-----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, QY0XZ2uEsbjuyjlsVQDVNtaBn8DzdHR/fSCEA+brGBRfyPqJ3hguVpfISnZNcCdE 7OFENhOw5ArWJv+Xfli6FA== 0000950147-96-000380.txt : 19960826 0000950147-96-000380.hdr.sgml : 19960826 ACCESSION NUMBER: 0000950147-96-000380 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19960531 FILED AS OF DATE: 19960823 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONTINENTAL HOMES HOLDING CORP CENTRAL INDEX KEY: 0000796122 STANDARD INDUSTRIAL CLASSIFICATION: OPERATIVE BUILDERS [1531] IRS NUMBER: 860554624 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-10700 FILM NUMBER: 96619754 BUSINESS ADDRESS: STREET 1: 7001 N SCOTTSDALE RD STE 2050 CITY: SCOTTSDALE STATE: AZ ZIP: 85253 BUSINESS PHONE: 6024830006 MAIL ADDRESS: STREET 1: 7001 N SCOTTSDALE ROAD STREET 2: SUITE 2050 CITY: SCOTTSDALE STATE: AZ ZIP: 85253 10-K405 1 ANNUAL REPORT 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 May 31, 1996 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 0-14830 CONTINENTAL HOMES HOLDING CORP. (Exact name of registrant as specified in its charter) ------------------ Delaware State or other jurisdiction of 86-0554624 incorporation or organization) (I.R.S. Employer Identification Number) 7001 North Scottsdale Road, Suite 2050 Scottsdale, Arizona 85253 (Address of principal executive offices) Registrant's telephone number, including area code: (602) 483-0006 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on Which Registered ------------------- ------------------- Common Stock, par value $.01 per share New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the registrant as of July 29, 1996 was $122,289,320. (This calculation assumes that all officers and directors of the Company are affiliates.) The number of shares of Common Stock outstanding as of July 29, 1996 was 7,007,330. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's Annual Report to Stockholders for the year ended May 31, 1996 are incorporated herein by reference into Part II and portions of the registrant's Proxy Statement for the Annual Meeting of Stockholders to be held August 29, 1996 are incorporated herein by reference into Part III. CONTINENTAL HOMES HOLDING CORP. FORM 10-K ANNUAL REPORT For the Fiscal Year Ended May 31, 1996 TABLE OF CONTENTS
PART I Item 1. Business Page General............................................................................ 1 Land Acquisition and Development................................................... 1 Product Lines...................................................................... 2 Contract Backlog................................................................... 3 Marketing.......................................................................... 3 Construction and Customer Service.................................................. 4 Mortgage Banking................................................................... 4 Competition........................................................................ 5 Regulation......................................................................... 5 Employees.......................................................................... 5 Item 2. Properties......................................................................... 6 Item 3. Legal Proceedings.................................................................. 6 Item 4. Submission of Matters to a Vote of Security Holders................................ 6 Part II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters................................................................ 6 Item 6. Selected Financial Data............................................................ 6 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................................... 7 Item 8. Financial Statements and Supplementary Data........................................ 7 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............................................................... 7 Part III Item 10. Directors and Executive Officers of the Registrant................................. 7 Item 11. Executive Compensation............................................................. 7 Item 12. Security Ownership of Certain Beneficial Owners and Management..................... 7 Item 13. Certain Relationships and Related Transactions..................................... 7 Part IV Item 14. Exhibits and Reports on Form 8-K................................................... 7
Part I Item 1. Business -------- GENERAL Continental Homes Holding Corp. (the "Company"), a Delaware corporation, was formed in June 1986. The Company designs, constructs and sells high quality single-family homes targeted primarily to entry-level and first-time move-up homebuyers. The Company is geographically diversified, currently operating in Phoenix, Arizona; Austin, San Antonio and Dallas, Texas; Denver, Colorado; South Florida and Southern California. The Company entered the Dallas/Fort Worth, Texas market in June 1996 through the acquisition of Westchester Homes. The Company entered the Austin, San Antonio and South Florida markets in July 1993, January 1994 and November 1994, respectively, through acquisitions of existing homebuilders. In July 1996, the Company opened for sales at "Arizona Traditions", its first active adult community. When completed, the community will have approximately 1,800 homes, a golf course, community center and many other amenities. The Company complements its homebuilding activities by providing mortgage banking services to its homebuyers and to third parties in most locations. LAND ACQUISITION AND DEVELOPMENT As of May 31, 1996, the Company operated 16 subdivisions in Phoenix, 15 subdivisions in Austin, 10 subdivisions in Denver, 8 subdivisions in San Antonio, 5 subdivisions in Miami and 5 subdivisions in Southern California. The following table summarizes the Company's available lot inventory at May 31, 1996 by location: AVAILABLE LOT INVENTORY
Sites Available Homes Under for Future Construction Construction Total Lots ------------ ------------- Available Sold Specs(1) Models Unsold Sold --------- ---- -------- ------ ------ ---- Phoenix(2)................. 4,526 762 210 49 3,435 70 Texas(3)................... 6,164 626 173 42 5,297 26 Denver..................... 1,281 231 67 20 902 61 Miami...................... 1,364 125 37 18 1,120 64 California................. 479 83 72 9 293 22 ------ ----- --- --- ------ --- Total........ 13,814 1,827 559 138 11,047 243 ====== ===== === === ====== ===
- ---------- (1) Speculative units are unsold homes under construction. (2) Includes 1,800 units at Arizona Traditions. (3) Includes operations in Austin and San Antonio. The Company's objective is to maintain a supply of land to meet anticipated homebuilding requirements for approximately two to three years. At May 31, 1995 and 1996, the Company had an aggregate of 10,150 and 11,047 unsold lots, respectively, which represents approximately 38 and 30 months of inventory, respectively, based on actual deliveries in each of fiscal 1995 and 1996. The Company believes that an adequate supply of undeveloped land is available in its markets to maintain current levels of homebuilding. See "Management's Discussion and Analysis of Results of Operations and Financial Condition -- Liquidity and Capital Resources." As of May 31, 1996, the Company also owned 417 acres in Carlsbad, California, located in San Diego County. Discretionary city entitlements for this project, which will result in approximately 760 dwelling units, were approved by the Carlsbad City Council in March 1995. The Company is currently working 1 with state and federal governmental agencies regarding environmental issues with regard to the property and is preparing final improvement plans for the project. The Company is unable to predict the date on which all additional approvals necessary to commence development will be received, but it is currently actively seeking these additional approvals and will commence development as soon as the aforementioned approvals are received and financing is obtained. PRODUCT LINES The product line constructed by the Company in a particular subdivision is dependent upon many factors, including the housing generally available in the area, the needs of the particular market and the Company's cost of lots in the subdivision. The Company typically offers between three and sixteen floorplans within the same product line in each subdivision and often offers the same models in similar subdivisions. Models are periodically reviewed and updated to reflect changing homebuyer preferences. Both new models and design modifications are generally developed by Company employees. Homes sold by the Company typically have three to five bedrooms, two or more bathrooms and at least a two car garage. The Company offers a variety of options and upgrades, including the placement of certain walls, the style of kitchen and bathroom cabinetry, a selection of floor coverings and light fixtures, patios, decks, french doors and fireplaces, which allow homebuyers to customize their homes. Options and upgrades are generally priced to have a positive effect on profit margins. PRODUCT LINES
Living Area Base Price Range (Square Feet) at May 31, 1996 ------------- --------------- Phoenix Move-up single-family............. 1,391 - 3,761 $107,750 - $218,600 Entry-level single-family......... 1,287 - 2,484 $ 87,550 - $162,900 Texas Move-up single-family............. 1,974 - 3,230 $126,400 - $167,400 Entry-level single-family......... 924 - 3,062 $ 58,950 - $153,250 Denver Move-up single-family............. 1,820 - 3,096 $155,800 - $239,600 Entry-level single -family........ 1,358 - 1,834 $136,900 - $147,900 Miami Move-up single-family............. 1,615 - 2,511 $136,900 - $174,900 Entry-level single-family......... 1,323 - 2,012 $ 92,900 - $141,900 California Move-up single-family............. 2,883 - 4,093 $339,000 - $445,000 Entry-level single-family......... 1,808 - 3,165 $149,900 - $207,900
2 HOMES DELIVERED
Years ended May 31, ------------------- 1996 1995 1994 ---- ---- ---- Move-up single-family Revenues (000's)................................ $222,918 $208,026 $128,494 Units........................................... 1,281 1,281 811 Average sales price............................. $174,000 $162,400 $158,400 Entry-level single-family Revenues (000's)................................ $352,839 $206,692 $206,615 Units........................................... 3,073 1,921 1,976 Average sale price.............................. $114,800 $107,600 $104,600 Townhomes and duplex homes Revenues (000's)................................ $ 1,316 $ -- $ 4,922 Units........................................... 13 -- 44 Average sales price............................. $101,200 $ -- $111,900 Total Revenues (000's)................................ $577,073 $414,718 $340,031 Units........................................... 4,367 3,202 2,831 Average sale price.............................. $132,100 $129,500 $120,100
Fluctuations in the number of homes delivered by product type are generally related to product availability, market conditions or the introduction of a new product. CONTRACT BACKLOG Sales of the Company's homes are made pursuant to standard sales contracts which require a $500 to $2,500 deposit upon signing. The contract is generally cancelable if the customer is unable to obtain a mortgage commitment, usually within 60 days. A sale becomes part of backlog only upon receipt of a signed contract and a deposit. See "Business -- Construction and Customer Service." As of May 31, 1996, the Company's contract backlog had an aggregate sales value of $295,484,000 and consisted of 2,070 homes. The contract backlog as of May 31, 1995 had an aggregate sales value of $198,126,000 and consisted of 1,493 homes. The Company anticipates that substantially all of the homes in backlog at May 31, 1996 will be delivered during the calendar year ending December 31, 1996. MARKETING The Company markets its homes to first-time and move-up buyers. Although the Company utilized the services of independent brokers, approximately 43% of its homes sold in fiscal 1996 were sold by Company commissioned personnel (without the assistance of independent brokers) from sales offices located in furnished model homes in the subdivisions. Sales personnel are trained by the Company and attend weekly meetings to be updated on financing availability, construction schedules and marketing and advertising plans. Company sales personnel and independent brokers are generally paid a commission at the time of closing of between 1% and 2% (depending on the market) and 3%, respectively, of the sales price of the home. The Company uses radio, newspaper, magazine, billboard displays, special promotional events and, occasionally, television in its marketing program. The Company builds its homes under the guidelines and specifications of the Federal Housing Administration ("FHA") and the Veterans Administration ("VA"), thereby providing prospective buyers the added benefits of FHA-insured and VA-guaranteed mortgages. 3 CONSTRUCTION AND CUSTOMER SERVICE The Company designs and supervises the development and building of its projects. The construction period for the Company's homes during fiscal 1996 ranged from 100 to 180 days in Phoenix, from 75 to 120 days in Texas, from 120 to 180 days in Denver, from 90 to 120 days in South Florida and from 100 to 150 days in Southern California. The actual construction is performed for a fixed price by independent subcontractors, who are generally selected on a competitive basis. All stages of construction are supervised by the Company's on-site superintendents who coordinate the activities of subcontractors, subject their work to quality and cost controls and monitor compliance with zoning and building codes. The Company's management information systems also assist the Company in controlling the costs of construction by making information available which allows the Company to monitor subcontractor performance and expenditures. The Company believes its relationships with its subcontractors are good. The Company is not, and does not anticipate, experiencing a significant shortage of either subcontractors or building materials. The Company provides homebuyers with a one-year warranty on its homes for non-structural defects and a two-year warranty with respect to structural defects. In addition, the Company purchases, in certain locations, builder's liability insurance protection for major structural defects in the third through tenth year. In Phoenix, Denver, South Florida and Southern California, the Company constructs homes principally against orders which are evidenced by written contracts and modest escrow deposits. In fiscal 1996, approximately 17% of such contracts have been canceled, a majority of such cancellations being attributable to the inability of the prospective purchaser to qualify for financing. The Company attempts to limit cancellations by training its sales force to determine the qualification of potential homebuyers at the sales office. The Company classifies a unit as speculative when construction commences on a unit that does not have a written contract. The Company may construct speculative units in order to maintain an inventory for quick delivery or to continue the construction sequence. The majority of the Company's speculative units are less than 50% complete. As a result of such cancellations and construction procedures, at May 31, 1995 and 1996, the Company had respectively, 494 and 559 speculative units under construction. MORTGAGE BANKING The Company commenced mortgage banking operations in 1986 and all mortgage operations of the Company have been conducted by American Western Mortgage Company ("AWMC") and Miltex Management, Inc. ("MMI"), which are approved by the FHA and VA as qualified mortgage lenders. As of July 1, 1995, all mortgage operations of the Company are being conducted by AWMC which has changed its name to CH Mortgage Company ("CHMC"). For the year ended May 31, 1996, CHMC provided mortgage financing for more than 63% and 66% of the Company's customers in Arizona and Texas, respectively. The Company is currently licensed to do business in Arizona, Colorado, Texas, Florida and California. As a mortgage banker, CHMC completes the processing of loan applications, performs credit checks, submits applications to mortgage lenders for approval, and originates and sells mortgage loans. CHMC has a $25,000,000 warehouse line of credit to fund the mortgage loans on an interim basis. CHMC bears the interest expense and receives the interest income while mortgages are warehoused. Accordingly, depending upon the relative interest rates of such loans and the related mortgages and the extent to which mortgages are financed, CHMC may have net interest income or expense during the warehouse period. CHMC establishes its interest rates and terms to facilitate the sale of the Company's homes through the origination of first mortgage loans utilizing programs established by the FHA, VA, GNMA and FNMA. Interest rates are generally established by prevailing market rates, although lower rates may be offered from time to time to remain competitive in certain markets. 4 Each mortgage originated by CHMC contains the provision for a servicing fee (which is included as a part of the monthly payment made by the mortgagor) to be paid for the collection of, and accounting for, mortgage payments. This servicing fee provision is a separate interest in the mortgage that may be sold independently of, or together with, the mortgage itself. CHMC began retaining a portion of the servicing portfolio in fiscal 1991 and from time to time may continue to do so, although this is not expected to become a material part of the Company's business. During fiscal 1996, the Company sold significantly all of the servicing rights it had previously retained. COMPETITION The single-family residential housing industry is highly competitive, and the Company competes in each of its markets with numerous other national, regional and local homebuilders, some of which have greater resources than the Company. The Company's homes compete on the basis of quality, price, design, mortgage financing terms and location. The Company also competes with developers of rental housing units and, to a lesser extent, condominiums. REGULATION The housing and mortgage banking industries are subject to extensive and complex regulations. The Company and its subcontractors must comply with various federal, state and local laws and regulations including zoning and density requirements, building, environmental, advertising and consumer credit rules and regulations as well as other rules and regulations in connection with its homebuilding and sales activities. These include requirements as to building materials to be used, building designs and minimum elevation of properties. The Company's homes are inspected by local authorities where required, and homes eligible for insurance or guarantees provided by the FHA and VA, respectively, are subject to inspection by the FHA or VA. The Company is also subject to a variety of local, state and federal statutes, ordinances, rules and regulations concerning protection of health and the environment ("environmental laws"), as well as effects of environmental factors. The particular environmental laws which apply to any given homebuilding site vary greatly according to the site's location, the site's environmental condition and the present and former uses of the site. These environmental laws may result in delays, may cause the Company to incur substantial compliance and other costs, and can prohibit or severely restrict homebuilding activity in certain environmentally sensitive regions or areas. The Company's mortgage banking subsidiary must also comply with various federal and state laws and consumer credit rules and regulations as well as rules and regulations in connection with its mortgage lending activities. Additionally, mortgage loans originated under the FHA, VA, FNMA and GNMA are subject to rules and regulations imposed by such agencies. EMPLOYEES At May 31, 1996, the Company and its subsidiaries employed approximately 553 persons, including corporate staff, sales personnel, construction personnel and mortgage and title staff. None of the Company's employees are covered by a collective bargaining agreement. The Company believes that its relations with its employees are good. 5 Item 2. PROPERTIES The Company's principal offices are located at 7001 North Scottsdale Road, Suite 2050, Scottsdale, Arizona 85253. The offices, which include approximately 22,000 square feet, are leased for a term expiring March 2001. Item 3. LEGAL PROCEEDINGS The Company is not involved in any legal proceedings which it believes would have a material effect on the Company's financial position or operating results. The Company has filed suit against William O. Milburn and Ernst & Young seeking reimbursement for the payments made to the Internal Revenue Service in excess of the tax liability recorded at the time Milburn was acquired. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None Part II Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS PRICE RANGE OF COMMON STOCK Since December 15, 1993 the Company's Common Stock has traded on the New York Stock Exchange (Symbol: CON). The following table sets forth for each period indicated the high and low closing sales prices of the Company's Common Stock and cash dividends paid:
Dividends High Low Per Share ---- --- --------- Year Ended May 31, 1996 First Quarter............................. $21.00 $15.13 $.05 Second Quarter............................ 22.50 18.13 .05 Third Quarter............................. 24.63 18.88 .05 Fourth Quarter............................ 25.25 20.00 .05 Year Ended May 31, 1995: First Quarter............................. $15.75 $13.38 $.05 Second Quarter............................ 17.25 13.50 .05 Third Quarter............................. 14.13 11.63 .05 Fourth Quarter............................ 15.88 11.00 .05
DIVIDEND POLICY Declarations of dividends are within the discretion of the Board of Directors and are dependent upon various factors, including the earnings, cash flow, capital requirements and operating and financial condition of the Company. In addition, the company's ability to pay dividends in excess of current levels is restricted by its 10% and 12% Senior Notes. See Note E of "Notes to Consolidated Financial Statements" of the Company. As of August 14, 1996, there were 105 holders of record of the Company's Common Stock. Item 6. SELECTED FINANCIAL DATA Information relating to this item appears under the caption "Financial Highlights" on page 3 of the Annual Report, and such information is incorporated herein by reference in accordance with General Instruction G(2) of Form 10-K. This information should be read in conjunction with "Management's Discussion and Analysis of Results of Operations and Financial Condition" and the Company's Consolidated Financial Statements and the Notes thereto. 6 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Information relating to this item appears under the caption "Management's Discussion and Analysis of Results of Operations and Financial Condition" on pages 12 through 16 of the Annual Report, and such information is incorporated herein by reference in accordance with General Instruction G(2) of Form 10-K. Other financial statements and schedules required under Regulation S-X promulgated under the Securities Act of 1933 are identified in Item 14 hereof and are incorporated herein by reference. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Information relating to this item appears on pages 17 through 31 of the Annual Report, and such information is incorporated herein by reference in accordance with General Instruction G(2) of Form 10-K. There are no other financial statements and schedules required under Regulations S-X promulgated under the Securities Act of 1933. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information relating to this item appears in the definitive Proxy Statement for the Company's Annual Meeting of Stockholders to be held on August 29, 1996, and such information is incorporated herein by reference in accordance with General Instruction G(3) of Form 10-K. Item 11. EXECUTIVE COMPENSATION Information relating to this item is contained in the definitive Proxy Statement referred to above in "Item 10. Directors and Executive Officers of the Registrant," and such information is incorporated herein by reference in accordance with General Instruction G(3) of Form 10-K. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information relating to this item is contained in the definitive Proxy Statement referred to above in "Item 10. Directors and Executive Officers of the Registrant," and such information is incorporated herein by reference in accordance with General Instruction G(3) of From 10-K. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information relating to this item is contained in the definitive Proxy Statement referred to above in "Item 10. Directors and Officers of the Registrant, " and such information is incorporated herein by reference in accordance with General Instruction G(3) of Form 10-K. PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. Financial Statements The following consolidated financial statements of Continental Homes Holding Corp. and Subsidiaries, included in the Annual Report to Shareholders for the year ended May 31, 1996, are incorporated by reference in Item 8: 7 (a) 1. Financial Statements Report of Independent Public Accountants Consolidated Balance Sheets - May 31, 1996 and 1995. Consolidated Statements of Income - Years ended May 31, 1996, 1995 and 1994. Consolidated Statements of Stockholder's Equity - Years ended May 31, 1996, 1995 and 1994. Consolidated Statements of Cash Flows - Years ended May 31, 1996, 1995 and 1994. Notes to Consolidated Financial Statements. (a) 2. Financial Statement Schedules Not applicable. (a) 3. Exhibits 2.1 Stock purchase Agreement between William O. Milburn and the Company dated July 28, 1993. Incorporated by reference to Exhibit 2.1 to the Company's report on Form 8-K dated July 29, 1993. 2.2(a) Stock Purchase Agreement between Seller and the Company dated November 3, 1994. Incorporated by reference to Exhibit 2.1 to the Company's report on Form 8-K dated November 18, 1994. 2.2(b) Amendment to Stock Purchase Agreement between Seller and the Company dated November 18, 1994. Incorporated by reference to Exhibit 2.2(b) to the Company's report on Form 10-K for the year ended May 31, 1995. 2.2(c) Second Amendment to Stock Purchase Agreement between Seller and the Company dated November 18, 1994. Incorporated by reference to Exhibit 2.2(c) to the Company's report on Form 10-K for the year ended May 31, 1995. 2.2(d) Third Amendment to Stock Purchase Agreement between Seller and the Company dated July 12, 1995. Incorporated by reference to Exhibit 2.2(d) to the Company's report on Form 10-K for the year ended May 31, 1995. 3.1(a) Certificate of Incorporation of the Company. Incorporated by reference to Exhibit 3.1(a) to Registration Statement No. 33-6797, as filed on June 25, 1986. 3.1(b) Amendment to Certificate of Incorporation of the Company. Incorporated by reference to Exhibit 3.1(b) to Amendment No. 2 to Registration Statement No. 33-6797, as filed on January 30, 1987. 3.1(c) Certificate of Second Amendment of the Certificate of Incorporation. Incorporated by reference to Exhibit 3 to the Company's report on Form 10-Q for the quarter ended August 31, 1993. 3.2 By-laws of the Company. Incorporated by reference to Exhibit 3.2 to registration Statement No. 33-6797, as filed on June 25, 1986. 4.1* Indenture dated as of April 15, 1996 between the Company and First Union National Bank, as Trustee. 8 (a) 3. Exhibits (continued) 4.2(a) Indenture dated as of August 1, 1992 between the Company and Fidelity Bank, National Association, as Trustee. Incorporated by reference to Exhibit 4.1 to the Company's report on Form 10-Q for the quarter ended August 31, 1992. 4.2(b) First Supplemental Indenture dated as of March 22, 1994 to the Indenture dated August 1, 1992, between CHHC and First Fidelity Bank, National Association, (formerly Fidelity Bank, National Association), as Trustee. Incorporated by reference to Exhibit 4.1 to the Company's report on Form 10-Q for the quarter ended February 28, 1994. 4.3 Indenture dated as of November 1, 1995 between the Company and Manufacturer's and Traders Trust Company, as Trustee. Incorporated by reference to Exhibit 4.1 to the Company's report on form 10-Q for the quarter ended November 30, 1995. 10.1(a) Lease Agreement dated August 1, 1990, as amended, for the Company's principal office located at 7001 N. Scottsdale Road, Suite 2050, Scottsdale, Arizona. Incorporated by reference to Exhibit 10.1 to the Company's report on Form 10-K for the year ended May 31, 1991. 10.1(b) Third Amendment to Lease Agreement dated June 27, 1994 for the Company's principal office located at 7001 N. Scottsdale Road, Suite 2050, Scottsdale, Arizona. Incorporated by reference to Exhibit 10.1(b) to the Company's report on Form 10-K for the year ended May 31, 1994. 10.2(a)+ The Company's Restated 1986 Stock Incentive Plan. Incorporated by reference to Exhibit 10.3 to Amendment No. 2 to Registration Statement No. 33-6797, as filed on January 30, 1987. 10.2(b)+ The Company's 1988 Stock Incentive Plan (As amended and restated July 23, 1992). Incorporated by reference to Exhibit A to the Company's Notice of Annual Meeting and Proxy Statement dated August 3, 1992. 10.3 Amended and Restated Mortgage Warehousing Credit and Security Agreement dated as of July 1, 1995 between Bank One, Arizona, NA ("BOAZ") and CHMC. Incorporated by reference to Exhibit 10.3 to the Company's report on Form 10-K for the year ended May 31, 1995. 10.3(a) Modification Agreement dated as of December 1, 1995 between BOAZ and CHMC. Incorporated by reference to Exhibit 10.1 to the Company's report on Form 10-Q for the quarter ended November 30, 1995. 10.4 Replacement Revolving Line of Credit Promissory Note dated July 1, 1995 by CHMC in favor of BOAZ in the principal amount of up to $25,000,000. Incorporated by reference to Exhibit 10.4 to the Company's report on form 10-K for the year ended May 31, 1995. 10.4(a) Amended and Restated Replacement Revolving Line of Credit Promissory Note dated December 1, 1995 between BOAZ and CHMC in favor of BOAZ in the amount of $25,000,000. Incorporated by reference to Exhibit 10.2 to the Company's report on Form 10-Q for the quarter ended November 30, 1995. 10.5* Credit Agreement dated as of June 27, 1996 between BOAZ, Norwest, The First National Bank of Boston and CHHC. 10.6* Promissory Note dated June 27, 1996 between BOAZ and CHHC in the principal amount of up to $65,000,000. 10.7* Promissory Note dated June 27, 1996 between The First National Bank of Boston and CHHC in the principal amount of up to $25,000,000. 9 (a)3. Exhibits (continued) 10.8* Promissory Note dated June 27, 1996 between Norwest Bank Arizona and CHHC in the principal amount of up to $20,000,000. 11.* Statement Re Computation of Per Share Earnings. 13.* Page 3 and pages 12 through 31 of the Annual Report to Stockholders for the year ended May 31, 1996. 21.* Subsidiaries of the Company. 23.* Consent of Independent Public Accountants. 27.* Financial Data Schedule. - ---------- + Denotes a compensatory plan or agreement. * Filed herewith. (b) Reports on Form 8-K There were no reports filed on Form 8-K during the last quarter of the year ended May 31, 1996. The Company filed a report on Form 8-K dated November 18, 1994. 10 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. Dated: August 23, 1996 CONTINENTAL HOMES HOLDING CORP. By: /s/ Donald R. Loback ---------------------------- Donald R. Loback Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Donald R. Loback August 23, 1996 - ------------------------------------ --------------- Donald R. Loback Date Chief Executive Officer /s/ W. Thomas Hickcox August 23, 1996 - ------------------------------------ --------------- W. Thomas Hickcox Date President and Director /s/ Julie E. Collins August 23, 1996 - ------------------------------------ --------------- Julie E. Collins Date Secretary, Treasurer and Financial Vice President (Principal Financial and Accounting Officer) /s/ Bradley S. Anderson August 23, 1996 - ------------------------------------ --------------- Bradley S. Anderson Date Director /s/ Jo Ann Rudd August 23, 1996 - ------------------------------------ --------------- Jo Ann Rudd Date Director /s/ William Steinberg August 23, 1996 - ------------------------------------ --------------- William Steinberg Date Director 11 INDEX OF EXHIBITS
Page Number 4.1 Indenture dated as of April 15, 1996 between the Company and First Union National Bank, as Trustee. 10.5 Credit Agreement dated as of June 27, 1996 between BOAZ, Norwest, The First National Bank of Boston and CHHC. 10.6 Promissory Note dated June 27, 1996 between BOAZ and CHHC in the principal amount of up to $65,000,000. 10.7 Promissory Note dated June 27, 1996 between the First National Bank of Boston and CHHC in the principal amount of up to $25,000,000. 10.8 Promissory Note dated June 27, 1996 between Norwest Bank Arizona and CHHC in the principal amount of up to $20,000,000. 11. Statement Re: Computation of Per Share Earnings E-2 13. Page 3 and pages 12 through 31 of the Annual Report to Stockholders for the year ended May 31, 1996. 21. Subsidiaries of the Company. E-3 23. Consent of Independent Public Accountants. E-4 27. Financial Data Schedule.
EX-4.1 2 IDENTURE BETWEEN THE COMPANY AND FIRST UNION BANK ================================================================================ CONTINENTAL HOMES HOLDING CORP., THE GUARANTORS PARTY HERETO AND FIRST UNION NATIONAL BANK, as Trustee ------------ Indenture Dated as of April 15, 1996 ------------ $150,000,000 10% SENIOR NOTES DUE APRIL 15, 2006 ================================================================================ CROSS-REFERENCE TABLE --------------------- TIA Indenture Section Section - ------- ------- 310(a)(1).................................................. 7.11 (a)(2).................................................. 7.11 (a)(3).................................................. N.A. (a)(4).................................................. N.A. (a)(5).................................................. 7.11 (b) .................................................. 7.09; 7.11; 11.02 (c) .................................................. N.A. 311(a) .................................................. 7.12 (b) .................................................. 7.12 (c) .................................................. N.A. 312(a) .................................................. 2.05 (b) .................................................. 11.03 (c) .................................................. 11.03 313(a) .................................................. 7.07 (b)(1).................................................. N.A. (b)(2).................................................. N.A. (c) .................................................. 7.07; 11.02 (d) .................................................. 7.06 314(a) .................................................. 4.07; 11.02 (b) .................................................. N.A. (c)(1).................................................. 11.04 (c)(2).................................................. 11.04 (c)(3).................................................. N.A. (d) .................................................. N.A. (e) .................................................. 11.05 (f) .................................................. N.A. 315(a) .................................................. 7.01(b) (b) .................................................. 7.05; 11.02 (c) .................................................. 7.01(a) (d) .................................................. 7.01(c) (e) .................................................. 6.11 316(a)(last sentence)...................................... 2.09 (a)(1)(A)............................................... 6.05 (a)(1)(B)............................................... 6.04 (a)(2).................................................. N.A. (b) .................................................. 6.07 317(a)(1).................................................. 6.08 (a)(2).................................................. 6.09 (b) .................................................. 2.04 318(a) .................................................. 11.01 (c) .................................................. 11.01 - ------------- N.A. means Not Applicable. This cross-reference table does not constitute a part of the Indenture. TABLE OF CONTENTS -----------------
Section Page - ------- ---- ARTICLE ONE DEFINITIONS AND INCORPORATION BY REFERENCE 1.01. Definitions............................................................................... 1 1.02. Other Definitions......................................................................... 19 1.03. Incorporation by Reference of Trust Indenture Act................................................................................... 20 1.04. Rules of Construction..................................................................... 21 ARTICLE TWO THE SECURITIES 2.01. Form and Dating........................................................................... 21 2.02. Execution and Authentication.............................................................. 21 2.03. Registrar and Paying Agent................................................................ 22 2.04. Paying Agent to Hold Money in Trust....................................................... 23 2.05. Securityholder Lists...................................................................... 23 2.06. Transfer and Exchange..................................................................... 23 2.07. Replacement Securities.................................................................... 24 2.08. Outstanding Securities.................................................................... 24 2.09. Securities Held by the Company or an Affiliate............................................ 25 2.10. Temporary Securities...................................................................... 25 2.11. Cancellation.............................................................................. 25 2.12. Defaulted Interest........................................................................ 26 ARTICLE THREE REDEMPTION 3.01. Notices to Trustee........................................................................ 26 3.02. Selection of Securities to Be Redeemed.................................................... 26 3.03. Notice of Redemption...................................................................... 27 3.04. Effect of Notice of Redemption............................................................ 27 3.05. Deposit of Redemption Price............................................................... 27 3.06. Securities Redeemed in Part............................................................... 28 ARTICLE FOUR COVENANTS 4.01. Payment of Securities..................................................................... 28 4.02. Maintenance of Office or Agency........................................................... 28 4.03. SEC Reports............................................................................... 29 4.04. Compliance Certificate.................................................................... 29 4.05. Stay, Extension and Usury Laws............................................................ 30 4.06. Corporate Existence....................................................................... 30
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Section Page - ------- ---- 4.07. Notice of Default......................................................................... 30 4.08. Change of Control......................................................................... 30 4.09. Maintenance of Net Worth.................................................................. 33 4.10. Limitation on Debt........................................................................ 36 4.11. Limitation on Restricted Payments......................................................... 37 4.12. Limitation on Dividends and Other Payment Restrictions Affecting Subsidiaries................................................... 39 4.13. Limitation on Liens....................................................................... 40 4.14. Transactions with Affiliates.............................................................. 40 4.15. Limitation on Asset Sales................................................................. 41 4.16. Additional Guarantors..................................................................... 44 ARTICLE FIVE SUCCESSORS 5.01. When Company May Merge, etc............................................................... 45 5.02. Successor Substituted..................................................................... 46 ARTICLE SIX DEFAULTS AND REMEDIES 6.01. Events of Default......................................................................... 47 6.02. Acceleration.............................................................................. 49 6.03. Other Remedies ........................................................................... 6.04. Waiver of Past Defaults................................................................... 49 6.05. Control by Majority....................................................................... 49 6.06. Limitation on Suits....................................................................... 50 6.07. Rights of Holders to Receive Payment...................................................... 50 6.08. Collection Suit by Trustee................................................................ 51 6.09. Trustee May File Proofs of Claim.......................................................... 51 6.10. Priorities................................................................................ 51 6.11. Undertaking for Costs..................................................................... 52 ARTICLE SEVEN TRUSTEE 7.01. Duties of Trustee......................................................................... 52 7.02. Rights of Trustee......................................................................... 54 7.03. Individual Rights of Trustee.............................................................. 54 7.04. Trustee's Disclaimer...................................................................... 54 7.05. Notice of Defaults........................................................................ 55 7.06. Reports by Trustee to Holders............................................................. 55 7.07. Compensation and Indemnity................................................................ 55 7.08. Replacement of Trustee.................................................................... 56 7.09. Successor Trustee by Merger, etc.......................................................... 57 7.10. Eligibility; Disqualification............................................................. 57
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Section Page - ------- ---- 7.11. Preferential Collection of Claims Against Company............................................................................... 58 ARTICLE EIGHT DEFEASANCE 8.01. Defeasance upon Deposit of Moneys or U.S. Government Obligations................................................................ 58 8.02. Termination of Obligations Pursuant to Redemption........................................................................... 59 8.03. Survival of Company's Obligations......................................................... 61 8.04. Application of Trust Money................................................................ 61 8.05. Repayment to Company or Guarantors........................................................ 61 8.06. Reinstatement............................................................................. 61 ARTICLE NINE AMENDMENTS 9.01. Without Consent of Holders................................................................ 62 9.02. With Consent of Holders................................................................... 63 9.03. Compliance with Trust Indenture Act....................................................... 64 9.04. Revocation and Effect of Consents......................................................... 64 9.05. Notation on or Exchange of Securities..................................................... 65 9.06. Trustee Protected......................................................................... 65 ARTICLE TEN GUARANTEES 10.01. Guarantee................................................................................. 65 10.02. Execution and Delivery of Guarantee....................................................... 68 10.03. Additional Guarantors..................................................................... 69 10.04. Release of Guarantor...................................................................... 69 ARTICLE ELEVEN MISCELLANEOUS 11.01. Trust Indenture Act Controls.............................................................. 70 11.02. Notices................................................................................... 70 11.03. Communication by Holders with Other Holders............................................... 71 11.04. Certificate and Opinion as to Conditions Precedent............................................................................. 71 11.05. Statements Required in Certificate or Opinion............................................. 72 11.06. Rules by Trustee and Agents............................................................... 72 11.07. Legal Holidays............................................................................ 73 11.08. No Recourse Against Others................................................................ 73 11.09. Duplicate Originals....................................................................... 73
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Section Page - ------- ---- 11.10. Governing Law............................................................................. 73 11.11. No Adverse Interpretation of Other Agreements............................................. 73 11.12. Successors................................................................................ 74 11.13. Separability.............................................................................. 74 11.14. Table of Contents, Headings, etc.......................................................... 74 SIGNATURES . .......................................................................................... 75 EXHIBIT A - FORM OF SECURITY EXHIBIT B - FORM OF GUARANTEE
