CREDIT AGREEMENT FORM OF NOTE PROMISSORY NOTE $____________ Minneapolis, Minnesota , FOR VALUE RECEIVED, CH MORTGAGE COMPANY I, LTD., a Texas limited partnership (the "Borrower"), hereby promises to pay to the order of ________________________ (the "Lender") at the main office of the Agent (as such term and each other capitalized term used herein are defined in the Credit Agreement hereinafter referred to) in Minneapolis, Minnesota, in lawful money of the United States of America in immediately available funds, the principal sum of _____________________ MILLION AND NO/100 DOLLARS ($_____) or the aggregate unpaid principal amount of all Loans [and Swingline Loans]* made by the Lender pursuant to the Credit Agreement described below, whichever is less, and to pay interest in like funds from the date hereof on the unpaid balance thereof at the rates per annum and at such times as are specified in the Credit Agreement. Interest (computed on the basis of actual days elapsed and a year of 360 days) shall be payable at said office at the times specified in the Credit Agreement. Principal hereof shall be payable in the amounts and at the times set forth in the Credit Agreement. This note is one of the Notes referred to in the Credit Agreement dated as of August 13, 1999, between the Borrower, the Lender, the other lenders party thereto and U.S. Bank National Association, as Agent (as the same may be amended, modified or restated from time to time, the "Credit Agreement"). Unless otherwise defined herein, capitalized terms used herein shall have the meanings given to such terms in the Credit Agreement. This note is subject to certain mandatory and voluntary prepayments and its maturity is subject to acceleration, in each case upon the terms provided in the Credit Agreement. The Borrower hereby waives diligence, presentment, demand, protest, and notice (except such notice as is required under the Loan Documents) of any kind whatsoever. The nonexercise by the Lender of any of its rights hereunder or under the other Loan Documents in any particular instance shall not constitute a waiver thereof in any subsequent instance. Borrower reserves the right to prepay the outstanding principal balance of this Note, in whole or in part at any time and from time to time without premium or penalty in accordance -1- with the terms of the Credit Agreement. This note is entitled to the benefit of the Security Agreement and the other Loan Documents. THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF MINNESOTA, WITHOUT GIVING EFFECT TO CONFLICT OF LAWS PRINCIPLES THEREOF BUT GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL BANKS. In the event of default hereunder, the undersigned agrees to pay all costs and expenses of collection, including but not limited to reasonable attorneys' fees. [Notwithstanding the foregoing paragraphs and all other provisions of this note and the Credit Agreement, none of the terms and provisions of this note or the Credit Agreement shall ever be construed to create a contract to pay to the Lender, for the use, forbearance or detention of money, interest in excess of the maximum amount of interest permitted to be charged by the Lender to the undersigned under applicable state or federal law from time to time in effect, and the undersigned shall never be required to pay interest in excess of such maximum amount. If, for any reason, interest is paid hereon in excess of such maximum amount (whether as a result of the payment of this note prior to its maturity or otherwise), then promptly upon any determination that such excess has been paid the Lender will, at its option, either refund such excess to the undersigned or apply such excess to the principal owing hereunder. All interest paid shall, to the extent permitted by applicable law, be amortized, prorated, allocated and spread throughout the full period of the Borrower's credit relationship with the Lender until payment in full of the principal (including the period of any renewal or extension) so that the interest for such full period shall not exceed the maximum rate of interest permitted by applicable law.]