-v- INDENTURE dated as of April 15, 1996 between CONTINENTAL HOMES HOLDING CORP., a Delaware corporation (the "Company"), the Guarantors signatory hereto (the "Guarantors") 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"). Each party agrees as follows for the benefit of the other parties and for the equal and ratable benefit of the Holders of the Company's 10% Senior Notes due 2006 (the "Securities"). ARTICLE 1. DEFINITIONS AND INCORPORATION BY REFERENCE SECTION 1.01 Definitions. ----------- "Additional Assets" means assets used or usable by the Company or any of its Restricted Subsidiaries in the operation of the existing lines of business of the Company and its Restricted Subsidiaries. "Affiliate" of any Person means (i) any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such Person and (ii) any other Person that beneficially owns at least 10% of the voting common stock of such Person. For the purposes of this definition, "control" when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Agent" means any Registrar, Paying Agent, or co-Registrar. "Asset Sale" for any Person means the sale, lease, conveyance or other disposition (including, without limitation, by merger, consolidation or sale and leaseback transaction, and whether by operation of law or otherwise) of any of that Person's assets (including, without limitation, the sale or other disposition of Capital Stock of any Subsidiary of such Person, whether by such Person or such Subsidiary) outside the ordinary course of business, whether owned on the date of this Indenture or subsequently acquired in one transaction or a series of related transactions, in which such Person and/or its Subsidiaries receive cash and/or other consideration (including, without limitation, the unconditional assumption of Indebtedness -2- of such Person and/or its Subsidiaries) of $5,000,000 or more as to each such transaction or series of related transactions; provided, however, that (i) a transaction or series of related transactions that results in a Change of Control will not constitute an Asset Sale, (ii) sales, leases, conveyances or other dispositions of real estate related to the homebuilding business of the Company or its Subsidiaries will not constitute Asset Sales, and (iii) transactions between the Company and any Guarantor, or among such Guarantors, will not constitute Asset Sales. "Bank Facility" means, collectively, one or more commitments from one or more banks or other lending institutions to lend funds, together with any and all agreements, documents and instruments from time to time delivered in connection therewith as such commitments or any such agreements, documents or instruments may be in effect or amended, amended and restated, renewed, extended, restructured, supplemented or otherwise modified from time to time and any credit agreement, loan agreement, note purchase agreement, indenture or other agreement, document or instrument refinancing, refunding or otherwise replacing such Bank Facility, whether or not with the same agent, trustee, representative, lenders or holders, and, subject to the proviso to the next succeeding sentence, irrespective of any changes in the terms and conditions thereof. Without limiting the generality of the foregoing, the term "Bank Facility" shall include any amendment, amendment and restatement, renewal, extension, restructuring, supplement or modification to any Bank Facility and all refundings, refinancings and replacements of any Bank Facility, including any agreement (i) extending the maturity of any Debt Incurred thereunder or contemplated thereby, (ii) adding or deleting borrowers or guarantors thereunder; provided that such borrowers and issuers include one or more of the Company and its Subsidiaries and their respective successors and assigns, (iii) increasing the amount of Debt Incurred thereunder or available to be borrowed thereunder; provided that on the date thereof such Debt would not be prohibited by clause (b) of the definition of Permitted Debt, or (iv) otherwise altering the terms and conditions thereof in a manner not prohibited by the terms of this Indenture. "Capital Stock" of any Person means any and all shares, interests, participations or other equivalents (however designated) of capital stock of such Person and all warrants or options to acquire such capital stock. -3- "Carlsbad Property" means the 417 acres owned by the Carlsbad Subsidiary in Carlsbad, California, located in San Diego County. "Carlsbad Subsidiary" means Rancho Carillo, Inc., a Delaware corporation and a Subsidiary of the Company. "Change of Control" of the Company shall be deemed to have occurred upon the occurrence of any of the following events: (a) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act), excluding the Management Group, is or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a person shall be deemed to have "beneficial ownership" of all securities that such person has the right to acquire, whether such right is exercisable immediately, after the passage of time, upon the happening of an event or otherwise), directly or indirectly, of more than 50% of the total Voting Stock of the Company; provided, however, that the members of the Management Group do not have the right or ability by voting power, contract or otherwise to elect or designate for election a majority of the Board of Directors of the Company; (b) the Company consolidates with, or merges with or into, another Person or sells, assigns, conveys, transfers, leases or otherwise disposes of all or substantially all of its assets to any Person, or any Person consolidates with, or merges with or into, the Company, in any such event pursuant to a transaction in which the outstanding Voting Stock of the Company is converted into or exchanged for cash, securities or other property, other than any such transaction where immediately after such transaction no "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act), excluding the Management Group, is the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a person shall be deemed to have "beneficial ownership" of all securities that such person has the right to acquire, whether such right is exercisable immediately, after the passage of time, upon the happening of an event or otherwise), directly or indirectly, of more than 50% of the total Voting Stock of the surviving or transferee corporation; provided, however, that the members of the Management Group do not have the right or ability by voting power, contract or otherwise to elect or designate for election a majority of the Board of Directors of the Company; (c) at any time during any consecutive two-year period, individuals who at the beginning of such period constituted the Board of Directors of the Company (together with any new directors whose election by such Board of Directors or whose nomination for election by the stockholders of the Company was approved by a vote of a majority of the directors then still in office who were either directors -4- at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board of Directors of the Company then in office; or (d) the Company is liquidated or dissolved or adopts a plan of liquidation. "Closing Date" means the date on which the Securities are originally issued. "Common Stock" means the common stock, par value $.01 per share, of the Company. "Company" means the party named as such above and any other obligor until a successor replaces it pursuant to the applicable provision hereof and thereafter means the successor. "Consolidated Interest Expense" of the Company means, for any period, the aggregate amount of interest which, in accordance with generally accepted accounting principles, would be included on an income statement for the Company and its Restricted Subsidiaries on a consolidated basis, whether expensed directly, or included as a component of cost of goods sold, or allocated to joint ventures or otherwise (including, but not limited to, imputed interest included on capitalized lease obligations, all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing, the net costs associated with hedging obligations, amortization of other financing fees and expenses, the interest portion of any deferred payment obligation, amortization of discount or premium, if any, and all other non-cash interest expense), excluding interest expense related to the Company's mortgage banking operations, plus the product of (x) the sum of (i) cash dividends paid on any Preferred Stock of the Company plus (ii) cash dividends, the principal amount of any debt securities issued as a dividend, the liquidation value of any Preferred Stock issued as a dividend and the fair market value (as determined by the Company's board of directors in good faith) of any other non-cash dividends, in each case, paid on any Preferred Stock of any Restricted Subsidiary of the Company (other than a Wholly-Owned Restricted Subsidiary), times (y) a fraction, the numerator of which is one and the denominator of which is one minus the then current effective aggregate federal, state and local tax rate of the Company, expressed as a decimal. "Consolidated Interest Incurred" of the Company means, for any period, (a) the aggregate amount of interest which, in accordance with generally accepted accounting principles, would be included on an income statement for the Company and its -5- Restricted Subsidiaries on a consolidated basis, whether expensed directly, or included as a component of cost of goods sold, or allocated to joint ventures or otherwise (including, but not limited to, imputed interest included on capitalized lease obligations, all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing, the net costs associated with hedging obligations, amortization of other financing fees and expenses, the interest portion of any deferred payment obligation, amortization of discount or premium, if any, and all other non-cash interest expense), excluding interest expense related to the Company's mortgage banking operations, plus or minus, without duplication, (b) the difference between capitalized interest for such period and the interest component of cost of goods sold for such period, plus (c) the product of (x) the sum of (i) cash dividends paid on any Preferred Stock of the Company plus (ii) cash dividends, the principal amount of any debt securities issued as a dividend, the liquidation value of any Preferred Stock issued as a dividend and the fair market value (as determined by the Company's Board of Directors in good faith) of any other non-cash dividends, in each case, paid on any Preferred Stock of any Restricted Subsidiary of the Company (other than a Wholly-Owned Restricted Subsidiary), times (y) a fraction, the numerator of which is one and the denominator of which is one minus the then current effective aggregate federal, state and local tax rate of the Company, expressed as a decimal. "Consolidated Net Income" of the Company, for any period, means the net income (loss) of the Company and its Restricted Subsidiaries for such period, determined on a consolidated basis, in accordance with generally accepted accounting principles; provided that, without duplication, (i) the net income of any Person, other than a Restricted Subsidiary which is consolidated with the Company, in which any Person other than the Company and its Restricted Subsidiaries has an interest in shall be included only to the extent of the amount of cash dividends or distributions actually paid to the Company or a Restricted Subsidiary during such period, (ii) the net income of any Person acquired in a pooling of interests transaction for any period prior to the date of such acquisition shall be excluded, (iii) the net income of any Subsidiary of the Company shall be excluded to the extent such Subsidiary is prohibited, directly or indirectly, from distributing such net income or any portion thereof to the Company or a Restricted Subsidiary, (iv) all extraordinary gains and losses (after taxes) that would be included on an income statement for such period shall be excluded and (v) all gains and losses (after taxes) attributable to Asset Sales shall be excluded; provided that -6- there shall be included in such net income, without duplication, the net income of any Unrestricted Subsidiary to the extent such net income is actually received by the Company or any of its Restricted Subsidiaries in cash during such period. "Consolidated Non-cash Charges" of the Company means, for any period, the aggregate depreciation, amortization and other non-cash charges (other than reserves or expenses established in anticipation of future cash requirements such as reserves for taxes and uncollectible accounts) of the Company and its Restricted Subsidiaries on a consolidated basis for such period, as determined in accordance with generally accepted accounting principles; provided that Consolidated Non-cash Charges shall exclude (i) any charges that are not included for the purpose of determining Consolidated Net Income, (ii) any charges that are included for the purpose of determining Consolidated Interest Expense or Consolidated Tax Expense and (iii) any charges representing capitalized selling, general and administrative expenses that are expensed during such period as cost of goods sold. "Consolidated Tangible Assets" of the Company as of any date means the total amount of assets of the Company and its Restricted Subsidiaries (less applicable reserves and less the assets securing the payment of Non-Recourse Debt of the Company and its Restricted Subsidiaries) on a consolidated basis at the end of the fiscal quarter immediately preceding such date, as determined in accordance with generally accepted accounting principles, less: (i) unamortized debt and debt issuance expense, deferred charges, goodwill, patents, trademarks, copyrights, and all other items which would be treated as intangibles on the consolidated balance sheet of the Company and its Restricted Subsidiaries prepared in accordance with generally accepted accounting principles and (ii) appropriate adjustments on account of minority interests of other Persons holding equity investments in Restricted Subsidiaries, in the case of each of clauses (i) and (ii) above, as reflected on the consolidated balance sheet of the Company and its Restricted Subsidiaries. "Consolidated Tangible Net Worth" of the Company means the Company's Net Worth less unamortized debt and debt issuance expense, deferred charges, goodwill, patents, trademarks, copyrights, and all other items which would be treated as intangibles on the consolidated balance sheet of the Company and its Restricted Subsidiaries prepared in accordance with generally accepted accounting principles. -7- "Consolidated Tax Expense" of the Company means, for any period, the aggregate of the tax expense of the Company and its Restricted Subsidiaries for such period, determined on a consolidated basis, in accordance with generally accepted accounting principles. "Corporate Trust Office of the Trustee" shall be at the address of the Trustee specified in Section 11.02 or such other address as the Trustee may give notice of to the Company. "Coverage Ratio" of the Company means the ratio of the Company's EBITDA to its Consolidated Interest Incurred for the four fiscal quarters ending immediately prior to the date of determination. Notwithstanding clause (ii) of the definition of Consolidated Net Income, if the Debt which is being Incurred is Incurred in connection with an acquisition by the Company or a Restricted Subsidiary, the Coverage Ratio shall be determined after giving effect to both the Consolidated Interest Incurred related to the Incurrence of such Debt and the EBITDA (x) of the Person becoming a Restricted Subsidiary of the Company or (y) in the case of an acquisition of assets that constitute substantially all of an operating unit or business, relating to the assets being acquired by the Company or a Restricted Subsidiary. "Debt" means, as to any Person, without duplication, (a) any indebtedness of such Person for borrowed money, (b) all indebtedness of such Person evidenced by bonds, debentures, notes, letters of credit, drafts or similar instruments, (c) all indebtedness of such Person to pay the deferred purchase price of property or services, but not including accounts payable and accrued expenses arising in the ordinary course of business, (d) all capitalized lease obligations of such Person, (e) all Debt of others secured by a Lien on any asset of such Person, whether or not such Debt is assumed by such Person or guaranteed by such Person, (f) Redeemable Stock of such Person and Preferred Stock of any Subsidiary of such Person, (g) all obligations of such Person with respect to Interest Rate Protection Agreements and (h) all Debt of others guaranteed by such Person. The amount of all Debt of any Person at any date pursuant to clauses (a)-(d) and (f) above shall be as would appear as a liability upon a balance sheet of such Person prepared on a consolidated basis in accordance with generally accepted accounting principles. Notwithstanding the foregoing, "Debt" of the Company shall not include the amount reflected on a consolidated balance sheet of the Company with respect to options to acquire real property which was purchased by the Company and sold to a third party within 360 days of such purchase for consideration at least equal -8- to the amount paid by the Company for such property less an amount equal to the value of such option. "Default" means any event which is, or after notice or passage of time or both would be, an Event of Default. "EBITDA" for the Company, for any period, means, without duplication, the Consolidated Net Income of the Company plus, to the extent deducted in calculating Consolidated Net Income, the sum of (a) Consolidated Tax Expense, (b) Consolidated Interest Expense and (c) Consolidated Non-cash Charges. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Existing Debt" means all of the Debt of the Company and its Restricted Subsidiaries that was outstanding on the Closing Date. "guarantee" by any Person means any obligation, contingent or otherwise, of such Person directly or indirectly guaranteeing any Debt of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt of such other Person (whether by agreement to keep-well or to maintain financial condition or otherwise); provided that the term "guarantee" shall not include endorsements for collection or deposit in the ordinary course of business. "Guarantee" means the guarantee of the Company's obligations hereunder made by a Guarantor in favor of the Holders pursuant to the terms of Article 10 hereof. "Guarantor" means all of the Restricted Subsidiaries of the Company existing on the date hereof and any person who becomes a guarantor pursuant to Section 10.03. "Holder" or "Securityholder" means a Person in whose name a Security is registered on the Registrar's books. "Indenture" means this Indenture, as amended, supplemented or otherwise modified from time to time, in accordance with the terms hereof. "Independent Financial Advisor" means a firm (i) which does not, and whose directors, officers and employees or Affiliates do not, have a direct or indirect financial interest -9- in the Company and (ii) which, in the judgment of the Board of Directors of the Company, is otherwise independent and qualified to perform the task for which it is to be engaged. "Interest Rate Protection Agreement" means any arrangement with any other Person whereby, directly or indirectly, such Person is entitled to receive from time to time periodic payments calculated by applying either a floating or a fixed rate of interest on a stated notional amount in exchange for periodic payments made by such Person calculated by applying a fixed or a floating rate of interest on the same notional amount and shall include, without limitation, interest rate swaps, caps, floors, collars and similar agreements; provided that any arrangement which is entered into by the Company or any of its Restricted Subsidiaries in connection with Debt Incurred by the Company or any of its Restricted Subsidiaries shall constitute Permitted Debt. "Investment" means, with respect to any Person, any direct or indirect loan or other extension of credit or capital contribution to (by means of any transfer of cash or other property to others or any payment for property or services for the account or use of others), or any purchase or acquisition by such Person of any Capital Stock, bonds, notes, debentures or other securities or evidences of Debt issued by, any other Person. "Investments" shall exclude extensions of trade credit by the Company and its Subsidiaries in the ordinary course of business in accordance with normal trade practices of the Company or such Subsidiary, as the case may be. "Lien" means, with respect to any asset, any mortgage, lien, pledge, assignment (including any assignment of rights to receive payments of money other than in connection with mortgage banking operations in the ordinary course of business), charge, security interest or encumbrance of any kind (including any conditional sale or other title retention agreement or any lease in the nature thereof) in respect of such asset and any agreement to grant to any Person any such Lien and any sale and leaseback of any asset. "Management Group" means the executive officers of the Company as of the date of this Indenture, members of their immediate families, certain trusts for their benefit, and legal representatives of, or heirs, beneficiaries or legatees receiving Common Stock (or securities convertible or exchangeable for Common Stock) under, any such person's estate. -10- "Material Subsidiary" means any Restricted Subsidiary of the Company which accounted for 10 percent or more of the Consolidated Tangible Assets or EBITDA of the Company for the fiscal year ending immediately prior to any Default or Event of Default. "Mortgage" means a first priority mortgage or first priority deed of trust on improved real property. "Mortgage Debt" means such mortgage banking debt as would be listed on the consolidated balance sheet of the Company prepared in accordance with generally accepted accounting principles. "Net Proceeds" with respect to any Asset Sale means (i) cash (in U.S. dollars or freely convertible into U.S. dollars) received by the Company or any of its Restricted Subsidiaries from such Asset Sale (including cash received as consideration for the assumption or incurrence of liabilities incurred in connection with or in anticipation of such Asset Sale), after (a) provision for all income or other taxes measured by or resulting from such Asset Sale to the Company or any of its Restricted Subsidiaries, whether or not offset by net operating loss and tax credit carry-forwards, (b) payment of all brokerage commissions and the underwriting fees and, without limitation, all other fees and expenses related to such Asset Sale, and (c) deduction of appropriate amounts to be provided by the Company or any of its Restricted Subsidiaries as a reserve, in accordance with generally accepted accounting principles, against any liabilities associated with the assets sold or otherwise disposed of in such Asset Sale (including, without limitation, pension and other post-employment benefit liabilities and liabilities related to environmental matters) or against any indemnification obligations associated with the sale or other disposition of the assets sold or otherwise disposed of in such Asset Sale, and (ii) all noncash consideration received by the Company or any of its Restricted Subsidiaries from such Asset Sale upon the liquidation or conversion of such consideration into cash. "Net Worth" of the Company means, at any date, the aggregate of capital, surplus and retained earnings of the Company and its Restricted Subsidiaries as would be shown on a consolidated balance sheet of the Company prepared in accordance with generally accepted accounting principles, adjusted to exclude (to the extent included) investments by the Company and its Subsidiaries in joint ventures and the amount of equity -11- attributable to Affiliates other than Restricted Subsidiaries of the Company. "Non-Recourse Debt" with respect to any Person means Debt of such Person for which the sole legal recourse for collection of principal and interest on such Debt is against the specific property identified in the instruments evidencing or securing such Debt and such property was acquired with the proceeds of such Debt or such Debt was Incurred (i) within 90 days after the acquisition of such property or (ii) in respect of the Carlsbad Property. "Officer" means the Chief Executive Officer, the President, any Vice President, the Treasurer or the Secretary of the Company or any Guarantor, as applicable. "Officers' Certificate" means a certificate signed by two Officers or by an Officer and an Assistant Treasurer or an Assistant Secretary of the Company or any Guarantor, as applicable. "Opinion of Counsel" means a written opinion from legal counsel who may be an employee of or counsel for the Company or other counsel reasonably acceptable to the Trustee. "Permitted Debt" means: (a) Debt evidenced by the Securities and the Guarantees; (b) Debt Incurred by the Company or any Guarantor under or in respect of a Bank Facility (including any guarantees related thereto) for working capital or general corporate purposes or evidenced by letters of credit; provided that the aggregate amount of all such Debt outstanding at any time pursuant to this clause (b) may not exceed $110,000,000; (c) Debt Incurred under a Warehouse Facility; provided that the amount of such Debt (including funding drafts issued thereunder) outstanding at any time pursuant to this clause (c) guaranteed by the Company or a Restricted Subsidiary may not exceed $30,000,000 and the amount of such Debt (excluding funding drafts issued thereunder) shall not exceed 98% of the value of the Mortgages pledged to secure Debt thereunder; (d) Debt of the Company to any Guarantor or of any Restricted Subsidiary of the Company to the Company or to any Guarantor; -12- (e) Existing Debt (without duplication of Debt indicated under clauses (a)-(d) above) of the Company and its Restricted Subsidiaries other than Debt to be repaid from the proceeds of the sale of the Securities; (f) Non-Recourse Debt; (g) Debt in respect of performance, completion, guarantee, surety and similar bonds or banker's acceptances provided by the Company or any of its Restricted Subsidiaries in the ordinary course of business; (h) Additional Debt of the Company or any Guarantor in an amount not exceeding $5,000,000 at any time outstanding; (i) Debt referred to in the definition of Interest Rate Protection Agreement; and (j) Refinancing Debt. "Permitted Investments" of any Person means Investments of such Person in (i) direct obligations of the United States or any agency thereof or obligations guaranteed by the United States or any agency thereof, in each case maturing within 180 days of the date of acquisition thereof, (ii) certificates of deposit maturing within 180 days of the date of acquisition thereof issued by a bank, trust company or savings and loan association which is organized under the laws of the United States or any state thereof having capital, surplus and undivided profits aggregating in excess of $250 million and a Keefe Bank Watch Rating of C or better, (iii) certificates of deposit maturing within 180 days of the date of acquisition thereof issued by a bank, trust company or savings and loan association organized under the laws of the United States or any state thereof other than banks, trust companies or savings and loan associations satisfying the criteria in (ii) above; provided that the aggregate amount of all certificates of deposit issued to the Company at any one time by such bank, trust company or savings and loan association will not exceed $100,000, (iv) commercial paper given the highest rating by two established national credit rating agencies and maturing not more than 180 days from the date of the acquisition thereof, (v) repurchase agreements or money-market accounts which are fully secured by direct obligations of the United States or any agency thereof and (vi) in the case of the Company and its Subsidiaries, (1) any receivables or loans taken by the Company or a Subsidiary in connection with the sale of any asset otherwise permitted by this Indenture, (2) Investments in any Guarantor, (3) Investments in -13- the Securities or Debt pari passu with the Securities, (4) Investments in evidences of Debt securities or other property received from another Person by the Company or any of its Restricted Subsidiaries in connection with any bankruptcy proceeding or by reason of a composition or readjustment of debt or a reorganization of such Person or as a result of foreclosure, perfection or enforcement of any Lien in exchange for evidences of Debt, securities or other property of such Person held by the Company or any of its Restricted Subsidiaries, or for other liabilities or obligations of such other Person to the Company or any of its Restricted Subsidiaries that were created, in accordance with the terms of this Indenture, (5) Investments in Interest Rate Protection Agreements which constitute Permitted Debt and (6) Investments in an aggregate amount outstanding not greater than $30,000,000. "Permitted Liens" with respect to the Company and its Restricted Subsidiaries means (i) Liens on assets of the Company or any Restricted Subsidiary of the Company securing Debt which may be incurred pursuant to Section 4.10 hereof, provided that the aggregate amount of Debt secured by Liens (excluding Non-Recourse Debt of the Company and its Restricted Subsidiaries and Debt outstanding under a Warehouse Facility) may not exceed 40 percent of the Company's Consolidated Tangible Assets; (ii) Liens securing a Warehouse Facility, provided that such Liens shall not extend to any assets other than the mortgages, promissory notes and other collateral that secures mortgage loans made by the Company or any of its Restricted Subsidiaries; (iii) Liens securing Non-Recourse Debt of the Company or any of its Restricted Subsidiaries, provided that such Liens apply only to the property financed out of the net proceeds of such Non-Recourse Debt within 90 days of the Incurrence of such Non-Recourse Debt (except that such 90 day limitation shall not apply with respect to the Carlsbad Property) (iv) Liens securing Debt of a Person existing at the time that such Person is merged into or consolidated with the Company or a Restricted Subsidiary, provided that such Liens were not created in contemplation of such merger or consolidation and do not extend to any assets or property of the Company or any Restricted Subsidiary, other than the surviving Person and its Subsidiaries; (v) Liens on assets or property acquired by the Company or a Restricted Subsidiary, provided that such Liens were not created in contemplation of such acquisition and do not extend to any other assets or property (other than proceeds of such acquired assets or property); (vi) Liens in respect of Interest Rate Protection Agreements which constitute Permitted Debt; (vii) Liens for taxes, assessments or governmental charges or claims that either (a) are not yet delinquent or (b) are being contested in good -14- faith by appropriate proceedings and as to which appropriate reserves have been established or other provisions have been made in accordance with generally accepted accounting principles; (viii) statutory Liens of landlords and carriers', warehousemen's, mechanics', suppliers', materialmen's, repairmen's or other Liens imposed by law and arising in the ordinary course of business; (ix) Liens (other than any Lien imposed by the Employee Retirement Income Security Act of 1974, as amended) incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security; (x) Liens incurred or deposits made to secure the performance of tenders, bids, leases, statutory obligations, surety and appeal bonds, progress payments, government contracts and other obligations of like nature (exclusive of obligations for the payment of borrowed money), in each case, incurred in the ordinary course of business; (xi) attachment or judgment Liens not giving rise to a Default or Event of Default; (xii) easements, rights-of-way, restrictions and other similar charges or encumbrances not materially interfering with the ordinary conduct of the business of the Company or any of its Subsidiaries; (xiii) leases or subleases granted to others not materially interfering with the ordinary conduct of the business of the Company or any of its Restricted Subsidiaries; (xiv) Liens securing Refinancing Debt; provided that such Liens only extend to the assets securing the Debt being refinanced, such refinanced Debt was previously secured and such Liens do not extend to any other assets of the Company or the assets of any of the Company's other Subsidiaries; (xv) Liens securing Purchase Money Obligations (including capitalized lease obligations); (xvi) Liens existing on the date hereof; (xvii) any contract to sell an asset provided such sale is otherwise permitted under this Indenture; and (xviii) Liens on property or assets of any Restricted Subsidiary securing Debt of such Restricted Subsidiary owing to the Company or one or more Restricted Subsidiaries of the Company. "Person" means any individual, corporation, partnership, association, trust or other entity or organization, including a government or political subdivision or agency or instrumentality thereof. "Preferred Stock" means, with respect to any Person, any and all shares, interests, participations or other equivalents (however designated) of such Person's preferred or preference stock whether now outstanding or issued after the date of this Indenture, and including, without limitation, all classes and series of preferred or preference stock. -15- "principal" of a debt security means the principal of the security plus the premium, if any, on the security. "Purchase Money Obligations" means Debt of any Person secured by Liens (i) on property purchased, acquired, or constructed by such Person or its Subsidiaries after the date of this Indenture and used in the ordinary course of business by such Person and (ii) securing the payment of all or any part of the purchase price or construction cost of such assets and limited to the property so acquired and improvements thereof; provided that such Debt is incurred no later than 90 days after the acquisition of such property or completion of such construction or improvements. "Redeemable Stock" means, with respect to any Person, any class or series of Capital Stock of such Person that is redeemable at the option of the holder (except pursuant to a change in control provision that does not (i) cause such Capital Stock to become redeemable in circumstances which would not constitute a Change of Control and (ii) require the Company to pay the redemption price therefor prior to the Change of Control Repurchase Date) or is subject to mandatory redemption or otherwise matures prior to the final stated maturity of the Securities. "Refinancing Debt" means Debt that refunds, refinances or extends any Securities, Existing Debt (other than Existing Debt to be repaid with the net proceeds of the offering of the Securities) or other Debt Incurred by the Company or its Restricted Subsidiaries pursuant to the terms of this Indenture, but only to the extent that (i) the Refinancing Debt is subordinated to the Securities to the same extent as the Debt being refunded, refinanced or extended, if at all, (ii) the Refinancing Debt is scheduled to mature either (a) no earlier than the Debt being refunded, refinanced or extended, or (b) after the maturity date of the Securities, (iii) the portion, if any, of the Refinancing Debt that is scheduled to mature on or prior to the maturity date of the Securities has a Weighted Average Life to Maturity at the time such Refinancing Debt is Incurred that is equal to or greater than the Weighted Average Life to Maturity of the portion of the Debt being refunded, refinanced or extended that is scheduled to mature on or prior to the maturity date of the Securities and (iv) the gross proceeds of such Refinancing Debt are an amount that is equal to or less than the aggregate principal amount then outstanding under the Debt being refunded, refinanced or extended (plus the premiums or other payments paid in connection therewith (which shall not exceed the stated amount of any premium or other payment required -16- to be paid in connection with such a renewal, extension, substitution, refunding, refinancing, redemption, repurchase or replacement pursuant to the terms of the Debt being renewed, extended, substituted, refunded, refinanced, amended, modified, supplemented, redeemed, repurchased or replaced) and the expenses incurred in connection therewith). "Restricted Payments" means with respect to the Company or any Restricted Subsidiary (i) the declaration or payment of any dividend or other distribution on any shares of such Person's Capital Stock (except (x) dividends or distributions in additional shares of Capital Stock of the Company other than Redeemable Stock or (y) the declaration or payment of any dividend or other distribution by a Restricted Subsidiary to the Company or another Restricted Subsidiary), (ii) any payment on account of the purchase, redemption or other acquisition of (a) any shares of such Person's Capital Stock or (b) any option, warrant or other right to acquire shares of such Person's Capital Stock, except, in each case, Capital Stock held by the Company or a Restricted Subsidiary, (iii) any Investment (other than a Permitted Investment) in any Person, or (iv) any principal payment, redemption, repurchase, defeasance or other acquisition or retirement, prior to scheduled principal payment or scheduled maturity, of Subordinated Debt of the Company or its Restricted Subsidiaries. "Restricted Subsidiary" means any Subsidiary which is not an Unrestricted Subsidiary. "SEC" means the Securities and Exchange Commission. "Securities" means the Securities described above issued under this Indenture. "Subordinated Debt" means, with respect to the Company and its Restricted Subsidiaries, all Debt of such Person which is, pursuant to its terms, expressly subordinated in right of payment to the Securities or the Guarantees (other than Debt held by the Company or a Restricted Subsidiary). "Subsidiary" means, with respect to any Person, (i) any corporation or entity of which a majority of the capital stock having ordinary voting power to elect a majority of the board of directors or other Persons performing similar functions is at the time directly or indirectly owned by such Person or one or more of the other Subsidiaries of that Person or (ii) any partnership or joint venture at least a majority of the voting power of which is at the time directly or indirectly owned by such Person or one -17- or more of the other Subsidiaries of that Person, or a combination thereof or a successor thereto. "TIA" means the Trust Indenture Act of 1939 (15 U.S. Code ss.ss. 77aaa-77bbbb) as in effect on the date of this Indenture, except as provided in Section 9.03. "Trust Officer" means any officer of the Trustee assigned by the Trustee to administer its corporate trust matters. "Trustee" means the party named as such in this Indenture until a successor replaces it and thereafter means the successor. "Unrestricted Subsidiary" means each of the Subsidiaries of the Company (other than a Guarantor) so designated by a resolution adopted by the Board of Directors of the Company as provided below; provided that (a) neither the Company nor any of its other Subsidiaries (other than Unrestricted Subsidiaries) (1) provides any direct or indirect credit support for any Debt of such Subsidiary (including any undertaking, agreement or instrument evidencing such Debt) or (2) is directly or indirectly liable for any Debt of such Subsidiary, and (b) the creditors with respect to Debt for borrowed money of such Subsidiary have agreed in writing that they have no recourse, direct or indirect, to the Company or any other Subsidiary of the Company (other than Unrestricted Subsidiaries), including, without limitation, recourse with respect to the payment of principal or interest on any Debt of such Subsidiary. The Board of Directors of the Company may designate an Unrestricted Subsidiary to be a Restricted Subsidiary; provided that (i) any such redesignation will be deemed to be an Incurrence by the Company and its Restricted Subsidiaries of the Debt (if any) of such redesignated Subsidiary for purposes of Section 4.10 hereof as of the date of such redesignation, (ii) any Debt of such Unrestricted Subsidiary could then be Incurred in accordance with Section 4.10 on the date of such redesignation and (iii) the Liens of such Unrestricted Subsidiary could then be incurred in accordance with Section 4.13 hereof as of the date of such redesignation. Subject to the foregoing, the Board of Directors of the Company also may designate any Restricted Subsidiary to be an Unrestricted Subsidiary; provided that (i) all previous Investments by the Company and its Restricted Subsidiaries in such Restricted Subsidiary (net of any returns previously paid on such Investments) will be deemed to be Restricted Payments at the time of such designation and will reduce the amount available for -18- Restricted Payments under Section 4.11 hereof, (ii) the Company and its Restricted Subsidiaries could incur $1.00 of additional Indebtedness under the Coverage Ratio test contained in Section 4.10 hereof and (iii) no Default or Event of Default shall have occurred or be continuing. Any such designation or redesignation by the Board of Directors of the Company will be evidenced to the Trustee by the filing with the Trustee of a certified copy of the resolution of the Board of Directors of the Company giving effect to such designation or redesignation and an Officers' Certificate certifying that such designation or redesignation complied with the foregoing conditions and setting forth the underlying calculations. "U.S. Government Obligations" means direct non-callable obligations of, or non-callable obligations guaranteed by, the United States of America for the payment of which the full faith and credit of the United States of America is pledged. "Voting Stock" means with respect to any Person, Capital Stock of any class or kind normally entitled to vote in the election of the board of directors or other governing body of such Person. "Warehouse Facility" means a Bank Facility to finance the making of mortgage loans originated by the Company or any of its Subsidiaries. "Weighted Average Life to Maturity" means, when applied to any Debt or portion thereof, if applicable, at any date, the number of years obtained by dividing (i) the then outstanding principal amount of such Debt or portion thereof, if applicable, into (ii) the sum of the products obtained by multiplying (a) the amount of each then remaining installment, sinking fund, serial maturity or other required payment of principal, including payment at final maturity, in respect thereof, by (b) the number of years (calculated to the nearest one-twelfth) that will elapse between such date and the making of such payment. "Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary of the Company of which 100% of the outstanding Capital Stock is owned by one or more Wholly Owned Restricted Subsidiaries of the Company or by the Company and one or more Wholly Owned Restricted Subsidiaries of the Company. For purposes of this definition, any directors' qualifying shares shall be disregarded in determining the ownership of a Subsidiary. -19- SECTION 1.02. Other Definitions. ----------------- Term Defined in Section ---- ------------------ "Bankruptcy Law" ...................................... 6.01 "business day" ........................................ 11.07 "Change of Control Notice" ............................ 4.08 "Change of Control Price" ............................. 4.08 "Change of Control Repurchase Date" .......................................... 4.08 "Change of Control Repurchase Right" ......................................... 4.08 "Custodian" ........................................... 6.01 "Discharged" .......................................... 8.01 "Event of Default" .................................... 6.01 "Incur" ............................................... 4.10 "Legal Holiday" ....................................... 11.07 "Minimum Net Worth" ................................... 4.09 "Net Proceeds Offer" .................................. 4.15 "Net Proceeds Offer Notice" ........................... 4.15 "Net Worth" ........................................... 4.09 "Net Worth Notice" .................................... 4.09 "Net Worth Offer" ..................................... 4.09 "Net Worth Offer Amount" .............................. 4.09 "Net Worth Price" ..................................... 4.09 "Net Worth Repurchase Date" ........................... 4.09 "Net Worth Repurchase Right" .......................... 4.09 "Paying Agent" ........................................ 2.03 "Purchase Amount" ..................................... 4.15 "Registrar ............................................ 2.03 "Successor" ........................................... 5.01 "Trigger Date" ........................................ 4.09 SECTION 1.03 Incorporation by Reference of Trust Indenture Act. ----------------------------------- Whenever this Indenture refers to a provision of the TIA, the provision is incorporated by reference in and made a part of this Indenture. The following TIA terms used in this Indenture have the following meanings: "indenture securities" means the Securities. "indenture security holder" means a Securityholder. -20- "indenture to be qualified" means this Indenture. "indenture trustee" or "institutional trustee" means the Trustee. "obligor" on the indenture securities means the Company. All other terms used in this Indenture that are defined by the TIA, defined by TIA reference to another statute or defined by SEC rule under the TIA have the meanings so assigned to them. SECTION 1.04 Rules of Construction. --------------------- Unless the context otherwise requires: (1) a term has the meaning assigned to it; (2) an accounting term not otherwise defined has the meaning assigned to it in accordance with generally accepted accounting principles in effect on the date hereof; (3) "or" is not exclusive; (4) words in the singular include the plural and in the plural include the singular; (5) provisions apply to successive events and transactions; and (6) "herein," "hereof" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other Subdivision. ARTICLE 2. THE SECURITIES SECTION 2.01 Form and Dating. --------------- The Securities and the Trustee's certificate of authentication shall be substantially in the form set forth in Exhibit A, which is incorporated in and forms a part of this Indenture. The Securities may have notations, legends or endorsements required by law, stock exchange rule or usage. Each Security shall be dated the date of its authentication. -21- SECTION 2.02 Execution and Authentication. ---------------------------- Two Officers shall sign the Securities for the Company by manual or facsimile signature. The Company's seal shall be reproduced on the Securities. If an Officer whose signature is on a Security no longer holds that office at the time the Security is authenticated, the Security shall nevertheless be valid. A Security shall not be valid until authenticated by the manual signature of the Trustee. The signature shall be conclusive evidence that the Security has been authenticated under this Indenture. At any time and from time to time after the execution and delivery of this Indenture, the Company may deliver Securities executed by the Company to the Trustee for authentication; and the Trustee shall, upon a written order or orders of the Company signed by two Officers or by an Officer and an Assistant Treasurer or Assistant Secretary of the Company, authenticate and make available for delivery such Securities. The order shall specify the amount of Securities to be authenticated and the date on which such Securities are to be authenticated. The aggregate principal amount of Securities outstanding at any time may not exceed $150,000,000 except as provided in Section 2.07. The Trustee may appoint an authenticating agent acceptable to the Company to authenticate Securities. An authenticating agent may authenticate Securities whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. An authenticating agent has the same rights as an Agent to deal with the Company or an Affiliate. The Securities shall be issuable only in registered form without coupons and only in denominations of $1,000 and any integral multiple thereof. SECTION 2.03. Registrar and Paying Agent. -------------------------- The Company shall maintain in the Borough of Manhattan, The City of New York, an office or agency where Securities may be presented for registration of transfer or for exchange ("Registrar") and an office or agency where Securities may be presented for payment ("Paying Agent"). The Registrar shall keep a register of the Securities and of their transfer and exchange. -22- The Company may appoint or change one or more co-Registrars and one or more additional paying agents without notice and may act in any such capacity on its own behalf. The term "Paying Agent" includes any additional paying agent. The Company shall enter into an appropriate agency agreement with any Agent not a party to this Indenture. The agreement shall implement the provisions of this Indenture that relate to such Agent. The Company shall notify the Trustee of the name and address of any Agent not a party to this Indenture. If the Company fails to maintain a Registrar or Paying Agent, the Trustee shall act as such, and shall be entitled to appropriate compensation therefor pursuant to Section 7.07. The Company initially appoints the Trustee as Paying Agent and Registrar. SECTION 2.04. Paying Agent to Hold Money in Trust. ----------------------------- Each Paying Agent shall hold in trust for the benefit of the Securityholders or the Trustee all moneys held by such Paying Agent for the payment of principal of or interest on the Securities, and shall notify the Trustee of any default by the Company in making any such payment. While any such default continues, the Trustee may require a Paying Agent to pay all money held by it to the Trustee. The Company at any time may require a Paying Agent to pay all money held by it to the Trustee. Upon payment over to the Trustee, such Paying Agent shall have no further liability for the money. If the Company acts as Paying Agent, it shall segregate and hold as a separate trust fund all money held by it as Paying Agent. SECTION 2.05. Securityholder Lists. -------------------- The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of Securityholders. If the Trustee is not the Registrar, the Company shall furnish to the Trustee on or before each interest payment date and at such other times as the Trustee may request in writing a list, in such form and as of such date as the Trustee may reasonably require, of the names, addresses and tax identification numbers of Securityholders. SECTION 2.06. Transfer and Exchange. --------------------- Where Securities are presented to the Registrar or a co-Registrar with a request to register the transfer or to -23- exchange them for an equal principal amount of Securities of other authorized denominations, the Registrar shall register the transfer or make the exchange if the requirements of Section 8-401(1) of the New York Uniform Commercial Code are met. To permit registrations of transfer and exchanges, the Trustee shall authenticate Securities at the Registrar's request. The Company or the Trustee, as the case may be, shall not be required (a) to issue, authenticate, register the transfer of or exchange any Security during a period beginning at the opening of business 15 days before the mailing of a notice of redemption of the Securities selected for redemption under Section 3.02 and ending at the close of business on the day of such mailing, or (b) to register the transfer of or exchange any Security so selected for redemption in whole or in part, except the unredeemed portion of Securities being redeemed in part. No service charge shall be made for any registration of transfer or exchange of Securities, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any transfer, registration of transfer or exchange of Securities, other than exchanges pursuant to Section 2.10, 3.06 or 9.05 not involving any transfer. SECTION 2.07. Replacement Securities. ---------------------- If the Holder of a Security claims that the Security has been mutilated, lost, destroyed or wrongfully taken, the Company shall issue and the Trustee shall authenticate a replacement Security if the requirements of Section 8-405 of the New York Uniform Commercial Code are met and, in the case of a mutilated Security, such mutilated Security is surrendered to the Trustee. If required by the Trustee or the Company, an indemnity bond must be sufficient, in the judgment of both, to protect the Company, the Trustee, or any Agent from any loss which any of them may suffer if a Security is replaced. The Company or the Trustee may charge for its expenses in replacing a Security. In case any such mutilated, destroyed or wrongfully taken Security has become or is about to become due and payable, the Company in its discretion may, instead of issuing a new Security, pay such Security when due. Every replacement Security is an additional obligation of the Company. SECTION 2.08. Outstanding Securities. ---------------------- Securities outstanding at any time are all the Securities authenticated by the Trustee except for those cancelled by it, those delivered to it for cancellation and those described in this Section as not outstanding. A Security does not cease to be outstanding because the Company or one of its subsidiaries or Affiliates holds the Security. If a Security is replaced pursuant to Section 2.07, it ceases to be outstanding unless the Trustee receives proof satisfactory to it, or a court holds, that the replaced Security is held by a bona fide purchaser. If the Paying Agent (other than the Company) holds on a redemption date, repurchase date or maturity date money sufficient to pay Securities payable on that date, then on and after that date, such Securities shall be deemed to be no longer outstanding and interest on them shall cease to accrue. SECTION 2.09. Securities Held by the Company or an Affiliate. ---------------------------------------------- In determining whether the Holders of the required principal amount of Securities have concurred in any direction, waiver or consent, Securities owned by the Company or a Subsidiary or an Affiliate shall be disregarded, except that for the purposes of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent, only Securities which the Trustee actually knows are so owned shall be so disregarded. SECTION 2.10. Temporary Securities. -------------------- Until definitive Securities are ready for delivery, the Company may prepare and the Trustee shall authenticate temporary Securities. Temporary Securities shall be substantially in the form of definitive Securities but may have variations that the Company considers appropriate for temporary Securities. Without unreasonable delay, the Company shall prepare and the Trustee shall authenticate definitive Securities in exchange for temporary Securities. SECTION 2.11. Cancellation. ------------ The Company at any time may deliver Securities to the Trustee for cancellation. The Registrar and Paying Agent shall forward to the Trustee any Securities surrendered to them for registration of transfer, exchange or payment. The Trustee shall -25- cancel all Securities surrendered for registration of transfer, exchange, payment or cancellation and may destroy cancelled Securities and deliver a certificate of any such destruction to the Company. The Company may not issue new Securities to replace Securities that it has paid or delivered to the Trustee for cancellation. SECTION 2.12. Defaulted Interest. ------------------ If and to the extent the Company defaults in a payment of interest on the Securities, it shall pay the defaulted interest in any lawful manner plus, to the extent not prohibited by applicable statute or case law, interest payable on the defaulted interest. It may pay the defaulted interest to the persons who are Securityholders on a subsequent special record date. The Company shall fix such record date and payment date. At least 15 days before the record date, the Company shall mail to Securityholders a notice that states the record date, payment date and amount of interest to be paid. ARTICLE 3. REDEMPTION SECTION 3.01. Notices to Trustee. ------------------ If the Company wants to redeem a portion of the Securities pursuant to paragraph 5 of the Securities, it shall notify the Trustee at least 60 days prior to the redemption date (unless a shorter notice period shall be satisfactory to the Trustee) of the redemption date and the principal amount of Securities to be redeemed. SECTION 3.02. Selection of Securities to Be Redeemed. -------------------------------------- If less than all the Securities are to be redeemed, the Trustee shall select the particular Securities (or portions thereof) to be redeemed on either a pro rata basis or by lot or such other method as the Trustee shall determine, such determination to be final and conclusive for all purposes hereunder, but in any event, in such manner as complies with applicable legal and stock exchange requirements. The Trustee shall make the selection from Securities outstanding not previously called for redemption. The Trustee may select for redemption portions of the principal of Securities that have denominations larger than $1,000. Securities and portions of them it selects shall be in amounts of $1,000 or whole multiples -26- of $1,000. Provisions of this Indenture that apply to Securities called for redemption also apply to portions of Securities called for redemption. SECTION 3.03. Notice of Redemption. -------------------- At least 30 days but not more than 60 days before a redemption date, the Company shall mail by first-class mail a notice of redemption to each Holder whose Securities are to be redeemed. The notice shall identify the Securities and the principal amount thereof to be redeemed and shall state: (1) the redemption date; (2) the redemption price (including the amount of accrued interest to be paid on the Securities called for redemption); (3) the name and address of the Paying Agent; (4) that Securities called for redemption must be surrendered to the Paying Agent to collect the redemption price; and (5) that interest on Securities called for redemption ceases to accrue on and after the redemption date. At the Company's request, the Trustee shall give the notice of redemption in the Company's name and at the Company's expense. In such event the Company will provide the Trustee with the information required by clauses (1) through (5). SECTION 3.04. Effect of Notice of Redemption. ------------------------------ Once a notice of redemption is mailed, Securities called for redemption become due and payable on the redemption date at the redemption price and, on and after such date (unless the Company shall default in the payment of the redemption price), such Securities shall cease to bear interest. Upon surrender to the Paying Agent, such Securities shall be paid at the redemption price plus accrued interest to the redemption date. -27- SECTION 3.05. Deposit of Redemption Price. --------------------------- On or before 12:00 Noon on the redemption date, the Company shall deposit with the Paying Agent money in funds immediately available on the redemption date sufficient to pay the redemption price of and accrued interest on all Securities to be redeemed on that date. SECTION 3.06. Securities Redeemed in Part. --------------------------- Upon surrender of a Security that is redeemed in part, the Trustee shall authenticate for the Holder a new Security equal in principal amount to the unredeemed portion of the Security surrendered. ARTICLE 4. COVENANTS SECTION 4.01. Payment of Securities. --------------------- The Company shall pay the principal of and interest on the Securities on the dates and in the manner provided in the Securities. Principal and interest shall be considered paid on the date due if the Paying Agent holds on that date money sufficient to pay all principal and interest then due. The Company shall pay interest on overdue principal at the rate borne by the Securities. The Company shall pay interest on overdue installments of interest at the same rate to the extent not prohibited by applicable statute or case law. SECTION 4.02. Maintenance of Office or Agency. ------------------------------- The Company will maintain in the Borough of Manhattan, The City of New York, an office or agency where Securities may be surrendered for registration of transfer or exchange and where notices and demands to or upon the Company in respect of the Securities and this Indenture may be served. The Company will give prompt written notice to the Trustee of the location, and any change in the location, of such office or agency. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee. -28- The Company may also from time to time designate one or more other offices or agencies where the Securities may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in the Borough of Manhattan, The City of New York for such purposes. The Company will give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency. The Company hereby designates the Corporate Trust Office of the Trustee in the Borough of Manhattan, The City of New York, an agency of the Company in accordance with Section 2.03. SECTION 4.03. SEC Reports. ----------- The Company shall deliver to the Trustee and mail to each Holder within 15 days after it files them with the SEC copies of the quarterly and annual reports and of the information, documents and other reports (or copies of such portions of any of the foregoing as the SEC may by rules and regulations prescribe) with respect to the Company and the Guarantors, if any, which the Company and the Guarantors may be required to file with the SEC pursuant to Section 13 or 15(d) of the Exchange Act. The Company also shall comply with the other provisions of TIA ss. 314(a). Notwithstanding that neither the Company nor any of the Guarantors may be required to remain subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company and the Guarantors will continue to file with the SEC and provide the Trustee and Holders with such annual and quarterly reports and such information, documents and other reports with respect to the Company and the Guarantors as are required under Sections 13 and 15(d) of the Exchange Act. If filing of documents by the Company with the SEC as aforementioned in this paragraph is not permitted under the Exchange Act, the Company shall promptly upon written notice supply copies of such documents to any prospective holder. SECTION 4.04. Compliance Certificate. ---------------------- The Company shall deliver to the Trustee within 120 days after the end of each fiscal year of the Company an Officers' Certificate stating whether or not the signatories know of any Default by the Company in performing any of its -29- obligations under this Indenture or the Securities. If they do know of any such Default, the certificate shall describe the Default and its status. SECTION 4.05. Stay, Extension and Usury Laws. ------------------------------ The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it will not, by resort to any such law, hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. SECTION 4.06. Corporate Existence. ------------------- Subject to Article 5, the Company will do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence and the corporate existence of each of its Restricted Subsidiaries in accordance with the respective organizational documents of each Restricted Subsidiary and the rights (charter and statutory), licenses and franchises to the Company and its Restricted Subsidiaries; provided, however, that the Company shall not be required to preserve any such right, license or franchise, or the corporate existence of any Restricted Subsidiary if, in the judgment of the Board of Directors of the Company, (i) such preservation or existence is not material to the conduct of business of the Company and (ii) the loss of such right, license or franchise or the dissolution of such Restricted Subsidiary does not have a material adverse impact on the Holders. SECTION 4.07. Notice of Default. ----------------- In the event that any Default under Section 6.01 hereof shall occur the Company will give prompt written notice of such Default to the Trustee. SECTION 4.08. Change of Control. ----------------- (a) In the event that there shall occur a Change of Control of the Company, each Holder of a Security shall have the right (a "Change of Control Repurchase Right") upon receipt of a -30- Change of Control Notice (as defined below), at such Holder's option, to require the Company to repurchase any Securities of such Holder or any portion of the principal amount thereof which is $1,000 or any integral multiple thereof, on the date (the "Change of Control Repurchase Date") that is 45 days after the date of the Change of Control Notice, or, if such 45th day is a Legal Holiday, the next subsequent day which is not a Legal Holiday, unless otherwise required by applicable law, at a price equal to 101% of the principal amount thereof, plus accrued interest to the Change of Control Repurchase Date (the "Change of Control Price"). The right to require the repurchase of Securities shall not continue after a discharge of the Company from its obligations with respect to the Securities in accordance with Article 8. (b) Within 30 days after the occurrence of a Change of Control, the Company, or, at the request of the Company, the Trustee, shall give notice of the occurrence of the Change of Control and of the Change of Control Repurchase Right set forth herein to each Holder (the "Change of Control Notice"). The Company shall also deliver a copy of the Change of Control Notice to the Trustee. Any such notice shall contain all instructions and materials necessary to enable such Holders to deliver Securities pursuant to the Change of Control Repurchase Right including, without limitation, the following: (1) the Change of Control Repurchase Date; (2) the date by which the Change of Control Repurchase Right must be exercised; (3) the Change of Control Price; (4) that Securities are to be surrendered for payment of the Change of Control Price; and (5) that the exercise of the Change of Control Repurchase Right is irrevocable. (c) To exercise a Change of Control Repurchase Right a Holder shall deliver to the Company (if it is acting as its own Paying Agent) or to a Paying Agent designated by the Company for such purpose in the notice referred to above on or before the 30th day after the date of the Change of Control Notice, or, if such day is a Legal Holiday, the next subsequent day which is not a Legal Holiday, (i) written notice of the Holder's exercise of such right, which notice shall set forth the name of the Holder, the principal amount of Securities (or portions thereof) to be -31- repurchased and a statement that an election to exercise the Change of Control Repurchase Right is being made thereby, and (ii) the Securities with respect to which the Change of Control Repurchase Right is being exercised, duly endorsed for transfer to the Company, and the Holder of such Securities shall be entitled to receive from the Company (if it is acting as its own Paying Agent) or such Paying Agent a nontransferable receipt of deposit evidencing such deposit. Such written notice shall be irrevocable. If the Change of Control Repurchase Date is between a regular record date for the payment of interest and the next succeeding interest payment date, any Security to be repurchased must be accompanied by funds equal to the interest payable on such succeeding interest payment date on the principal amount to be repurchased (unless such Security shall have been called for redemption, in which case no such payment shall be required), and the interest on the principal amount of the Security being repurchased will be paid on such next succeeding interest payment date to the registered holder of such Security on the immediately preceding record date. A Security repurchased on an interest payment date need not be accompanied by any payment, and the interest on the principal amount of the Security being repurchased will be paid on such interest payment date to the registered holder of such Security on the immediately preceding record date. (d) In the event a Change of Control Repurchase Right shall be exercised in accordance with the terms hereof, the Company shall pay or cause to be paid the applicable Change of Control Price with respect to the Securities as to which the Change of Control Repurchase Right shall have been exercised to the Holder on the Change of Control Repurchase Date. (e) On or prior to a Change of Control Repurchase Date, the Company shall deposit with the Trustee or with a Paying Agent (or, if the Company is acting as its own Paying Agent, segregate and hold in trust in accordance with Section 2.04) an amount of money sufficient to pay the Change of Control Price payable in respect of all of the Securities which are to be repurchased on that date. (f) Both the notice of the Company and the notice of the Holder having been given as specified in this Section 4.08, the Securities so to be repurchased shall, on the Change of Control Repurchase Date, become due and payable at the Change of Control Price applicable thereto and from and after such date (unless the Company shall default in the payment of the Change of -32- Control Price) such Securities shall cease to bear interest. If any Security shall not be paid upon surrender thereof for repurchase, the principal shall, until paid, bear interest from the Change of Control Repurchase Date at the rate borne by such Security. (g) Any Security which is to be submitted for repurchase only in part shall be delivered pursuant to this Section 4.08 (with, if the Company or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company and the Trustee duly executed by, the Holder thereof or his attorney duly authorized in writing), and the Company shall execute, and the Trustee shall authenticate and make available for delivery to the Holder of such Security without any service charge, a new Security or Securities, of any authorized denomination as requested by such Holder, of the same tenor and in aggregate principal amount equal to and in exchange for the portion of the principal of such Security not submitted for repurchase. (h) If any repurchase pursuant to the foregoing provisions constitutes a tender offer as defined under the Exchange Act, the Company will comply with the requirements of Rule 14e-1 and any other tender offer rules under the Exchange Act which then may be applicable. SECTION 4.09. Maintenance of Net Worth. ------------------------ (a) In the event that the Company's Net Worth at the end of each of any two consecutive fiscal quarters (the last day of such second fiscal quarter being referred to as the "Trigger Date") is less than $20,000,000 (the "Minimum Net Worth"), then the Company shall make an offer to all Holders (a "Net Worth Offer") to acquire on a pro rata basis on the date (the "Net Worth Repurchase Date") that is 45 days following the date of the Net Worth Notice (as defined below), Securities in an aggregate principal amount equal to 10% of the initial outstanding principal amount of the Securities (or if less than 10% of the aggregate principal amount of the Securities originally issued are then outstanding, all the Securities outstanding at the time) (the "Net Worth Offer Amount") at a purchase price of 100% of the principal amount thereof, plus accrued interest to the Net Worth Repurchase Date (the "Net Worth Price"). The Company may credit against the Net Worth Offer Amount the principal amount of Securities acquired by the Company prior to the Trigger Date through purchase, optional redemption or exchange. The Company, however, may not credit a specific Security in more than one Net Worth Offer. In no event shall the failure to meet the Minimum -33- Net Worth at the end of any fiscal quarter be counted toward the making of more than one Net Worth Offer. The Company shall notify the Trustee promptly after the occurrence of any of the events specified in this Section 4.09 and shall notify the Trustee in writing if its Net Worth is equal to or less than the Minimum Net Worth for any fiscal quarter. (b) Within 30 days after the Trigger Date, the Company, or, at the request of the Company, the Trustee, shall give notice of the Net Worth Offer to each Holder (the "Net Worth Notice"). The Company shall also deliver a copy of the Net Worth Notice to the Trustee. Any such notice shall contain all instructions and materials necessary to enable such Holders to deliver Securities pursuant to the Net Worth Offer including, without limitation, the following: (1) the Net Worth Repurchase Date; (2) the date by which the Net Worth Offer must be accepted by a Holder; (3) the Net Worth Price and the Net Worth Offer Amount; and (4) that Securities are to be surrendered for payment of the Net Worth Price. (c) To accept a Net Worth Offer a Holder shall deliver to the Company (if it is acting as its own Paying Agent) or to a Paying Agent designated by the Company for such purpose in the Net Worth Notice, on or before the 30th day after the date of the Net Worth Notice, or, if such day is a Legal Holiday, the next subsequent day which is not a Legal Holiday, (i) written notice of the Holder's acceptance of such offer, which notice shall set forth the name of the Holder, the principal amount of Securities (or portions thereof) to be repurchased, a statement that an acceptance of the Net Worth Offer is being made thereby and (ii) the Securities with respect to which the Net Worth Offer is being accepted, duly endorsed for transfer to the Company, and the Holder of such Securities shall be entitled to receive from the Company (if it is acting as its own Paying Agent) or such Paying Agent a nontransferable receipt of deposit evidencing such deposit. Such written notice may be withdrawn upon further written notice delivered to the Trustee on or prior to the third day preceding the Net Worth Repurchase Date. If the Net Worth Repurchase Date is between a regular record date for the payment of interest and the next succeeding -34- interest payment date, any Security to be repurchased must be accompanied by funds equal to the interest payable on such succeeding interest payment date on the principal amount to be repurchased (unless such Security shall have been called for redemption, in which case no such payment shall be required), and the interest on the principal amount of the Security being repurchased will be paid on such next succeeding interest payment date to the registered holder of such Security on the immediately preceding record date. A Security repurchased on an interest payment date need not be accompanied by any payment, and the interest on the principal amount of the Security being repurchased will be paid on such interest payment date to the registered holder of such Security on the immediately preceding record date. (d) In the event a Net Worth Offer is accepted in accordance with the terms hereof, the Company shall pay or cause to be paid the applicable Net Worth Price with respect to the Securities as to which the Net Worth Offer shall have been accepted (on a pro rata basis up to the Net Worth Offer Amount, plus accrued interest) to the Holder on the Net Worth Repurchase Date. (e) On the Net Worth Repurchase Date, the Company shall deliver to the Trustee the amount of Securities to be credited against the Net Worth Offer Amount and shall deposit with the Trustee or with a Paying Agent (or, if the Company is acting as its own Paying Agent, segregate and hold in trust in accordance with Section 2.04) an amount of money sufficient to pay the Net Worth Price payable in respect of all of the Securities which are to be repurchased on that date, but in no event shall the Company be obligated to deposit an amount in excess of the Net Worth Offer Amount, plus accrued interest. (f) Both the notice of the Company and the notice of the Holder having been given as specified in this Section 4.09, the Securities to be repurchased shall, on the Net Worth Repurchase Date, become due and payable at the Net Worth Price applicable thereto and from and after such date (unless the Company shall default in the payment of the Net Worth Price) such Securities shall cease to bear interest. If any Security shall not be paid upon surrender thereof for repurchase, the principal and interest (to the extent lawful) shall, until paid, bear interest from the Net Worth Repurchase Date at the rate borne by such Security. (g) Any Security which is to be submitted for repurchase only in part shall be delivered (with, if the Company -35- or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company and the Trustee duly executed by, the Holder thereof or his attorney duly authorized in writing), and the Company shall execute, and the Trustee shall authenticate and make available for delivery to the Holder of such Security without any service charge, a new Security or Securities, of any authorized denomination as requested by such Holder, of the same tenor and in aggregate principal amount equal to and in exchange for the portion of the principal of such Security not submitted for repurchase. (h) If any repurchase pursuant to the foregoing provisions constitutes a tender offer as defined under the Exchange Act, the Company will comply with the requirements of Rule 14e-1 and any other tender offer rules under the Exchange Act which then may be applicable. SECTION 4.10. Limitation on Debt. ------------------ The Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, create, incur, assume, guarantee or otherwise become liable for ("Incur") any Debt, except Permitted Debt. Notwithstanding the foregoing, and subject to the immediately succeeding paragraph, the Company and its Restricted Subsidiaries may Incur Debt if, at the time such Debt is so Incurred and after giving effect thereto and the application of the proceeds therefrom, the Company's Coverage Ratio shall not be less than 2.0 to 1.0. The Company will not, and will not cause or permit any Guarantor to, directly or indirectly, Incur any Debt that purports to be by its terms (or by the terms of any agreement governing such Debt) subordinated to any other Debt of the Company or of such Guarantor, as the case may be, unless such Debt is also by its terms (or by the terms of any agreement governing such Debt) made expressly subordinated to the Securities or the Guarantee of such Guarantor, as the case may be, to the same extent and in the same manner as such Debt is subordinated to such other Debt. For purposes of this Section 4.10, any waiver, extension or continuation of any or all mandatory prepayments or installment payments or the maturity date of any of the Debt Incurred pursuant to this Section 4.10 shall not be or be deemed to be the Incurrence of Debt by the Company or its Restricted Subsidiaries. -36- SECTION 4.11. Limitation on Restricted Payments. --------------------------------- The Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, make any Restricted Payment, if, after giving effect thereto: (a) an Event of Default, or an event that through the passage of time or the giving of notice, or both, would become an Event of Default, shall have occurred and be continuing; (b) the Company would be unable to Incur $1.00 of additional Debt under the second paragraph set forth under Section 4.10; or (c) the aggregate amount of all Restricted Payments made by the Company and its Restricted Subsidiaries (the amount expended or distributed for such purposes, if other than cash, to be determined in good faith by the Board of Directors of the Company) from and after the date of this Indenture shall exceed the sum of: (i) the aggregate of 50% of the Consolidated Net Income of the Company accrued for the period (taken as one accounting period) commencing with April 1, 1996 to and including the first full month ended immediately prior to the date of such calculation (or, in the event Consolidated Net Income is a deficit, then minus 100% of such deficit); (ii) the aggregate net proceeds (the amount of such proceeds, if other than in cash, to be determined in good faith by the Board of Directors of the Company) received by the Company from the issuance or sale (other than to a Subsidiary of the Company) of its Capital Stock (other than Redeemable Stock), including the principal amount of any convertible or exchangeable notes or other convertible or exchangeable securities that are converted or exchanged into Capital Stock, from and after the date of this Indenture, and options, warrants and rights to purchase its Capital Stock (other than Redeemable Stock); (iii) in the case of the disposition or repayment of any Investment constituting a Restricted Payment made after the date of this Indenture (excluding any Investment described in clause (iv) of the following paragraph, but including upon the redesignation of an -37- Unrestricted Subsidiary as a Restricted Subsidiary), an amount equal to the lesser of the return of capital with respect to such Investment and the cost of such Investment, in either case, reduced (but not below zero) by the excess, if any, of the cost of the disposition of such Investment over the gain, if any, realized by the Company or such Restricted Subsidiary in respect of such disposition of such Investment; and (iv) $5,000,000. The foregoing paragraphs will not prevent (i) the payment of any dividend within 60 days after the date of its declaration if such dividend could have been made on the date of its declaration in compliance with the foregoing provisions; (ii) so long as no Default or Event of Default shall have occurred and be continuing, the redemption, repurchase or other acquisition or retirement of any shares of any class of Capital Stock of the Company or any Subsidiary of the Company in exchange for, or out of the net cash proceeds of, a substantially concurrent (x) capital contribution to the Company from any Person (other than a Subsidiary of the Company) or (y) issue and sale of other shares of Capital Stock (other than Redeemable Stock) of the Company to any Person (other than to a Subsidiary of the Company); provided, however, that the amount of any such net proceeds that are utilized for any such redemption, repurchase or other acquisition or retirement shall be excluded from clause (ii) of the preceding paragraph; (iii) so long as no Default or Event of Default shall have occurred and be continuing, any redemption, repurchase or other acquisition or retirement of Subordinated Debt by exchange for, or out of the net cash proceeds of, a substantially concurrent (x) capital contribution to the Company from any Person (other than a Subsidiary of the Company) or (y) issue and sale of (A) Capital Stock (other than Redeemable Stock) of the Company to any Person (other than to a Subsidiary of the Company); provided, however, that the amount of any such net proceeds that are utilized for any such redemption, repurchase or other acquisition or retirement shall be excluded from clause (ii) of the preceding paragraph; or (B) Debt of the Company issued to any Person (other than a Subsidiary of the Company), so long as such Debt (x) has no stated maturity earlier than April 15, 2006, (y) has a Weighted Average Life to Maturity equal to or greater than the remaining Weighted Average Life to Maturity of the Securities and (z) is subordinated to the Securities in the same manner and at least to the same extent as the Subordinated Debt so purchased, exchanged, redeemed, acquired or retired; (iv) Investments constituting Restricted Payments made as a result of the receipt of non-cash consideration from any Asset Sale made -37- pursuant to and in compliance with Section 4.15; (v) so long as no Default or Event of Default has occurred and is continuing, the repurchase or redemption of shares of Capital Stock from any officer, director or employee of the Company or its Restricted Subsidiaries whose employment has been terminated or who has died or become disabled in an aggregate amount not to exceed $250,000 per annum; and (vi) so long as no Default or Event of Default shall have occurred and be continuing, the making of Restricted Payments in an aggregate amount not to exceed $5,000,000, provided that amounts paid pursuant to clauses (v) and (vi) (but not clauses (i), (ii), (iii) or (iv)) shall reduce amounts available for future Restricted Payments. SECTION 4.12. Limitation on Dividends and Other Payment Restrictions Affecting Restricted Subsidiaries. --------------------------------- The Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, create, assume or otherwise cause or suffer to exist or to become effective any consensual encumbrance or restriction on the ability of any Restricted Subsidiary of the Company to (a) pay dividends or make any other distributions on its Capital Stock to the Company or any of its Restricted Subsidiaries; (b) make payments in respect of any Debt owed to the Company or any of its Restricted Subsidiaries; or (c) make loans or advances to the Company or any of the Company's Restricted Subsidiaries; provided, however, that the following restrictions shall not be prohibited pursuant to this Section 4.12: (i) those contained in this Indenture, a Bank Facility, a Warehouse Facility, any Non-Recourse Debt Incurred by the Carlsbad Subsidiary (to the extent that restrictions in such Non-Recourse Debt apply only to the Carlsbad Subsidiary or any Subsidiary thereof) and Refinancing Debt (to the extent restrictions contained in such Refinancing Debt are not more restrictive than those contained in the Debt being refinanced); (ii) consensual encumbrances or restrictions binding upon any Person at the time such Person becomes a Restricted Subsidiary of the Company, provided that such encumbrances or restrictions are not created, incurred or assumed in contemplation of such Person becoming a Restricted Subsidiary of the Company and do not extend to any other property of the Company or another of its Restricted Subsidiaries; (iii) restrictions contained in security agreements permitted by this Indenture securing Debt permitted by this Indenture to the extent such restrictions restrict the transfer of assets subject to such security agreements; (iv) any encumbrance or restriction consisting of customary non-assignment provisions in leases to the extent such provisions restrict the transfer of the leases; -39- (v) any encumbrance or restriction pursuant to an agreement in effect on the date of this Indenture; or (vi) any restrictions with respect to a Restricted Subsidiary of the Company imposed pursuant to an agreement which has been entered into for the sale or disposition of all or substantially all the Capital Stock or assets of such Restricted Subsidiary. SECTION 4.13. Limitation on Liens. ------------------- The Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, create, incur, assume or permit to exist any Lien upon or with respect to any of the assets of the Company or any such Restricted Subsidiary, whether now owned or hereafter acquired, or on any income or profits therefrom, other than Liens which constitute Permitted Liens at the date such Liens are created, unless contemporaneously therewith or prior thereto all payments due under this Indenture and the Securities are secured on an equal and ratable basis with the obligation or liability so secured until such time as such obligation or liability is no longer secured by a Lien. SECTION 4.14. Transactions with Affiliates. ---------------------------- The Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, enter into any transactions with Affiliates of the Company unless (i) such transactions are between or among the Company and its Restricted Subsidiaries, (ii) such transactions are in the ordinary course of business and consistent with past practice or (iii) the terms of such transactions are as fair and reasonable to the Company or such Restricted Subsidiary, as the case may be, as in a comparable transaction made on an arm's-length basis between unaffiliated parties. In the event of any transaction or series of transactions occurring subsequent to the Closing Date with an Affiliate of the Company which involves in excess of $2,500,000 and is not permitted under clause (i) or (ii) of the preceding sentence, all of the disinterested members of the Board of Directors shall by resolution determine that such transaction or series of transactions meets the criteria set forth in clause (iii) of the preceding sentence. In the event of any transaction or series of transactions occurring subsequent to the Closing Date with an Affiliate of the Company which involves in excess of $10,000,000 and is not permitted under clause (i) above, the Company will be required to deliver to the Trustee an opinion of an Independent Financial Advisor to the effect that the transaction is fair to the Company or the relevant Restricted Subsidiary, as the case may be, from a financial point of view. -40- Notwithstanding the foregoing, such provisions do not prohibit and will not apply to (1) any Restricted Payment which is permitted by Section 4.11 or (2) the payment of compensation to directors of the Company who are not employees of the Company and wages and other compensation to officers of the Company or any of its Subsidiaries. SECTION 4.15. Limitation on Asset Sales. ------------------------- (a) The Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, consummate an Asset Sale unless (i) the Company or such Restricted Subsidiary, as the case may be, receives consideration at the time of such Asset Sale at least equal to the fair market value (as determined in good faith by the board of directors of the Company) of the assets disposed of, and (ii) the consideration for such Asset Sale consists of at least 85% cash; provided that (x) the amount of liabilities assumed by the transferee, (y) any notes or other obligations received by the Company or such Restricted Subsidiary and immediately converted into cash or (z) with respect to the sale or other disposition of all of the Capital Stock of any Restricted Subsidiary, the amount of liabilities that remain the obligation of such Restricted Subsidiary subsequent to such sale or other disposition, shall be deemed to be "cash". (b) Within 12 months from the date that any Asset Sale is consummated, the Net Proceeds thereof shall be reinvested in Additional Assets or applied to the redemption or repurchase of Debt of the Company which ranks pari passu with the Securities or Debt of a Restricted Subsidiary of the Company which is not subordinated to other debt of such Restricted Subsidiary (which, in each case, shall be a permanent reduction of such Debt). To the extent that the Net Proceeds of an Asset Sale are not so applied, the Company or such Restricted Subsidiary, as the case may be, shall, within 30 days from the expiration of such 12-month period, use the remaining Net Proceeds (less any amounts used to pay reasonable fees and expenses connected with a Net Proceeds Offer (as defined below)) to make an offer (a "Net Proceeds Offer") to repurchase the Securities at a price equal to 100% of the principal amount thereof, plus accrued interest to the date of such repurchase, which date shall be the 45th day after the date of the Net Proceeds Offer Notice (the "Net Proceeds Repurchase Date"), in accordance with the provisions of clause (c) below. Notwithstanding the foregoing, the Net Proceeds of an Asset Sale are not required to be applied in accordance with the -41- preceding paragraph, unless and until the aggregate Net Proceeds for all such Asset Sales in a 12-month period exceeds $1,000,000. (c) If the Company or one of its Restricted Subsidiaries is required to make a Net Proceeds Offer pursuant to clause (b) above, the Company or such Restricted Subsidiary, or, at the request of the Company, the Trustee, shall give notice of the Net Proceeds Offer to each Holder (the "Net Proceeds Offer Notice"). The Company shall also deliver a copy of the Net Proceeds Offer Notice to the Trustee. Any such notice shall contain all instructions and materials necessary to enable such Holders to deliver Securities pursuant to the Net Proceeds Offer including, without limitation, the following: (1) the Net Proceeds Repurchase Date, (2) the date by which the Net Proceeds Offer must be accepted; (3) the applicable amount of Net Proceeds being applied to the repurchase of Securities in the Net Proceeds Offer (the "Purchase Amount"); and (4) that Securities are to be surrendered for payment. To accept a Net Proceeds Offer a Holder shall deliver to the Company (if it is acting as its own Paying Agent) or to a Paying Agent designated by the Company for such purpose in the notice referred to above on or before the 30th day after the date of the Net Proceeds Offer, or, if such day is a Legal Holiday, the next subsequent day which is not a Legal Holiday, (i) written notice of the Holder's acceptance of the Net Proceeds Offer, which notice shall set forth the name of the Holder, the principal amount of Securities (or portions thereof) to be repurchased and a statement that an election to accept the Net Proceeds Offer is being made thereby and (ii) the Securities with respect to which the Net Proceeds Offer is being accepted, duly endorsed for transfer to the Company, and the Holder of such Securities shall be entitled to receive from the Company (if it is acting as its own Paying Agent) or such Paying Agent a nontransferable receipt of deposit evidencing such deposit. Such written notice may be withdrawn upon further written notice to the Trustee on or prior to the third day preceding the Net Proceeds Repurchase Date. If the Net Proceeds Repurchase Date is between a regular record date for the payment of interest and the next succeeding interest payment date, any Security to be repurchased -42- must be accompanied by funds equal to the interest payable on such succeeding interest payment date on the principal amount to be repurchased (unless such Security shall have been called for redemption, in which case no such payment shall be required), and the interest on the principal amount of the Security being repurchased will be paid on such next succeeding interest payment date to the registered holder of such Security on the immediately preceding record date. A Security repurchased on an interest payment date need not be accompanied by any payment, and the interest on the principal amount of the Security being repurchased will be paid on such interest payment date to the registered holder of such Security on the immediately preceding record date. In the event a Net Proceeds Offer shall be accepted in accordance with the terms hereof, the Company shall pay or cause to be paid the pro rata portion of the Purchase Amount with respect to the Securities as to which the Net Proceeds Offer shall have been accepted to the Holder on the Net Proceeds Repurchase Date. On or prior to a Net Proceeds Repurchase Date, the Company shall deposit with the Trustee or with a Paying Agent (or, if the Company is acting as its own Paying Agent, segregate and hold in trust in accordance with Section 2.04) an amount of money equal to the Purchase Amount. Both the notice of the Company and the notice of the Holder having been given as specified above, the Securities to be repurchased shall, on the Net Proceeds Repurchase Date, become due and payable and from and after such date (unless the Company shall default in the payment of the Purchase Amount) such Securities shall cease to bear interest. If any Security shall not be paid upon surrender thereof for repurchase, the principal and interest shall, until paid, bear interest from the Net Proceeds Repurchase Date at the rate borne by such Security. Any Security which is to be submitted for repurchase only in part shall be delivered pursuant to this provision (with, if the Company or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company and the Trustee duly executed by, the Holder thereof or his attorney duly authorized in writing), and the Company shall execute, and the Trustee shall authenticate and make available for delivery to the Holder of such Security without any service charge, a new Security or Securities, of any authorized denomination as requested by such Holder, of the same tenor and in aggregate principal amount equal to and in exchange for the -42- portion of the principal of such Security not submitted for repurchase. If any repurchase pursuant to the foregoing provisions constitutes a tender offer as defined under the Exchange Act, the Company will comply with the requirements of Rule 14e-1 and any other tender offer rules under the Exchange Act which then may be applicable. (d) Any amount of Net Proceeds remaining after a Net Proceeds Offer shall be returned by the Trustee to the Company and may be used by the Company for any purpose not inconsistent with the Indenture. SECTION 4.16. Additional Guarantors. --------------------- The Company shall cause any Subsidiary with a net book value greater than $10,000,000 which is designated as a Restricted Subsidiary to, simultaneously with its designation as a Restricted Subsidiary, execute and deliver (i) a supplemental indenture to this Indenture, providing for the guarantee of payment of the Securities by such Subsidiary pursuant to the terms of Article Ten hereof and Exhibit B hereto and (ii) a guarantee in the form of Exhibit B hereto. ARTICLE 5. SUCCESSORS SECTION 5.01. When Company May Merge, etc. --------------------------- Neither the Company nor any Guarantor shall consolidate or merge with or into, or sell, lease, convey or otherwise dispose of all or substantially all of its assets (including, without limitation, by way of liquidation or dissolution), or assign any of its obligations under the Securities, the Guarantees or this Indenture (as an entirety or substantially as an entirety in one transaction or a series of related transactions), to any Person or permit any of its Restricted Subsidiaries to do any of the foregoing (in each case other than with the Company or another wholly owned Restricted Subsidiary) unless: (1) the person formed by or surviving any such consolidation or merger (if other than the Company or such Guarantor, as the case may be), or to which such sale, lease, conveyance or other disposition or assignment will be made (collectively, the "Successor"), is a Person organized -44- and existing under the laws of the United States, any State thereof or the District of Columbia; (2) the Successor assumes by supplemental indenture in a form reasonably satisfactory to the Trustee all of the obligations of the Company or such Guarantor, as the case may be, under the Securities or such Guarantor's Guarantee, as the case may be, and this Indenture; (3) immediately after giving effect to such transaction no Default or Event of Default has occurred and is continuing; (4) immediately after giving effect to such transaction and the use of any net proceeds therefrom, on a pro forma basis, the Consolidated Tangible Net Worth of the Company or the Successor (in the case of a transaction involving the Company), as the case may be, would be at least equal to the Consolidated Tangible Net Worth of the Company immediately prior to such transaction; and (5) in the case of a transaction involving the Company, immediately after giving effect to such transaction and the use of any net proceeds therefrom, on a pro forma basis, the Coverage Ratio of the Company or the Successor (in the case of a transaction involving the Company), as the case may be, would be such that the Company or the Successor (in the case of a transaction involving the Company), as the case may be, would be entitled to Incur at least $1.00 of additional Debt under such Coverage Ratio test set forth in Section 4.10. The foregoing provisions shall not apply to a transaction involving the consolidation or merger of a Guarantor with or into another person, or the sale, lease, conveyance or other disposition of all or substantially all of the assets of such Guarantor, that results in such Guarantor being released from its Guarantee as provided under its Guarantee. Notwithstanding the foregoing, clauses (4) and (5) shall not prohibit a transaction, the principal purpose of which is (as determined in good faith by the board of directors of the Company) to change the state of incorporation of the Company, and such transaction does not have as one of its purposes the evasion of the restrictions of this Section 5.01. The Company shall deliver to the Trustee prior to the consummation of the proposed transaction an Officers' Certificate -45- to the foregoing effect and an Opinion of Counsel stating that the proposed transaction and such supplemental indenture comply with this Indenture. SECTION 5.02. Successor Substituted. --------------------- Upon any consolidation, merger, sale, assignment, transfer, lease or other disposition of all or substantially all of the assets of the Company in accordance with Section 5.01, the Successor shall succeed to, and be substituted for, and may exercise every right and power of, and shall assume every duty and obligation of, the Company under this Indenture with the same effect as if such Successor had been named as the Company herein. When the Successor assumes all obligations of the Company hereunder, all obligations of the predecessor shall terminate. ARTICLE 6. DEFAULTS AND REMEDIES SECTION 6.01. Events of Default. ----------------- An "Event of Default" occurs if: (1) the Company defaults in the payment of interest on any Security when the same becomes due and payable and the default continues for a period of 30 days; (2) the Company defaults in the payment of the principal of any Security when the same becomes due and payable at maturity, upon acceleration or otherwise; (3) the Company or any Guarantor fails to comply with any of its other agreements in the Securities, the Guarantees or this Indenture and the default continues for the period and after the notice specified below; (4) an event of default shall have occurred under one or more evidences of Debt of the Company or any of its Restricted Subsidiaries (other than Non-Recourse Debt) with an outstanding aggregate principal amount of $5,000,000 or more, whether such Debt now exists or is created hereafter, which event of default (i) consists of the failure by the Company or any Restricted Subsidiary to make any payment in respect of such Debt at its final maturity or (ii) results in the acceleration of such Debt, which acceleration shall be in effect; -46- (5) a final judgment or judgments for the payment of money in excess of $5,000,000 in the aggregate are rendered against the Company or any of its Restricted Subsidiaries and such judgment or judgments remain unstayed, unsatisfied or undischarged for the period and after the notice specified below; (6) any Guarantee of a Material Subsidiary ceases to be in full force and effect (other than in accordance with the terms of such Guarantee and this Indenture) or is declared null and void and unenforceable or found to be invalid or any Guarantor denies its liability under its Guarantee (other than by reason of release of a Guarantor from its Guarantee in accordance with the terms of the Guarantee and this Indenture); (7) the Company or any of its Material Subsidiaries pursuant to or within the meaning of any Bankruptcy Law: (A) commences a voluntary case, (B) consents to the entry of an order for relief against it in an involuntary case, (C) consents to the appointment of a Custodian of it or for all or substantially all of its property, or (D) makes a general assignment for the benefit of its creditors; or (8) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (A) is for relief against the Company in an involuntary case, (B) appoints a Custodian of the Company for all or substantially all of its property, or (C) orders the liquidation of the Company, and the order or decree remains unstayed and in effect for 90 days. The term "Bankruptcy Law" means Title 11, U.S. Code or any similar Federal or State law for the relief of debtors. The term "Custodian" means any receiver, trustee, assignee, liquidator or similar official under any Bankruptcy Law. -47- A default under clause (3) or (5) is not an Event of Default until the Trustee or the Holders of at least 25% in principal amount of the Securities then outstanding notify the Company of the default and the Company does not cure the default within 60 days after receipt of the notice. The notice must specify the default, demand that it be remedied and state that the notice is a "Notice of Default". If the Holders of 25% in principal amount of Securities then outstanding request the Trustee to give such notice on their behalf, the Trustee shall do so. The Trustee shall not be deemed to have notice of any Default hereunder unless it shall have actual knowledge of such Default or it shall have received written notice thereof making specific reference to such Default as a Default. SECTION 6.02. Acceleration. ------------ If an Event of Default (other than an Event of Default specified in Section 6.01(7) or Section 6.01(8), with respect to the Company) occurs and is continuing, the Trustee by notice to the Company, or the Holders of at least 25% in principal amount of the Securities then outstanding by notice to the Company and the Trustee, may declare the principal of and accrued interest on all the Securities to be due and payable. Upon such declaration such principal and interest shall be due and payable immediately. If an Event of Default specified in Section 6.01(7) or Section 6.01(8), with respect to the Company occurs, all unpaid principal and accrued interest on the Securities then outstanding shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Securityholder. The Holders of a majority in principal amount of the Securities by notice to the Trustee may rescind an acceleration and its consequences if the rescission would not conflict with any judgment or decree and if all existing Events of Default have been cured or waived except nonpayment of principal or interest that has become due solely because of the acceleration. SECTION 6.03. Other Remedies. -------------- Notwithstanding any other provision of this Indenture, if an Event of Default occurs and is continuing, the Trustee may pursue any available remedy by proceeding at law or in equity to collect the payment of principal of or interest on the Securities or to enforce the performance of any provision of the Securities or this Indenture. -48- The Trustee may maintain a proceeding even if it does not possess any of the Securities or does not produce any of them in the proceeding. A delay or omission by the Trustee or any Securityholder in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. All remedies are cumulative. SECTION 6.04. Waiver of Past Defaults. ----------------------- Subject to Sections 6.07 and 9.02, the Holders of a majority in principal amount of the Securities then outstanding by notice to the Trustee may waive an existing Default and its consequences. When a Default is waived, it is cured and ceases; but no such waiver shall extend to any other default. SECTION 6.05. Control by Majority. ------------------- The Holders of a majority in principal amount of the Securities then outstanding may direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on it. However, the Trustee may refuse to follow any direction that conflicts with law or this Indenture, that the Trustee determines is unduly prejudicial to the rights of other Securityholders or would involve the Trustee in personal liability and the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction. SECTION 6.06. Limitation on Suits. ------------------- Except as provided in Section 6.07, a Securityholder may pursue a remedy with respect to this Indenture or the Securities only if: (1) the Holder gives to the Trustee written notice of a continuing Event of Default; (2) the Holders of at least 25% in principal amount of the Securities then outstanding make a written request to the Trustee to institute proceedings in respect of such Event of Default; (3) such Holder or Holders offer to the Trustee reasonable indemnity against any loss, liability or expense (including reasonable attorneys' fees); -49- (4) the Trustee does not comply with the request within 60 days after receipt of the request and the offer of indemnity; and (5) during such 60-day period the Holders of a majority in principal amount of the Securities then outstanding do not give the Trustee a direction inconsistent with the request. A Securityholder may not use this Indenture to prejudice the rights of another Securityholder or to obtain a preference or priority over another Securityholder. SECTION 6.07. Rights of Holders to Receive Payment. ------------------------------------ Notwithstanding any other provision of this Indenture, the right of any Holder of a Security to receive payment of principal of and interest on the Security, on or after the respective due dates expressed in the Security, or to bring suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of the Holder. SECTION 6.08. Collection Suit by Trustee. -------------------------- If an Event of Default specified in Section 6.01(1) or (2) occurs and is continuing, the Trustee may recover judgment in its own name and as trustee of an express trust against the Company for the whole amount of principal and interest remaining unpaid. SECTION 6.09. Trustee May File Proofs of Claim. -------------------------------- The Trustee may file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee, any predecessor Trustee and the Securityholders allowed in any judicial proceedings relative to the Company, its creditors or its property. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder of the Securities any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Holder of the Securities in any such proceeding. -49- SECTION 6.10. Priorities. ---------- If the Trustee collects any money pursuant to this Article, it shall pay out the money in the following order: First: to the Trustee for amounts due under Section 7.07; Second: to Securityholders for amounts due and unpaid on the Securities for principal and interest, ratably, without preference or priority of any kind, according to the amounts due and payable on the Securities for principal and interest, respectively; and Third: to the Company. The Trustee may fix a record date and payment date for any payment by it to Securityholders pursuant to this Section. SECTION 6.11. Undertaking for Costs. --------------------- In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as Trustee, a court in its discretion may require the filing by any party litigant in the suit other than the Trustee of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section does not apply to a suit by the Trustee, a suit by a Holder pursuant to Section 6.07 or a suit by Holders of more than 10% in principal amount of the Securities. ARTICLE 7. TRUSTEE SECTION 7.01. Duties of Trustee. ----------------- (a) If an Event of Default has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent person would exercise or use under the circumstances in the conduct of his own affairs. -51- (b) Except during the continuance of an Event of Default: (1) The Trustee need perform only those duties that are specifically set forth in this Indenture and no others. (2) In the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture. However, the Trustee shall examine the certificates and opinions to determine whether or not they conform to the requirements of this Indenture but need not verify the accuracy of the content thereof. (c) The Trustee may not be relieved from liability for its own negligent action, its own negligent failure to act or its own willful misconduct, except that: (1) This paragraph does not limit the effect of paragraph (b) of this Section 7.01. (2) The Trustee shall not be liable for any error of judgment made in good faith by a Trust Officer, unless it is proved that the Trustee was negligent in ascertaining the pertinent facts. (3) The Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 6.05. (d) Every provision of this Indenture that in any way relates to the Trustee is subject to paragraphs (a), (b) and (c) of this Section 7.01. (e) The Trustee may refuse to perform any duty or exercise any right or power unless it receives indemnity satisfactory to it against any loss, liability or expense, including reasonable attorneys' fees. (f) The Trustee shall not be liable for interest on any money received by it except as the Trustee may agree with the Company. Money held in trust by the Trustee need not be segregated from other funds except to the extent required by law. -52- (g) The Trustee shall not be required to give any bond or surety with respect to the execution of its rights and powers or with respect to this Indenture. (h) The Trustee shall not be bound to ascertain or inquire as to the performance or observance of any covenants, conditions or agreements on the part of the Company hereunder; but the Trustee may require of the Company full information and advice as to the performance of the covenants, conditions and agreements as aforesaid. SECTION 7.02. Rights of Trustee. ----------------- (a) The Trustee may rely on any document believed by it to be genuine and to have been signed or presented by the proper person. The Trustee need not investigate any fact or matter stated in the document. (b) Before the Trustee acts or refrains from acting, it may require an Officers' Certificate and/or an Opinion of Counsel. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on such Certificate or Opinion. (c) The Trustee may act through agents and shall not be responsible for the misconduct or negligence of any agent appointed with due care. (d) The Trustee shall not be liable for any action it takes or omits to take in good faith which it believes to be authorized or within its rights or powers. (e) It shall not be the duty of the Trustee, except as expressly provided herein, to ensure that any duties or obligations herein imposed upon the Company or any other Person are performed, and, except as expressly provided herein, the Trustee shall not be liable or responsible for the failure of any other Person to perform any act required of it or them by this Indenture. (f) No provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder. -53- SECTION 7.03. Individual Rights of Trustee. ---------------------------- The Trustee in its individual or any other capacity may become the owner or pledgee of Securities and may otherwise deal with the Company or an Affiliate thereof with the same rights it would have if it were not Trustee. Any Agent may do the same with like rights. The Trustee, however, must comply with Sections 7.10 and 7.11. SECTION 7.04. Trustee's Disclaimer. -------------------- The Trustee makes no representation as to the validity or adequacy of this Indenture or the Securities; it shall not be accountable for the Company's use of the proceeds from the Securities; and it shall not be responsible for any statement in the Securities other than its certificate of authentication. SECTION 7.05. Notice of Defaults. ------------------ If a Default occurs and is continuing and if it is actually known to the Trustee or the Trustee has received written notice thereof, the Trustee shall mail to each Securityholder a notice of the Default within 90 days after it occurs. Except in the case of a Default in payment of principal of or interest on any Security, the Trustee may withhold the notice if and so long as it in good faith determines that withholding the notice is in the interests of Securityholders. SECTION 7.06. Reports by Trustee to Holders. ----------------------------- If required by TIA ss. 313(a), within 60 days after each May 15 beginning with May 15, 1996, the Trustee shall mail to each Securityholder as required by TIA ss. 313(c) a brief report dated as of such date that complies with TIA ss. 313(a). The Trustee also shall comply with TIA ss. 313(b). A copy of each report at the time of its mailing to Securityholders shall be filed by the Trustee with the SEC and each stock exchange, if any, on which the Securities are listed. The Company shall notify the Trustee when the Securities are listed on any stock exchange. SECTION 7.07. Compensation and Indemnity. -------------------------- The Company shall pay to the Trustee from time to time such compensation for its services as shall be agreed upon in writing. The Trustee's compensation shall not be limited by any law on compensation of a trustee of an express trust. The -54- Company shall reimburse the Trustee upon request for all reasonable out-of-pocket expenses incurred by it. Such expenses shall include the reasonable compensation and out-of-pocket expenses of the Trustee's agents and counsel. The Company shall indemnify the Trustee against any loss or liability (including the fees and expenses of counsel) incurred by it in connection with the administration of this trust and the performance of its duties hereunder. The Company need not pay for any settlement made without its consent. The Trustee shall notify the Company promptly of any claim for which it may seek indemnification. The Company need not reimburse any expense or indemnify against any loss or liability incurred by the Trustee through the Trustee's negligence or bad faith. To secure the Company's payment obligations in this Section, the Trustee shall have a lien prior to the Securities on all money or property held or collected by the Trustee, except that held in trust to pay principal and interest on particular Securities. When the Trustee incurs expenses or renders services after an Event of Default specified in Section 6.01(6) or (7) occurs, the expenses and the compensation for the services are intended to constitute expenses of administration under any Bankruptcy Law. SECTION 7.08. Replacement of Trustee. ---------------------- A resignation or removal of the Trustee and appointment of a successor Trustee shall become effective only upon the successor Trustee's acceptance of appointment as provided in this Section. The Trustee may resign by so notifying the Company. The Holders of a majority in principal amount of the Securities may remove the Trustee by so notifying the Trustee and the Company and may appoint a successor Trustee with the Company's consent. The Company may remove the Trustee if: (1) the Trustee fails to comply with Section 7.10; (2) the Trustee is adjudged a bankrupt or an insolvent; (3) a receiver or other public officer takes charge of the Trustee or its property; or -55- (4) the Trustee becomes incapable of acting. If the Trustee resigns or is removed or if a vacancy exists in the office of Trustee for any reason, the Company shall promptly appoint a successor Trustee. Within one year after the successor Trustee takes office, the Holders of a majority in principal amount of the Securities may appoint a successor Trustee to replace the successor Trustee appointed by the Company. If a successor Trustee does not take office within 60 days after the retiring Trustee resigns or is removed, the retiring Trustee, the Company or the Holders of at least 10% in principal amount of the Securities may petition any court of competent jurisdiction for the appointment of a successor Trustee. If the Trustee fails to comply with Section 7.10, any Holder may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Company. Thereupon the resignation or removal of the retiring Trustee shall become effective, and the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture. The successor Trustee shall mail a notice of its succession to Securityholders. The retiring Trustee shall promptly transfer all property held by it as Trustee to the successor Trustee, subject to the lien provided for in Section 7.07. Notwithstanding the replacement of the Trustee pursuant to Section 7.08, the Company's obligation to compensate the retiring Trustee under Section 7.07, for services rendered prior to its retirement shall continue for the benefit of the retiring Trustee. SECTION 7.09. Successor Trustee by Merger, etc. -------------------------------- If the Trustee consolidates, merges or converts into, or transfers all or substantially all of its corporate trust business to another corporation, the successor corporation without any further act shall be the successor Trustee. -56- SECTION 7.10. Eligibility; Disqualification. ----------------------------- This Indenture shall always have a Trustee who satisfies the requirements of TIA ss. 310(a)(1). The Trustee shall always have a combined capital and surplus of at least $50,000,000 as set forth in its most recent published annual report of condition. The Trustee shall comply with TIA ss. 310(b). SECTION 7.11. Preferential Collection of Claims Against Company. --------------------------------- The Trustee shall comply with TIA ss. 311(a), excluding any creditor relationship listed in TIA ss. 311(b). A Trustee who has resigned or been removed shall be subject to TIA ss. 311(a) to the extent indicated. ARTICLE 8. DEFEASANCE SECTION 8.01. Defeasance upon Deposit of Moneys or U.S. Government Obligations. ------------------------------- This Indenture and the Guarantees shall cease to be of further effect (except that the Company's obligations under Sections 7.07 and 8.05 hereof shall survive) when all outstanding Securities theretofore authenticated and issued (other than Securities which have been destroyed, lost or stolen and which have been replaced as provided in Section 2.07 hereof) have been delivered to the Trustee for cancellation and the Company has paid all sums payable hereunder. Notwithstanding the first paragraph of this Section 8.01, at the Company's option indicated by notice to the Trustee, either (a) the Company shall be deemed to have been Discharged (as defined below) from its obligations with respect to the Securities on the 91st day after the applicable conditions set forth below have been satisfied or (b) the Company shall cease to be under any obligation to comply with any term, provision or condition set forth in Sections 4.06 through 4.15 and shall cease to be subject to the provisions of Section 6.01(3) with respect to Sections 4.06 through 4.15 and Section 6.01(4) with respect to the Securities at any time after the conditions set forth below have been satisfied: (1) the Company shall have deposited or caused to be deposited irrevocably with the Trustee as trust funds in -57- trust, specifically pledged as security for, and dedicated solely to, the benefit of the Holders of the Securities (i) money in an amount, or (ii) U.S. Government Obligations which through the payment of interest and principal in respect thereof in accordance with their terms will provide, not later than one day before the due date of any payment, money in an amount, or (iii) a combination of (i) and (ii), sufficient, in the opinion with respect to (ii) and (iii) of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay and discharge each installment of principal of and interest on the outstanding Securities on the dates such installments of interest or principal are due; (2) the Company shall have delivered to the Trustee an Opinion of Counsel stating that the Holders of the outstanding Securities will not recognize income, gain or loss for Federal income tax purposes as a result of such defeasance and will be subject to Federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such defeasance had not occurred; (3) such deposit will not result in a breach or violation of, or constitute a Default under, this Indenture or any other agreement or instrument to which the Company is a party or by which it is bound; (4) no Default or Event of Default shall have occurred and be continuing on the date of such deposit; and (5) the Company shall have delivered to the Trustee an Officers Certificate stating that the conditions set forth in this Section 8.01 have been satisfied or complied with. "Discharged" shall mean that the Company and each Guarantor shall be deemed to have paid and discharged the entire indebtedness represented by, and obligations under, the Securities and to have satisfied all the obligations under this Indenture and the Guarantees relating to the Securities (and the Trustee, upon the request of the Company and at the expense of the Company, shall execute proper instruments acknowledging the same). -58- SECTION 8.02. Termination of the Obligations Pursuant to Redemption. ------------------------------ The Company and each Guarantor may terminate its obligations under the Securities, this Indenture and the Guarantees (except that the Company's obligations under Sections 7.07 and 8.05 hereof shall survive) and the Company and the Guarantors shall be deemed to have been Discharged from its Obligations with respect to the Securities and the Guarantees if: (a) either (i) pursuant to Article Three, the Company shall have given notice to the Trustee and mailed a notice of redemption to each Holder of the redemption of all of the Securities under arrangements satisfactory to the Trustee for the giving of such notice or (ii) all Securities have otherwise become due and payable hereunder; (b) the Company shall have irrevocably deposited or caused to be deposited with the Trustee or a trustee reasonably satisfactory to the Trustee, under the terms of an irrevocable trust agreement in form and substance satisfactory to the Trustee, as trust funds in trust solely for the benefit of the Holders for that purpose, money in such amount as is sufficient without consideration of reinvestment of such interest, to pay principal of, premium, if any, and interest on the outstanding Securities to maturity or redemption, as certified in a certificate of a nationally recognized firm of independent public accountants; provided that the Trustee shall have been irrevocably instructed to apply such money to the payment of said principal, premium, if any, and interest with respect to the Securities; (c) no Default of Event of Default with respect to this Indenture or the Securities shall have occurred and be continuing on the date of such deposit or shall occur as a result of such deposit and such deposit will not result in a breach or violation of, or constitute a default under, any other instrument to which the Company is a party or by which it is bound; and (d) the Company shall have paid all other sums payable by it hereunder; (e) the Company shall have delivered to the Trustee an Officers' Certificate stating that the conditions set forth in this Section 8.02 have been complied with. -59- SECTION 8.03. Survival of Company's Obligations. --------------------------------- Notwithstanding the satisfaction and discharge of the Indenture under Section 8.01 or Section 8.02, the Company's obligations in Sections 2.04, 2.05, 2.06, 2.07, 2.08, 4.01, 4.02, 4.05, 7.07, 7.08, 8.04, 8.05 and 8.06, however, shall survive until the Securities are no longer outstanding. Thereafter, the Company's obligations in Sections 7.07, 8.05 and 8.06 shall survive. SECTION 8.04. Application of Trust Money. -------------------------- The Trustee shall hold in trust money or U.S. Government Obligations deposited with it pursuant to Section 8.01. It shall apply the deposited money and the money from U.S. Government Obligations in accordance with this Indenture to the payment of principal of and interest on the Securities. SECTION 8.05. Repayment to Company. -------------------- The Trustee and the Paying Agent shall promptly pay to the Company upon request any excess money or securities held by them at any time. The Trustee and the Paying Agent shall pay to the Company upon request any money held by them for the payment of principal or interest that remains unclaimed for two years, provided, however, that the Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of the Company cause to be published once in a newspaper of general circulation in the City of New York or mail to each such Holder notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such publication or mailing, any unclaimed balance of such money then remaining will be repaid to the Company. After payment to the Company, Securityholders entitled to the money must look to the Company for payment as general creditors unless applicable abandoned property law designates another person. The Company shall indemnify Trustee to the fullest extent permissible by law for the Trustee's failure to comply with any abandoned property or escheat law by acting in accordance with this Section 8.05. SECTION 8.06. Reinstatement. ------------- If the Trustee is unable to apply any money or U.S. Government Obligations in accordance with Section 8.01 by reason of any legal proceeding or by reason of any order or judgment of any court or governmental authority enjoining, restraining or -60- otherwise prohibiting such application, the Company's obligations under this Indenture and the Securities shall be revived and reinstated as though no deposit had occurred pursuant to Section 8.01 until such time as the Trustee is permitted to apply all such money or U.S. Government Obligations in accordance with Section 8.01; provided, however, that if the Company has made any payment of interest on or principal of any Securities because of the reinstatement of its obligations, the Company shall be subrogated to the rights of the Holders of such Securities to receive such payment from the money or U.S. Government Obligations held by the Trustee. ARTICLE 9. AMENDMENTS SECTION 9.01. Without Consent of Holders. -------------------------- The Company and the Guarantors, with the consent of the Trustee, may amend or supplement this Indenture, the Securities or the Guarantees without notice to or the consent of any Securityholder: (1) to cure any ambiguity, omission, defect or inconsistency; provided that such amendment or supplement does not adversely affect the rights of any Securityholder; (2) to comply with Section 5.01; (3) to provide for uncertificated Securities in addition to certificated Securities; (4) to make any change that does not materially adversely affect the rights of any Securityholder hereunder, including, without limitation, any amendments reasonably necessary to issue additional Securities hereunder; (5) to comply with the qualification of this Indenture under the TIA; or (6) to reflect a Guarantor ceasing to be liable on the Guarantees because it is no longer a Subsidiary of the Company or to reflect additional Guarantors. For the purposes of Section 9.01, the Trustee may, in its discretion, determine whether or not the Holder of any Securities would be materially adversely affected by any -61- amendment or supplement to this Indenture and any such determination shall be conclusive upon every Holder, whether theretofore or thereafter entered into. The Trustee shall, subject to the express provisions of this Indenture, not be liable for any such determination made in good faith and shall be entitled to, and may rely upon, an Opinion of Counsel with respect thereto. SECTION 9.02. With Consent of Holders. ----------------------- The Company and the Guarantors, with the consent of the Trustee, may amend or supplement this Indenture, the Securities or the Guarantees without notice to any Securityholder but with the written consent of the Holders of at least a majority in principal amount of the Securities then outstanding. Subject to Section 6.07, the Holders of a majority in principal amount of the Securities then outstanding may waive compliance by the Company or any Guarantor with any provision of this Indenture, the Securities or the Guarantees without notice to any Securityholder. However, without the consent of each Securityholder affected, an amendment, supplement or waiver, including a waiver pursuant to Section 6.04, may not: (1) reduce the amount of Securities whose Holders must consent to an amendment, supplement or waiver; (2) reduce the rate of or change the time for payment of interest on any Security; (3) reduce the principal of or change the fixed maturity of any Security (including, without limitation, the optional redemption provisions, but excluding Sections 4.08, 4.09 and 4.15); (4) waive a Default or Event of Default in the payment of principal of or interest on any Security; (5) make any Security payable in money other than that stated in the Security; (6) make any change in Section 6.04, Section 6.07 or Section 9.02; (7) adversely modify the terms and conditions of the obligations of the Guarantors or ranking or priority of the Securities or any Guarantee; or -62- (8) release any Guarantor from any of its obligations under its Guarantee or this Indenture otherwise than in accordance with the terms hereof. Promptly after an amendment under this Section becomes effective, the Company shall mail to Securityholders a notice briefly describing the amendment. It shall not be necessary for the consent of the Holders under this Section to approve the particular form of any proposed amendment or supplement, but it shall be sufficient if such consent approves the substance thereof. SECTION 9.03. Compliance with Trust Indenture Act. ----------------------------------- Every amendment to this Indenture, the Securities or the Guarantees shall comply with the TIA as then in effect. SECTION 9.04. Revocation and Effect of Consents. --------------------------------- Until an amendment, supplement or waiver becomes effective, a consent to it by a Holder of a Security is a continuing consent by the Holder and every subsequent Holder of a Security or portion of a Security that evidences the same debt as the consenting Holder's Security, even if notation of the consent is not made on any Security. However, any such Holder or subsequent Holder may revoke the consent as to his Security or portion of a Security if the Trustee receives the notice of revocation before the date the amendment, supplement or waiver becomes effective. An amendment, supplement or waiver becomes effective in accordance with its terms and thereafter binds every Securityholder. After an amendment, supplement or waiver becomes effective with respect to the Securities, it shall bind every Securityholder unless it makes a change described in any of clauses (1) through (8) of Section 9.02. In that case the amendment, supplement or waiver shall bind each Holder of a Security who has consented to it and, provided that notice of such amendment, supplement or waiver is reflected on a Security that evidences the same debt as the consenting Holder's Security, every subsequent Holder of a Security or portion of a Security that evidences the same debt as the consenting Holder's Security. SECTION 9.05. Notation on or Exchange of Securities. ------------------------------------- If an amendment, supplement or waiver changes the terms of a Security, the Trustee may require the Holder of the Security -63- to deliver it to the Trustee. The Trustee may place an appropriate notation on the Security about the changed terms and return it to the Holder. Alternatively, if the Company or the Trustee so determines, the Company in exchange for the Security shall issue and the Trustee shall authenticate a new Security that reflects the changed terms. SECTION 9.06. Trustee Protected. ----------------- The Trustee need not sign any amendment, supplement or waiver authorized pursuant to this Article that adversely affects the Trustee's rights. The Trustee shall be entitled to receive and rely upon an Opinion of Counsel and an Officers' Certificate that any supplemental indenture complies with the Indenture. ARTICLE 10. GUARANTEE OF SECURITIES SECTION 10.01. Guarantee. --------- Subject to the provisions of this Article 10, each Guarantor (which term includes any successor Person under this Indenture and any additional Guarantor pursuant to Section 4.16 of this Indenture) for consideration received hereby jointly and severally unconditionally and irrevocably guarantees on a senior basis (each a "Guarantee", and collectively, the "Guarantees") to each Holder of a Security authenticated and delivered by the Trustee and to the Trustee and its successors and assigns, irrespective of the validity and enforceability of this Indenture, the Securities or the obligations of the Company or any other Guarantor to the Holders or the Trustee hereunder or thereunder, that: (a) the principal of, premium, if any, and interest on the Securities will be duly and punctually paid in full when due, whether at maturity, as a result of redemption, upon a Change of Control, as a result of a Net Worth Offer, by acceleration or otherwise, and interest on the overdue principal, premium, if any, and (to the extent permitted by law) interest, if any, on the Securities and all other payment obligations of the Company or the Guarantors to the Holders or the Trustee hereunder or thereunder (including fees, expenses or other) will be promptly paid in full or performed, all in accordance with the terms hereof and thereof; (b) all other obligations under this Indenture to the Holders or the Trustee will be duly and punctually performed all in accordance with the terms of this Indenture and the Securities and (c) in case of any extension of time of payment or renewal of any Securities or any such other -64- obligations, the same will be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, whether at stated maturity, as a result of redemption, upon a Change of Control, as a result of a Net Worth Offer, by acceleration or otherwise. Failing payment or performance when due of any amount or obligations so guaranteed for whatever reason, each Guarantor will be obligated to pay or perform the same immediately. An Event of Default under this Indenture or the Securities shall constitute an event of default under the Guarantees, and shall entitle the Holders of Securities to accelerate the obligations of the Guarantors hereunder in the same manner and to the same extent as the obligations of the Company. Each of the Guarantors hereby agrees that its obligations hereunder shall be absolute and unconditional, irrespective of, and shall be unaffected by, the invalidity, irregularity or unenforceability of the Securities or this Indenture, the absence of any action to enforce the same, any waiver, modification or consent by any holder of the Securities with respect to any provisions hereof or thereof, any release of any other Guarantor, the recovery of any judgment against the Company, any action to enforce the same, whether or not a Guarantee is affixed to any particular Security, or any other circumstance which might otherwise constitute a legal or equitable discharge or defense of a Guarantor. Each of the Guarantors hereby waives the benefit of diligence, presentment, demand of payment, filing of claims with a court in the event of merger insolvency or bankruptcy of the Company, any right to require a proceeding first against the Company, protest, notice and all demands whatsoever and covenants that its Guarantee will not be discharged except by complete performance of the obligations contained in the Securities, this Indenture and its Guarantee. If any Holder or the Trustee is required by any court or otherwise to return to the Company or to any Guarantor, or any custodian, trustee, liquidator or other similar official acting in relation to the Company or such Guarantor, any amount paid by the Company or such Guarantor to the Trustee or such Holder, its Guarantee, to the extent theretofore discharged, shall be reinstated in full force and effect. Each Guarantor further agrees that, as between it, on the one hand, and the Holders of Securities and the Trustee, on the other hand, (a) subject to this Article 10, the maturity of the obligations guaranteed hereby may be accelerated as provided in Article 6 hereof for the purposes of its Guarantee, notwithstanding any stay, injunction or other prohibition preventing such acceleration in respect of the obligations guaranteed hereby, and (b) in the event of any declaration of acceleration of such obligations as provided in -65- Article 6 hereof, such obligations (whether or not due and payable) shall forthwith become due and payable by such Guarantor for the purpose of its Guarantees. [The Guarantees shall remain in full force and effect and continue to be effective should any petition be filed by or against the Company for liquidation or reorganization, should the Company become insolvent or make an assignment for the benefit of creditors or should a receiver or trustee be appointed for all or any significant part of the Company's assets, and shall, to the fullest extent permitted by law, continue to be effective or be reinstated, as the case may be, if at any time payment of the Securities are, pursuant to applicable law, rescinded or reduced in amount, or must otherwise be restored or returned by any obligee on the Securities, whether as a "voidable preference," "fraudulent transfer" or otherwise, all as though such payment had not been made. In the event that any payment, or any part thereof, is rescinded, reduced, restored or returned, the Securities shall, to the fullest extent permitted by law, be reinstated and deemed reduced only by such amount paid and not so rescinded, reduced, restored or returned.] For purposes of this Article 10, each Guarantor's liability (a Guarantor's "Base Guaranty Liability") shall be that amount from time to time equal to the aggregate liability of a Guarantor hereunder, but shall be limited to the lessor of (A) the aggregate amount of the obligation as stated in the first sentence of this Section 10.01 with respect to the Securities or (B) the amount, if any, which would not have (i) rendered such Guarantor "insolvent" (as such term is defined in Section 101(29) of the Federal Bankruptcy Code and in Section 271 of the Debtor and Creditor Law of the State of New York, as each is in effect at the date of this Indenture) or (ii) left it with unreasonably small capital at the time its Guarantee of the Securities was entered into, after giving effect to the incurrence of existing Debt immediately prior to such time provided, that, it shall be a presumption in any lawsuit or other proceeding in which a Guarantor is a party that the amount guaranteed is the amount set forth in (A) above unless a creditor, or representative of creditors of such Guarantor or a trustee in bankruptcy of the Guarantor, as debtor in possession, otherwise proves in such a lawsuit that the aggregate liability of the Guarantor is limited to the amount set forth in (B). In making any determination as to the solvency or sufficiency of capital of a Guarantor in accordance with the previous sentence, the right of such Guarantor to contribution from other Guarantors, to subrogation pursuant to the next paragraph and any other rights such -66- Guarantor may have contractual or otherwise shall be taken into account. Each Guarantor shall be subrogated to all rights of the Holder of any Securities and the Trustee against the Company or any of ther other Guarantors in respect of any amounts paid to the Holder and the Trustee by such Guarantor pursuant to the provisions of this Guarantee; provided, however, that such Guarantor shall not be entitled to enforce, or to receive any payments arising out of or based upon, such right of subrogation until the principal of, premium, if any, and interest on all the Securities have been paid in full. Nothing contained in this Article 10 or elsewhere in this Indenture or in any Security is intended to or shall impair, as between the Guarantors and the Holders and the Trustee, the obligation of each Guarantor, which is absolute and unconditional, to pay the Holders and the Trustee the principal of, premium, if any, and interest on the Securities as and when the same shall become due and payable and to perform all other obligations in accordance with the provisions of this Guarantee, nor shall anything herein or therein prevent the Trustee or any Holder from exercising all remedies otherwise permitted by applicable law upon Default under this Indenture. The Guarantors shall have the right to seek contribution from any non-paying Guarantor so long as the exercise of such right does not impair the rights of the Holders under the Guarantees. SECTION 10.02. Execution and Delivery of Guarantee. ----------------------------------- To further evidence the Guarantee set forth in Section 10.01, each Guarantor hereby agrees that a notation of such Guarantee, substantially in the form included in Exhibit B hereto, shall be endorsed on each Security authenticated and delivered by the Trustee after such Guarantee is executed and executed by either manual or facsimile signature of an officer of each Guarantor. The validity and enforceability of any Guarantee shall not be affected by the fact that it is not affixed to any particular Security. Each of the Guarantors hereby agrees that its Guarantee set forth in Section 10.01 shall remain in full force and effect notwithstanding any failure to endorse on each Security a notation of such Guarantee. -67- If an officer of a Guarantor whose signatures is on this Indenture or a Security no longer holds that office at the time the Trustee authenticates such Security or at any time thereafter, such Guarantor's Guarantee of such Security shall be valid nevertheless. The delivery of any Security by the Trustee, after the authentication thereof hereunder, shall constitute due delivery of any Guarantee set forth in this Indenture on behalf of the Guarantor. SECTION 10.03. Additional Guarantors. --------------------- Any person may become a Guarantor by executing and delivering to the Trustee (a) a supplemental indenture in form and substance satisfactory to the Trustee, which subjects such person to the provisions of this Indenture as a Guarantor, and (b) an Opinion of Counsel to the effect that such supplemental indenture has been duly authorized and executed by such person and constitutes the legal, valid, binding and enforceable obligation of such person (subject to such customary exceptions concerning fraudulent conveyance laws, creditors' rights and equitable principles as may be acceptable to the Trustee in its discretion). SECTION 10.04. Release of a Guarantor. ---------------------- (a) Upon the sale or disposition of all of the assets or all of the Capital Stock of a Guarantor by the Company or a Subsidiary of the Company, or upon the consolidation or merger of a Guarantor with or into any Person (in each case, other than to the Company or an Affiliate of the Company), such Guarantor shall be deemed automatically and unconditionally released and discharged from all obligations under this Article 10 without any further action required on the part of the Trustee or any Holder, if all obligations of such Guarantor, if any, in respect of any Indebtedness of the Company shall also terminate upon such transaction; provided, however, that each such Guarantor is sold or disposed of in accordance with Section 4.15 hereof; provided, further, that the foregoing proviso shall not apply to the sale or disposition of a Guarantor in a foreclosure to the extent that such proviso would be inconsistent with the requirements of the Uniform Commercial Code. (b) The Trustee shall deliver an appropriate instrument evidencing the release of a Guarantor upon receipt of a request of the Company accompanied by an Officers' Certificate certifying as to the compliance with this Section 10.04. Any -68- Guarantor not so released or the entity surviving such Guarantor, as applicable, will remain or be liable under its Guarantee as provided in this Article 10. The Trustee shall execute any documents reasonably requested by the Company or a Guarantor in order to evidence the release of such Guarantor from its obligations under its Guarantee endorsed on the Securities and under this Article 10. Except as set forth in Articles 4 and 5 and this Section 10.04, nothing contained in this Indenture or in any of the Securities shall prevent any consolidation or merger of a Guarantor with or into the Company or another Guarantor or shall prevent any sale or conveyance of the property of a Guarantor as an entirety or substantially as an entirety to the Company or another Guarantor. ARTICLE 11. MISCELLANEOUS SECTION 11.01. Trust Indenture Act Controls. ---------------------------- If any provision of this Indenture limits, qualifies or conflicts with another provision which is required to be included in this Indenture by the TIA, the required provision shall control. SECTION 11.02. Notices. ------- Any notice or communication by the Company or the Trustee to the other is duly given if in writing and delivered in person, mailed by first-class mail or by express delivery to the other's address stated in this Section 11.02. The Company or the Trustee by notice to the other may designate additional or different addresses for subsequent notices or communications. Any notice or communication to a Securityholder shall be mailed by first-class mail to his address shown on the register kept by the Registrar. Failure to mail a notice or communication to a Securityholder or any defect in it shall not affect its sufficiency with respect to other Securityholders. If a notice or communication is mailed in the manner provided above within the time prescribed, it is duly given, whether or not the addressee receives it. -69- If the Company mails a notice or communication to Securityholders, it shall mail a copy to the Trustee and each Agent at the same time. All notices or communications shall be in writing. The Company's address is: Continental Homes Holding Corp. 7001 N. Scottsdale Road Suite 2050 Scottsdale, Arizona 85252 Attention: Corporate Secretary The Trustee's address is: First Union National Bank 123 South Broad Street Philadelphia, Pennsylvania 19109 Attention: Corporation Trust Department SECTION 11.03. Communication by Holders with Other Holders. ----------------------------- Securityholders may communicate pursuant to TIA ss. 312(b) with other Securityholders with respect to their rights under this Indenture or the Securities. The Company, the Trustee, the Registrar and anyone else shall have the protection of TIA ss. 312(c). SECTION 11.04. Certificate and Opinion as to Conditions Precedent. -------------------------- Upon any request or application by the Company to the Trustee to take any action under this Indenture the Company shall furnish to the Trustee: (1) an Officers' Certificate stating that, in the opinion of the signers, all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with; and (2) an Opinion of Counsel stating that, in the opinion of such counsel, all such conditions precedent have been complied with. Each signer of an Officers' Certificate or an Opinion of Counsel may (if so stated) rely, effectively, upon an Opinion -70- of Counsel as to legal matters and an Officers' Certificate as to factual matters if such signer reasonably and in good faith believes in the accuracy of the document relied upon. SECTION 11.05. Statements Required in Certificate or Opinion. ---------------------------------- Each certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture shall include: (1) a statement that the person making such certificate or opinion has read such covenant or condition; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of such person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether or not, in the opinion of such person, such condition or covenant has been complied with. SECTION 11.06. Rules by Trustee and Agents. --------------------------- The Trustee may make reasonable rules for action by or at a meeting of Securityholders. The Registrar or Paying Agent may make reasonable rules and set reasonable requirements for their respective functions. SECTION 11.07. Legal Holidays. -------------- A "Legal Holiday" is a Saturday, a Sunday or a day on which banking institutions are not required to be open in The City of New York, in the State of New York or in the city in which the Trustee administers its corporate trust business. If a payment date is a Legal Holiday at a place of payment, payment may be made at that place on the next succeeding day that is not a Legal Holiday, and no interest shall accrue on that payment for the intervening period. A "business day" is a day other than a Legal Holiday. -71- SECTION 11.08. No Recourse Against Others. -------------------------- No director, officer, employee or stockholder of the Company, any Guarantor or any successor Person thereof shall have any liability for any obligations of the Company under the Securities or this Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. Each Securityholder by accepting a Security waives and releases all such liability. The waiver and releases are part of the consideration for the issue of the Securities. SECTION 11.09. Duplicate Originals. ------------------- The parties may sign any number of copies of this Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. SECTION 11.10. Governing Law. ------------- The laws of the State of New York, without regard to principles of conflicts of law, shall govern this Indenture and the Securities. SECTION 11.11. No Adverse Interpretation of Other Agreements. ------------------------- This 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 Indenture. SECTION 11.12. Successors. ---------- All agreements of the Company in this Indenture and the Securities shall bind its successors. All agreements of the Trustee in this Indenture shall bind its successors. SECTION 11.13. Separability. ------------ In case any provision in this Indenture or in the Securities shall be valid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby and a Holder shall have no claim therefor against any party hereto. -72- SECTION 11.14. Table of Contents, Headings, etc. -------------------------------- The Table of Contents, Cross-Reference Table and headings of the Articles and Sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part hereof and shall in no way modify or restrict any of the terms or provisions hereof. -73- SIGNATURES IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed, all as of the day and year first above written. FIRST UNION NATIONAL BANK, as Trustee By: /s/ Alan G. Finn ------------------------------------- Name: Alan G. Finn Title: Assistant Vice President CONTINENTAL HOMES HOLDING CORP. By: /s/ Kenda B. Gonzales ------------------------------------- Name: Kenda B. Gonzales Title: ACHETER, INC. By: /s/ Kenda B. Gonzales ------------------------------------- Name: Kenda B. Gonzales Title: CH MORTGAGE COMPANY By: /s/ Randall C. Present ------------------------------------- Name: Randall C. Present Title: CHI CONSTRUCTION COMPANY By: /s/ Kenda B. Gonzales ------------------------------------- Name: Kenda B. Gonzales Title: -74- CHI FINANCE CORP. By: /s/ Kenda B. Gonzales ------------------------------------- Name: Kenda B. Gonzales Title: CONTINENTAL HOMES, INC. By: /s/ Kenda B. Gonzales ------------------------------------- Name: Kenda B. Gonzales Title: CONTINENTAL HOMES OF FLORIDA, INC. By: /s/ Kenda B. Gonzales ------------------------------------- Name: Kenda B. Gonzales Title: CONTINENTAL HOMES OF TEXAS, INC. By: /s/ Kenda B. Gonzales ------------------------------------- Name: Kenda B. Gonzales Title: KDB HOMES, INC. By: /s/ Kenda B. Gonzales ------------------------------------- Name: Kenda B. Gonzales Title: L&W INVESTMENTS INC. By: /s/ Kenda B. Gonzales ------------------------------------- Name: Kenda B. Gonzales Title: -75- MILBURN INVESTMENTS, INC. By: /s/ Kenda B. Gonzales ------------------------------------- Name: Kenda B. Gonzales Title: MILTEX FINANCIAL IV GENERAL PARTNERSHIP By: /s/ Kenda B. Gonzales ------------------------------------- Name: Kenda B. Gonzales Title: MILTEX MANAGEMENT, INC. By: /s/ Randall C. Present ------------------------------------- Name: Randall C. Present Title: President MILTEX MORTGAGE OF TEXAS LIMITED PARTNERSHIP By: /s/ Kenda B. Gonzales ------------------------------------- Name: Kenda B. Gonzales Title: RANCHO CARILLO, INC. By: /s/ Kenda B. Gonzales ------------------------------------- Name: Kenda B. Gonzales Title: R.O.S. CORPORATION By: /s/ Kenda B. Gonzales ------------------------------------- Name: Kenda B. Gonzales Title: -76- SETTLEMENT CORPORATION By: /s/ Kenda B. Gonzales ------------------------------------- Name: Kenda B. Gonzales Title: TRAVIS COUNTY TITLE COMPANY By: /s/ Burwell B. McClendon, III ------------------------------------- Name: Burwell B. McClendon, III Title: Assistant Secretary EX-10.5 3 CREDIT AGREEMENT CREDIT AGREEMENT DATED AS OF JUNE 27, 1996 AMONG CONTINENTAL HOMES HOLDING CORP. as Borrower AND THE BANKS NAMED HEREIN as Banks AND BANK ONE, ARIZONA, NA as Agent TABLE OF CONTENTS
Page ARTICLE I DEFINITIONS.................................................................................1 ARTICLE II THE CREDITS................................................................................22 2.1 Commitment.................................................................................22 2.2 Required Payments..........................................................................23 2.3 Ratable Loans..............................................................................23 2.4 Types of Advances; Set Aside Amount........................................................23 2.5 Fees; Reduction in Commitment..............................................................24 2.6 Minimum Amount of Each Advance.............................................................26 2.7 Optional Principal Payments................................................................26 2.8 Method of Selecting Types and Interest Periods for New Advances............................26 2.9 Conversion and Continuation of Outstanding Advances........................................27 2.10 Changes in Interest Rate, etc..............................................................27 2.11 Determination of Applicable Margins and Applicable Unused Commitment Rate.......................................................................................28 2.12 Rates Applicable After Event of Default....................................................29 2.13 Method of Payment..........................................................................29 2.14 Notes; Telephonic Notices..................................................................29 2.15 Interest Payment Dates; Interest Basis.....................................................30 2.16 Notification of Advances, Interest Rates, Prepayments and Commitment Reductions.................................................................................30 2.17 Lending Installations......................................................................30 2.18 Non-Receipt of Funds by Agent..............................................................30 2.19 Swing Line.................................................................................31 2.20 Withholding Tax Exemption..................................................................32 2.21 Extension of Facility Termination Date.....................................................33 2.22 Conversion Period..........................................................................35 2.23 Replacement of Certain Banks...............................................................39 ARTICLE III CHANGE IN CIRCUMSTANCES....................................................................40 3.1 Yield Protection...........................................................................40 3.2 Changes in Capital Adequacy Regulations....................................................41 3.3 Availability of Types of Advances..........................................................42 3.4 Funding Indemnification....................................................................42 3.5 Bank Statements; Survival of Indemnity.....................................................42
-i- ARTICLE IV THE LETTER OF CREDIT FACILITY..............................................................43 4.1 Facility Letters of Credit.................................................................43 4.2 Limitations................................................................................43 4.3 Conditions.................................................................................44 4.4 Procedure for Issuance of Facility Letters of Credit.......................................45 4.5 Duties of Issuing Bank.....................................................................46 4.6 Participation..............................................................................47 4.7 Compensation for Facility Letters of Credit................................................49 4.8 Issuing Bank Reporting Requirements........................................................50 4.9 Indemnification; Nature of Issuing Bank's Duties...........................................51 4.10 No Obligation to Issue.....................................................................52 4.11 Obligations of Issuing Bank and Other Banks................................................52 ARTICLE V CONDITIONS PRECEDENT.......................................................................53 5.1 Initial Advance............................................................................53 5.2 Each Advance...............................................................................54 ARTICLE VI REPRESENTATIONS AND WARRANTIES.............................................................55 6.1 Existence and Standing.....................................................................55 6.2 Authorization and Validity.................................................................55 6.3 No Conflict; Government Consent............................................................56 6.4 Financial Statements.......................................................................56 6.5 Material Adverse Change....................................................................56 6.6 Taxes......................................................................................56 6.7 Litigation and Contingent Obligations......................................................57 6.8 Subsidiaries...............................................................................57 6.9 ERISA......................................................................................57 6.10 Accuracy of Information....................................................................57 6.11 Regulation U...............................................................................57 6.12 Material Agreements........................................................................57 6.13 Labor Disputes and Acts of God.............................................................58 6.14 Ownership..................................................................................58 6.15 Operation of Business......................................................................58 6.16 Laws; Environment..........................................................................58 6.17 Investment Company Act.....................................................................59 6.18 Public Utility Holding Company Act.........................................................59 6.19 Subordination Provisions...................................................................59 6.20 Indenture Provisions.......................................................................59
-ii- ARTICLE VII AFFIRMATIVE COVENANTS......................................................................59 7.1 Financial Reporting........................................................................60 7.2 Use of Proceeds............................................................................62 7.3 Notice of Certain Events...................................................................63 7.4 Conduct of Business........................................................................63 7.5 Taxes......................................................................................63 7.6 Insurance..................................................................................63 7.7 Compliance with Laws.......................................................................63 7.8 Maintenance of Properties..................................................................63 7.9 Inspection.................................................................................63 7.10 Environment................................................................................64 ARTICLE VIII NEGATIVE COVENANTS.........................................................................64 8.1 Dividends..................................................................................64 8.2 Indebtedness...............................................................................64 8.3 Merger.....................................................................................66 8.4 Sale of Assets.............................................................................66 8.5 Investments and Acquisitions...............................................................67 8.6 Liens......................................................................................68 8.7 Redemption.................................................................................70 8.8 Affiliates.................................................................................70 8.9 Modifications to Certain Indebtedness......................................................71 8.10 Subordinated Indebtedness..................................................................71 8.11 Amendments.................................................................................71 ARTICLE IX FINANCIAL COVENANTS........................................................................71 9.1 Minimum Consolidated Tangible Net Worth....................................................71 9.2 Leverage Test; Interest Coverage Test......................................................72 9.3 Spec Unit Inventory........................................................................73 9.4 Land Owned. ...............................................................................73 ARTICLE X EVENTS OF DEFAULT..........................................................................73 10.1 Representations and Warranties.............................................................73 10.2 Non-payment................................................................................74 10.3 Other Defaults.............................................................................74 10.4 Other Indebtedness.........................................................................74 10.5 Bankruptcy.................................................................................74 10.6 Receiver...................................................................................75 10.7 Judgment...................................................................................75
-iii- 10.8 Unfunded Liabilities.......................................................................75 10.9 Withdrawal Liability.......................................................................75 10.10 Increased Contributions....................................................................76 10.11 Change in Control..........................................................................76 10.12 Dissolution................................................................................76 10.13 Guaranty...................................................................................76 10.14 Collateral.................................................................................76 10.15 Financial Covenants........................................................................76 10.16 No Defaults................................................................................76 ARTICLE XI ACCELERATION, WAIVERS, AMENDMENTS AND REMEDIES.............................................77 11.1 Acceleration; Remedies.....................................................................77 11.2 Amendments.................................................................................78 11.3 Preservation of Rights.....................................................................79 11.4 New Guarantor..............................................................................79 ARTICLE XII GENERAL PROVISIONS.........................................................................80 12.1 Survival of Representations................................................................80 12.2 Governmental Regulation....................................................................80 12.3 Taxes......................................................................................80 12.4 Headings...................................................................................80 12.5 Entire Agreement...........................................................................80 12.6 Nature of Obligations; Benefits of this Agreement..........................................80 12.7 Expenses; Indemnification..................................................................80 12.8 Numbers of Documents.......................................................................81 12.9 Accounting.................................................................................81 12.10 Severability of Provisions.................................................................81 12.11 Nonliability of Banks and Issuing Bank.....................................................81 12.12 CHOICE OF LAW..............................................................................81 12.13 Arbitration................................................................................81 12.14 CONSENT TO JURISDICTION....................................................................83 12.15 WAIVER OF JURY TRIAL.......................................................................83 12.16 Confidentiality............................................................................84 ARTICLE XIII AGENT......................................................................................84 13.1 Appointment................................................................................84 13.2 Powers.....................................................................................84 13.3 General Immunity...........................................................................84 13.4 No Responsibility for Loans, Recitals, etc.................................................84 13.5 Action on Instructions of Banks............................................................85
-iv- 13.6 Employment of Agents and Counsel...........................................................85 13.7 Reliance on Documents; Counsel.............................................................85 13.8 Agent's Reimbursement and Indemnification..................................................85 13.9 Rights as a Bank or Issuing Bank...........................................................86 13.10 Bank Credit Decision.......................................................................86 13.11 Successor Agent............................................................................86 13.12 Agent's Fee................................................................................87 ARTICLE XIV SETOFF; RATABLE PAYMENTS...................................................................87 14.1 Setoff.....................................................................................87 14.2 Ratable Payments...........................................................................87 ARTICLE XV BENEFIT OF AGREEMENT, ASSIGNMENTS; PARTICIPATIONS..........................................87 15.1 Successors and Assigns.....................................................................87 15.2 Participations.............................................................................88 15.2.1 Permitted Participants; Effect...................................................88 15.2.2 Voting Rights....................................................................88 15.2.3 Benefit of Setoff................................................................88 15.3 Assignments................................................................................89 15.3.1 Permitted Assignments............................................................89 15.3.2 Effect; Effective Date...........................................................89 15.4 Dissemination of Information...............................................................89 15.5 Tax Treatment..............................................................................90 ARTICLE XVI NOTICES....................................................................................90 16.1 Giving Notice..............................................................................90 16.2 Change of Address..........................................................................90 ARTICLE XVII COUNTERPARTS...............................................................................90
-v- LIST OF SCHEDULES AND EXHIBITS EXHIBITS: Exhibit A Form of Deed of Trust Exhibit B Form of Mortgage Exhibit C Form of Environmental Agreement Exhibit D Form of Guaranty Exhibit E Form of Note Exhibit F Form of Opinion of Cahill, Gordon & Reindel Exhibit G Form of Opinion of General Counsel Exhibit H Form of Opinion of Local Counsel Exhibit I Form of Borrowing Notice Exhibit J Form of Compliance Certificate of Authorized Officer (Financial Covenant Tests) Exhibit K Form of Assignment (with Form of Notice of Assignment attached) Exhibit L Form of Amended and Restated Set Aside Agreement SCHEDULES: Schedule "1" Refinanced Loans Schedule "2.21" Terms Relating to Last 24 Months of Term/No Extension Schedule "2.22" Terms Relating to Conversion Period Schedule "6.3" Required Orders, Consents and Approvals Schedule "8.2(ii)" Existing Indebtedness Schedule "8.6(iv)" Existing Liens CREDIT AGREEMENT THIS AGREEMENT is entered into as of June 27, 1996, among CONTINENTAL HOMES HOLDING CORP., a Delaware corporation, the Banks listed on the signature pages of this Agreement, and BANK ONE, ARIZONA, NA, a national banking association, as Agent. The parties hereto agree as follows: ARTICLE I DEFINITIONS ----------- As used in this Agreement: "Acquisition" means any transaction, or any series of related transactions, consummated on or after the date of this Agreement, by which Borrower or any Guarantor (i) acquires any going concern or all or substantially all of the assets of any firm, corporation or division thereof, whether through purchase of assets, merger or otherwise or (ii) directly or indirectly acquires (in one transaction or as the most recent transaction in a series of transactions) at least a majority (in number of votes) of the securities of a corporation which have ordinary voting power for the election of directors (other than securities having such power only by reason of the happening of a contingency) or a majority (by percentage or voting power) of the outstanding partnership or other ownership interests of a partnership, joint venture, limited liability company or other similar business organization. "Adjusted Consolidated Tangible Net Worth" means Consolidated Tangible Net Worth, plus (i) Indebtedness evidenced by the Convertible Notes, but only to the extent that the maturity date of such Indebtedness will occur after the Facility Termination Date, and (ii) any other Public Indebtedness constituting convertible subordinated notes with convertible and subordination features similar to the Convertible Notes, but only to the extent that the maturity date of such Indebtedness will occur after the Facility Termination Date. Adjusted Consolidated Tangible Net Worth shall specifically not include the Net Worth of any Subsidiary (taken as a whole on a consolidated basis) engaged primarily or substantially in the business of mortgage lending or providing title insurance. As used in this definition, "Net Worth" means, as to each such Subsidiary (taken as a whole on a consolidated basis), the sum of (A) all capital accounts (including without limitation, any paid-in capital, capital surplus, and retained earnings), less (B) all advances or other sums or consideration paid and outstanding from such Subsidiary to Borrower, all as determined in conformity with GAAP. "Advance" means a borrowing hereunder consisting of the aggregate amount of the several Loans made by Banks (or Swing Line Advances made by Bank One) to Borrower of the same Type and, in the case of a LIBOR Advance, for the same Interest Period. "Affected Bank" is defined in Section 2.23. "Affiliate" of any Person means any other Person directly or indirectly controlling, controlled by or under common control with such Person. A Person shall be deemed to control another Person if the controlling Person beneficially owns (within the meaning of Rule 13d-3 of the Securities Exchange Act of 1934, as amended) 10% or more of any class of voting securities (or other ownership interests) of the controlled Person or possesses, directly or indirectly, the power to direct or cause the direction of the management or policies of the controlled Person, whether through ownership of stock, by contract or otherwise. "Agent" means Bank One, Arizona, NA, a national banking association, in its capacity as agent for Banks pursuant to Article XIII, and not in its individual capacity as a Bank, and any successor Agent appointed pursuant to Article XIII. "Aggregate Available Credit" means the aggregate of the Available Credits of all of Banks. "Aggregate Commitment" means the aggregate of the Commitments of all Banks, as reduced from time to time pursuant to the terms hereof. As of the date of this Agreement, the Aggregate Commitment is $110,000,000.00. "Aggregate Senior Indebtedness" means the aggregate principal balance outstanding with respect to (i) the Senior Notes, (ii) the Old Senior Notes, (iii) any Refinancing Indebtedness of the Senior Notes and the Old Senior Notes, and (iv) any other Public Indebtedness except (A) Indebtedness evidenced by the Convertible Notes, but only to the extent that the maturity date of such Indebtedness will occur after the Facility Termination Date, and (B) any other Public Indebtedness constituting convertible subordinated notes with convertible and subordination features similar to the Convertible Notes, but only to the extent that the maturity date of such Indebtedness will occur after the Facility Termination Date. "Agreement" means this Credit Agreement, as it may be amended or modified and in effect from time to time. "Applicable Floating Rate Margin" means, as at any date of determination, the margin indicated in Section 2.11 as then applicable in the determination of the Floating Rate. "Applicable Letter of Credit Rate" means, as at any date of determination, the rate per annum indicated in Section 4.7(b) as then applicable in the determination of the Facility Letter of Credit Fee under Section 4.7. "Applicable LIBOR Rate Margin" means, as at any date of determination, the margin indicated in Section 2.11 as then applicable in the determination of LIBOR Rates. "Applicable Margin(s)" means the Applicable LIBOR Rate Margin and/or the Applicable Floating Rate Margin, as the case may be. -2- "Applicable Unused Commitment Rate" means, as at any date of determination, the rate per annum indicated in Section 2.11 as then applicable in the determination of the Unused Commitment Fee under Section 2.5(b). "Article" means an article of this Agreement unless another document is specifically referenced. "Authorized Officer" means any one or more of the Chairman, President, Senior Vice President or any Vice President, Chief Financial Officer, or other officer of Borrower or each Guarantor, as applicable, acting singly or together, in accordance with the applicable resolutions and bylaws of Borrower or such Guarantor. "Available Credit" means, at any date with respect to any Bank, the amount (if any) by which such Bank's Commitment exceeds the sum of (i) the outstanding principal balance of such Bank's Loans as of such date, plus (ii) such Bank's ratable share (determined in accordance with Section 4.6) of the Facility Letter of Credit Obligations as of such date, plus (iii) such Bank's ratable share (ratable in proportion to the ratio that such Bank's Commitment bears to the Aggregate Commitment) of (A) the Set Aside Amount less (B) any portion of the Set Aside Amount that has been advanced by Banks pursuant to this Agreement and repaid by Borrower. "Bank One" means Bank One, Arizona, NA, in its individual capacity, and its successors. "Banks" means the lending institutions listed on the signature pages of this Agreement and their respective successors and assigns. "Borrower" means CONTINENTAL HOMES HOLDING CORP., a Delaware corporation, and its successors and assigns. "Borrowing Base" means, with respect to an Inventory Valuation Date for which it is to be determined, an amount equal to the sum of the following assets of all Guarantors (but only to the extent that such assets are not subject to any Liens other than Permitted Liens): (i) the Receivables, multiplied by ninety percent (90%), plus (ii) the Housing Unit Costs, multiplied by ninety percent (90%), plus (iii) the book value of Finished Lots, multiplied by seventy percent (70%), plus (iv) the book value of Land Under Development, multiplied by fifty percent (50%); -3- provided, however, that the aggregate of the amounts calculated pursuant to clauses (iii) and (iv) shall not exceed, on any Inventory Valuation Date, sixty percent (60%) of the aggregate of the amounts calculated pursuant to clauses (i), (ii), (iii) and (iv). "Borrowing Base Certificate" means a written certificate in a form acceptable to Agent setting forth the amount of the Borrowing Base with respect to the calendar month most recently completed, certified as true and correct by an Authorized Officer of Borrower. "Borrowing Date" means a date on which an Advance is made hereunder. "Borrowing Notice" is defined in Section 2.8. "Business Day" means (i) with respect to any borrowing, payment or rate selection of LIBOR Advances, a day (other than a Saturday or Sunday) on which banks generally are open in Phoenix and New York for the conduct of substantially all of their commercial lending activities and on which dealings in United States dollars are carried on in the London interbank market, and (ii) for all other purposes, a day (other than a Saturday or Sunday) on which banks generally are open in Phoenix for the conduct of substantially all of their commercial lending activities. "Capitalized Lease" of a Person means any lease of Property by such Person as lessee which would be capitalized on a balance sheet of such Person prepared in accordance with GAAP. "Carlsbad Property" means the 417 acres owned by the Carlsbad Subsidiary in Carlsbad, California, located in San Diego County. "Carlsbad Subsidiary" means Rancho Carillo, Inc., a Delaware corporation and a Subsidiary of Borrower. "Capitalized Lease Obligations" of a Person means the amount of the obligations of such Person under Capitalized Leases which would be shown as a liability on a balance sheet of such Person prepared in accordance with GAAP. "Cash Equivalents" means: (a) direct obligations of the United States or any agency thereof or obligations guaranteed by the United States or any agency thereof, in each case maturing within 180 days after the date of acquisition thereof; (b) certificates of deposit maturing within 180 days after the date of acquisition thereof issued by a bank, trust company or savings and loan association which is organized under the laws of the United States or any state thereof having capital, surplus and undivided profits aggregating in excess of $250 million and a Keefe Bank Watch Rating of C or better; -4- (c) certificates of deposit maturing within 180 days after the date of acquisition thereof issued by a bank, trust company or savings and loan association organized under the laws of the United States or any state thereof other than banks, trust companies or savings and loan associations satisfying the criteria in (b) above; provided that the aggregate amount of all certificates of deposit issued to Borrower or any Subsidiary of Borrower at any one time by such bank, trust company or savings and loan association will not exceed $100,000.00; (d) commercial paper given the highest rating by two (2) established national credit rating agencies and maturing not more than 180 days after the date of the acquisition thereof; and (e) repurchase agreements or money market accounts which are fully secured by direct obligations of the United States or any agency thereof. "Change in Control" means (a) as to Borrower, the acquisition by any Person, or two or more Persons acting in concert, of beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Securities Exchange Act of 1934) of 50% or more of the outstanding shares of voting stock of Borrower, or (b) as to any Guarantor, the acquisition by any Person (except Borrower or one or more of the Guarantors), or two or more Persons acting in concert of any beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Securities Exchange Act of 1934) of any of the outstanding shares of voting stock of such Guarantor. "Code" means the Internal Revenue Code of 1986, as amended, reformed or otherwise modified from time to time. "Collateral" means the Presold Units, Spec Units, Model Units, Finished Lots, and Land Under Development owned by a Guarantor from time to time upon which Banks hold a properly perfected first and prior Deed of Trust as security for the Obligations. "Collateral Documents" is defined in Paragraph C(5) of Schedule "2.22." "Commitment" means, for each Bank, the obligation of such Bank to make Loans, and to participate in the Facility Letters of Credit in accordance with Section 4.6(a), not exceeding the amount set forth opposite its signature below or as set forth in any Notice of Assignment relating to any assignment that has become effective pursuant to Section 15.3.2, as such amount may be modified from time to time pursuant to the terms hereof. "Consolidated Indebtedness" means, at any date, the outstanding amount of all Indebtedness of Borrower and Guarantors, without duplication, all determined on a consolidated basis for Borrower in conformity with GAAP. For purposes of this definition, "Consolidated Indebtedness" shall specifically not include: -5- (i) Indebtedness of any Subsidiary that is not engaged in either the construction of Housing Units and/or land development for the future construction of Housing Units and such Indebtedness is not otherwise directly related to the construction of Housing Units and/or land development for the future construction of Housing Units; and (ii) Indebtedness evidenced by the Convertible Notes, and any other Public Indebtedness constituting convertible subordinated notes with convertible and subordination features similar to the Convertible Notes, but only to the extent, in each case, that the maturity date of such Indebtedness will occur after the Facility Termination Date; and (iii) Indebtedness evidenced by that Loan Agreement dated February - 7, 1996 between Surprise Village North L.L.C., an Arizona limited liability company, Continental Traditions L.L.C., an Arizona limited liability company (collectively the "Surprise Entities"), and Bank One, as thereafter amended, or in any Promissory Note, Revolving Commitment Note or other document or instrument relating to the loans (the "Surprise Loans") evidenced by such loan agreement including without limitation, (A) the Promissory Note dated February 7, 1996, in the original principal amount of $1,500,000.00 executed by Borrower and payable to Bank One, and (B) that Set Aside Agreement dated February 7, 1996 between Borrower and Bank One ("Set Aside Agreement"); and (iv) Indebtedness reflected on a consolidated balance sheet of Borrower with respect to options to acquire real property which was purchased by Borrower and sold to a third party within 360 days of such purchase for consideration at least equal to the amount paid by Borrower for such property less an amount equal to the value of such option. "Consolidated Interest Expense" means for any period, without duplication, the aggregate amount of interest which, in conformity with GAAP, would be set opposite the caption "interest expense" or any like caption on a consolidated income statement for Borrower (other than for Borrower's mortgage lending and title insurance Subsidiaries), including, without limitation, imputed interest included on Capitalized Lease Obligations, all commissions, discounts and other fees and charges owed with respect to Letters of Credit and bankers' acceptance financing, the net costs associated with Rate Hedging Obligations, amortization of other financing fees and expenses, the interest portion of any deferred payment obligation, amortization of discount or premiums, if any, and all other noncash interest expense, other than interest and other charges amortized to cost of sales. Consolidated Interest Expense includes, with respect to Borrower and Guarantors (other than for Borrower's mortgage lending and title insurance Subsidiaries), without duplication, all interest included as a component of cost of sales for such period. -6- "Consolidated Interest Incurred" means for any period, without duplication, the aggregate amount of interest which, in conformity with GAAP, would be set opposite the caption "interest expense" or any like caption on a consolidated income statement for Borrower (other than for Borrower's mortgage lending and title insurance Subsidiaries), including, without limitation, imputed interest included on Capitalized Lease Obligations, all commissions, discounts and other fees and charges owed with respect to Letters of Credit and bankers' acceptance financing, the net costs associated with Rate Hedging Obligations, amortization of other financing fees and expenses, the interest portion of any deferred payment obligation, amortization of discount or premiums, if any, and all other noncash interest expense other than interest and other charges amortized to cost of sales. Consolidated Interest Incurred includes, with respect to Borrower and Guarantors, without duplication, all capitalized interest for such period, all interest attributable to discontinued operations for such period to the extent not set forth on the income statement under the caption "interest expense" or any like caption, and all interest actually paid by Borrower or Guarantors (other than for Borrower's mortgage lending and title insurance Subsidiaries) under any contingent obligation during such period. "Consolidated Net Income" means, for any period, the net income (or loss) of Borrower on a consolidated basis for such period taken as a single accounting period, determined in conformity with GAAP. "Consolidated Tangible Net Worth" means, as to Borrower, at any date, the sum of all capital accounts (including without limitation, any paid-in capital, capital surplus, and retained earnings) determined on a consolidated basis in conformity with GAAP, less (i) its consolidated Intangible Assets, and (ii) loans and advances to directors, officers and employees of Borrower but excluding any arms-length mortgage loans made by any Subsidiary in the ordinary course of such Subsidiary's business. For purposes of this definition "Intangible Assets" means the amount (to the extent reflected in determining such consolidated stockholders' equity) of (I) all write-ups in the book value of any asset owned by Borrower or any Subsidiary, (II) any amount, however designated on the balance sheet, representing the excess of the purchase price paid for assets or stock acquired over the value assigned thereto on the books of Borrower or any Subsidiary, (III) all unamortized debt and debt issuance expense, deferred charges, goodwill, patents, trademarks, service marks, trade names, copyrights, organization or developmental expenses and other intangible items, and (IV) all items that would be considered intangible assets under GAAP. "Consolidated Tangible Net Worth Test" is defined in Section 9.1. "Controlled Group" means all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with Borrower, Guarantors or any Subsidiary, are treated as a single employer under Section 414 of the Code. "Conversion/Continuation Notice" is defined in Section 2.9. -7- "Convertible Notes" means the 6 7/8% Convertible Subordinated Notes due 2002 of Borrower issued in the principal amount of $86,250,000.00. "Convertible Notes Indenture" means that certain Indenture, dated November 1, 1995, between Borrower and Manufacturers and Traders Trust Company, as trustee, with respect to the Convertible Notes. "Conversion Date" means the first day of the Conversion Period, determined pursuant to Section 2.22. "Conversion Period" means the period of time commencing on the Conversion Date and expiring on the earlier of (i) the Facility Termination Date, or (ii) the expiration date determined pursuant to Section 2.22. The Conversion Period shall be either (A) a Secured Conversion Period, (B) an Unsecured Conversion Period, or (C) a Modified Secured Conversion Period. "Deed of Trust" means each and all Deeds of Trust, Assignment of Rents, Security Agreement and Fixture Filing, securing the Obligations, granted from time to time by a Guarantor, as Trustor, for the benefit of Agent on behalf of Banks, as Beneficiary, as the same may be amended or modified and in effect from time to time, each being substantially in the form of Exhibit A attached hereto (conformed as necessary with respect to the laws of the state where the Collateral described therein is located), and each and all Mortgages, Assignment of Rents, Security Agreement and Fixture Filing, securing the Obligations, granted from time to time by a Guarantor, as Mortgagor, for the benefit of Agent on behalf of Banks, as Mortgagee, as the same may be amended or modified and in effect from time to time, each being substantially in the form of Exhibit B attached hereto (conformed as necessary with respect to the laws of the state where the Collateral described therein is located). "Dividend" means (i) any dividend paid or declared by Borrower or any Guarantor, as applicable; (ii) any purchase, redemption, retirement or other acquisition by Borrower or any Guarantor, as applicable for value, or the setting aside of any funds or issuance of any warrants for such purpose, of any of the capital stock of Borrower or such Guarantor, as applicable now or hereafter outstanding or any interest therein; and (iii) as to any Guarantor, any distribution of assets, properties, cash, rights, obligations or other consideration or securities of such Guarantor, directly or indirectly, to Borrower. "Dollars" and the sign "$" mean lawful money of the United States of America. "Due Diligence Documents" is defined in Paragraph C(6) of Schedule "2.22." "EBITDA" means, for any period, without duplication, the following, all as determined on a consolidated basis for Borrower in conformity with GAAP, -8- (i) the sum of the amounts for such period of (a) Consolidated Net Income, (b) Consolidated Interest Expense, (c) charges against income for all federal, state and local taxes, (d) depreciation expense, (e) amortization expense, (f) other non-cash charges and expenses (but specifically excluding losses arising from the sale of a Subsidiary which were due in whole or in part to amortization of good will), and (g) any losses arising outside of the ordinary course of business which have been included in the determination of Consolidated Net Income, less (ii) any gains arising outside of the ordinary course of business which have been included in the determination of Consolidated Net Income. "Environmental Agreement" means each and all Environmental Indemnity Agreements executed by Borrower and Guarantors from time to time for the benefit of Banks and Agent, and relating to the Collateral, as the same may be amended or modified and in effect from time to time, each being substantially in the form of Exhibit C. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and any rule or regulation issued thereunder. "Event of Default" means an event described in Article X after the expiration of any applicable cure or notice period provided in Article X. "Excluded Taxes" is defined in Section 3.1(i). "Existing Letters of Credit" is defined in Section 4.4(f). "Extension Request" is defined in Section 2.21(a). "Facility Letter of Credit" means a Letter of Credit issued by the Issuing Bank for the account of Borrower in accordance with Article IV. "Facility Letter of Credit Fee" means a fee, payable with respect to each Facility Letter of Credit issued by the Issuing Bank, in an amount per annum equal to the product of (i) the Applicable Letter of Credit Rate [determined as of the date on which the quarterly installment of such fee is due, if the fee is payable in advance pursuant to Section 4.7(a), or determined as of the Issuance Date of such Facility Letter of Credit, if the fee is payable in arrears pursuant to Section 4.7(a)] and (ii) the face amount of such Facility Letter of Credit. "Facility Letter of Credit Obligations" means, at any date, the sum of (i) the aggregate undrawn face amount of all outstanding Facility Letters of Credit, plus (ii) the aggregate amount paid by an Issuing Bank on any Facility Letters of Credit to the extent (if any) not reimbursed by Borrower or by Banks under Section 4.4. -9- "Facility Maturity Date" means November 30, 1999, as the same may be extended as provided in Section 2.21. "Facility Termination Date" means the earlier of (i) the Facility Maturity Date, or (ii) the last day of the Conversion Period (if applicable) then in effect. "Federal Funds Effective Rate" means, for any day, an interest rate per annum 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 for such day (or, if such day is not a Business Day, for the immediately preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations at approximately 10:00 a.m., Phoenix time, on such day on such transactions received by Agent from three (3) Federal funds brokers of recognized standing selected by Agent in its sole discretion. "Financial Covenant Test" means each of the Consolidated Tangible Net Worth Test, the Leverage Test, and the Interest Coverage Test. "Finished Lots" means parcels of land owned by any Guarantor which are duly recorded and platted for use as Housing Units and zoned for such use, with respect to which all requisite governmental consents and approvals have been obtained and on which (i) all development activity has been completed, and (ii) water and sewer connections have been brought to the lot shown on the plat covering such parcel and are available for hook-up to a Housing Unit. The term "Finished Lot" shall also include any real property upon which the construction of a Housing Unit has commenced or has been completed, but shall specifically not include the Housing Unit (or any portion thereof). "Floating Rate" means, for any day, a rate per annum equal to (i) the Prime Rate for such day, plus (ii) the Applicable Floating Rate Margin, in each case changing when and as the Prime Rate changes. "Floating Rate Advance" means an Advance which bears interest at the Floating Rate. "Floating Rate Loan" means a Loan which bears interest at the Floating Rate. "GAAP" means generally accepted accounting principles in effect from time to time, consistently applied. "Guarantors" means ACHETER, INC., a Texas corporation, CH MORTGAGE COMPANY, a Colorado corporation, CHI CONSTRUCTION COMPANY, an Arizona corporation, CHI FINANCE CORP., an Arizona corporation, CONTINENTAL HOMES, INC., a Delaware corporation, CONTINENTAL HOMES OF FLORIDA, INC., a Florida corporation, CONTINENTAL HOMES OF TEXAS, INC., a Texas corporation, KDB HOMES, INC., a -10- Delaware corporation, L & W INVESTMENTS INC., a California corporation, MILBURN INVESTMENTS, INC., a Texas corporation, MILTEX MANAGEMENT, INC., a Texas corporation, MILTEX MORTGAGE OF TEXAS LIMITED PARTNERSHIP, a Texas limited partnership, RANCHO CARILLO, INC., a Delaware corporation, R.O.S. CORPORATION, a Texas corporation, SETTLEMENT CORPORATION, a Texas corporation, TRAVIS COUNTY TITLE COMPANY, a Texas corporation, and their successors and assigns, and any Subsidiary that shall hereafter become a Guarantor in accordance with Section 11.4 hereof, and any successors and assigns of any of the foregoing. "Guarantor" means any one of the Guarantors. "Guaranty" means a Guaranty, in substantially the form of Exhibit D, duly executed by Guarantors, as the same may be amended or modified and in effect from time to time. "Housing Unit" means a single-family dwelling (where construction has commenced), whether detached or attached (including condominiums but excluding mobile homes), and including the Finished Lot on which such dwelling is located, that is or will be available for sale by a Guarantor. Each "Housing Unit" is either a Presold Unit, a Spec Unit or a Model Unit. "Housing Unit Closing" means a closing of the sale of a Housing Unit by a Guarantor to a bona fide purchaser for value. "Housing Unit Cost" means, with respect to each Housing Unit, the total costs, expenses and fees necessary for or related to the construction of such Unit (including without limitation, the onsite cost of labor and materials related to construction of the Housing Unit, construction permits, building permits, tap fees, improvement district fees, fees charged by governmental authorities prior to the start of construction, and costs of upgrades and options), calculated in accordance with GAAP. "Housing Unit Cost" shall specifically exclude the acquisition cost and any other costs, expenses and fees associated with the Finished Lot or parcel on which such Housing Unit is located. "Indebtedness" of a Person means, without duplication, such Person's (i) obligations for borrowed money, (ii) obligations representing the deferred purchase price of Property or services (other than trade accounts payable and accrued expenses arising or occurring in the ordinary course of such Person's business), (iii) obligations, whether or not assumed, secured by Liens on, or payable out of the proceeds or production from, Property now or hereafter owned or acquired by such Person, (iv) obligations which are evidenced by notes, bonds, debentures, or other similar instruments, -11- (v) Capitalized Lease Obligations, (vi) net liabilities under Rate Hedging Obligations, (vii) all liabilities and obligations of others of the kind described in clauses (i) through (vi) and (viii) that such Person has guaranteed or that is otherwise its legal liability, and (viii) reimbursement obligations for which such Person is obligated with respect to a Letter of Credit; Indebtedness shall specifically not include contingent obligations with respect to a Letter of Credit. Indebtedness includes, without limitation, (A) in the case of Borrower, the Obligations and the obligations evidenced by the Senior Notes, the Old Senior Notes and the Convertible Notes and the documents executed in connection therewith, and (B) in the case of Guarantors, the obligations under the Guaranty, and the obligations under the guaranties executed pursuant to the Indenture. "Indenture" means that certain Indenture, dated as of April 15, 1996, between Borrower, guarantors party thereto, and First Union National Bank, as trustee, pursuant to which the Senior Notes were issued. "Interest Coverage Test" is defined in Section 9.2(b). "Interest Period" means, for each LIBOR Advance, the period commencing on the date of such LIBOR Advance and ending on the last day of the period selected by Borrower pursuant to the provisions herein and, thereafter, each subsequent period commencing on the last day of the immediately preceding Interest Period and ending on the last day of the period selected by Borrower pursuant to the provisions of this Agreement. The duration of each Interest Period shall be one (1), two (2), three (3), or six (6) months as selected by Borrower (A), for a new Advance, in the Borrowing Notice, or (B), for an outstanding Advance, in the Conversion/Continuation Notice; provided, however, that: (i) Whenever the last day of any Interest Period would otherwise occur on a day other than a Business Day, the last day of such Interest Period shall be extended to occur on the next succeeding Business Day, provided that if such extension would cause the last day of such Interest Period to occur in the next following calendar month, the last day of such Interest Period shall occur on the next preceding Business Day; and (ii) No Interest Period with respect to any LIBOR Advance shall extend beyond the Facility Termination Date. -12- "Inventory Valuation Date" means the last day of the most recent calendar month with respect to which Borrower is required to have delivered a Borrowing Base Certificate pursuant to Section 7.1(vi) hereof. "Investment" of a Person means any loan, advance, extension of credit (other than, as to Borrower and Guarantors, accounts receivable and extensions of trade credit arising in the ordinary course of business in accordance with normal trade practices of Borrower or such Guarantor, as the case may be), or contribution of capital by such Person to any other Person or any investment in, or purchase or other acquisition of, the stock, partnership, joint venture or limited liability company interests, notes, debentures or other securities of any other Person made by such Person. "Issuance Date" means the date on which a Facility Letter of Credit is issued, amended or extended. "Issuing Bank" means Bank One or such other Bank as Borrower, Agent and such other Bank may agree upon, that may from time to time issue Facility Letters of Credit. "Land Under Development" means parcels of land owned by any Guarantor which are zoned for Housing Units with respect to which development activity has commenced for the purpose of construction of Housing Units by such Guarantor; provided, however, that the term "Land Under Development" shall not include (i) any Finished Lots, (ii) any real property upon which the construction of a Housing Unit has commenced, and (iii) vacant land held by a Guarantor for future development or sale. For purposes of this definition, the construction of a Housing Unit shall be deemed to have commenced upon commencement of the trenching for the foundation of the Housing Unit. "Lending Installation" means, with respect to a Bank or Agent, any office, branch, banking subsidiary of the holding company of a Bank or Agent, or banking Affiliate of such Bank or Agent. "Letter of Credit" means a letter of credit or similar instrument which is issued by a financial institution upon the application of a Person or upon which such Person is an account party or for which such Person is in any way liable. "Leverage Multiplier" means, at the date hereof, 1.50, as such amount may hereafter be adjusted from time to time as provided in Section 9.2(c). "Leverage Test" is defined in Section 9.2(a). "LIBOR Advance" means an Advance which bears interest at a LIBOR Rate. -13- "LIBOR Base Rate" means, with respect to a LIBOR Advance for the relevant Interest Period, the rate of interest determined by Agent, based on Telerate System reports or other source as may be selected by Agent, to be the "London Interbank Offered Rate" at which deposits in United States dollars are offered by major banks in London, England, two (2) Business Days before the first day of the respective Interest Period, in the approximate amount of the relevant LIBOR Advance and having a maturity approximately equal to such LIBOR Advance's Interest Period. "LIBOR Loan" means a Loan which bears interest at a LIBOR Rate. "LIBOR Rate" means, with respect to a LIBOR Advance for the relevant Interest Period, the sum of (i) the quotient of (a) the LIBOR Base Rate applicable to such Interest Period, divided by (b) one minus the Reserve Requirement (expressed as a decimal) applicable to such Interest Period, plus (ii) the Applicable LIBOR Rate Margin. The LIBOR Rate shall be rounded to the next higher multiple of 1/16 of 1% if the rate is not such a multiple. "Lien" means any lien (statutory or other), mortgage, pledge, hypothecation, assignment (the purpose of which is to grant a security interest), deposit arrangement (the purpose of which is to grant a security interest), encumbrance or other security agreement or arrangement of any kind or nature whatsoever the purpose of which is to grant a security interest, whether or not filed or recorded or otherwise perfected (including the interest of a vendor or lessor under any conditional sale, any Capitalized Lease or any lease deemed to constitute a security interest, or any other title retention agreement). "Loan" means, with respect to a Bank, such Bank's portion of any Advance. For purposes of a Swing Line Advance, Bank One's portion of such Advance is 100%. "Loan Documents" means this Agreement, the Notes and any Reimbursement Agreements, and if applicable, the Deeds of Trust and Environmental Agreements. "Majority Banks" means at least three (3) Banks in the aggregate having more than fifty percent (50%) of the Aggregate Commitment, or if the Aggregate Commitment has been terminated, at least three (3) Banks in the aggregate holding more than fifty percent (50%) of the aggregate unpaid principal amount of the outstanding Advances; provided, however, if Agent and any Lending Installation(s) of Agent have in the aggregate fifty percent (50%) or more of the Aggregate Commitment or hold in the aggregate fifty percent (50%) or more of the aggregate unpaid principal amount of the outstanding Advances, as applicable, then "Majority Banks" shall mean all Banks other than Agent and its Lending Installation(s). "Material Adverse Effect" means a material adverse effect, based on commercially reasonable standards, on (i) the business, Property, condition (financial or otherwise), or results of operations of Borrower and Guarantors, taken as a whole, (ii) the ability of Borrower or any Guarantor to perform its obligations under any of the Loan Documents or the Guaranty, or (iii) -14- the validity or enforceability under applicable law of any of the Loan Documents or the Guaranty or the rights or remedies of Agent, Banks or any Issuing Bank thereunder. "Model Unit" means a Housing Unit constructed initially for inspection by prospective purchasers that is not intended to be sold until all or substantially all other Housing Units in the applicable subdivision are sold. "Modified Secured Conversion Period" means the period commencing on the first day of the first month following the second consecutive fiscal quarter (or the first fiscal quarter, as applicable) in which Borrower has failed to satisfy a Financial Covenant Test and expiring on the Facility Maturity Date, all as more specifically described in Section 2.22, during the term of which, among other things, (i) the Aggregate Commitment is reduced from time to time, and (ii) Borrower shall cause Guarantors to provide to Banks Collateral for the Obligations. "Multiemployer Plan" means a Plan maintained pursuant to a collective bargaining agreement or any other arrangement as described in Section 3(37) of ERISA to which Borrower, any Guarantor or any member of the Controlled Group is a party to which more than one employer is obligated to make contributions. "Non-Recourse Indebtedness" with respect to any Person means Indebtedness of such Person (i) for which the sole legal recourse for collection of principal and interest on such Indebtedness is against the specific property identified in the instruments evidencing or securing such Indebtedness and such property was acquired with the proceeds of such Indebtedness or such Indebtedness was incurred within ninety (90) days after the acquisition of such property and for which no other assets of such Person may be realized upon in collection of principal or interest on such Indebtedness, or (ii) that refinances Indebtedness described in clause (i) and for which the recourse is limited to the same extent described in clause (i), or (iii) in respect of the Carlsbad Property. "Note" means a promissory note, in substantially the form of Exhibit E hereto, duly executed by Borrower and payable to the order of a Bank in the amount of its Commitment, including any amendment, modification, renewal or replacement of such promissory note. "Notice of Assignment" is defined in Section 15.3.2. "Obligations" means all unpaid principal of and accrued and unpaid interest on the Notes, the Facility Letter of Credit Obligations, all accrued and unpaid fees and all expenses, reimbursements, indemnities and other obligations of Borrower to Banks or to any Bank, Agent, any Issuing Bank or any indemnified party hereunder arising under the Loan Documents. "Old Indenture" means that certain Indenture, dated as of April 1, 1992, between Borrower and First Union National Bank, formerly known as Fidelity Bank, National Association, as trustee, pursuant to which the Old Senior Notes were issued, as amended by that First -15- Supplemental Indenture dated March 22, 1994, and that Second Supplemental Indenture dated as of April 10, 1996. "Old Senior Notes" means the 12% Senior Notes due 1999 of Borrower in the maximum aggregate principal amount of $110,000,000.00 issued pursuant to the Old Indenture. "Participants" is defined in Section 15.2.1. "PBGC" means the Pension Benefit Guaranty Corporation, or any successor thereto. "Permitted Liens" means, as to each Guarantor, any of the following: (i) Liens for taxes, assessments or governmental charges or levies on such Guarantor's Property if the same (A) shall not at the time be delinquent or thereafter can be paid without penalty, or (B) are being contested in good faith and by appropriate proceedings and for which adequate reserves shall have been established on such Guarantor's books in accordance with GAAP. (ii) Liens imposed by law, such as carriers', warehousemen's, mechanics' and materialmen's Liens and other similar Liens arising in the ordinary course of business with respect to amounts that either (A) are not yet delinquent, or (B) are delinquent but are being contested in good faith by appropriate proceedings and for which adequate reserves shall have been established on such Guarantor's books in accordance with GAAP. (iii) Utility easements, rights of way, zoning restrictions, covenants, reservations, and such other burdens, encumbrances or charges against real property, or other minor irregularities of title, as are of a nature generally existing with respect to properties of a similar character and which do not in any material way interfere with the use thereof or the sale thereof in the ordinary course of business of such Guarantor. (iv) Easements, dedications, assessment district or similar Liens in connection with municipal financing and other similar encumbrances or charges, in each case reasonably necessary or appropriate for the development of real property of such Guarantor, and which are granted in the ordinary course of the business of such Guarantor, and which in the aggregate do not materially burden or impair the fair market value or use of such real property (or the project to which it is related) for the purposes for which it is or may reasonably be expected to be held. -16- "Person" means any natural person, corporation, firm, joint venture, partnership, limited liability company, association, enterprise, trust or other entity or organization, or any government or political subdivision or any agency, department or instrumentality thereof. "Plan" means an employee pension benefit plan which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code as to which Borrower, any Guarantor or any member of the Controlled Group may have any liability. "Presold Unit" means a Housing Unit owned by any Guarantor that is subject to a bona fide written agreement between such Guarantor and a third Person purchaser for sale in the ordinary course of such Guarantor's business of such Housing Unit and the related lot, accompanied by a cash earnest money deposit or down payment in an amount that is customary, and subject only to ordinary and customary contingencies to the purchaser's obligation to buy the Housing Unit and related Finished Lot. "Prime Rate" means the rate per annum most recently publicly announced by Bank One, or its successors, in Phoenix, Arizona, as its "prime rate," as in effect from time to time. The Prime Rate will change on each day the "prime rate" changes. The "prime rate" is not necessarily the best or lowest rate offered by said bank, and said bank may lend to its customers at rates that are at, above, or below its "prime rate." "Property" of a Person means any and all property, whether real, personal, tangible, intangible, or mixed, of such Person, or other assets owned, leased or operated by such Person. "Public Indebtedness" means Indebtedness evidenced by notes, debentures, or other similar instruments issued after the date of this Agreement pursuant to either (i) a registered public offering or (ii) a private placement of such instruments in accordance with an exemption from registration (other than Indebtedness evidenced by the Senior Notes, the Old Senior Notes or the Convertible Notes, or any Refinancing Indebtedness with respect to any of the foregoing) under the Securities Act of 1933 and/or the Securities Exchange Act of 1934 or similar law. "Purchasers" is defined in Section 15.3.1. "Rate Hedging Obligations" of a Person means any and all obligations of such Person, whether absolute or contingent and howsoever and whensoever created, arising, evidenced or acquired (including all renewals, extensions and modifications thereof and substitutions therefor), under (i) any and all agreements, devices or arrangements designed to protect at least one of the parties thereto from the fluctuations of interest rates, exchange rates or forward rates applicable to such party's assets, liabilities or exchange transactions, including, but not limited to, dollar-denominated or cross-currency interest rate exchange agreements, forward currency exchange agreements, forward rate currency or interest rate options, puts and warrants, (ii) any arrangement with any other Person whereby, directly or indirectly, such Person is entitled to receive from time to time periodic payments calculated by applying either a floating or a fixed rate -17- of interest on a stated notional amount in exchange for periodic payments made by such Person calculated by applying a fixed or a floating rate of interest on the same notional amount, including without limitation, interest rate swaps, caps, floors, collars and similar arrangements, and (iii) any and all cancellations, buy backs, reversals, terminations or assignments of any of the foregoing. "Receivables" means the net proceeds payable to, but not yet received by, any Guarantor following a Housing Unit Closing. "Refinanced Loans" means, severally and collectively, the loans listed on Schedule "1" hereto. "Refinancing Indebtedness" means Indebtedness that refunds, refinances or extends any Indebtedness (or that refunds, refinances or extends any refund, refinancing or extension of such Indebtedness), but only to the extent that (i) the Refinancing Indebtedness is subordinated to or pari passu with the Obligations (or Guarantors' obligations under the Guaranty, as applicable) to the same extent as the Indebtedness being refunded, refinanced or extended, (ii) the Refinancing Indebtedness is scheduled to mature no earlier than the earlier of (A) the then current maturity date of such Indebtedness, or (B) the Facility Maturity Date, (iii) such Refinancing Indebtedness is in an aggregate amount that is equal to or less than the sum of the aggregate amount then outstanding plus all amounts committed but undisbursed under the Indebtedness being refunded, refinanced or extended, (iv) the Person or Persons liable for the payment of such Refinancing Indebtedness are the same Person or Persons (or successor(s) thereto) that were liable for the Indebtedness being refunded, refinanced or extended when such Indebtedness was initially incurred, and (v) such Refinancing Indebtedness is incurred within 120 days after the Indebtedness being refunded, refinanced or extended is so refunded, refinanced or extended. "Regulation D" means Regulation D of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor thereto or other regulation or official interpretation of said Board of Governors relating to reserve requirements applicable to member banks of the Federal Reserve System. -18- "Regulation U" means Regulation U of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor thereto or other regulation or official interpretation of said Board of Governors relating to the extension of credit by banks for the purpose of purchasing or carrying margin stocks applicable to member banks of the Federal Reserve System. "Related Business" means any line or lines of business or business activity reasonably related to (i) the home building business, or (ii) a substantial business segment of Borrower, Guarantors and their Subsidiaries on the date hereof, all as reasonably determined by Agent. "Rejecting Bank" is defined in Section 2.21(b). "Reimbursement Agreement" means, with respect to a Facility Letter of Credit, such form of application therefor and form of reimbursement agreement therefor (whether in a single or several documents, taken together) as an Issuing Bank may employ in the ordinary course of business for its own account, with such modifications thereto as may be agreed upon by such Issuing Bank and Borrower and as are not materially adverse (in the reasonable judgment of such Issuing Bank and Agent) to the interests of Banks; provided, however, in the event of any conflict between the terms of any Reimbursement Agreement and this Agreement, the terms of this Agreement shall control. "Replacement Bank" is defined in Section 2.23. "Reportable Event" means a reportable event as defined in Section 4043 of ERISA and the regulations issued under such Section, with respect to a Plan, excluding, however, such events as to which the PBGC by regulation waived the requirement of Section 4043(a) of ERISA that it be notified within thirty (30) days of the occurrence of such event; provided, however, that a failure to meet the minimum funding standard of Section 412 of the Code and of Section 302 of ERISA shall be a Reportable Event regardless of the issuance of any such waiver of the notice requirement in accordance with either Section 4043(a) of ERISA or waiver of the funding requirements under Section 412(d) of the Code. "Required Banks" means (a) if one Bank has fifty percent (50%) or more of the Aggregate Commitment, at least three (3) Banks in the aggregate having at least 66-2/3% of the Aggregate Commitment or, if the Aggregate Commitment has been terminated and one Bank holds fifty percent (50%) or more of the aggregate unpaid principal amount of the outstanding Advances, at least three (3) Banks in the aggregate holding at least 66-2/3% of the aggregate unpaid principal amount of the outstanding Advances, or (b) in all other circumstances, Banks in the aggregate having at least 66-2/3% of the Aggregate Commitment or, if the Aggregate Commitment has been terminated, Banks in the aggregate holding at least 66-2/3% of the aggregate unpaid principal amount of the outstanding Advances. Solely for purposes of this definition, Agent and all of its Lending Installations that are Banks shall be deemed to be a single Bank. -19- "Reserve Requirement" means, with respect to an Interest Period, the maximum aggregate reserve requirement (including all basic, supplemental, marginal and other reserves) which is imposed under Regulation D on Eurocurrency liabilities (as defined therein). "Section" means a numbered section of this Agreement, unless another document is specifically referenced. "Secured Conversion Period" means the 24-month Conversion Period described in Section 2.22 during the term of which, among other things, (i) the Aggregate Commitment is reduced from time to time, and (ii) Borrower shall cause Guarantors to provide to Banks Collateral for the Obligations. "Senior Debt" means the Senior Notes or, if the Senior Notes are refinanced, the Refinancing Indebtedness with respect thereto. "Senior Debt Rating" means the publicly announced ratings by any two (2) of the following nationally recognized rating agencies (provided, however, that at least one (1) of the two (2) agencies shall be Moody's Investors Service, Inc. or Standard & Poor's Corporation): Moody's Investors Service, Inc., Standard & Poor's Corporation, Fitch's Investment Service, and Duff & Phelps Credit Rating Co., as selected by Borrower, on Borrower's Senior Debt; provided, however, (i) except as provided in clause (ii), if the two ratings are not identical, the Senior Debt Rating shall be the lower of the two ratings, (ii) if more than one rating gradation exists between the two ratings, the Senior Debt Rating shall be the rating that is one gradation below the higher of the two ratings, and (iii) if only one rating is announced, the Senior Debt Rating shall be the rating that is one gradation below the announced rating. The Senior Debt Rating shall change if and when such rating(s) change. "Senior Notes" means the 10% Senior Notes due April 15, 2006 of Borrower in the maximum aggregate principal amount of $150,000,000.00 issued pursuant to the Indenture. "Set Aside Agreement" is defined in clause (iii) of the definition of "Consolidated Indebtedness." "Set Aside Amount" is defined in Section 2.4. "Significant Breach" is defined in Section 2.22(b). "Single Employer Plan" means a Plan maintained by Borrower, any Guarantor or any member of the Controlled Group for employees of Borrower, any Guarantor or any member of the Controlled Group. "Spec Unit" means any Housing Unit owned by any Guarantor that is not a Presold Unit or a Model Unit. -20- "Subordinated Indebtedness" means any Indebtedness of Borrower the payment of which is subordinated to payment of the Obligations to the reasonable satisfaction of Agent. "Subsidiary" of a Person means (i) any corporation more than 50% of the outstanding securities having ordinary voting power for the election of the board of directors of which shall at the time be beneficially owned (within the meaning of Rule 13d-3 of the Securities Exchange Act of 1934, as amended) directly or indirectly, by such Person or by one or more of its Subsidiaries or by such Person and one or more of its Subsidiaries, or (ii) any partnership, association, joint venture, limited liability company or similar business organization more than 50% of the ownership interests having ordinary voting power of which shall at the time be so owned or controlled. Unless otherwise expressly provided, all references herein to a "Subsidiary" shall mean a direct or indirect Subsidiary of Borrower. "Substantial Portion" means, with respect to the Property of Borrower and Guarantors, taken as a whole, Property which represents more than 10% of the book value of the assets of Borrower and Guarantors, as shown in the consolidated financial statements of Borrower as of the beginning of the fiscal quarter in which such determination is made. "Surprise Entities" is defined in clause (iii) of the definition of "Consolidated Indebtedness." "Surprise Loans" is defined in clause (iii) of the definition of "Consolidated Indebtedness." "Swing Line Advances" is defined in Section 2.19. "Swing Line Advance Maturity Date" means that day that is the second Business Day following the date in which a Swing Line Advance was funded by Bank One. "Transferee" is defined in Section 15.4. "Type" means, with respect to any Advance, its nature as a Floating Rate Advance or LIBOR Advance. "Unfunded Liabilities" means the amount (if any) by which the present value of all vested nonforfeitable benefits under all Single Employer Plans exceeds the fair market value of the assets of such Plans allocable to such benefits, all determined as of the then most recent valuation date for such Plans, using the actuarial methods and assumptions utilized in the actuarial report for each such Plan as of such date. "Unmatured Event of Default" means an event which but for the lapse of time or the giving of notice, or both, would constitute an Event of Default. -21- "Unsecured Conversion Period" means the 12-month Conversion Period described in Section 2.22 during the term of which, among other things, (i) the Aggregate Commitment shall be reduced from time to time, and (ii) Borrower shall not be required to cause Guarantors to provide to Banks Collateral for the Obligations. "Unused Commitment" means, at any date with respect to any Bank, the amount (if any) by which such Bank's Commitment exceeds the sum of (i) the outstanding principal balance of such Bank's Loans as of such date, plus (ii) such Bank's ratable share (determined in accordance with Section 4.6) of the outstanding amount of the Facility Letters of Credit. "Unused Commitment Fee" means a fee payable by Borrower to each Bank with respect to such Bank's Unused Commitment, calculated in accordance with Section 2.5(b). "Warehouse Facility" means one or more commitments from one or more banks or other lending institutions to lend funds for the purpose of financing the making of mortgage loans originated by Borrower or any of its Subsidiaries. "Wholly-Owned Subsidiary" of a Person means (i) any Subsidiary all of the outstanding voting securities (or the election of the board of directors) of which shall at the time be beneficially owned (within the meaning of Rule 13d-3 of the Securities Exchange Act of 1934, as amended) directly or indirectly, by such Person or one or more Wholly-Owned Subsidiaries of such Person, or by such Person and one or more Wholly-Owned Subsidiaries of such Person, or (ii) any partnership, association, joint venture, limited liability company or similar business organization 100% of the ownership interests having ordinary voting power of which shall at the time be so owned or controlled. The foregoing definitions shall be equally applicable to both the singular and plural forms of the defined terms. ARTICLE II THE CREDITS ----------- 2.1 Commitment. From and including the date of this Agreement and prior to the Facility Termination Date, each Bank severally agrees, on the terms and conditions set forth in this Agreement, to make Loans and to issue Facility Letters of Credit to Borrower from time to time in amounts not to exceed in the aggregate at any one time outstanding the amount of its Commitment; provided, however, that (i) a Bank shall not be required to make any Loan or Loans in excess of the amount of such Bank's then Available Credit, and (ii) the aggregate principal amount of all Advances plus the aggregate amount of the Facility Letter of Credit Obligations plus the Aggregate Senior Indebtedness outstanding at any time and from time to time shall not exceed the Borrowing Base determined as of the most recent Inventory Valuation Date. Subject to the terms of this Agreement, Borrower may borrow, repay and reborrow at any time prior to the -22- Facility Termination Date. The Commitments to lend hereunder shall expire on the Facility Termination Date. 2.2 Required Payments. Any outstanding Advances and all other unpaid Obligations shall be paid in full by Borrower on the Facility Termination Date. Additionally, if for any reason at any time either (i) the principal amount of all Advances plus the aggregate amount of the Facility Letter of Credit Obligations outstanding plus the Set Aside Amount less any portion of the Set Aside Amount that has been advanced by Banks and thereafter repaid by Borrower exceeds the Aggregate Commitment, or (ii) the aggregate principal amount of all Advances plus the aggregate amount of the Facility Letter of Credit Obligations plus the Aggregate Senior Indebtedness outstanding exceeds the Borrowing Base determined as of the most recent Inventory Valuation Date, then: (a) Borrower shall, within five (5) days after notice from Agent, make a payment to Agent for the benefit of Banks in an amount equal to such excess principal amount; and (b) Until Borrower shall have made the payment to Agent described in subparagraph (a) above, Borrower shall not, directly or indirectly, declare, make or pay, or incur any liability to make or pay, or cause or permit to be declared, made or paid, any Dividend. The foregoing paragraph will not prevent the payment of any Dividend by Borrower within sixty (60) days after the date of its declaration if such Dividend could have been made on the date of its declaration in compliance with the foregoing provisions. 