** CH MORTGAGE COMPANY I, LTD. By______________________________ Its____________________________ * Include in Note payable to U.S. Bank. ** Include in Notes payable to Lenders headquartered in the State of Texas. -2- EXHIBIT B TO CREDIT AGREEMENT FORM OF CONFIRMATION OF BORROWING/PAYDOWN/CONVERSION [On Borrower Letterhead] [Date] U.S. Bank National Association, as Agent 601 Second Avenue South Minneapolis, Minnesota 55402 Attention: Mortgage Banking Services Division Re: Confirmation of Borrowing/Paydown/Conversion Ladies and Gentlemen: Reference is made to the Credit Agreement dated as of August 13, 1999 (as said Agreement may be amended, supplemented or restated from time to time, the "Credit Agreement"), between CH Mortgage Company I, Ltd. (the "Borrower"), the Lenders party thereto and U.S. Bank National Association ("U.S. Bank") as Agent for the Lenders (in such capacity, the "Agent"). Each capitalized term used herein shall have the meaning ascribed to such term in the Credit Agreement. The Borrower and the undersigned hereby confirm and certify to the Agent as follows: 1. The undersigned is authorized to submit this Confirmation of Borrowing/Paydown/Conversion on behalf of the Borrower. 2. On __________________, ______, the Borrower (a) requested the Lenders to make Loans in the aggregate principal amount of $__________________ , (b) requested U.S. Bank to make a Swingline Loan in the aggregate principal amount of $_________________ , (c) made principal payments on outstanding Loans in the aggregate amount of $_______________, or(d) converted -1- outstanding Advances to outstanding Advances of another type,(*) as follows: Balance Reference Rate Eurodollar Rate Funded Rate -------------- --------------- ----------- Advance $_________ $_________ $_________ Payment $_________ $_________ $_________ Net Amount Outstanding $_________ $_________ $_________ Interest Rate % % 1.125% 3. In connection with any requested Loans or Swingline Loans, please disburse $__________ as follows [include wire instructions]: 4. In connection with any requested Loans or Swingline Loans: (a) no Event of Default or Unmatured Event of Default has occurred or will exist upon the making of any such Loans or Swingline Loans; (b) the representations and warranties contained in Article IV of the Credit Agreement and in Section 5 of the Security Agreement are true and correct in all material respects with the same force and effect as if made on and as of the date hereof; and (c) after giving effect to the Loans or Swingline Loans requested herein, the sum of the outstanding principal balance under the Notes shall not exceed the Borrowing Base or the Aggregate Commitment Amounts. Very truly yours, CH MORTGAGE COMPANY I, LTD. By_______________________________ Its_____________________________ - --------------------------- * For purposes of this Certificate, Advances being converted shall be described as principal payments, and the new Advances into which such Advances are being converted shall be described as new Advances. -2- EXHIBIT C TO CREDIT AGREEMENT FORM OF BORROWING BASE CERTIFICATE [On Borrower Letterhead] U.S. Bank National Association, as Agent 601 Second Avenue South Minneapolis, Minnesota 55402 Attention: Mortgage Banking Services Division Ladies and Gentlemen: We submit this certificate to you in accordance with the terms of the Credit Agreement dated as of August 13, 1999 (as the same may be amended, supplemented or restated from time to time, the "Credit Agreement") between CH Mortgage Company I, Ltd., the lenders party thereto (the "Lenders") and U.S. Bank National Association, as Agent for the Lenders (in such capacity, the "Agent"). Each capitalized term used herein and not defined herein has the same meaning ascribed to such term in the Credit Agreement. The undersigned hereby certifies the following as of the close of business on __________________,__________, the Borrowing Base was calculated as follows: Collateral Value ---------------- (a) Pledged Mortgage Loans $_______ Conforming Mortgage Loans $_______ Nonconforming Mortgage Loans $_______ Jumbo Mortgage Loans $_______ Less: (b) Pledged Mortgage Loans with No Collateral Value (i.e., not Eligible Mortgage Loans) $_______ Conforming Mortgage Loans and Jumbo Mortgage Loans - 120 days or more since origination or acquisition; Nonconforming Mortgage Loans- -1- 90 days or more since