2.3 Ratable Loans. Each Advance hereunder, including without limitation, any Advance made by the Banks pursuant to Section 2.19(d), but excluding Swing Line Advances, shall consist of Loans made by the several Banks ratably in proportion to the ratio that their respective Commitments bear to the Aggregate Commitment. Swing Line Advances shall consist of Loans made by Bank One. 2.4 Types of Advances; Set Aside Amount. (a) The Advances may be Floating Rate Advances or LIBOR Advances, or a combination thereof, selected by Borrower in accordance with Sections 2.8 and 2.9. (b) Pursuant to the terms of the Set Aside Agreement, Borrower agreed to "set aside" a portion of the commitment amount under a $15,000,000.00 unsecured loan from Bank One to Borrower in the sum of $1,500,000.00 (the "Set Aside Amount") for purposes of paying certain release prices under the Surprise Loans, as more fully described in the Set Aside Agreement. The Set Aside Agreement shall be amended and restated contemporaneously with the execution -23- of this Agreement to be in the form attached as Exhibit L and shall continue to remain in full force and effect. Agent, within one (1) Business Day after receipt of written request from Bank One acting in its sole and absolute discretion and in its capacity as lender under the Surprise Loans, and without notice or liability to Borrower or any Guarantor, and regardless of whether the terms and conditions in this Agreement for Advances are satisfied, shall make an Advance to Bank One under this Agreement in the amount requested by Bank One under the Set Aside Agreement. All such Advances shall be Floating Rate Advances, subject to Borrower's rights under Article II hereof. 2.5 Fees; Reduction in Commitment. (a) Commitment Fee. Borrower agrees to pay to Agent, for the account of each Bank, a commitment fee, at a rate equal to the applicable rate set forth below, determined with respect to the amount of such Bank's initial Commitment notified to Agent during syndication and multiplied by the amount of such Bank's actual Commitment: Commitment Fee (as a percentage Bank's Initial Commitment of Bank's Commitment) ------------------------- ------------------------------- $30,000,000.00 or more .35% Less than $30,000,000.00 .30% The commitment fee shall be paid by Borrower to Agent in advance, contemporaneously with the execution of this Agreement, and shall be non-refundable in any event. (b) Unused Commitment Fee. Borrower agrees to pay to Agent for the account of each Bank an Unused Commitment Fee, at a rate per annum equal to the Applicable Unused Commitment Rate, calculated on the basis of a 360-day year in accordance with this Section from the date hereof and to and including the Facility Termination Date, and payable quarterly in arrears as of the first day of each January, April, July and October hereafter and on the Facility Termination Date. The Unused Commitment Fee shall be due and payable within ten (10) days after Borrower's receipt of a statement therefor from Agent. For each quarter (or portion thereof), the Unused Commitment Fee shall be equal to (A) such Bank's average daily Commitment during such quarter (or portion thereof) minus (B) such Bank's "average daily outstandings" for the quarter (or portion thereof) with respect to which the Unused Commitment Fee is being computed, with the resulting number multiplied by (C) the Applicable Unused Commitment Rate, and the final product divided by (D) four (4). -24- As used herein, "average daily outstandings" means the sum of (i) the outstanding principal balance of such Bank's Loans (including, with respect to Bank One only, the outstanding principal balance of Swing Line Advances) plus (ii) such Bank's ratable share (determined in accordance with Section 4.6) of the outstanding amount of the Facility Letters of Credit, all calculated for each day during the quarter (or portion thereof) for which the fee is being computed, divided by the number of days in that quarter (or portion thereof). If the Unused Commitment Fee is being computed for less than a full quarter, the number used in clause (D) above shall be computed on a daily basis for the number of days for which the fee is being computed. The Unused Commitment Fee shall continue to be payable during the Conversion Period. All accrued Unused Commitment Fees shall be payable on the effective date of any termination of the obligations of Banks to make Loans hereunder. (c) Extension Fee. If the Facility Maturity Date is extended pursuant to the provisions of Section 2.21, then Borrower shall pay to Agent, for the account of each Bank an extension fee for each such extension, at a rate equal to the applicable rate set forth below determined with respect to the amount of such Bank's Commitment: Extension Fee (as a percentage Bank's Commitment of Bank's Commitment) ----------------- ------------------------------ $30,000,000.00 or more .20% Less than $30,000,000.00 .175% The extension fee shall be paid by Borrower to Agent in advance, in the manner provided in Section 2.21(d). The extension fee shall be non-refundable in any event. (d) Reductions in Aggregate Commitment. Borrower may permanently reduce the Aggregate Commitment in whole, or in part ratably among Banks (in proportion to the ratio that their respective Commitment bear to the Aggregate Commitment) in integral multiples of $5,000,000.00 at any time or from time to time, upon at least three (3) Business Days' written notice to Agent, which notice shall specify the amount of any such reduction; provided, however, that the amount of the Aggregate Commitment may not be reduced below the sum of (i) the aggregate principal amount of the outstanding Advances plus (ii) the Facility Letter of Credit Obligations. -25- 2.6 Minimum Amount of Each Advance. Except with respect to Swing Line Advances, each Advance shall be in the minimum amount of $2,000,000.00 (and in multiples of $1,000,000.00 if in excess thereof). 2.7 Optional Principal Payments. Borrower may at any time or from time to time pay, without penalty or premium, all Floating Rate Advances, or, in a minimum aggregate amount of $1,000,000.00 or any integral multiple of $500,000.00 in excess thereof (except with respect to Swing Line Advances), any portion of the outstanding Floating Rate Advances upon one (1) Business Day's prior notice to Agent. Borrower may, (i) upon one (1) Business Day's prior notice to Agent, pay, without penalty or premium, any LIBOR Advance in full on the last day of the Interest Period for such LIBOR Advance, and (ii) upon three (3) Business Days' prior notice to Agent, prepay any LIBOR Advance in full prior to the last day of the Interest Period for such LIBOR Advance, provided that Borrower shall also pay at the time of such prepayment all amounts payable with respect thereto pursuant to Section 3.4 hereof. 2.8 Method of Selecting Types and Interest Periods for New Advances. Borrower, when requesting an Advance, shall select the Type of Advance and, in the case of each LIBOR Advance, the Interest Period applicable to each Advance from time to time. Borrower shall give Agent irrevocable notice (a "Borrowing Notice") in the form of Exhibit I not later than (a) 10:00 a.m., Phoenix time, one (1) Business Day before the Borrowing Date of each Floating Rate Advance (except a Swing Line Advance), (b) 10:00 a.m., Phoenix time, three (3) Business Days before the Borrowing Date of each LIBOR Advance, and (c) noon, Phoenix time, on the Borrowing Date of each Swing Line Advance, specifying: (i) the Borrowing Date, which shall be a Business Day, of such Advance, (ii) whether the Advance is a Swing Line Advance, (iii) the aggregate amount of such Advance, (iv) the Type of Advance selected; provided, however, that the aggregate number of LIBOR Advances outstanding at any one time shall not exceed five (5), and further provided that any Swing Line Advance shall be a Floating Rate Advance, and (v) in the case of each LIBOR Advance, the Interest Period applicable thereto. With respect to each Floating Rate Advance (except Swing Line Advances) and each LIBOR Advance, Agent shall notify Banks by noon, Phoenix time, on the date Agent receives the Borrowing Notice as described above. With respect to such Advances, not later than 11:00 a.m., Phoenix time, on each Borrowing Date, each Bank shall make available its Loan or Loans, in -26- funds immediately available in Phoenix to Agent at its address specified pursuant to Article XVI. Agent will make the funds so received from Banks available to Borrower at Agent's aforesaid address. Disbursements of all Advances (other than Swing Line Advances) to Borrower may be made not more frequently than one time per Business Day. Disbursements of all Swing Line Advances to Borrower may be made not more frequently than one time per Business Day, or on a more frequent basis as Bank One may agree. 2.9 Conversion and Continuation of Outstanding Advances. Floating Rate Advances shall continue as Floating Rate Advances unless and until such Floating Rate Advances are converted into LIBOR Advances. Each LIBOR Advance shall continue as a LIBOR Advance until the end of the then applicable Interest Period therefor, at which time such LIBOR Advance shall be automatically converted into a Floating Rate Advance unless Borrower shall have given Agent a Conversion/Continuation Notice requesting that, at the end of such Interest Period, such LIBOR Advance either continues as a LIBOR Advance for the same or another Interest Period or be repaid. Subject to the terms of Section 2.6, Borrower may elect from time to time to convert all or any part of an Advance of any Type into any other Type or Types of Advances; provided, however, that any conversion of any LIBOR Advance may be made on, and only on, the last day of the Interest Period applicable thereto, and further provided that the aggregate number of LIBOR Advances outstanding at any one time shall not exceed five (5). Borrower shall give Agent irrevocable notice (a "Conversion/Continuation Notice") of each conversion of an Advance or continuation of a LIBOR Advance not later than 10:00 a.m., Phoenix time, at least one (1) Business Day, in the case of a conversion into a Floating Rate Advance, or three (3) Business Days, in the case of a conversion into or continuation of a LIBOR Advance, prior to the date of the requested conversion or continuation, specifying: (i) the requested date which shall be a Business Day, of such conversion or continuation; (ii) the aggregate amount and Type of the Advance which is to be converted or continued; and (iii) the amount and Type(s) of Advance(s) into which such Advance is to be converted or continued and, in the case of a conversion into or continuation of a LIBOR Advance, the Interest Period applicable thereto. 2.10 Changes in Interest Rate, etc. Each Floating Rate Advance shall bear interest on the outstanding principal amount thereof, for each day from and including the date such Advance is made or is converted from a LIBOR Advance into a Floating Rate Advance pursuant to Section 2.9 to but excluding the date it becomes due or is converted into a LIBOR Advance pursuant to Section 2.9 hereof, at a rate per annum equal to the Floating Rate for such day. Changes in the rate of interest on any Advance maintained as a Floating Rate Advance will take effect simultaneously with each change in the Floating Rate or in the Applicable Floating Rate Margin. -27- Each LIBOR Advance shall bear interest from and including the first day of the Interest Period applicable thereto to (but not including) the last day of such Interest Period at the interest rate determined as applicable to such LIBOR Advance. No Interest Period may end after the Facility Termination Date. 2.11 Determination of Applicable Margins and Applicable Unused Commitment Rate.able Unused Commitment Rate (a) Senior Debt Rating. The Applicable Margins and the Applicable Unused Commitment Rate shall be determined by reference to the Senior Debt Rating, in accordance with the following table: Applicable Applicable Senior Debt LIBOR Rate Floating Rate Applicable Unused Rating Margin (%) Margin (%) Commitment Rate (%) - ----------- ---------- ------------- ------------------- BBB-/Baa3 or 1.00 0 0.25 higher BB+/Ba1 1.25 0 0.25 BB/Ba2 1.50 0.125 0.30 BB-/Ba3 1.75 0.125 0.30 B+/B1 2.00 0.250 0.35 Lower or no 2.25 0.250 0.35 Rating (b) Adjustment of Margins. The Applicable Floating Rate Margin and the Applicable Unused Commitment Rate shall be adjusted, as applicable from time to time, effective on the first Business Day after any change in the Senior Debt Rating. The applicable LIBOR Rate Margin in respect of any LIBOR Advance shall be adjusted, as applicable from time to time, effective on the first day of the Interest Period for any LIBOR Advance after any change in the Senior Debt Rating. (c) Changes to Ratings. Notwithstanding the foregoing, (i) if either of the two (2) rating agencies selected by Borrower for purposes of calculating the foregoing amounts shall not have in effect a Senior Debt Rating for a reason related to the creditworthiness of Borrower or Guarantors or to any act or failure to act on the part of Borrower or Guarantors, then the Applicable Margins and the Applicable Unused Commitment Rate shall be determined by reference to the last category listed above, and (ii) if the rating system used by either such rating agency shall change, or if neither rating agency shall have in effect a Senior Debt Rating and clause (i) above shall not be applicable, then Borrower and Banks, acting through Agent, shall negotiate in good faith to amend the references to -28- specific ratings in this definition to reflect such changed rating system or the non-availability of ratings from such rating agencies. 2.12 Rates Applicable After Event of Default. Notwithstanding anything to the contrary contained in Section 2.8, 2.9 or 2.10, during the continuance of an Event of Default the Required Banks may, at their option, by notice to Borrower (which notice may be revoked at the option of the Required Banks notwithstanding any provision of Section 11.2 requiring unanimous consent of Banks to changes in interest rates), declare that no Advance may be made as, converted into or continued as a LIBOR Advance after expiration of the applicable Interest Period. Notwithstanding anything to the contrary contained in Section 2.8, 2.9 or 2.10, during the continuance of an Unmatured Event of Default the Required Banks may, at their option, by notice to Borrower (which notice may be revoked at the option of the Required Banks notwithstanding any provision of Section 11.2 requiring unanimous consent of Banks to changes in interest rates), declare that no Advance may be made as or converted into a LIBOR Advance. During the continuance of an Event of Default, the Required Banks may, at their option, by notice to Borrower (which notice may be revoked at the option of the Required Banks notwithstanding any provision of Section 11.2 requiring unanimous consent of Banks to changes in interest rates), declare that (i) each LIBOR Advance shall bear interest for the remainder of the applicable Interest Period at the rate otherwise applicable to such Interest Period plus 2% per annum and (ii) each Floating Rate Advance shall bear interest at a rate per annum equal to the Floating Rate otherwise applicable to the Floating Rate Advance plus 2% per annum. 2.13 Method of Payment. All payments of the Obligations hereunder shall be made, without setoff, deduction, or counterclaim, in immediately available funds to Agent at Agent's address specified pursuant to Article XVI, or at any other Lending Installation of Agent specified in writing by Agent to Borrower, by noon (local time at the place of receipt) on the date when due (or with respect to Swing Line Advances, in accordance with Section 2.19), and, except for Swing Line Advances shall be applied ratably by Agent among Banks, in proportion to the ratio that each Bank's Commitment bears to the Aggregate Commitment. Each payment delivered to Agent for the account of any Bank shall be delivered promptly by Agent to such Bank in the same type of funds that Agent received at its address specified pursuant to Article XVI or at any Lending Installation specified in a notice received by Agent from such Bank. If Agent receives, for the account of a Bank, a payment from Borrower and fails to remit such payment to the Bank on the Business Day such payment is received (if received by noon, Phoenix time, by Agent) or on the next Business Day (if received after noon, Phoenix time, by Agent), Agent shall pay to such Bank interest on such payment at a rate per annum equal to the Federal Funds Effective Rate for each day for which such payment is so delayed. 2.14 Notes; Telephonic Notices. Each Bank is hereby authorized to record the principal amount of each of its Loans and each repayment on the schedule attached to its Note; provided, however, that the failure to so record shall not affect Borrower's obligations under such Note. Borrower hereby authorizes Agent to extend, convert or continue Advances, effect selections of Types of Advances and to transfer funds based on telephonic notices made by any person or -29- persons who Agent in good faith believes to be acting on behalf of Borrower. Borrower agrees to deliver promptly to Agent a written confirmation, if such confirmation is requested by Agent, of each telephonic notice signed by an Authorized Officer of Borrower. If the written confirmation differs in any material respect from the action taken by Agent, the records of Agent shall govern absent manifest error. 2.15 Interest Payment Dates; Interest Basis. Interest on all Advances shall be calculated on the basis of a 360 day year, based on the actual days elapsed. Interest accrued on each Advance shall be calculated as of the first day of each calendar month, commencing with the first such date to occur after the date hereof, and shall be payable within ten (10) days after Borrower's receipt of a statement therefor from Agent. Interest shall also be payable on any date on which such Advance is prepaid, whether due to acceleration or otherwise. Interest shall be payable for the day an Advance is made but not for the day of any payment on the amount paid if payment is received prior to noon (local time at the place of receipt). If any payment of principal of or interest on an Advance shall become due on a day which is not a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall be included in computing interest in connection with such payment. 2.16 Notification of Advances, Interest Rates, Prepayments and Commitment ReductionNotification of Advances, Interest Rates, Prepayments and Commitment Reductions. Promptly after receipt thereof, Agent will notify each Bank of the contents of each Aggregate Commitment reduction notice, Borrowing Notice, Conversion/Continuation Notice, and repayment notice received by it hereunder. Agent will notify each Bank of the interest rate applicable to each LIBOR Advance promptly upon determination of such interest rate and will give each Bank prompt notice of each change in the Floating Rate, the Applicable Margin or the Applicable Unused Commitment Rate. 2.17 Lending Installations. Each Bank may book its Loans at any Lending Installation selected by such Bank and may change its Lending Installation from time to time. All terms of this Agreement shall apply to any such Lending Installation and the Notes shall be deemed held by each Bank for the benefit of such Lending Installation. Each Bank may, by written or telex notice to Agent and Borrower, designate a Lending Installation through which Loans will be made by it and for whose account Loan payments are to be made. 2.18 Non-Receipt of Funds by Agent. Unless Borrower or a Bank, as the case may be, notifies Agent prior to the date on which such payment is due to Agent of (i) in the case of a Bank, the proceeds of a Loan or (ii) in the case of Borrower, a payment of principal, interest, fees or other amounts due under the Loan Documents to Agent for the account of Banks, that it does not intend to make such payment, Agent may assume that such payment has been made. Agent may, but shall not be obligated to, make the amount of such payment available to the intended recipient in reliance upon such assumption. If Borrower or such Bank, as the case may be, has not in fact made such payment to Agent, the recipient of such payment shall, on demand by Agent, repay to Agent the amount so made available together with interest thereon in respect of each day during the period commencing on the date such amount was so made available by Agent -30- until the date Agent recovers such amount at a rate per annum equal to (a) in the case of payment by a Bank, the Federal Funds Effective Rate for such day or (b) in the case of payment by Borrower, the interest rate applicable to the relevant Advance. 2.19 Swing Line. Notwithstanding the minimum amount of an Advance that may be requested and the minimum amount of an Advance repaid under this Agreement, Banks desire to fund Advances for Borrower in amounts that may be less than the minimum Advance amounts required under Section 2.6, and Banks desire to permit Borrower to repay Advances in amounts that may be less than the minimum repayment amounts required under Section 2.7. Such Advances made pursuant to this Section 2.19 shall be deemed to be Advances for purposes of this Agreement and are referred to herein as "Swing Line Advances." Swing Line Advances shall be requested, advanced, and repaid in accordance with the provisions and limitations of this Agreement relating to all Advances, subject to the following: (a) Aggregate Limit. The aggregate amount of all outstanding Swing Line Advances shall not exceed at any one time $10,000,000.00. (b) Floating Rate Advances. All Swing Line Advances shall be Floating Rate Advances. (c) Funding Swing Line Advances. Swing Line Advances shall be funded by Bank One pursuant to the procedures set forth in Section 2.8 of this Agreement. The principal amount of each Swing Line Advance, together with all accrued interest, shall be repaid by Borrower to Bank One in same day funds by 5:00 p.m. (or such later time as may be acceptable to Agent), Phoenix time, on the Swing Line Advance Maturity Date. Additionally, if the aggregate principal amount of all outstanding Swing Line Advances exceeds $10,000,000.00, Borrower shall pay to Bank One the excess amount in same day funds by noon, Phoenix time, on the first Business Day following the day that the excess amount occurs. (d) Repayment of Swing Line Advances. If Borrower fails to pay any Swing Line Advances on the applicable Swing Line Advance Maturity Date, then such Advances shall no longer be Swing Line Advances, but shall continue to be Floating Rate Advances for purposes of this Agreement. Each Bank shall be deemed to have irrevocably and unconditionally purchased and received from Agent an undivided interest and participation (ratably in proportion to the ratio that such Bank's Commitment bears to the Aggregate Commitment) in such Advances. In such event, as of 11:59 p.m., Phoenix time, on the Swing Line Advance Maturity Date, Agent shall notify each Bank of the total principal amount of all matured Swing Line Advances and each Bank's ratable share thereof. Upon receipt of such notice, each Bank shall promptly and unconditionally pay to Agent for the account of Bank One the amount of such Bank's share (ratably in -31- proportion to the ratio that such Bank's Commitment bears to the Aggregate Commitment) of such payment in same day funds, and Agent shall pay such amount, and any other amounts received by Agent for Bank One's account pursuant to this Section 2.19(d), to Bank One, in accordance with the payment provisions of Section 2.13. If Agent so notifies such Bank prior to 10:00 a.m., Phoenix time, on any Business Day, such Bank shall make available to Agent for the account of Bank One such Bank's share of the amount of such payment on such Business Day in same day funds. If Agent notifies such Bank after 10:00 a.m., Phoenix time, on any Business Day, such Bank shall make available to Agent for the account of Bank One such Bank's share of the amount of such payment on the next succeeding Business Day in same day funds. If and to the extent such Bank shall not have so made its share of the amount of such payment available to Agent for the account of Bank One, such Bank agrees to pay to Agent for the account of Bank One forthwith on demand such amount, together with interest thereon, for each day from the date such payment was first due until the date such amount is paid to Agent for the account of Bank One, at the Federal Funds Effective Rate. The failure of any Bank to make available to Agent for the account of Bank One such Bank's share of any such payment shall not relieve any other Bank of its obligation hereunder to make available to Agent for the account of Bank One its share of any payment on the date such payment is to be made. (e) Advances. The payments made by Banks to Bank One in reimbursement of Swing Line Advances shall constitute, and Borrower hereby expressly acknowledges and agrees that such payments shall constitute, Advances hereunder to Borrower and such payments shall for all purposes be treated as Advances to Borrower (notwithstanding that the amounts thereof may not comply with the provisions of Section 2.6 and 2.7). Such Advances shall be Floating Rate Advances, subject to Borrower's rights under Article II hereof. 2.20 Withholding Tax Exemption. At least five (5) Business Days prior to the first date on which interest or fees are payable hereunder for the account of any Bank, each Bank (if any) that is not incorporated under the laws of the United States of America, or a state thereof, agrees that it will deliver to each of Borrower and Agent two (2) duly completed copies of United States Internal Revenue Service Form 1001 or 4224, certifying in either case that such Bank is entitled to receive payments under this Agreement and the Notes without deduction or withholding of any United States federal taxes and an Internal Revenue Service Form W-8 or W-9 entitling such Bank to receive a complete exemption from United States tax backup withholding. Each Bank which so delivers a Form 1001 or 4224 further undertakes to deliver to each of Borrower and Agent two (2) additional copies of such form (or a successor form) on or before the date that such form expires (currently, three (3) successive calendar years for Form 1001 and one (1) calendar year for Form 4224) or becomes obsolete or after the occurrence of any event requiring a change in the most recent forms so delivered by it, and such amendments thereto or extensions or renewals thereof as may be reasonably requested by Borrower or Agent, in each case certifying that such -32- Bank is entitled to receive payments under this Agreement and the Notes without deduction or withholding of any United States federal taxes, unless an event (including without limitation any change in treaty, law or regulation) has occurred prior to the date on which any such delivery would otherwise be required which renders all such forms inapplicable or which would prevent such Bank from duly completing and delivering any such form with respect to it and such Bank advises Borrower and Agent that it is not capable of receiving payments without any deduction or withholding of United States federal tax. If a Bank does not provide duly executed forms to Borrower and Agent within the time periods set forth in the preceding paragraph, Borrower or Agent shall withhold taxes from payments to such Bank at the applicable statutory rates and Borrower shall not be required to pay any additional amounts as a result of such withholding. Upon the reasonable request of Borrower or Agent, each Bank that has not provided the forms or other documents, as provided above, on the basis of being a "United States person," shall submit to Borrower and Agent a certificate or other evidence to the effect that it is such a "United States person." 2.21 Extension of Facility Termination Date (a) Extension Requests. Borrower may request a two-year extension of the Facility Maturity Date by submitting a request for an extension to Agent (an "Extension Request") no more than 14 months nor less than 12 months prior to the then scheduled Facility Maturity Date. Promptly upon (but not later than five (5) Business Days after) receipt of the Extension Request, Agent shall notify each Bank of the contents thereof and shall request each Bank to approve the Extension Request. Each Bank approving the Extension Request shall deliver its written approval no later than sixty (60) days after the date of the Extension Request. If the approval of each of Banks is received by Agent within sixty (60) days after the date of the Extension Request (or as otherwise provided in Section 2.21(b)), Agent shall promptly so notify Borrower and each Bank, and the Facility Maturity Date shall be extended by two (2) years, and in such event Borrower may thereafter request further extension(s) of the then scheduled Facility Maturity Date in accordance with this Section 2.21. If any of Banks does not deliver to Agent such Bank's written approval to any Extension Request within sixty (60) days after the date of such Extension Request, the Facility Maturity Date shall not be extended, except as otherwise provided in Section 2.21(b) or 2.21(c). (b) Rejecting Banks/Full Assignment. If (i) any Banks ("Rejecting Banks") shall not approve an Extension Request, (ii) all rights and obligations of such Rejecting Banks under this Agreement and under the other Loan Documents (including, without limitation, their Commitment and all Loans owing to them) shall have been assigned, within ninety (90) days following such Extension Request, in accordance with Section 2.23, to one or more Replacement Banks who shall have approved in writing such Extension Request at the time of such -33- assignment, and (iii) no other Bank shall have given written notice to Agent of such Bank's withdrawal of its approval of the Extension Request, Agent shall promptly so notify Borrower and each Bank and the Facility Maturity Date shall be extended by two (2) years, and in such event Borrower may thereafter request further extension(s) as provided in Section 2.21(a). (c) Rejecting Banks/No Full Assignment. If (A) the Rejecting Banks shall not approve an Extension Request, (B) the provisions of clause (b)(ii) above do not apply, and (iii) no other Bank shall have given written notice to Agent of such Bank's withdrawal of its approval of the Extension Request, Agent shall promptly notify Borrower and each Bank and any Replacement Bank, and the Facility Maturity Date shall be extended by two (2) years, and in such event Borrower may thereafter request further extension(s) as provided in Section 2.21 (a); provided, however, that the Aggregate Commitment shall be automatically reduced, effective as of the first day of the extension period, and shall equal the aggregate Commitments of the Banks who are not Rejecting Banks and the Banks who are Replacement Banks. All rights and obligations of such Rejecting Banks under this Agreement and under the other Loan Documents (including, without limitation, their Commitment and all Loans owing to them) shall either be (I) assigned to Replacement Banks pursuant to Section 2.21(b), or (II) terminated, effective as of the then existing Facility Maturity Date (or such earlier date as Borrower and Agent may designate), in which case the terminated Bank shall have concurrently received, in cash, all amounts due and owing to the terminated Bank hereunder or under any other Loan Document, including without limitation the aggregate outstanding principal amount of the Loans owed to such Bank, together with accrued interest thereon through the date of such termination, all amounts payable under Sections 3.1 and 3.2 with respect to such Bank and all fees payable to such Bank hereunder (and payment of such amount may not be waived except with the consent of each Bank, as more specifically provided in Section 11.2(i)); provided that, upon such Bank's termination, such Bank shall cease to be a party hereto but shall continue to be entitled to the benefits of Article III and Section 12.7, as well as to any fees accrued hereunder and not yet paid, and shall continue to be obligated under Section 13.8 with respect to obligations and liabilities accruing prior to the termination of such Bank. (d) Approval of Extension. Within ten (10) days after Agent's notice to Borrower that all (or some, as applicable) of Banks have approved an Extension Request (whether pursuant to Section 2.21(a), (b) or (c)), Borrower shall pay to Agent for the account of each Bank approving the extension and each Replacement Bank an extension fee calculated in the manner set forth in Section 2.5(c). (e) No Extension. If the Extension Request is not approved pursuant to Section 2.21(a), (b) or (c), or if Borrower does not request an extension -34- pursuant to this Section 2.21, then during the twelve (12) months preceding the Facility Maturity Date, the terms and conditions set forth on Schedule "2.21" shall be deemed to be incorporated into this Agreement by this reference, and Borrower, Banks and Agent agree that the terms and conditions set forth in Schedule "2.21" shall be controlling to the extent the same are inconsistent with the terms and conditions of this Agreement, and Borrower, Banks and Agent shall act in accordance therewith. 2.22 Conversion Period (a) Commencement of Conversion Period. If Borrower fails to satisfy any Financial Covenant Test, and such failure in each case continues for two (2) consecutive fiscal quarters, then unless the Required Banks in their sole and absolute discretion agree otherwise, the Conversion Period shall automatically commence. The Conversion Date shall be first day of the first month after the second consecutive fiscal quarter of such failure. Borrower shall have the right to elect, by notice given to Agent on or before that day that is thirty (30) days after the Conversion Date, that the Conversion Period be an Unsecured Conversion Period or a Secured Conversion Period. If Borrower fails to provide such notice within such 30-day period, then Borrower shall be deemed to have elected that the Conversion Period be an Unsecured Conversion Period. (b) Significant Events. Notwithstanding the provisions of Section 2.22(a), if during any fiscal quarter Borrower fails to satisfy a Financial Covenant Test and either (I) With respect to the Consolidated Tangible Net Worth Test, Consolidated Tangible Net Worth is less than (i) $91,000,000.00 plus (ii) fifty percent (50%) of the Consolidated Net Income earned after March 1, 1996 plus (iii) one hundred percent (100%) of the net proceeds of capital stock issued by Borrower after March 1, 1996, or (II) With respect to the Leverage Test, Consolidated Indebtedness exceeds the product of 1.75 multiplied by Adjusted Consolidated Tangible Net Worth during any fiscal quarter, or (III) With respect to the Interest Coverage Test, the ratio of (A) EBITDA to (B) Consolidated Interest Incurred, is less than 1.5 to 1.0 during any fiscal quarter, then the Conversion Period shall be a Secured Conversion Period (or, subject to the provisions of Section 2.22(f) hereof, a Modified Secured Conversion Period, -35- as applicable). The Conversion Date shall be the first day of the first month after the fiscal quarter of such Significant Event. Each of the events described in clauses (I), (II) and (III) is referred to herein as a "Significant Event." (c) Unsecured Conversion Period. If Borrower elects, or is deemed to have elected pursuant to Section 2.22(a), that the Conversion Period be an Unsecured Conversion Period, then: (i) The Facility Termination Date shall be that date that is the day preceding the first anniversary date of the Conversion Date. (ii) From and after three (3) calendar months after the Conversion Date, the Aggregate Commitment (and each Bank's Commitment) in effect as of the Conversion Date shall be reduced on the first day after the end of each three-month period by a percentage of such Aggregate Commitment amount (or such Bank's Commitment amount) as follows: Percentage Percentage of Commitment of Commitment Period Reduction Remaining ------ --------- --------- 3 calendar months after Conversion Date 25% 75% 6 calendar months after Conversion Date 25% 50% 9 calendar months after Conversion Date 25% 25% 12 calendar months after Conversion Date 25% 0% (d) Secured Conversion Period. If Borrower elects pursuant to Section 2.22(a), or is deemed to have elected pursuant to Section 2.22(b), that the Conversion Period be a Secured Conversion Period, then: (i) The Facility Termination Date shall be that date that is the day preceding the second anniversary date of the Conversion Date. -36- (ii) From and after three (3) calendar months after the Conversion Date, the Aggregate Commitment (and each Bank's Commitment) in effect as of the Conversion Date shall be reduced on the first day after the end of each three-month period by a percentage of such Aggregate Commitment amount (or such Bank's Commitment amount) as follows: Percentage Percentage of Commitment of Commitment Period Reduction Remaining ------ --------- --------- 3 calendar months after Conversion Date 5% 95% 6 calendar months after Conversion Date 10% 85% 9 calendar months after Conversion Date 10% 75% 12 calendar months after Conversion Date 15% 60% 15 calendar months after Conversion Date 15% 45% 18 calendar months after Conversion Date 15% 30% 21 calendar months after Conversion Date 15% 15% 24 calendar months after Conversion Date 15% 0% (iii) Borrower shall cause Guarantors to provide, and Agent and Banks shall accept, Collateral for the Obligations in accordance with the terms of Schedule "2.22". Within thirty (30) days after the Conversion Date, Borrower shall cause Guarantors to provide to Agent all Collateral Documents relating to the Collateral. Within ninety (90) days after the Conversion Date, Borrower shall cause Guarantors to provide to Agent all Due Diligence Documents relating to the Collateral. -37- (iv) During the Conversion Period, the terms and conditions set forth on Schedule "2.22" shall be deemed to be incorporated into this Agreement by this reference, and Borrower, Banks and Agent agree that the terms and conditions set forth in Schedule "2.22" shall be controlling to the extent the same are inconsistent with the terms and conditions of this Agreement, and Borrower, Banks and Agent shall act in accordance therewith. (e) Failure During Certain Periods. Notwithstanding the provisions of Section 2.22(a) and 2.22(b) above, if Borrower fails to satisfy any Financial Covenant Test for two (2) consecutive fiscal quarters (or one fiscal quarter, if a Significant Event occurs) and the second such fiscal quarter (or the fiscal quarter, if a Significant Event occurs) occurs (i) during an Unsecured Conversion Period, or (ii) during a Secured Conversion Period, or (iii) during a Modified Secured Conversion Period, or (iv) during the twelve-month period immediately preceding the Facility Maturity Date where no Conversion Period is in effect, then the provisions of Section 2.22(a) and 2.22(b) shall not apply, and such failure shall not be deemed to be an Event of Default under this Agreement. If Borrower fails to satisfy any Financial Covenant Test for three (3) consecutive fiscal quarters, then an Event of Default shall have occurred. (f) Failure During End of Term. Notwithstanding the provisions of Section 2.22(a) above, if (A) Borrower fails to satisfy any Financial Covenant Test for two (2) consecutive fiscal quarters and the second such fiscal quarter occurs during the period that is twenty-four (24) months to thirteen (13) months immediately preceding the Facility Maturity Date (or, if a Significant Event occurs during the foregoing 24 to 13-month period), and (B) no Conversion Period is then in effect, then unless the Required Banks in their sole and absolute discretion agree otherwise, the Conversion Period shall automatically commence. The Conversion Date shall be first day of the first month after the second consecutive fiscal quarter (or the fiscal quarter, as applicable) of such failure. Borrower shall have the right to elect, by notice given to Banks on or before that day that is thirty (30) days after the Conversion Date, that the Conversion Period be an Unsecured Conversion Period or a Modified Secured Conversion Period; provided, however, that the Conversion Period shall be a Secured Conversion Period if a Significant Event has occurred. If Borrower fails to provide such notice within such 30-day period, then Borrower shall be deemed to have elected that the Conversion Period be an Unsecured Conversion Period. If Borrower elects (or is deemed to have elected) that the Conversion Period be an Unsecured Conversion Period, then the provisions of Section 2.22(c) shall apply. If Borrower elects that the Conversion Period be a Modified Secured Conversion Period, then: -38- (i) the Aggregate Commitment (and each Bank's Commitment) in effect as of end of the second fiscal quarter (or the fiscal quarter, as applicable) to which such failure or Significant Event relates shall be reduced on the first day after the end of each three-month period thereafter in an equal portion of such Aggregate Commitment amount (or such Bank's Commitment amount), such that the Aggregate Commitment amount (and each Bank's Commitment amount) shall be zero on the Facility Maturity Date. (ii) Borrower shall cause Guarantors to provide, and Agent and Banks shall accept, Collateral for the Obligations in accordance with the terms of Schedule "2.22". Within thirty (30) days after the end of the second fiscal quarter (or the fiscal quarter, as applicable) to which the failure or Significant Event relates, Borrower shall cause Guarantors to provide to Agent all Collateral Documents relating to the Collateral. Within ninety (90) days after the end of the second fiscal quarter (or the fiscal quarter, as applicable) to which such failure or Significant Event relates, Borrower shall cause Guarantors to provide to Agent all Due Diligence Documents relating to the Collateral. (iii) During the Conversion Period, the terms and conditions set forth on Schedule "2.22" shall be deemed to be incorporated into this Agreement by this reference, and Borrower, Banks and Agent agree that the terms and conditions set forth in Schedule "2.22" shall be controlling to the extent the same are inconsistent with the terms and conditions of this Agreement, and Borrower, Banks and Agent shall act in accordance therewith. 2.23 Replacement of Certain Banks. In the event a Bank (the "Affected Bank"): (i) shall have requested compensation from Borrower under Sections 3.1 or 3.2 to cover additional costs incurred by such Bank that are not being incurred generally by the other Banks, or (ii) shall have delivered a notice pursuant to Section 3.3 that such Affected Bank is unable to extend LIBOR Loans for reasons not generally applicable to the other Banks, or (iii) is a Rejecting Bank pursuant to Section 2.21, -39- then, in any such case, and at any time after such event occurs, Borrower or Agent may make written demands on such Affected Bank (with a copy to Agent in the case of a demand by Borrower and a copy to Borrower in the case of a demand by Agent) for the Affected Bank to assign, and such Affected Bank shall assign, pursuant to one or more duly executed assignment agreements in substantially the form provided for in Section 15.3.1, within five (5) Business Days after the date of such demand, to one or more financial institutions that comply with the provisions of Section 15.3, and that are selected by Borrower and/or Agent, that are reasonably acceptable to Agent or Borrower, as applicable, that Borrower or Agent, as the case may be, shall have engaged for such purpose (the "Replacement Bank"), all of such Affected Bank's rights and obligations under this Agreement and the other Loan Documents (including, without limitation, its Commitment and all Loans owing to it) in accordance with Section 15.3. If any Affected Bank fails to execute and deliver such assignment agreements within thirty (30) days after demand, then such Affected Bank shall have no further right to receive any amounts payable under Sections 3.1 and 3.2 with respect to such Affected Bank. Agent agrees, upon the occurrence of such events with respect to an Affected Bank and upon written request of Borrower, to use its reasonable efforts to obtain the commitments from one or more financial institutions to act as a Replacement Bank. Agent is authorized, but shall not be obligated to, execute one or more of such assignment agreements as attorney-in-fact for any Affected Bank failing to execute and deliver the same within five (5) Business Days after the date of such demand. Further, with respect to such assignment, the Affected Bank shall have concurrently received, in cash, all amounts due and owing to the Affected Bank hereunder or under any other Loan Document, including without limitation the aggregate outstanding principal amount of the Loans owed to such Bank, together with accrued interest thereon through the date of such assignment, amounts payable under Sections 3.1 and 3.2 with respect to such Affected Bank and all fees payable to such Affected Bank hereunder; provided that, upon such Affected Bank's replacement, such Affected Bank shall cease to be a party hereto but shall continue to be entitled to the benefits of Article III and Section 12.7, as well as to any fees accrued hereunder and not yet paid, and shall continue to be obligated under Section 13.8 with respect to obligations and liabilities accruing prior to the replacement of such Affected Bank. ARTICLE III CHANGE IN CIRCUMSTANCES ----------------------- 3.1 Yield Protection. If any law or any governmental or quasi-governmental rule, regulation, policy, guideline or directive (whether or not having the force of law), or any interpretation thereof, or the compliance of any Bank therewith, (i) subjects any Bank or any applicable Lending Installation to any tax, duty, charge or withholding on or from payments due from Borrower (excluding any taxes imposed on, or based on, or determined by reference to the net income of any Bank or applicable Lending Installation, including, without limitation, -40- franchise taxes, alternative minimum taxes and any branch profits tax (collectively, "Excluded Taxes")), any taxes imposed on, or based on, or determined by reference to or changes the basis of taxation of payments to any Bank in respect of its Loans or other amounts due it hereunder (except for Excluded Taxes), (ii) imposes or increases or deems applicable any reserve, assessment, insurance charge, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Bank or any applicable Lending Installation (other than reserves and assessments taken into account in determining the interest rate applicable to LIBOR Rates), or (iii) imposes any other condition or requirement the result of which is to increase the cost to any Bank or any applicable Lending Installation of making, funding or maintaining loans or reduces any amount receivable by any Bank or any applicable Lending Installation in connection with loans, or requires any Bank or any applicable Lending Installation to make any payment calculated by reference to the amount of loans held or interest received by it, by an amount deemed material by such Bank, then, within fifteen (15) days after demand by such Bank, Borrower shall pay such Bank that portion of such increased expense incurred or reduction in an amount received which such Bank determines is attributable to making, funding and maintaining its Loans and its Commitment; provided, however, that Borrower shall not be required to increase any such amounts payable to any Bank (1) if such Bank fails to comply with the requirements of Section 2.20 hereof or (2) to the extent that such Bank determines, in its sole reasonable discretion, that it can, after notice from Borrower, through reasonable efforts, eliminate or reduce the amount of tax liabilities payable (without additional costs or expenses unless Borrower agrees to bear such costs or expenses) or other disadvantages or risks (economic or otherwise) to such Bank or Agent. If any Bank receives a refund in respect of any tax for which such Bank has received payment from Borrower hereunder, such Bank shall promptly notify Borrower of such refund and such Bank shall repay the amount of such refund to Borrower, provided that Borrower, upon the request of such Bank, agrees to return such refund (plus any penalties, interest or other charges) to such Bank in the event such Bank is required to repay such refund. The determination as to whether any Bank has received a refund shall be made by such Bank and such determination shall be conclusive absent manifest error. 3.2 Changes in Capital Adequacy Regulations. If a Bank or Issuing Bank determines the amount of capital required or expected to be maintained by such Bank, any Lending Installation of such Bank or Issuing Bank or any corporation controlling such Bank or Issuing Bank is increased as a result of a Change, then, within fifteen (15) days after demand by such Bank or Issuing Bank, Borrower shall pay such Bank or Issuing Bank the amount necessary to -41- compensate for any shortfall in the rate of return on the portion of such increased capital which such Bank or Issuing Bank determines is attributable to this Agreement, its Loans or its obligation to make Loans hereunder, or its issuance or maintenance of or participation in, or commitment to issue, to maintain or to participate in, the Facility Letters of Credit hereunder (after taking into account such Bank's or Issuing Bank's policies as to capital adequacy). "Change" means (i) any change after the date of this Agreement in the Risk-Based Capital Guidelines or (ii) any adoption of or change in any other law, governmental or quasi-governmental rule, regulation, policy, guideline, interpretation, or directive (whether or not having the force of law) after the date of this Agreement which affects the amount of capital required or expected to be maintained by any Bank, Issuing Bank, Lending Installation or any corporation controlling any Bank or Issuing Bank. "Risk-Based Capital Guidelines" means (A) the risk-based capital guidelines in effect in the United States on the date of this Agreement, including transition rules, and (B) the corresponding capital regulations promulgated by regulatory authorities outside the United States implementing the July 1988 report of the Basle Committee on Banking Regulation and Supervisory Practices Entitled "International Convergence of Capital Measurements and Capital Standards," including transition rules, and any amendments to such regulations adopted prior to the date of this Agreement. 3.3 Availability of Types of Advances. If any Bank determines and notifies Agent that maintenance of any of such Bank's LIBOR Loans at a suitable Lending Installation would violate any applicable law, rule, regulation or directive, whether or not having the force of law, Agent shall suspend the availability of the affected Type of Advance and require any LIBOR Advances of the affected Type to be repaid; or if the Required Banks determine and notify Agent that (i) deposits of a type or maturity appropriate to match fund LIBOR Advances are not available, Agent shall suspend the availability of the affected Type of Advance with respect to any LIBOR Advances made after the date of any such determination, or (ii) an interest rate applicable to a Type of Advance does not accurately reflect the cost of making a LIBOR Advance of such Type, then, if for any reason whatsoever the provisions of Section 3.1 are inapplicable, Agent shall suspend the availability of the affected Type of Advance with respect to any LIBOR Advance made after the date of any such determination. 3.4 Funding Indemnification. If any payment of a LIBOR Advance occurs on a date which is not the last day of the applicable Interest Period, whether because of acceleration, prepayment or otherwise, or a LIBOR Advance is not made on the date specified by Borrower for any reason other than default by Banks, Borrower will indemnify each Bank for any loss or cost or expense incurred by it resulting therefrom, including, without limitation, any loss or cost in liquidating or employing deposits acquired to fund or maintain the LIBOR Advance. 3.5 Bank Statements; Survival of Indemnity. To the extent reasonably possible, each Bank shall designate an alternate Lending Installation with respect to its LIBOR Advances to reduce any liability of Borrower to such Bank under Sections 3.1 and 3.2 or to avoid the unavailability of a Type of Advance under Section 3.3, so long as such designation is not disadvantageous to such Bank. Each Bank or Issuing Bank shall deliver a written statement of -42- such Bank or Issuing Bank as to the amount due, if any, under Sections 3.1, 3.2 or 3.4. Such written statement shall set forth in reasonable detail the calculations upon which such Bank or Issuing Bank determined such amount and shall be final, conclusive and binding on Borrower in the absence of manifest error. Determination of amounts payable under such Sections in connection with a LIBOR Advance shall be calculated as though each Bank funded its LIBOR Advance through the purchase of a deposit of the type and maturity corresponding to the deposit used as a reference in determining the LIBOR Advance applicable to such Loan, whether in fact that is the case or not. Unless otherwise provided herein, the amount specified in the written statement shall be payable within three (3) days after receipt by Borrower of the written statement. The obligations of Borrower under Sections 3.1, 3.2 and 3.4 shall survive payment of the Obligations and termination of this Agreement. ARTICLE IV THE LETTER OF CREDIT FACILITY ----------------------------- 4.1 Facility Letters of Credit. The Issuing Bank agrees, on the terms and conditions set forth in this Agreement, to issue from time to time for the account of Borrower, through such offices or branches as it and Borrower may jointly agree, one or more Facility Letters of Credit in accordance with this Article IV, during the period commencing on the date hereof and ending on the Business Day prior to the Facility Termination Date. Each Facility Letter of Credit shall be either (i) a standby letter of credit to support obligations of Borrower or a Guarantor, contingent or otherwise, arising in the ordinary course of business, or (ii) a documentary letter of credit in respect of the purchase of goods or services by Borrower or a Guarantor in the ordinary course of business. 4.2 Limitations. No Issuing Bank shall issue, amend or extend, at any time, any Facility Letter of Credit: (i) if the aggregate maximum amount then available for drawing under Letters of Credit issued by such Issuing Bank, after giving effect to the Facility Letter of Credit or amendment or extension thereof requested hereunder, shall exceed any limit imposed by law or regulation upon such Issuing Bank; (ii) if, after giving effect to the Facility Letter of Credit or amendment or extension thereof requested hereunder, the aggregate principal amount of the Facility Letter of Credit Obligations would exceed $10,000,000.00; (iii) that, in the case of the issuance of a Facility Letter of Credit, is in, or in the case of an amendment of a Facility Letter of Credit, increases the face amount thereof by, an amount in excess of the then Aggregate Available Credit; -43- (iv) if, after giving effect to the Facility Letter of Credit or amendment or extension thereof requested hereunder, the aggregate principal amount of the Facility Letter of Credit Obligations plus the principal amount of all Advances outstanding plus the Aggregate Senior Indebtedness would exceed the Borrowing Base as of the most recent Inventory Valuation Date; (v) if such Issuing Bank receives written notice from Agent at or before noon, Phoenix time, on the proposed Issuance Date of such Facility Letter of Credit that one or more of the conditions precedent contained in Sections 5.1 or 5.2, as applicable, would not on such Issuance Date be satisfied, unless such conditions are thereafter satisfied and written notice of such satisfaction is given to such Issuing Bank by Agent; (vi) that has an expiration date (taking into account any automatic renewal provisions thereof) that is later than one (1) year after the Issuance Date, or such later time as the Issuing Bank may agree; provided, however in no event shall the expiration date be later than the Business Day next preceding the scheduled Facility Termination Date; or (vii) that is in a currency other than Dollars, or that is not consistent with the Uniform Customs and Practice for Documentary Credits (1993 Revision), International Chamber of Commerce Publication No. 500, as the same may be updated. 4.3 Conditions. In addition to being subject to the satisfaction of the conditions contained in Sections 5.1 and 5.2, as applicable, the issuance of any Facility Letter of Credit is subject to the satisfaction in full of the following conditions: (i) Borrower shall have delivered to the Issuing Bank at such times and in such manner as the Issuing Bank may reasonably prescribe a Reimbursement Agreement and such other documents and materials as may be reasonably required pursuant to the terms thereof, and the proposed Facility Letter of Credit shall be reasonably satisfactory to such Issuing Bank in form and content; and (ii) as of the Issuance Date no order, judgment or decree of any court, arbitrator or governmental authority shall enjoin or restrain such Issuing Bank from issuing the Facility Letter of Credit and no law, rule or regulation applicable to such Issuing Bank and no directive from any governmental authority with jurisdiction over the Issuing Bank shall prohibit such Issuing Bank from issuing Letters of Credit generally or from issuing that Facility Letter or Credit. -44- 4.4 Procedure for Issuance of Facility Letters of Credit. (a) Request for Facility Letter of Credit. Borrower shall give the Issuing Bank and Agent not less than five (5) Business Days' prior written notice of any requested issuance of a Facility Letter of Credit under this Agreement. Such notice shall specify (i) the stated amount of the Facility Letter of Credit requested, (ii) the requested Issuance Date, which shall be a Business Day, (iii) the date on which such requested Facility Letter of Credit is to expire, which date shall be in compliance with the requirements of Section 4.2(vi), (iv) the purpose for which such Facility Letter of Credit is to be issued (which shall be a purpose permitted pursuant to Section 7.2), and (v) the Person for whose benefit the requested Facility Letter of Credit is to be issued. At the time such request is made, Borrower shall also provide Agent and the Issuing Bank with a copy of the form of the Facility Letter of Credit it is requesting be issued. (b) Issuing Bank. Within two (2) Business Days after receipt of a request for issuance of a Facility Letter of Credit in accordance with Section 4.4(a), the Issuing Bank shall approve or disapprove, in its reasonable discretion, the form of such requested Facility Letter of Credit, but the issuance of such approved Facility Letter of Credit shall continue to be subject to the provisions of this Article IV. The Issuing Bank shall use reasonable efforts to notify Borrower of any changes in the Issuing Bank's policies or procedures that could reasonably be expected to affect adversely the Issuing Bank's approval of the form of any requested Facility Letters of Credit. (c) Confirmation of Issuance. Upon receipt of a request for issuance of a Facility Letter of Credit in accordance with Section 4.4(a), Agent shall determine, as of the close of business on the day it receives such request, whether the issuance of such Facility Letter of Credit would be permitted under the provisions of Sections 4.2(ii), (iii), (iv) and (v) and, prior to the close of business on the second Business Day after Agent received such request, Agent shall notify the Issuing Bank and Borrower (in writing or by telephonic notice confirmed promptly thereafter in writing) whether issuance of the requested Facility Letter of Credit would be permitted under the provisions of Sections 4.2(ii), (iii), (iv) and (v). If Agent notifies the Issuing Bank and Borrower that such issuance would be so permitted, then, subject to the terms and conditions of this Article IV and provided that the applicable conditions set forth in Sections 5.1 and 5.2 have been satisfied, the Issuing Bank shall, on the requested Issuance Date, issue the requested Facility Letter of Credit in accordance with the Issuing Bank's usual and customary business practices. The Issuing Bank shall give Agent written notice, or telephonic notice confirmed promptly thereafter in writing, of the issuance of a Facility Letter of Credit. -45- (d) Extension and Amendment. An Issuing Bank shall not extend or amend any Facility Letter of Credit unless the requirements of this Section 4.4 are met as though a new Facility Letter of Credit were being requested and issued; provided, however, that if the Facility Letter of Credit, as originally issued, sets forth such extension or amendment, then the Issuing Bank shall so extend or amend the Facility Letter of Credit upon the request of Borrower given in the manner set forth in Section 4.4(a) and upon satisfaction of the terms and conditions of Section 4.4(c). (e) Other Letters of Credit. Any Bank may, but shall not be obligated to, issue to Borrower Letters of Credit (that are not Facility Letters of Credit) for its own account, and at its own risk. None of the provisions of this Article IV shall apply to any Letter of Credit that is not a Facility Letter of Credit. (f) Existing Letters of Credit. As of the date of this Agreement, certain of the Banks have previously issued, and there are currently outstanding, Letters of Credit for the benefit of Borrower and/or a Guarantor (the "Existing Letters of Credit"), all pursuant to the Refinanced Loans. Such Existing Letters of Credit shall remain outstanding after the date of this Agreement. Borrower and/or the applicable Guarantor remain obligated with respect to the Existing Letters of Credit, and the Refinanced Loans shall remain outstanding obligations of Borrower to the extent of such Existing Letters of Credit. At the request of Borrower from time to time pursuant to, and subject to the limitations and procedures of, Section 4.4(a), the Existing Letters of Credit shall be converted to Facility Letters of Credit. The date of such conversion shall be deemed to be the date of issuance of such Facility Letter of Credit for purposes of this Agreement, including without limitation, for purposes of calculating the fees payable under Section 4.7. Immediately upon such conversion, the Issuing Bank, through Agent, shall be deemed to have sold and transferred, and each Bank shall be deemed to have irrevocably and unconditionally purchased and received from Agent, without recourse or warranty, in each case without further action on the part of any Person, an undivided interest and participation, (ratably in proportion to the ratio that such Bank's Commitment bears to the Aggregate Commitment) in such Facility Letter of Credit. Each Bank severally agrees to fund any disbursements by the Issuing Bank pursuant to Existing Letters of Credit by funding in accordance with Section 4.6. The Existing Letters of Credit converted to Facility Letters of Credit pursuant to this Section 4.4(f) shall be deemed to be Facility Letters of Credit for all purposes under this Agreement, and shall be subject to all terms and conditions hereof. 4.5 Duties of Issuing Bank. Any action taken or omitted to be taken by an Issuing Bank under or in connection with any Facility Letter of Credit, if taken or omitted in the absence of willful misconduct or gross negligence, shall not put such Issuing Bank under any resulting -46- liability to any Bank or, assuming that such Issuing Bank has complied with the procedures specified in Section 4.4, relieve any Bank of its obligations hereunder to such Issuing Bank. In determining whether to pay under any Facility Letter of Credit, the Issuing Bank shall have no obligation relative to Banks other than to confirm that any documents required to be delivered under such Facility Letter of Credit appear to have been delivered in compliance and that they appear to comply on their face with the requirements of such Facility Letter of Credit. 4.6 Participation (a) Proportionate Share of Banks. Immediately upon issuance by an Issuing Bank of any Facility Letter of Credit in accordance with Section 4.4, each Bank shall be deemed to have irrevocably and unconditionally purchased and received from such Issuing Bank, without recourse or warranty, an undivided interest and participation (ratably in proportion to the ratio that such Bank's Commitment bears to the Aggregate Commitment) in such Facility Letter of Credit. (b) Payment by Issuing Bank. In the event that an Issuing Bank makes any payment under any Facility Letter of Credit and Borrower shall not have repaid such amount to such Issuing Bank on or before the date of such payment by such Issuing Bank, such Issuing Bank shall promptly so notify Agent, which shall promptly so notify each Bank. Upon receipt of such notice, each Bank shall promptly and unconditionally pay to Agent for the account of such Issuing Bank the amount of such Bank's share (ratably in proportion to the ratio that such Bank's Commitment bears to the Aggregate Commitment) of such payment in same day funds, and Agent shall promptly pay such amount, and any other amounts received by Agent for such Issuing Bank's account pursuant to this Section 4.6(b), to such Issuing Bank. If Agent so notifies such Bank prior to 10:00 a.m., Phoenix time, on any Business Day, such Bank shall make available to Agent for the account of such Issuing Bank such Bank's share of the amount of such payment on such Business Day in same day funds. If and to the extent such Bank shall not have so made its share of the amount of such payment available to Agent for the account of such Issuing Bank, such Bank agrees to pay to Agent for the account of such Issuing Bank forthwith on demand such amount, together with interest thereon, for each day from the date such payment was first due until the date such amount is paid to Agent for the account of such Issuing Bank, at the Federal Funds Effective Rate. The failure of any Bank to make available to Agent for the account of such Issuing Bank such Bank's share of any such payment shall not relieve any other Bank of its obligation hereunder to make available to Agent for the account of such Issuing Bank its share of any payment on the date such payment is to be made. (c) Advances. The payments made by Banks to an Issuing Bank in reimbursement of amounts paid by it under a Facility Letter of Credit shall -47- constitute, and Borrower hereby expressly acknowledges and agrees that such payments shall constitute, Advances hereunder to Borrower and such payments shall for all purposes be treated as Advances to Borrower (notwithstanding that the amounts thereof may not comply with the provisions of Section 2.6). Such Advances shall be Floating Rate Advances, subject to Borrower's rights under Article II hereof. (d) Copies of Documents. Upon the request of Agent or any Bank, an Issuing Bank shall furnish to the requesting Agent or Bank copies of any Facility Letter of Credit or Reimbursement Agreement to which such Issuing Bank is party and such other documentation as may reasonably be requested by Agent or the Bank. (e) Obligations of Banks. The obligations of Banks to make payments to Agent for the account of an Issuing Bank with respect to a Facility Letter of Credit shall be irrevocable, not subject to any qualification or exception whatsoever and shall be made in accordance with, but not subject to, the terms and conditions of this Agreement under all circumstances notwithstanding: (i) any lack of validity or enforceability of this Agreement, any Facility Letter of Credit (except where due to the gross negligence or willful misconduct of the Issuing Bank), or any of the other Loan Documents; (ii) the existence of any claim, setoff, defense or other right which Borrower or any Guarantor may have at any time against a beneficiary named in a Facility Letter of Credit or any transferee of any Facility Letter of Credit (or any Person for whom any such transferee may be acting), such Issuing Bank, Agent, any Bank, or any other Person, whether in connection with this Agreement, any Facility Letter of Credit, the transactions contemplated herein or any unrelated transactions (including any underlying transactions between Borrower or any Subsidiary and the beneficiary named in any Facility Letter of Credit) other than the defense of payment in accordance with this Agreement or a defense based on the gross negligence or willful misconduct of the Issuing Bank; (iii) any draft, certificate or any other document presented under the Facility Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect of any statement therein being untrue or inaccurate in any respect so long as the payment by the Issuing Bank under such Facility Letter of Credit against -48- presentation of such draft, certificate or other document shall not have constituted gross negligence or willful misconduct; (iv) the surrender or impairment of any security for the performance or observance of any of the terms of any of the Loan Documents; (v) any failure by Agent or the Issuing Bank to make any reports required pursuant to Section 4.8; or (vi) the occurrence of any Event of Default or Unmatured Event of Default. 4.7 Compensation for Facility Letters of Credit (a) Payment of Facility Letter of Credit Fee. Borrower agrees to pay to Agent, in the case of each outstanding Facility Letter of Credit, the Facility Letter of Credit Fee therefor, payable in quarterly installments in advance on the Issuance Date and on the first day of each January, April, July and October after the Issuance Date (which installment shall be a pro rata portion of the annual Facility Letter of Credit Fee for the 3-month period in which such payment date occurs). If the Issuance Date is a date other than the first day of January, April, July or October, then the first quarterly installment of the Facility Letter of Credit Fee shall be payable in arrears, on the first day of January, April, July, or October, as applicable, next following the Issuance Date. Such initial installment shall be a pro rata portion of the annual Facility Letter of Credit Fee for the period commencing on the Issuance Date and ending on the day preceding such payment date. Facility Letter of Credit Fees shall be calculated, on a pro rata basis for the period to which such payment applies, for actual days that will elapse during such period, on the basis of a 360 day year. Agent shall promptly remit such Facility Letter of Credit Fees, when paid, to Banks (ratably in the proportion that each Bank's Commitment bears to the Aggregate Commitment). (b) Calculation of Fee. The Facility Letter of Credit Fee shall be determined by reference to the Senior Debt Rating, in accordance with the following table: -49- Applicable Senior Debt Letter of Credit Rating Rate (%) ----------- ---------------- BBB-/Baa3 or higher 1.125 BB+/Ba1 1.125 BB/Ba2 1.250 BB-/Ba3 1.250 B+/B1 1.375 Lower or no 1.375 Rating (c) Adjustment of Fee. The Applicable Letter of Credit Rate shall be adjusted, as applicable from time to time, effective on the first January 1, April 1, June 1, or October 1 to occur after any change in the Senior Debt Rating. (d) Changes to Ratings. Notwithstanding the foregoing, (i) if either of the two (2) rating agencies selected by Borrower for purposes of calculating the Applicable Letter of Credit Rate shall not have in effect a Senior Debt Rating for a reason related to the creditworthiness of Borrower or Guarantors or to any act or failure to act on the part of Borrower or Guarantors, then the Applicable Letter of Credit Rate shall be determined by reference to the last category listed above, and (ii) if the rating system used by either such rating agency shall change, or if neither rating agency shall have in effect a Senior Debt Rating and clause (i) above shall not be applicable, then Borrower and Banks, acting through Agent, shall negotiate in good faith to amend the references to specific ratings in this definition to reflect such changed rating system or the non-availability of ratings from such rating agencies. (e) Amounts Owed to Issuing Bank. An Issuing Bank shall have the right to receive solely for its own account such amounts as Borrower may agree, in writing, to pay to such Issuing Bank with respect to issuance fees and for such Issuing Bank's out-of-pocket costs of issuing and servicing Facility Letters of Credit. 4.8 Issuing Bank Reporting Requirements. Each Issuing Bank shall, no later than the tenth day following the last day of each month, provide to Agent a schedule of the Facility Letters of Credit issued by it, in form and substance reasonably satisfactory to Agent, showing the Issuance Date, account party, original face amount, amount (if any) paid thereunder, expiration date and the reference number of each Facility Letter of Credit outstanding at any time during such month and the aggregate amount (if any) payable by Borrower to such Issuing Bank during the month pursuant to Section 3.2. Copies of such reports shall be provided promptly to each Bank and Borrower by Agent. -50- 4.9 Indemnification; Nature of Issuing Bank's Duties (a) Indemnity. In addition to amounts payable as elsewhere provided in this Article IV, Borrower hereby agrees to protect, indemnify, pay and hold harmless Agent and each Bank and Issuing Bank from and against any and all claims, demands, liabilities, damages, losses, costs, charges and expenses (including reasonable attorneys' fees) arising from the claims of third parties against Agent, Issuing Bank or Bank as a consequence, direct or indirect, of (i) the issuance of any Facility Letter of Credit other than, in the case of an Issuing Bank, as a result of its willful misconduct or gross negligence, or (ii) the failure of an Issuing Bank issuing a Facility Letter of Credit to honor a drawing under such Facility Letter of Credit as a result of any act or omission, whether rightful or wrongful, of any present or future de jure or de facto government or governmental authority. (b) Assumption of Risk. As among Borrower, Banks, Agent and the Issuing Bank, Borrower assumes all risks of the acts and omissions of, or misuse of Facility Letters of Credit by, the respective beneficiaries of such Facility Letters of Credit. In furtherance and not in limitation of the foregoing, neither the Issuing Bank nor Agent nor any Bank shall be responsible: (i) for the form, validity, sufficiency, accuracy, genuineness or legal effect of any document submitted by any party in connection with the application for and issuance of the Facility Letters of Credit, even if it should in fact prove to be in any or all respects invalid, insufficient, inaccurate, fraudulent or forged; (ii) for the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign a Facility Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, which may prove to be invalid or ineffective for any reason; (iii) for failure of the beneficiary of a Facility Letter of Credit to comply fully with conditions required in order to draw upon such Facility Letter of Credit; (iv) for errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, cable, telegraph, telex or otherwise, whether or not they be in cipher; (v) for errors in interpretation of technical terms; -51- (vi) for any loss or delay in the transmission or otherwise of any document required in order to make a drawing under any Facility Letter of Credit or of the proceeds thereof; (vii) for the misapplication by the beneficiary of a Facility Letter of Credit of the proceeds of any drawing under such Facility Letter of Credit; and (viii) for any consequences arising from causes beyond the control of Agent, the Issuing Bank and Banks including, without limitation, any act or omission, whether rightful or wrongful, of any present or future de jure or de facto government or governmental authority. None of the above shall affect, impair, or prevent the vesting of any of the Issuing Bank's rights or powers under this Section 4.9. (c) Good Faith. In furtherance and extension and not in limitation of the specific provisions hereinabove set forth, any action taken or omitted by an Issuing Bank under or in connection with the Facility Letters of Credit or any related certificates, if taken or omitted in good faith under commercially reasonable standards, shall not put such Issuing Bank, Agent or any Bank under any resulting liability to Borrower or relieve Borrower of any of its obligations hereunder to any such Person. (d) Certain Acts of Issuing Bank. Notwithstanding anything to the contrary contained in this Section 4.9, Borrower shall have no obligation to indemnify an Issuing Bank under this Section 4.9 in respect of any liability incurred by such Issuing Bank arising primarily out of the willful misconduct or gross negligence of such Issuing Bank, as determined by a court of competent jurisdiction, or out of the wrongful dishonor by such Issuing Bank of a proper demand for payment made under the Facility Letters of Credit issued by such Issuing Bank, unless such dishonor was made at the request of Borrower. 4.10 No Obligation to Issue. The Issuing Bank shall not at any time be obligated to issue any Facility Letter of Credit if such issuance would conflict with, or cause the Issuing Bank or any other Bank, to exceed any limits imposed by any applicable law, rule or regulation. 4.11 Obligations of Issuing Bank and Other Banks. Except to the extent that a Bank shall have agreed to be designated as an Issuing Bank, no Bank shall have any obligation to accept or approve any request for, or to issue, amend or extend, any Letter of Credit, and the obligations of the Issuing Bank to issue, amend or extend any Facility Letter of Credit are expressly limited by and subject to the provisions of this Article IV. -52- ARTICLE V CONDITIONS PRECEDENT -------------------- 5.1 Initial Advance. Banks shall not be required to make the initial Advance hereunder, and the Issuing Bank shall not be required to issue the initial Facility Letter of Credit hereunder, unless Borrower has paid to Agent the fees set forth in the letter agreement of even date herewith between Agent and Borrower, and Borrower has furnished to Agent with sufficient copies for Banks: (i) Copies of the certificate of incorporation of Borrower and each Guarantor, together with all amendments, and a certificate of good standing, all certified by the appropriate governmental officer in the jurisdiction of incorporation. (ii) Copies, certified by the Secretary or Assistant Secretary of Borrower and each Guarantor, of each such corporation's by-laws and of its Board of Directors' resolutions (and resolutions of other bodies, if any are deemed necessary by counsel for any Bank) authorizing the execution of the Loan Documents and the Guaranty. (iii) Incumbency certificates, executed by the Secretary or Assistant Secretary of Borrower and each Guarantor, which shall identify by name and title and bear the signature of the officers of the such corporation authorized to sign the Loan Documents and the Guaranty (as applicable) and (if applicable) to make borrowings hereunder and to request, apply for and execute Facility Letter of Credit Reimbursement Agreements with respect to Facility Letters of Credit hereunder, upon which certificates Agent, Banks and the Issuing Bank shall be entitled to rely until informed of any change in writing by Borrower or the applicable Guarantor. (iv) A written opinion of Cahill, Gordon & Reindel, counsel to Borrower and Guarantors, addressed to Agent and Banks in substantially the form of Exhibit F hereto. (v) A written opinion of General Counsel of Borrower, addressed to Agent and Banks in substantially the form of Exhibit G hereto. (vi) A written opinion of local counsel to Borrower and Guarantors, addressed to Agent and Banks in substantially the form of Exhibit H hereto. -53- (vii) Evidence acceptable to Agent indicating that no material accounting adjustments have occurred with respect to Borrower's consolidated financial statements in connection with the adoption of FASB 121. (viii) Notes payable to the order of each of Banks. (ix) Written money transfer instructions, in form acceptable to Agent, addressed to Agent and signed by an Authorized Officer, together with such other related money transfer authorizations as Agent may have reasonably requested. (x) The Guaranty duly executed by Guarantors. (xi) Evidence satisfactory to Agent (A) of payment in full (which payment may be made from the proceeds of the initial Advance hereunder) of all obligations of Borrower and Guarantors to, and termination of the financing arrangements evidenced by, the Refinanced Loans, and (B) that all Liens securing the obligations and financing arrangements related to the Refinanced Loans shall be discharged promptly, but in no event later than ninety (90) days, following the payment of such obligations. (xii) An accurate list of all of the Subsidiaries of Borrower and each Guarantor, setting forth their respective jurisdictions of incorporation or formation and the percentage of their respective capital stock or partnership interests owned by Borrower or any Guarantor or their Subsidiaries. (xiii) Such other documents as any Bank or Issuing Bank or their respective counsel may have reasonably requested. 5.2 Each Advance. Banks shall not be required to make any Advance (other than the conversion of an Advance of one Type to an Advance of another Type that does not increase the aggregate amount of outstanding Advances), unless on the applicable Borrowing Date, and an Issuing Bank shall not be required to issue, amend or extend a Facility Letter of Credit unless on the applicable Issuance Date: (i) There exists no Event of Default or Unmatured Event of Default. (ii) The representations and warranties contained in Article VI are true and correct in all material respects as of such Borrowing Date or Issuance Date except to the extent any such representation or warranty is stated to relate solely to an earlier date, in which case such representation or warranty shall be true and correct in all material respects on and as of such earlier date and except for changes permitted by this Agreement. -54- (iii) After the making of such Advance or issuance of such Facility Letter of Credit, (A) the principal amount of all Advances plus the aggregate amount of the Facility Letter of Credit Obligations outstanding shall not exceed the Aggregate Commitment, and (B) the aggregate principal amount of all Advances plus the aggregate amount of the Facility Letter of Credit Obligations plus the Aggregate Senior Indebtedness outstanding shall not exceed the Borrowing Base (determined as of the most recent Inventory Valuation Date). (iv) Borrower shall have delivered to Agent, within the time period specified in Section 2.8, a duly completed Borrowing Notice in substantially the form of Exhibit I hereto. (v) All legal matters incident to (A) the making of such Advance shall be reasonably satisfactory to Agent and its counsel and (B) the issuance of such Facility Letter of Credit shall be reasonably satisfactory to Agent, such Issuing Bank and their respective counsel. Each Borrowing Notice with respect to each such Advance and each request for a Facility Letter of Credit shall constitute a representation and warranty by Borrower that the conditions contained in Sections 5.2(i) and (ii) have been satisfied. ARTICLE VI REPRESENTATIONS AND WARRANTIES ------------------------------ Borrower represents and warrants to Banks and Agent that: 6.1 Existence and Standing. Borrower is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation and has all requisite authority to conduct its business in each jurisdiction in which its business is conducted (except to the extent that a failure to maintain such existence, good standing or authority would not reasonably be expected to have and does not have a Material Adverse Effect). Each Guarantor is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation and has all requisite authority to conduct its business in each jurisdiction in which its business is conducted (except to the extent that a failure to maintain such existence, good standing or authority would not reasonably be expected to have and does not have a Material Adverse Effect). 6.2 Authorization and Validity. Borrower has the corporate power and authority to execute and deliver the Loan Documents and to perform its obligations hereunder and thereunder. The execution and delivery by Borrower of the Loan Documents and the performance of its obligations thereunder have been duly authorized and the Loan Documents constitute legal, valid and binding obligations of Borrower enforceable against Borrower in accordance with their terms, -55- subject to bankruptcy, insolvency or similar laws affecting the enforcement of creditors' rights generally and general principles of equity. Guarantors have the corporate power and authority to execute and deliver the Guaranty and the Loan Documents and to perform its obligations thereunder. The execution and delivery by Guarantors of the Guaranty and the Loan Documents and the performance of its obligations thereunder have been duly authorized, and the Guaranty and the Loan Documents constitute the legal, valid and binding obligations of Guarantors enforceable against Guarantors in accordance with their terms, subject to bankruptcy, insolvency or similar laws affecting the enforcement of creditors' rights generally and general principles of equity. 6.3 No Conflict; Government Consent. Neither the execution and delivery by Borrower of the Loan Documents or by each Guarantor of the Guaranty and the Loan Documents, nor the consummation of the transactions herein contemplated, nor compliance with the provisions hereof or thereof will violate in any material respect any law, rule, regulation, order, writ, judgment, injunction, decree or award binding on Borrower or each Guarantor or Borrower's or such Guarantor's certificate of incorporation or bylaws or the provisions of any indenture (including without limitation the Indenture), instrument or agreement to which Borrower or any Guarantor is a party or is subject, or by which it, or its Property, is bound, or conflict with or constitute a default thereunder, or result in the creation or imposition of any Lien in, of or on the Property of Borrower or each Guarantor pursuant to the terms of any such indenture, instrument or agreement. Except as set forth on Schedule "6.3" hereto, no order, consent, approval, license, authorization, or validation of, or filing, recording or registration with, or exemption by, any governmental or public body or authority, or any subdivision thereof, is required to authorize, or is required in connection with the execution, delivery and performance of, or the legality, validity, binding effect or enforceability of, any of the Loan Documents or the Guaranty. 6.4 Financial Statements. The May 31, 1995 audited consolidated financial statements of Borrower and the February 28, 1996 unaudited financial statements of Borrower and the Subsidiaries delivered to Banks were prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Such statements fairly present, in all material respects, the consolidated financial condition and operations of Borrower and its Subsidiaries at such date and the consolidated results of their operations for the period then ended. 6.5 Material Adverse Change. Since the date of the financial statements (whether quarterly or annual) of Borrower and Guarantors described in Section 6.4, there has been no change in the business, Property, condition (financial or otherwise) or results of operations of Borrower and Guarantors (taken as a whole) that has had or would reasonably be expected to have a Material Adverse Effect. 6.6 Taxes. Borrower and each Guarantor have filed all United States federal income tax returns and all other material tax returns which are required to be filed and have paid all taxes due pursuant to said returns or pursuant to any assessment received by Borrower or any Guarantor, except such taxes, if any, as are being contested in good faith and as to which adequate -56- reserves have been provided. No tax Liens (except Permitted Liens) have been filed and no claims are being asserted with respect to any such taxes. The charges, accruals and reserves on the books of Borrower and each Guarantor in respect of any taxes or other governmental charges are adequate in accordance with GAAP. 6.7 Litigation and Contingent Obligations. Except as set forth in Borrower's form 10-K report for the period ending May 31, 1995, there is no litigation, arbitration, governmental investigation, proceeding or inquiry pending or, to the knowledge of any Authorized Officer, threatened against or affecting Borrower or any Guarantor that has had or would reasonably be expected to have a Material Adverse Effect. Other than any liability incident to such litigation, arbitration or proceedings, Borrower and each Guarantor have no material contingent obligations not provided for or disclosed in the financial statements (whether quarterly or annual) of Borrower and Guarantors that have been most recently delivered by Guarantors and Borrower to Agent that has had or would reasonably be expected to have a Material Adverse Effect. 6.8 Subsidiaries. All of the issued and outstanding shares of capital stock of Borrower and each Guarantor have been duly authorized and validly issued and are fully paid and non-assessable. 6.9 ERISA. The Unfunded Liabilities of all Single Employer Plans do not in the aggregate exceed $5,000,000.00. The withdrawal liabilities to Multiemployer Plans of the Borrower, any Guarantor and any other member of the Controlled Group do not, and are not reasonably expected to, exceed $5,000,000.00 in the aggregate. Each Plan complies in all material respects with all applicable requirements of law and regulations, no Reportable Event has occurred with respect to any Plan, neither Borrower, nor any Guarantor nor any other member of the Controlled Group has withdrawn from any Multiemployer Plan or initiated steps to do so, and no steps have been taken to terminate any Plan. 6.10 Accuracy of Information. All factual information heretofore or contemporaneously furnished in writing by or on behalf of Borrower or any Guarantor to Agent or any Bank for purposes of or in connection with this Agreement or any transaction contemplated hereby is, and all other such factual information hereafter furnished in writing by or on behalf of Borrower or any Guarantor to Agent or any Bank will be, true and accurate (taken as a whole), in all material respects, on the date as of which such information is dated or certified and not incomplete by omitting to state any material fact necessary to make such information (taken as a whole) not misleading at such time. 6.11 Regulation U. Neither Borrower, nor any Guarantor nor any Subsidiary is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying Margin Stock (as defined in Regulation U). 6.12 Material Agreements. Neither Borrower nor any Guarantor is in default in the performance, observance or fulfillment of any of the obligations, covenants or conditions -57- contained in (i) any agreement to which it is a party, (ii) the Indenture, the Old Indenture or the Convertible Notes Indenture, or (iii) any agreement or instrument evidencing or governing any other Indebtedness, which default (as to clauses (i) and (iii) only) has had or would reasonably be expected to have a Material Adverse Effect. 6.13 Labor Disputes and Acts of God. Neither the business nor the Property of Borrower or of any Guarantor is affected by any fire, explosion, accident, strike, lockout, or other labor dispute, drought, storm, hail, earthquake, embargo, act of God or of the public enemy, or other casualty (whether or not covered by insurance), which has had or would reasonably be expected to have a Material Adverse Effect. 6.14 Ownership. Borrower and each Guarantor have title to, or valid leasehold interests in, all of their respective properties and assets, real and personal, including the properties and assets and leasehold interests reflected in the financial statements referred to in Section 6.4 (except to the extent that (i) such properties or assets have been disposed of in the ordinary course of business or (ii) the failure to have such title has not had and would not reasonably be expected to have a Material Adverse Effect). 6.15 Operation of Business. Borrower and each Guarantor possess all licenses, permits, franchises, patents, copyrights, trademarks, and trade names, or rights thereto, to conduct their respective businesses substantially as now conducted, and as presently proposed to be conducted, with such exceptions as have not had and would not reasonably be expected to have a Material Adverse Effect. 6.16 Laws; Environment. Except as set forth in Borrower's form 10-K report for the period ending May 31, 1995, Borrower and each Guarantor have duly complied, and their businesses, operations and Property are in compliance, in all material respects, with the provisions of all federal, state, and local statutes, laws, codes, and ordinances and all rules and regulations promulgated thereunder (including without limitation those relating to the environment, health and safety). Except as set forth in the form 10-K described herein, Borrower and each Guarantor have been issued all required federal, state, and local permits, licenses, certificates, and approvals relating to (1) air emissions; (2) discharges to surface water or groundwater; (3) solid or liquid waste disposal; (4) the use, generation, storage, transportation, or disposal of toxic or hazardous substances or hazardous wastes (intended hereby and hereafter to include any and all such materials listed in any federal, state, or local law, code, or ordinance and all rules and regulations promulgated thereunder as hazardous); or (5) other environmental, health or safety matters. Except in accordance with a valid governmental permit, license, certificate or approval or as set forth in the form 10-K described herein, to the best knowledge of Borrower, there has been no material emission, spill, release, or discharge into or upon (1) the air; (2) soils, or any improvements located thereon; (3) surface water or groundwater; or (4) the sewer, septic system or waste treatment, storage or disposal system servicing any Property of Borrower or a Guarantor, of any toxic or hazardous substances or hazardous wastes at or from such Property. Neither Borrower nor any Guarantor has received notice of any written complaint, order, directive, claim, -58- citation, or notice from any governmental authority or any person or entity with respect to violations of law or damage by reason of Borrower's or any Guarantor's (1) air emissions; (2) spills, releases, or discharges to soils or improvements located thereon, surface water, groundwater or the sewer, septic system or waste treatment, storage or disposal systems servicing any Property; (3) solid or liquid waste disposal; (4) use, generation, storage, transportation, or disposal of toxic or hazardous substances or hazardous waste; or (5) other environmental, health or safety matters affecting Borrower or any Guarantor or its business, operation or Property. Except as set forth in the form 10-K described herein, neither Borrower nor any Guarantor has any material Indebtedness, obligation, or liability, absolute or contingent, matured or not matured, with respect to the storage, treatment, cleanup, or disposal of any solid wastes, hazardous wastes, or other toxic or hazardous substances (including without limitation any such indebtedness, obligation, or liability with respect to any current regulation, law or statute regarding such storage, treatment, cleanup, or disposal). A matter will not constitute a breach of this Section 6.16 unless it is reasonably likely to result in costs or liabilities to Borrower or a Guarantor in excess of $2,500,000.00 in the aggregate. 6.17 Investment Company Act. Neither Borrower nor any Guarantor is an "investment company" or a company "controlled" by an "investment company," within the meaning of the Investment Company Act of 1940, as amended. 6.18 Public Utility Holding Company Act. Neither Borrower nor any Guarantor nor any Subsidiary is 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," within the meaning of the Public Utility Holding Company Act of 1935, as amended. 6.19 Subordination Provisions. The Obligations to the Banks constitute Senior Indebtedness, as defined in the Convertible Notes Indenture, which is entitled to the benefits of the subordination provisions of the Convertible Notes. 6.20 Indenture Provisions. Each Guarantor is a Wholly-Owned Restricted Subsidiary, as that term is defined in the Indenture. Each Guarantor hereunder is a Guarantor, as that term is defined in the Indenture. The Commitments constitute a Bank Facility, as that term is defined in the Indenture. ARTICLE VII AFFIRMATIVE COVENANTS --------------------- During the term of this Agreement, unless the Required Banks shall otherwise consent in writing: 7.1 Financial Reporting. Borrower will maintain, and will cause each Guarantor to maintain, a system of accounting established and administered in accordance with GAAP, and furnish to Banks: (i) Within 90 days after the close of each fiscal year, (A) an unqualified (or qualified as reasonably acceptable to Agent) audited financial statements of Borrower certified by one of the "Big Six" accounting firms or other nationally recognized independent certified public accountants, reasonably acceptable to Banks, prepared in accordance with GAAP on a consolidated basis, including balance sheets as of the end of such fiscal year and statements of income and retained earnings and a statement of cash flows, in each case setting forth in comparative form the figures for the preceding fiscal year, and (B) unaudited financial statements, prepared in accordance with GAAP (excluding footnotes) on a consolidating basis for Borrower and its respective Subsidiaries, including balance sheets as of the end of such fiscal year and statements of income. (ii) Within forty-five (45) days after the close of the first three (3) quarterly periods of each fiscal year, for Borrower and each Guarantor and their respective Subsidiaries, on a consolidated and a consolidating basis, unaudited financial statements, including balance sheets as of the end of such period, statements of income and, with respect to the consolidated financial statements only, retained earnings and a statement of cash flows, in each case for the portion of the fiscal year ending with such fiscal period, all certified by an Authorized Officer. All consolidated balance sheets shall set forth in comparative form figures for the preceding year end. All such income statements shall reflect current period and year-to-date figures. (iii) Annually, together with the financial statements described in clause (i) above, a copy of the business plan of Borrower and each Guarantor for the upcoming two (2) fiscal years, including, as to Borrower, a consolidated balance sheet, statement of income and projection of cash flows. (iv) Within forty-five (45) days of the end of each of the first three quarterly periods of each fiscal year, a quarterly variance analysis comparing actual quarterly results versus projected quarterly results for the fiscal quarter most recently ended, including an analysis of revenues, Housing Unit Closings and operating profits (by operating division) for such period, and such other items as are reasonably requested by Agent, together with a written explanation of material variances. (v) Within 90 days after the end of each fiscal year, a variance analysis comparing actual annual results versus the business plan for the fiscal year most recently ended, including an analysis of revenues, Housing Unit Closings and -60- operating profits (by operating division) for such period, and such other items as are reasonably requested by Agent, together with a written explanation of material variances. (vi) By the twentieth day of each calendar month, a Borrowing Base Certificate of an Authorized Officer for Borrower, with respect to the Inventory Valuation Date occurring on the last day of the immediately preceding calendar month. (vii) Within forty-five (45) days after the end of each quarterly period of each fiscal year, a report identifying as to Borrower and its Subsidiaries the inventory of real estate operations, including land and housing units as of such date; such summary shall include a delineation of sold or unsold items in each category. (viii) Within forty-five (45) days after the end of each of the first three quarterly periods, and within ninety (90) days after the end, of each fiscal year, a certificate of an Authorized Officer as to Borrower's compliance with the Financial Covenant Tests in the form of Exhibit J hereto. (ix) Within 270 days after the close of each fiscal year, a statement of the Unfunded Liabilities of each Single Employer Plan, certified as correct by an actuary enrolled under ERISA (which requirement may be satisfied by the delivery of the most recent actuarial valuation of each such Single Employer Plan). (x) As soon as possible and in any event within ten (10) days after Borrower knows that any Reportable Event has occurred with respect to any Plan, a statement, signed by an Authorized Officer of Borrower, describing said Reportable Event and the action which Borrower (or any Guarantor) proposes to take with respect thereto. (xi) As soon as possible, and in any event within thirty (30) days after Borrower knows or has reason to know that any circumstances exist that constitute grounds entitling the PBGC to institute proceedings to terminate a Plan subject to ERISA with respect to Borrower or any member of the Controlled Group and promptly but in any event within two (2) Business Days of receipt by Borrower, any Guarantor or any member of the Controlled Group of notice that the PBGC intends to terminate a Plan or appoint a trustee to administer the same, and promptly but in any event within five (5) Business Days of the receipt of notice concerning the imposition of withdrawal liability in excess of $500,000.00 with respect to Borrower, any Guarantor or any member of the Controlled Group, a certificate of an Authorized Officer setting forth all relevant details of such event -61- and the action which Borrower (or any Guarantor) proposes to take with respect thereto. (xii) Promptly after the sending or filing thereof, copies of all proxy statements, financial statements (including form 10-K and 10-Q, exclusive of exhibits unless otherwise requested by Agent), and reports which Borrower sends to its stockholders, and copies of all regular (except form S-8), periodic, and special reports, and all registration statements (exclusive of exhibits unless otherwise requested by Agent) which Borrower is required to file with the Securities and Exchange Commission or any governmental authority which may be substituted therefor, or with any national securities exchange. (xiii) Promptly after the commencement thereof, notice of all actions, suits and proceedings before any court or governmental department, commission, board, bureau, agency, or instrumentality, domestic or foreign, affecting Borrower or any Guarantor (a) which, if determined adversely to Borrower or any Guarantor, could reasonably be expected to have a Material Adverse Effect or (b) in which liability in excess of $2,500,000.00 (in the aggregate with respect to any action, suit or proceeding) is claimed and alleged against Borrower or any Guarantor. (xiv) As soon as possible and in any event within ten (10) days after receipt by Borrower or any Guarantor, a copy of (a) any written notice or claim to the effect that Borrower or any Guarantor is or may be liable to any Person as a result of the release of any toxic or hazardous waste or substance into the environment, and (b) any notice alleging any violation of any federal, state or local environmental, health or safety law or regulation by Borrower or any Guarantor which, in the case of either (a) or (b), could reasonably be expected to have a Material Adverse Effect or could result in liability to Borrower or any Guarantor in excess of $2,500,000.00 (in the aggregate with respect to any notice or claim). (xv) Such other information (including non-financial information) as Agent may from time to time reasonably request. 