origination or acquisition; and bond program loans - 180 days or more since origination or acquisition $_______ Jumbo Mortgage Loans - 120 days or more since origination or acquisition $_______ Nonconforming Mortgage Loans - 90 days or more since origination or acquisition $_______ Pledged more than 90 days $_______ Promissory Note and/or Collateral Documents not returned or purchased by an Investor (45 days/75 days for bond program loans) $_______ Collateral Document not returned (21 days) $_______ In default (one full reporting period) $_______ Requested documents not delivered (5 Business Days) $_______ Promissory Note and/or Collateral Documents not delivered (wet funding loans; 7 Business Days) $_______ Wet funding loans in excess of sublimit $_______ Wet funding loans not closed $_______ Jumbo Mortgage Loans in excess of applicable sublimit $_______ Nonconforming Mortgage Loans in excess of applicable sublimit $_______ Not marketable $_______ Agent does not have perfected, first priority security interest $_______ -2- Other ineligible $_______ (c) Eligible Mortgage Loans ((a) - (b)) $_______ (d) 2% of (c) $_______ (e) Total Collateral Value (Borrowing Base) ((c) minus (d)) $_______ Attached hereto is a schedule of the "Pledged Mortgage Loans" (as defined in the Security Agreement) that have no Collateral Value at the date hereof. Dated: ___________, 1999 CH MORTGAGE COMPANY I, LTD. By ______________________________ Its ______________________________ -3- EXHIBIT D TO CREDIT AGREEMENT FORM OF COMPLIANCE CERTIFICATE [On Borrower Letterhead] U.S. Bank National Association, as Agent 601 Second Avenue South Minneapolis, Minnesota 55402 Attention: Mortgage Banking Services Division Ladies and Gentlemen: We submit this certificate to you in accordance with the terms of the Credit Agreement dated as of August 13, 1999 (as the same may be amended, supplemented or restated from time to time, the "Credit Agreement") between CH Mortgage Company I, Ltd., the lenders party thereto (the "Lenders") and U.S. Bank National Association, as Agent for the Lenders (in such capacity, the "Agent"). Each capitalized term used herein and not defined herein has the same meaning ascribed to such term in the Credit Agreement. The undersigned hereby certifies the following as of the close of business on ________________, _______, the Borrower's compliance and/or noncompliance with Sections 6.12, 6.13, 6.14 and 6.15 of the Credit Agreement was as follows: Actual (or in Financial Covenants Required Compliance - ------------------- -------- ---------- 1) Distributions not more than (6.12) profit (rolling four quarters) $________ 2) Tangible Net Worth (6.13) $14,600,000 $________ 3) Tangible Net Worth Ratio (6.14) not more than 12.0 to 1.0 to 1.0 4) Net Income (6.15) not less than $1.00 $________ -1- The undersigned further certifies as follows: (a) The undersigned is the duly elected President, Chief Financial Officer or Accounting Director of the General Partner of Borrower. (b) The undersigned has reviewed the terms of the Credit Agreement and has made, or has caused to be made under the supervision of the undersigned, a detailed review of the transactions and conditions of the Borrower during the accounting period covered by this Certificate; and (c) These examinations did not disclose, and the undersigned has no knowledge, whether arising out of such examinations or otherwise, of the existence of any condition or event that constitutes an Event of Default or a Default during or at the end of the accounting period covered by this Certificate, except as described in a separate attachment to this Certificate, the exceptions listing, in detail, the nature of the condition or event, the period during which it has existed and the action that the Borrower has taken, is taking, or proposes to take with respect to each such condition or event. Dated: _____________, _____ CH MORTGAGE COMPANY I, LTD. By________________________________ Its ______________________________ -2- EX-21.1 6 EXHIBIT 21.1 EXHIBIT 21.1 SUBSIDIARIES OF D.R. HORTON, INC. AS OF SEPTEMBER 30, 1999
STATE OF INCORPORATION DOING BUSINESS NAME OR ORGANIZATION AS - ---------------------------------------- ---------------- ---------------- Astante Luxury Communities, Inc. Delaware C. Richard Dobson Builders, Inc. Virginia Dobson Builders CH Investments of Texas, Inc. Delaware CH Mortgage Company Colorado CH Mortgage Company LP, Inc. Delaware CH Mortgage Company GP, Inc. Delaware CH Mortgage Company I, Ltd. Texas Limited Partnership CHI Construction Company Arizona CHTEX of Texas, Inc. Delaware Century Title Agency, Inc. Arizona Continental Homes, Inc. Delaware Continental Homes of Florida, Inc. Florida Continental Homes Continental Homes of Texas, L.P. Texas Milburn Homes Continental Homes Continental Residential, Inc. California Continental Homes Continental Traditions, LLC Arizona Limited Continental Homes Liability Corporation D.R. Horton, Inc. - Birmingham Alabama Regency Homes D.R. Horton, Inc. - Chicago Delaware D.R. Horton, Inc. - Denver Delaware Trimark Communities D.R. Horton, Inc. - Greensboro Delaware Arappco Homes D.R. Horton, Inc. - Louisville Delaware Mareli Development & Construction D.R. Horton, Inc. - Los Angeles Delaware D.R. Horton, Inc. - Minnesota Delaware Joe Miller Homes STATE OF INCORPORATION DOING BUSINESS NAME OR ORGANIZATION AS - ---------------------------------------- ---------------- ---------------- D.R. Horton, Inc. - New Jersey Delaware SGS Communities D.R. Horton, Inc. - Portland Delaware RMP Properties D.R. Horton, Inc. - Sacramento California D.R. Horton, Inc. - San Diego Delaware D.R. Horton, Inc. - Torrey Delaware Torrey D.R. Horton Los Angeles Holding Company, Inc. California D.R. Horton Management Company, Ltd. Texas Limited Partnership D.R. Horton San Diego Holding Company, Inc. California D.R. Horton - Texas, Ltd. Texas Limited Partnership DHI Ranch, Ltd. Texas Limited Partnership DRH Cambridge Homes, LLC Delaware DRH Construction, Inc. Delaware DRH Mortgage LLC Texas DRH Properties, Inc. Arizona DRH Southwest Construction, Inc. California DRH Title Company of Colorado, Inc. Colorado DRH Title Company of Florida, Inc. Florida DRH Title Company - Minnesota, Inc. Delaware DRH Title Company - Southeast, Inc. Delaware DRH Title Company of Texas, Ltd. Texas Limited Partnership 2 STATE OF INCORPORATION DOING BUSINESS NAME OR ORGANIZATION AS - ---------------------------------------- ---------------- ---------------- DRH Tucson Construction, Inc. Delaware DRHI, Inc. Delaware D.R. Horton Desert Ridge Phase I Partners Arizona Encore I, Inc. Arizona Encore II, Inc. Arizona Encore Venture Partners, L.P. Delaware Grand Realty Incorporated New Jersey KDB Homes, Inc. Delaware Continental Homes Meadows I, Ltd. Delaware Meadows II, Ltd. Delaware Meadows IV, Inc. Texas Meadows V, Ltd. Delaware Meadows VIII, Ltd. Delaware Meadows IX, Inc. New Jersey Meadows X, Inc. New Jersey Metro Title, LLC Virginia Limited Liability Corporation Millwood JV II Texas Continental Homes Milburn Homes Paseo Del Sol 4000, LLC California Continental Homes SGS Communities at Battleground, LLC New Jersey SGS Communities SGS Communities at Grand Quay, LLC New Jersey SGS Communities Surprise Village North, LLC Arizona Arizona Traditions Travis County Title Company Texas
3 EX-23.1 7 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the following registration statements on Forms S-3 and S-4 and related prospectuses and in the following registration statements on Form S-8 of D.R. Horton, Inc., of our report dated November 8, 1999, with respect to the consolidated financial statements of D.R. Horton, Inc. included in this Annual Report (Form 10- K) for the year ended September 30, 1999. Form S-3 Registration No. 333-57193 Registration No. 333-76175 Form S-4 Registration No. 333-56491 Form S-8 Registration No. 33-48874 Registration No. 33-83162 Registration No. 333-3572 Registration No. 333-47767 Registration No. 333-51473 Registration No. 333-72423 /s/ ERNST & YOUNG LLP Fort Worth, Texas December 8, 1999 EX-27 8 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF INCOME FOUND ON PAGES 23 AND 24 OF THE COMPANY'S FORM 10-K FOR THE YEAR ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR SEP-30-1999 OCT-01-1998 SEP-30-1999 128,568 0 0 0 1,866,108 2,108,462 67,535 30,563 2,361,808 368,774 1,190,623 0 0 643 796,966 2,361,808 3,118,960 3,156,211 2,560,746 2,560,746 0 0 16,451 263,826 103,999 159,827 0 0 0 159,827 2.55 2.50
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