7.2 Use of Proceeds. Subject to the limitations contained in this Agreement, Borrower will use the proceeds of Advances for working capital and general corporate purposes (including payment of reimbursement obligations with respect to Facility Letters of Credit and payment of the Set Aside Amount) and to repay outstanding Advances. Borrower will not, and will not permit any Guarantor or Subsidiary to, use any of the proceeds of the Advances to purchase or carry any "margin stock" (as defined in Regulation U) or, except as otherwise permitted by this Agreement, to purchase any securities in any transaction that is subject to Sections 13 and 14 of the Securities Exchange Act of 1934, as amended. -62- 7.3 Notice of Certain Events. Borrower will, and will cause each Guarantor to, give prompt notice in writing to Agent of the occurrence of (i) any Event of Default or Unmatured Event of Default, (ii) Borrower's failure to satisfy any Financial Covenant Test, and (iii) any other development, financial or otherwise, that has had or would be reasonably expected to have a Material Adverse Effect. 7.4 Conduct of Business. Except as otherwise permitted under this Agreement, Borrower will, and will cause each Guarantor to, carry on and conduct business in the same general manner and in substantially the same fields of enterprise as presently conducted and to do all things necessary to remain duly incorporated, validly existing and in good standing as a domestic corporation in their respective jurisdictions of incorporation and maintain all requisite authority to conduct business in each jurisdiction in which business is conducted; provided, however, that nothing contained herein shall prohibit the dissolution of a Guarantor as long as another Guarantor or Borrower succeeds to the assets, liabilities and business of the dissolved Guarantor. 7.5 Taxes. Borrower will, and will cause each Guarantor to, pay prior to delinquency all taxes, assessments and governmental charges and levies upon them or their income, profits or Property, except (i) those that solely encumber property abandoned or in the process of being abandoned and with respect to which there is no recourse to Borrower or any Subsidiary; (ii) those that are being contested in good faith by appropriate proceedings and with respect to which adequate reserves have been established in accordance with GAAP, and (iii) to the extent that the failure to do so would not reasonably be expected to have and does not have a Material Adverse Effect. 7.6 Insurance. Borrower will, and will cause each Guarantor to, maintain with financially sound and reputable insurance companies insurance on all their Property in such amounts and covering such risks as is consistent with sound business practice, and Borrower will furnish to Agent upon request full information as to the insurance carried. 7.7 Compliance with Laws. Borrower will, and will cause each Guarantor to, comply with all laws, rules, regulations, orders, writs, judgments, injunctions, decrees or awards to which it may be subject, except to the extent that the failure to do so would not reasonably be expected to have and does not have a Material Adverse Effect. 7.8 Maintenance of Properties. Borrower will, and will cause each Guarantor to, do all things necessary to maintain, preserve, protect and keep its Property in good repair, working order and condition, except to the extent that the failure to do so would not reasonably be expected to have and does not have a Material Adverse Effect. 7.9 Inspection. Borrower will, and will cause each Guarantor to, permit Agent and Banks, by their respective representatives and agents, to inspect any of the Property, corporate (or partnership) books and financial records of Borrower and Guarantors to examine and make -63- copies of the books of accounts and other financial records of Borrower and Guarantors, and to discuss the affairs, finances and accounts of Borrower and Guarantors with, and to be advised as to the same by, their respective officers at such reasonable times and intervals as Agent may designate. 7.10 Environment. Borrower will, and will cause Guarantor to, (i) comply, in all material respects, with the provisions of all federal, state, and local environmental, health, and safety laws, codes and ordinances, and all rules and regulations issued thereunder; (ii) promptly contain and remove or otherwise remediate any hazardous discharge from or affecting the Property of Borrower or any Guarantor, to the extent required by and in compliance with all applicable laws; (iii) promptly pay any fine or penalty assessed in connection therewith or contest the same in good faith; and (iv) permit Agent to inspect such Property, to conduct tests thereon, and to inspect all books, correspondence, and records pertaining thereto at reasonable hours and places; and (v) at the request of the Required Banks, and at Borrower's expense, provide a report of a qualified environmental engineer, satisfactory in scope, form, and content to the Required Banks, and such other and further assurances reasonably satisfactory to the Required Banks that any new condition or occurrence hereafter identified in any updated form 10-K or 10-Q has been corrected; provided that a failure to comply with the provisions of clauses (i) through (v) of this Section 7.10 shall not constitute an Event of Default or an Unmatured Event of Default unless such noncompliance has resulted in or is reasonably likely to result in costs or liabilities to Borrower or a Guarantor in excess of $2,500,000.00. ARTICLE VIII NEGATIVE COVENANTS ------------------ During the term of the Agreement, unless the Required Banks shall otherwise consent in writing: 8.1 Dividends. Borrower will not, and will not permit any Guarantor to, directly or indirectly, declare, make or pay, or incur any liability to make or pay, or cause or permit to be declared, made or paid, any Dividend if, prior to or after giving effect to the declaration and payment of any Dividend, there shall exist any Event of Default under this Agreement. The foregoing paragraph will not prevent the payment of any Dividend by Borrower within sixty (60) days after the date of its declaration if such Dividend could have been made on the date of its declaration in compliance with the foregoing provisions. 8.2 Indebtedness. Borrower will not, and will not permit any Guarantor to, create, incur or suffer to exist any Indebtedness, except, without duplication and without duplication as to Borrower and Guarantors: (i) The Loans and the Guaranty. -64- (ii) Indebtedness existing on the date hereof (and not otherwise permitted under this Section 8.2) and described in Schedule "8.2(ii)" hereto and Refinancing Indebtedness with respect thereto. (iii) Indebtedness under a Warehouse Facility; provided that the amount of such Indebtedness (including funding drafts issued thereunder) outstanding at any time pursuant to this clause (iii) guaranteed by Borrower or any Guarantor may not exceed $30,000,000.00 and the amount of such Indebtedness (excluding funding drafts issued thereunder) shall not exceed 98% of the value of the mortgages pledged to secure Indebtedness thereunder. (iv) Rate Hedging Obligations. (v) Intercompany Indebtedness between Borrower, any Guarantor and/or any Subsidiary, provided that, as to Indebtedness of Borrower to Guarantors, such Indebtedness is subordinated by Guarantors under the Guaranty to the reasonable satisfaction of Agent. (vi) Trade accounts payable and accrued expenses arising or occurring in the ordinary course of business. (vii) Indebtedness constituting Capitalized Lease Obligations. (viii) Indebtedness with respect to Letters of Credit (including Facility Letters of Credit) in an aggregate face amount outstanding at any time not to exceed $20,000,000.00. (ix) Non-Recourse Indebtedness incurred in the ordinary course of business in an aggregate amount outstanding at any time not to exceed $25,000,000.00. (x) Indebtedness in respect of performance bonds, completion bonds, surety and similar bonds and guarantees of performance or banker's acceptances entered into in the ordinary cause of business. (xi) Indebtedness evidenced by the Senior Notes (including any related guaranties in effect that are required by the terms of the Indenture), the Old Senior Notes and the Convertible Notes and Refinancing Indebtedness with respect thereto. (xii) Indebtedness not otherwise permitted by this Section 8.2 in an aggregate amount outstanding at any time not to exceed $35,000,000.00. -65- 8.3 Merger. Borrower will not, nor will it permit any Guarantor to, merge or consolidate with or into any other Person, unless: (i) the Guarantor is merging with any other Guarantor or Borrower, and Borrower, if applicable, is the continuing corporation; or (ii) a Subsidiary (other than a Guarantor) is merging with Borrower or any Guarantor or another Subsidiary, and Borrower or the Guarantor, if applicable, is the continuing corporation; and (iii) no Event of Default shall exist or shall occur after giving effect to such transaction; and (iv) after giving effect to such transaction, Borrower shall be in compliance with the Financial Covenant Tests; and (v) (a) the other Person to the transaction is in a Related Business or, (b) if not in a Related Business, the aggregate net worth of the acquired non-related entities of all such transactions during any 24-month period shall not exceed $10,000,000.00, and Borrower or the Guarantor, if involved in the merger, is the continuing corporation; and (vi) the transaction is not otherwise prohibited under this Agreement; and (vii) if required by Agent, the continuing corporation ratifies and confirms by supplemental document in a form reasonably satisfactory to Agent all of the obligations of Borrower or such Guarantor, as the case may be, under the Loan Documents and/or the Guaranty. 8.4 Sale of Assets. Borrower will not, and will not permit any Guarantor to, lease, sell or otherwise dispose of its Property, in a single transaction or a series of transactions, to any other Person except (i) for sales or leases in the ordinary course of business, and (ii) for leases, sales or other dispositions of its Property that, together with all other Property of Borrower or such Guarantor previously leased, sold or disposed of (other than in the ordinary course of business) as permitted by this Section during the month in which any such lease, sale or other disposition occurs, do not constitute a Material Portion of the Property of Borrower or such Guarantor. For purposes of this Section 8.4, "Material Portion" means, with respect to the Property of Borrower or any Guarantor, Property which represents more than 25% of the book value of all assets of Borrower or such Guarantor. If a Material Portion of the Property of Borrower or any Guarantor is leased, sold or disposed of in violation of this Section 8.4, Borrower shall pay -66- to Agent for the benefit of Banks at the time of such lease, sale or disposal, all amounts owed by Borrower pursuant to Section 2.2, taking into account the effect of lease, sale or disposal. 8.5 Investments and Acquisitions. Borrower will not, and will not permit any Guarantor to, make or suffer to exist any Investments (including without limitation, loans and advances to, and other Investments in, Subsidiaries), or commitments therefor, or to create any Subsidiary or to become or remain a partner in any partnership or joint venture, or to make any Acquisition of any Person, except: (i) Investments in Cash Equivalents. (ii) Loans or advances made to officers, directors or employees of Borrower or any Guarantor or any Subsidiary. (iii) Investments in interests in issuances of collateralized mortgage obligations, mortgages (including funding by Borrower of mortgages originated by a Guarantor in the ordinary course of business), mortgage loan servicing or other mortgage related assets. (iv) Investments of Borrower in a Guarantor or of a Guarantor in Borrower or another Guarantor; provided, however, that the aggregate amount of such Investments of Borrower and all Guarantors in all mortgage lending and title insurance Subsidiaries (other than those described in clause (iii) above) shall not at any time exceed $15,000,000.00 in the aggregate. (v) Investments in existence on the date hereof, including without limitation, Investments in the Surprise Entities, but only to the extent of the Investments made prior to the date hereof and future Investments that may be required pursuant to the operating agreements of the Surprise Entities in an aggregate amount (calculated from the date hereof) not to exceed $6,000,000.00. (vi) Investments in joint ventures, partnerships, limited liability companies or other similar business organizations in which any Person other than Borrower or a Wholly-Owned Subsidiary has an interest (including without limitation Investments in the Surprise Entities not otherwise described in clause (v) above), provided that the outstanding amount of such Investments of Borrower and its Subsidiaries do not at any time exceed $15,000,000.00 in the aggregate. (vii) Investments in Subsidiaries or other Persons whose primary business is not a Related Business in an aggregate amount outstanding at any one time not to exceed $10,000,000.00. -67- (viii) The Acquisition of or Investment in a business or entity engaged primarily in a Related Business, provided that (a) immediately upon the consummation of any such Acquisition or Investment Borrower and each Guarantor is in compliance with the terms, covenants and conditions of this Agreement (including without limitation the Financial Covenant Tests), and (b) Borrower shall deliver to Agent a certificate, signed by an Authorized Officer, certifying to the best knowledge of Borrower that, on the date of, and taking into account, the consummation of such Acquisition, and based on the reasonable assumptions set forth in such Certificate, no Event of Default has occurred and is continuing, and Borrower is in compliance with the Financial Covenant Tests. (ix) The creation of new Subsidiaries engaged primarily in a Related Business (or the purpose of which is principally to preserve the use of a name in which such business is conducted). (x) Stock, obligations or securities received in satisfaction of debts owing to Borrower or any Guarantor in the ordinary course of business. (xi) Pledges or deposits in cash by Borrower or any Guarantor to support surety bonds, performance bonds or guarantees of completion in the ordinary course of business. (xii) Investments pursuant to Borrower's or any Guarantor's employment compensation plans or agreements. (xiii) Investments in Rate Hedging Obligations. (xiv) Investments, in addition to those enumerated in this Section 8.5, in an aggregate amount outstanding at any time not to exceed $5,000,000.00. 8.6 Liens. Borrower will not, and will not permit any Guarantor to, create, incur, or suffer to exist any Lien in, of or on the Property of Borrower or any Guarantor, except: (i) Permitted Liens. (ii) Purchase-money Liens on any Property hereafter acquired or the assumption of any Lien on Property existing at the time of such acquisition (and not created in contemplation of such acquisition), or a Lien incurred in connection with any conditional sale or other title retention or a Capitalized Lease; provided that (a) Any Property subject to any of the foregoing is acquired by Borrower or any Guarantor in the ordinary course of -68- its respective business and the Lien on any such Property attaches to such asset concurrently or within ninety (90) days after the acquisition thereof; (b) The obligation secured by any Lien so created, assumed, or existing shall not exceed ninety percent (90%) of the cost the Property covered thereby by Borrower or any Guarantor acquiring the same; and (c) Each Lien shall attach only to the Property so acquired. (iii) Liens existing on the date hereof (and not otherwise permitted under this Section 8.6) and described in Schedule "8.6(iv)" hereto and Liens securing Refinancing Indebtedness with respect thereto, but only to the extent such Liens encumber the same collateral in whole or in part as the previous Liens securing the Indebtedness being refunded, refinanced or extended. (iv) Liens incurred in the ordinary course of business not otherwise permitted by this covenant, provided that the aggregate amount of Indebtedness secured by such Liens outstanding at any time shall not exceed $25,000,000.00. (v) Judgments and similar Liens arising in connection with court proceedings; provided the execution or enforcement thereof is stayed and the claim is being contested in good faith, and the same do not give rise to an Event of Default or Unmatured Event of Default. (vi) Liens securing Non-Recourse Indebtedness of Borrower or any Guarantor, provided that (A) the amount of such Indebtedness is greater than fifty percent (50%) of the fair market value of the Property encumbered by the Liens, (B) such Liens apply only to the property financed out of the net proceeds of such Non-Recourse Indebtedness within ninety (90) days of the creation, incurrence or sufferance of such Non-Recourse Indebtedness (except that such 90-day limitation shall not apply with respect to the Carlsbad Property). (vii) Liens securing a Warehouse Facility, provided that such liens shall not extend to any assets other than the mortgages, promissory notes and other collateral that secures mortgage loans made by Borrower or any Guarantor. (viii) Liens securing Indebtedness of a Person existing at the time that such Person is merged into or consolidated with Borrower or a Guarantor, provided that such liens were not created in contemplation of such merger or -69- consolidation and do not extend to any assets or property of Borrower or any Guarantor, other than the surviving Person and its subsidiaries. (ix) Liens in respect of Rate Hedging Obligations. (x) Liens (other than any lien imposed by ERISA) incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security. (xi) Liens incurred or deposits made to secure the performance of tenders, bids, leases, statutory obligations, surety and appeal bonds, progress payments, government contracts and other obligations of like nature (exclusive of obligations for the payment of borrowed money), in each case, incurred in the ordinary course of business. (xii) Leases or subleases granted to others not materially interfering with the ordinary conduct of the business of Borrower or any Guarantor. (xiii) Liens granted by Guarantors pursuant to the provisions of Section 2.22(d). Notwithstanding anything herein to the contrary, Borrower will not, and will not permit any Guarantor to, create, incur, or suffer to exist any Lien in, of or on the capital stock of any Guarantor. 8.7 Redemption. Borrower will not purchase or redeem any of its capital stock heretofore or hereafter issued, except that Borrower may purchase or redeem its capital stock (i) to the extent that the consideration for such redemption or purchase is limited to capital stock of Borrower, or (ii) if the consideration for such purchaser or redemption is other than capital stock of Borrower and does not exceed, in the aggregate for all such purchases and redemptions from and after the date hereof, $5,000,000.00. 8.8 Affiliates. Borrower will not, and will not permit any Guarantor to, enter into any transaction (including, without limitation, the purchase or sale of any Property or service) with, or make any payment or transfer to, any Affiliate (other than a Subsidiary) except (i) in the ordinary course of business and/or pursuant to the reasonable requirements of Borrower's or such Guarantor's business and, in either event, upon fair and reasonable terms no less favorable to Borrower or such Guarantor than Borrower or such Guarantor would obtain in a comparable arms-length transaction, (ii) Investments permitted under Section 8.5, (iii) pursuant to employment compensation plans and agreements, and (iv) with officers, directors and employees of Borrower or any Subsidiary so long as the same are duly authorized pursuant to the articles of incorporation or bylaws (or procedures conducted in accordance therewith) of Borrower or such Subsidiary. -70- 8.9 Modifications to Certain Indebtedness. Borrower will not, and will not permit any Guarantor to, make any amendment or modification to the subordination provisions of any indenture, note or other agreement evidencing or governing (i) as to Borrower, any Subordinated Indebtedness, and (ii) as to any Guarantor, Indebtedness that has been subordinated to Guarantor's obligations under the Guaranty. 8.10 Subordinated Indebtedness. Borrower will not, nor will it permit any Guarantor to, make any amendment or modification to the subordination provisions of any indenture, note or other agreement evidencing or governing any Subordinated Indebtedness, or directly or indirectly voluntarily prepay, defease, or in substance defease, purchase, redeem, retire or otherwise acquire, any Subordinated Indebtedness; provided, however, that the foregoing shall not prohibit (i) the conversion of the Convertible Notes in accordance with the Convertible Notes Indenture, or (ii) the repayment or prepayment of Subordinated Indebtedness solely from the net proceeds of other Subordinated Indebtedness or from capital stock. 8.11 Amendments. Borrower will not, nor will it permit any Guarantor to, amend or modify the Indenture, the Old Indenture, or the Senior Notes or the Old Senior Notes, except for amendments or modifications that do not (i) impose upon Borrower or any Guarantor obligations more onerous than those contained therein as of the date of this Agreement, or (ii) otherwise adversely affect Borrower or any Guarantor. ARTICLE IX FINANCIAL COVENANTS ------------------- During the term of this Agreement, unless the Required Banks shall otherwise consent in writing: 9.1 Minimum Consolidated Tangible Net Worth. Borrower's Consolidated Tangible Net Worth shall not be less than (i) $96,000,000.00 plus (ii) fifty percent (50%) of the Consolidated Net Income earned after March 1, 1996 (excluding any quarter in which there is a loss) plus (iii) one hundred percent (100%) of the net proceeds of capital stock issued by Borrower after March 1, 1996 (the "Consolidated Tangible Net Worth Test"). Borrower's compliance with the foregoing covenant shall be measured on a quarterly basis, based on the financial statements delivered to Agent pursuant to Section 7.1. If Borrower fails to maintain Consolidated Tangible Net Worth in the amount required herein for two (2) consecutive fiscal quarters, an Event of Default shall not occur; however, the Conversion Period shall commence in accordance with, but subject to the limitations of, Section 2.22. If Borrower fails to maintain Consolidated Tangible Net Worth in the amount required herein for three (3) consecutive fiscal quarters, then an Event of Default shall have occurred. -71- 9.2 Leverage Test; Interest Coverage Test. (a) Leverage Test. Borrower's Consolidated Indebtedness shall not exceed the product of (i) the then applicable Leverage Multiplier multiplied by (ii) Adjusted Consolidated Tangible Net Worth (the "Leverage Test"). (b) Interest Coverage Test. If at any time Borrower shall fail to maintain, for two (2) consecutive fiscal quarters, a ratio, determined as of the last day of each fiscal quarter for the four-quarter period ending on such day, of (i) EBITDA to (ii) Consolidated Interest Incurred, of at least 2.0 to 1.0 (the "Interest Coverage Test"), then the Leverage Multiplier, effective as of the first day of the fiscal quarter immediately following the second quarter of such failure with respect to which Borrower shall have so failed the Interest Coverage Test, shall be decreased to the extent herein provided. Upon any failure to satisfy the Interest Coverage Test (i.e., a failure for two (2) consecutive fiscal quarters) that occurs on a date on which the Leverage Multiplier is 1.50, the Leverage Multiplier shall be decreased by 0.10 to 1.40. Upon any failure (i.e., a failure for two (2) consecutive fiscal quarters) to satisfy the Interest Coverage Test that occurs on a date on which the Leverage Multiplier is less than 1.50, the Leverage Multiplier shall be decreased by 0.10. (c) Adjustment of Leverage Multiplier. If at any time at which the Leverage Multiplier is less than 1.50, Borrower shall satisfy the Interest Coverage Test (which for purposes of this Section 9.2(c) shall be deemed satisfied only if, on the same day on which Borrower maintains the Interest Coverage Test, Borrower is also in compliance with the Leverage Test), then the Leverage Multiplier, effective as of the first day of the fiscal quarter immediately following the fiscal quarter with respect to which Borrower shall have so satisfied the Interest Coverage Test, shall be increased to the extent herein provided. Upon satisfaction of the Interest Coverage Test on a date on which the Leverage Multiplier is 1.40, the Leverage Multiplier shall be increased to 1.50. Upon satisfaction of the Interest Coverage Test on a date on which the Leverage Multiplier is less than 1.40, the Leverage Multiplier shall be increased by 0.10. In no event shall the Leverage Multiplier exceed 1.50. (d) Effectiveness of Change in Leverage Multiplier. Any increase or decrease of the Leverage Multiplier provided for in this Section 9.2 shall be effective as of the first day of a fiscal quarter as provided in Section 9.2(b) or (c) (as applicable), and the Leverage Multiplier (as adjusted) shall remain in effect for the entire fiscal quarter and thereafter unless and until adjusted as of the first day of any subsequent fiscal quarter as provided in this Section 9.2(b) or (c) (as applicable). -72- (e) Measure of Compliance. Borrower's compliance with covenants in this Section 9.2 shall be measured on a quarterly basis, based on the financial statements delivered to Agent pursuant to Section 7.1. If Borrower fails to satisfy the Leverage Test or the Interest Coverage Test for two (2) consecutive fiscal quarters (or one (1) fiscal quarter, if a Significant Event occurs), an Event of Default shall not occur; however, the Conversion Period shall commence in accordance with, but subject to the limitations of, Section 2.22. If Borrower fails to satisfy the Leverage Test or the Interest Coverage Test for three (3) consecutive fiscal quarters, then an Event of Default shall have occurred. 9.3 Spec Unit Inventory. Borrower will not at any time permit the aggregate number of all Spec Units owned by Guarantors to exceed the greater of (i) fifty percent (50%) of the number of Housing Unit Closings during the preceding twelve (12) months, or (ii) one hundred ten percent (110%) of the number of Housing Unit Closings during the preceding six (6) months. Borrower will not at any time permit any Guarantor to own any Spec Units except those Spec Units where the certificate of occupancy was issued during the preceding six (6) months. A failure to satisfy the requirements of this Section 9.4 shall not constitute an Event of Default or an Unmatured Event of Default, but the Housing Unit Costs of any Spec Units owned by Guarantors in excess of the foregoing requirements shall not be included in the Borrowing Base. 9.4 Land Owned. Borrower will not at any time permit the sum of (a) the book value of Finished Lots, plus (b) the book value of Land Under Development, plus (c) the book value of any vacant land (other than Finished Lots or Land Under Development), to exceed 150% of the sum of (i) Consolidated Tangible Net Worth, plus (ii) Indebtedness evidenced by the Convertible Notes, but only to the extent that the maturity date of such Indebtedness will occur after the Facility Termination Date, plus (iii) any other Public Indebtedness constituting convertible subordinated notes with convertible and subordination features similar to the Convertible Notes, but only to the extent that the maturity date of such Indebtedness will occur after the Facility Termination Date. ARTICLE X EVENTS OF DEFAULT ----------------- The occurrence of any one or more of the following events shall constitute an Event of Default: 10.1 Representations and Warranties. Any representation or warranty (except the representations and warranties in Section 6.7, but only to the extent the same are made, or deemed made, after the date hereof) made or deemed made by or on behalf of Borrower or any Guarantor to Banks, the Issuing Bank or Agent under or in connection with this Agreement, any Loan Document, or any certificate or information delivered in connection with this Agreement or any -73- other Loan Document shall not be true and correct in any material respect on the date as of which made. 10.2 Non-payment. Nonpayment of principal of any Note when due, or nonpayment of interest upon any Note or of any fees or other obligations under any of the Loan Documents within five (5) days after the same becomes due. 10.3 Other Defaults. The breach by Borrower of any of the terms or provisions of this Agreement (other than any term or provision covered by another Section of this Article X) which is not remedied within thirty (30) days after the occurrence of such breach. 10.4 Other Indebtedness. (a) Failure of Borrower or any Guarantor to pay when due (after any applicable grace period and after notice from the holder thereof) any Indebtedness (other than Non-Recourse Indebtedness) equal to or exceeding $5,000,000.00 (in the aggregate); or (b) The default (after any applicable grace period and after notice from the holder thereof) by Borrower or any Guarantor in the performance of any term, provision or condition contained in any agreement under which any Indebtedness (other than Non-Recourse Indebtedness) equal to or exceeding $5,000,000.00 (in the aggregate) was created or is governed; or (c) Any other event shall occur or condition exist (after any applicable grace period and after notice from the holder thereof), the effect of which is to cause, or to permit the holder or holders of any Indebtedness (other than Non-Recourse Indebtedness) of Borrower or any Guarantor equal to or exceeding $5,000,000.00 to cause such Indebtedness to become due prior to its stated maturity; or (d) Any Indebtedness (other than Non-Recourse Indebtedness) of Borrower or any Guarantor equal to or exceeding $5,000,000.00 (in the aggregate) shall be declared to be due and payable or required to be prepaid (other than by a regularly scheduled payment) prior to the stated maturity thereof (after any applicable grace period and after notice from the holder thereof); or (e) Borrower or any Guarantor shall not pay, or shall admit in writing its inability to pay, its debts generally as they become due. 10.5 Bankruptcy. Borrower or any Guarantor shall: -74- (i) have an order for relief entered with respect to it under the Federal bankruptcy laws as now or hereafter in effect; (ii) make an assignment for the benefit of creditors; (iii) apply for, seek, consent to, or acquiesce in, the appointment of a receiver, custodian, trustee, examiner, liquidator or similar official for it or any Substantial Portion of its Property; (iv) institute any proceeding seeking an order for relief under the Federal bankruptcy laws as now or hereafter in effect or seeking to adjudicate it a bankrupt or insolvent, or seeking dissolution, winding up, liquidation, reorganization, arrangement, adjustment or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors or fail to file, within the applicable time period for the filing thereof, an answer or other pleading denying the material allegations of any such proceeding filed against it; or (v) fail to contest in good faith any appointment or proceeding described in Section 10.6. 10.6 Receiver. A receiver, trustee, examiner, liquidator or similar official shall be appointed for Borrower or any Guarantor or any Substantial Portion of its Property without the application, approval or consent of Borrower or Guarantors, or a proceeding described in Section 10.5(iv) shall be instituted against Borrower or any Guarantor and such appointment continues undischarged or such proceeding continues undismissed or unstayed for a period of sixty (60) consecutive days. 10.7 Judgment. Borrower or any Guarantor shall fail within thirty (30) days to pay, bond or otherwise discharge any judgment or order for the payment of money in excess of $5,000,000.00 which has not been stayed on appeal or is not otherwise being appropriately contested in good faith. 10.8 Unfunded Liabilities. The Unfunded Liabilities of all Single Employer Plans shall exceed in the aggregate $5,000,000.00 or any Reportable Event shall occur in connection with any Plan, which Reportable Event has had or would reasonably be expected to have a Material Adverse Effect. 10.9 Withdrawal Liability. Borrower, or any Guarantor or any member of the Controlled Group shall have been notified by the sponsor of a Multiemployer Plan that it has incurred withdrawal liability to such Multiemployer Plan in an amount which, when aggregated with all other amounts required to be paid to Multiemployer Plans by Borrower or such Guarantor or any other member of the Controlled Group as withdrawal liability (determined as of the date of such notification), exceeds $5,000,000.00 or requires payments exceeding $2,000,000.00 per -75- annum; provided, however, that such event shall not constitute an Event of Default as long as Borrower, such Guarantor or the Controlled Group member, as applicable, is contesting in good faith the imposition of withdrawal liability. 10.10 Increased Contributions. Borrower, or any Guarantor, or any other member of the Controlled Group shall have been notified by the sponsor of a Multiemployer Plan that such Multiemployer Plan is in reorganization, if as a result of such reorganization the aggregate annual contributions of Borrower, Guarantors and the other members of the Controlled Group (taken as a whole) to all Multiemployer Plans which are then in reorganization have been or will be increased over the amounts contributed to such Multiemployer Plans for the respective plan years of each such Multiemployer Plan immediately preceding the plan year in which the reorganization occurs by an amount exceeding $5,000,000.00. 10.11 Change in Control. Any Change in Control shall occur. 10.12 Dissolution. The dissolution or liquidation of Borrower or any Guarantor shall occur, except as permitted under Section 8.3. 10.13 Guaranty. The Guaranty shall fail to remain in full force or effect with respect to any Guarantor or any action shall be taken by any Guarantor to discontinue or to assert the invalidity or unenforceability of the Guaranty, or any Guarantor shall fail to comply with any of the terms or provisions of the Guaranty, or any Guarantor denies that it has any further liability under the Guaranty or gives notice to such effect. 10.14 Collateral. Borrower shall fail to provide (i) Collateral for the Obligations in accordance with Section 2.22(d), or (ii) all Collateral Documents relating to the Collateral in accordance with Section 2.22(d). 10.15 Financial Covenants. Borrower shall fail to (i) maintain Consolidated Tangible Net Worth in the amount required in Section 9.1(a), (ii) satisfy the Interest Coverage Test, or (iii) satisfy the Leverage Test and, in each case, such failure continues for three (3) consecutive fiscal quarters. 10.16 No Defaults. The occurrence of any of the following events shall specifically not be a breach, a default, an Event of Default or an Unmatured Event of Default under this Agreement: (a) The failure to satisfy any Financial Covenant Test during one (1) fiscal quarter or two (2) consecutive fiscal quarters. (b) Borrower's failure to provide all Due Diligence Documents relating to the Collateral in accordance with Section 2.22(c); provided, however, that the affected Collateral shall be automatically excluded from the Borrowing Base. -76- ARTICLE XI ACCELERATION, WAIVERS, AMENDMENTS AND REMEDIES ---------------------------------------------- 11.1 Acceleration; Remedies. (a) If any Event of Default described in Section 10.5 or 10.6 occurs with respect to Borrower or any Guarantor, the obligations of Banks to make Loans and of the Issuing Bank to issue Facility Letters of Credit hereunder shall automatically terminate and the Obligations shall immediately become due and payable without any election or action on the part of Agent, the Issuing Bank or any Bank. If any other Event of Default occurs, the Required Banks may terminate or suspend the obligations of Banks to make Loans and of the Issuing Bank to issue Facility Letters of Credit hereunder, or declare the Obligations to be due and payable, or both, whereupon the Obligations shall become immediately due and payable, without presentment, demand, protest or notice of any kind, all of which Borrower hereby expressly waives. If, within five (5) days after acceleration of the maturity of the Obligations or termination of the obligations of Banks to make Loans hereunder as a result of any Event of Default (other than any Event of Default as described in Section 10.5 or 10.6 with respect to Borrower or a Guarantor) and before any judgment or decree for the payment of the Obligations due shall have been obtained or entered, the Required Banks (in their sole discretion) shall so direct, Agent shall, by notice to Borrower, rescind and annul such acceleration and/or termination. (b) Upon the occurrence of any Event of Default and upon the directive of the Required Banks, Agent or (but only upon directive of the Required Banks) any Bank shall proceed to protect, exercise and enforce the rights and remedies of Agent and Banks under the Loan Documents and the Guaranty against Borrower, any Guarantor and any other party and such other rights and remedies as are provided by law or equity. (c) The order and manner in which Banks' rights and remedies are to be exercised shall be determined by the Required Banks in their sole discretion, and all payments received by Agent and Banks, or any of them, shall be applied first to the costs and expenses (including attorneys' fees and disbursements) of Agent and of Banks, and thereafter paid pro rata to each Bank in the same proportions that each Bank's Commitment bears to the Aggregate Commitment, without priority or preference among Banks. Regardless of how each Bank may treat payments for the purpose of its own accounting, for the purpose of computing Borrower's obligations hereunder and under the Notes, payments shall be applied first, to the costs and expenses of Agent and Banks, as set forth above, second, to the payment of accrued and unpaid interest due under any Loan Documents to -77- and including the date of such application (ratably, and without duplication, according to the accrued and unpaid interest due under each of the Loan Documents), and third, to the payment of all other amounts (including principal and fees) then owing to Agent or Banks under the Loan Documents. No application of payments will cure any Event of Default, or prevent acceleration, or continued acceleration, of amounts payable under the Loan Documents, or prevent the exercise, or continued exercise, of rights or remedies of Banks hereunder or thereunder or at law or in equity. 11.2 Amendments. Subject to the provisions of this Article XI, the Required Banks (or Agent with the consent in writing of the Required Banks) and Borrower may enter into agreements supplemental hereto for the purpose of adding or modifying any provisions to the Loan Documents or changing in any manner the rights of Banks or Borrower hereunder or waiving any Event of Default hereunder; provided, however, that no such supplemental agreement shall, without the consent of each Bank and Issuing Bank affected thereby: (i) Extend the maturity of any Loan or Note or forgive all or any portion of the principal amount thereof, or reduce the rate of, or extend the time of payment of, interest or fees thereon; (ii) Release any or all Guarantors from any of their obligations under the Guaranty or the Environmental Agreements; (iii) Change the percentage specified in the definition of Required Banks or Majority Banks; (iv) Increase the amount of the Commitment of any Bank hereunder, or permit Borrower to assign its rights under this Agreement except by operation of law pursuant to a merger permitted under Section 8.3; (v) Amend any provisions of this Agreement relating to Facility Letters of Credit; (vi) Amend any provisions of this Agreement relating to Swing Line Advances without the consent of Bank One; or (vii) Amend this Section 11.2, Section 11.4, Section 12.7, Section 14.1, Section 14.2 or Section 15.2.3. No amendment of any provision of this Agreement relating to Agent shall be effective without the written consent of Agent. Agent may waive payment or reduce the amount of the fees referred to in Section 13.12 or the fee required under Section 15.3.2 without obtaining the consent of any other party to this Agreement. -78- 11.3 Preservation of Rights. No delay or omission of any Bank or Issuing Bank or Agent to exercise any right under the Loan Documents shall impair such right or be construed to be a waiver of any Event of Default or an acquiescence therein, and the making of a Loan or the issuance, amendment or extension of a Facility Letter of Credit notwithstanding the existence of an Event of Default or the inability of Borrower to satisfy the conditions precedent to such Loan or Facility Letter of Credit shall not constitute any waiver or acquiescence. Any single or partial exercise of any such right shall not preclude other or further exercise thereof or the exercise of any other right, and no waiver, amendment or other variation of the terms, conditions or provisions of the Loan Documents whatsoever shall be valid unless in writing signed by Banks (and, if applicable, Agent) required pursuant to Section 11.2, and then only to the extent in such writing specifically set forth. All remedies contained in the Loan Documents or by law afforded shall be cumulative and all shall be available to Agent, the Issuing Bank and Banks until the Obligations have been paid in full. 11.4 New Guarantor. Unless otherwise agreed to by all of the Banks, additional Persons shall be added as a Guarantor under this Agreement upon satisfaction of the following terms and conditions: (i) such Person is (a) a Wholly-Owned Subsidiary of Borrower, (b) a Restricted Subsidiary, as defined in the Indenture, and (c) a "Guarantor" (as defined therein) under the Indenture, and (ii) the addition of such Person as a Guarantor shall not cause an Event of Default or an Unmatured Event of Default to occur, and (iii) Borrower shall cause such Subsidiary to execute and deliver to Agent such documents and instruments whereby such Subsidiary assumes the obligations of a Guarantor under the Guaranty and the other Loan Documents, and (iv) Borrower shall deliver or cause to be delivered, by and with respect to such Subsidiary, certificates, opinions and other documents substantially similar to those required to be delivered under the provisions of Sections 5.1(i), (ii), (iii), (iv), (v) and (vi) and such other documents as Agent or any Issuing Bank or their respective counsel may reasonably request; all of the foregoing shall be in form and substance satisfactory to Agent or such Issuing Bank, as the case may be. Any Person added as a Guarantor (as defined therein) under the Indenture shall be added as a Guarantor under this Agreement and Borrower shall comply with the provisions of clauses (iii) and (iv) with respect thereto. Any Person released from its obligations as a Guarantor under the Indenture shall be released from its obligations under the Guaranty so long as no Event of Default has occurred and is continuing, and Borrower pays all amounts due under Section 2.2 of this Agreement. -79- ARTICLE XII GENERAL PROVISIONS ------------------ 12.1 Survival of Representations. All representations and warranties of Borrower contained in this Agreement shall survive delivery of the Notes and the making of the Loans and the issuance, amendment or extension of any Facility Letter of Credit herein contemplated. 12.2 Governmental Regulation. Anything contained in this Agreement to the contrary notwithstanding, no Bank or Issuing Bank shall be obligated to extend credit to Borrower in violation of any limitation or prohibition provided by any applicable statute or regulation effective after the date of this Agreement. 12.3 Taxes. Any recording, intangible, filing or stamp fees or taxes or other similar assessments or charges made by any governmental or revenue authority in respect of the Loan Documents shall be paid by Borrower, together with interest and penalties, if any. 12.4 Headings. Section headings in the Loan Documents are for convenience of reference only, and shall not govern the interpretation of any of the provisions of the Loan Documents. 12.5 Entire Agreement. The Loan Documents and the letter agreement(s) referred to in this Agreement embody the entire agreement and understanding among Borrower, Agent and Banks and supersede all prior agreements and understandings among Borrower, Agent, and Banks relating to the subject matter thereof. 12.6 Nature of Obligations; Benefits of this Agreement. (a) The respective obligations of Banks hereunder are several and not joint and no Bank shall be the partner or agent of any other (except to the extent to which Agent is authorized to act as such). The failure of any Bank to perform any of its obligations hereunder shall not relieve any other Bank from any of its obligations hereunder. (b) This Agreement shall not be construed so as to confer any right or benefit upon any Person other than the parties to this Agreement and their respective successors and assigns. 12.7 Expenses; Indemnification. Borrower shall reimburse Agent for any reasonable costs, internal charges and out-of-pocket expenses (including reasonable attorneys' fees and costs) paid or incurred by Agent in connection with the preparation, negotiation, execution, delivery, review, amendment, modification, and administration of the Loan Documents. Borrower also agrees to reimburse Agent, Banks and each Issuing Bank for any reasonable costs, internal charges -80- and out-of-pocket expenses (including reasonable attorneys' fees and time charges of attorneys for Agent, Banks and such Issuing Bank) paid or incurred by Agent, any Bank or such Issuing Bank in connection with the collection and enforcement of the Loan Documents. Borrower further agrees to indemnify and hold harmless Agent and each Bank or Issuing Bank, its directors, officers and employees against all losses, claims, damages, penalties, judgments, liabilities and expenses (including, without limitation, all expenses of litigation or preparation therefor whether or not Agent or any Bank or Issuing Bank is a party thereto) which any of them may pay or incur arising out of or relating to this Agreement, the other Loan Documents, the transactions contemplated hereby or the direct or indirect application or proposed application of the proceeds of any Loan hereunder (except to the extent arising due to the gross negligence or willful misconduct of the indemnified Person). The obligations of Borrower under this Section shall survive the termination of this Agreement. 12.8 Numbers of Documents. All statements, notices, closing documents, and requests hereunder shall be furnished to Agent with sufficient counterparts so that Agent may furnish one to each of Banks. 12.9 Accounting. Except as provided to the contrary herein, all accounting terms used herein shall be interpreted and all accounting determinations hereunder shall be made in accordance with GAAP. 12.10 Severability of Provisions. Any provision in any Loan Document that is held to be inoperative, unenforceable, or invalid in any jurisdiction shall, as to that jurisdiction, be inoperative, unenforceable, or invalid without affecting the remaining provisions in that jurisdiction or the operation, enforceability, or validity of that provision in any other jurisdiction, and to this end the provisions of all Loan Documents are declared to be severable. 12.11 Nonliability of Banks and Issuing Bank. The relationship between Borrower and Banks and Agent shall be solely that of borrower and lender. Neither Agent nor any Bank or Issuing Bank shall have any fiduciary responsibilities to Borrower. Neither Agent nor any Bank or Issuing Bank undertakes any responsibility to Borrower to review or inform Borrower of any matter in connection with any phase of Borrower's business or operations. 12.12 CHOICE OF LAW. THE LOAN DOCUMENTS (OTHER THAN THOSE CONTAINING A CONTRARY EXPRESS CHOICE OF LAW PROVISION) SHALL BE CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS (AND NOT THE LAW OF CONFLICTS) OF THE STATE OF ARIZONA, BUT GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL BANKS. 12.13 Arbitration. Subject to the provisions of this Section 12.13, Borrower, Banks and Agent agree to submit to binding arbitration any and all claims, disputes and controversies between or among them (and their respective employees, officers, directors, attorneys, and other agents if permitted by law or a contract between them and such persons) relating to this -81- Agreement and the Loan Documents and the negotiation, execution, collateralization, administration, repayment, modification, extension or collection thereof or arising thereunder. Such arbitration shall proceed in Phoenix, Arizona, shall be governed by Arizona law and shall be conducted in accordance with the Commercial Arbitration Rules of the American Arbitration Association (the "AAA"), as modified in this Section 12.13. Judgment upon the award rendered by each arbitrator(s) may be entered in any court having jurisdiction. (a) Nothing in the preceding paragraph, nor the exercise of any right to arbitrate thereunder, shall limit the right of any party hereto (1) to foreclose against any real or personal property collateral encumbered by a Deed of Trust or other Loan Document, or otherwise permitted under applicable law; (2) subject to provisions of applicable law, to exercise self-help remedies such as setoff or repossession or other self-help remedies provided in this Agreement or any other Loan Document; or (3) to obtain provisional or ancillary remedies such as replevin, injunctive relief, attachment, or appointment of a receiver from a court having jurisdiction, before, during or after the pendency of any arbitration proceeding, or (4) to defend or obtain injunctive or other equitable relief from a court of competent jurisdiction against the foregoing or assert mandatory counterclaims, if any, prior to and during the pendency of a determination in arbitration of issues of performance, default, damages and other such claims and disputes. (b) Arbitration hereunder shall be before a three-person panel of neutral arbitrators, consisting of one person from each of the following categories: (1) an attorney who has practiced in the area of commercial real estate law for at least ten (10) years; (2) a person with at least ten (10) years' experience in real estate lending; and (3) a person with at least ten (10) years' experience in the homebuilding industry. The AAA shall submit a list of persons meeting the criteria outlined above for each category of arbitrator, and the parties shall select one person from each category in the manner established by the AAA. (c) In any dispute between the parties that is arbitratable hereunder, where the aggregate of all claims and the aggregate of all counterclaims is an amount less than Fifty Thousand And No/100ths Dollars ($50,000.00), the arbitration shall be before a single neutral arbitrator to be selected in accordance with the Commercial Rules of the American Arbitration Association and shall proceed under the Expedited Procedures of said Rules. (d) In any arbitration hereunder, the arbitrators shall decide (by documents only or with a hearing, at the arbitrators' discretion) any pre-hearing motions which are substantially similar to pre-hearing motions to dismiss for failure to state a claim or motions for summary adjudication. -82- (e) In any arbitration hereunder, discovery shall be permitted in accordance with the Arizona Rules of Civil Procedure. Scheduling of such discovery may be determined by the arbitrators, and any discovery disputes shall be finally determined by the arbitrators. (f) The Arizona Rules of Evidence shall control the admission of evidence at the hearing in any arbitration conducted hereunder; provided, however, no error by the arbitrators in application of the Rules of Evidence shall be grounds, as such, for vacating the arbitrators' award. (g) Notwithstanding any AAA rule to the contrary, the arbitration award shall be in writing and shall specify the factual and legal basis for the award, including findings of fact and conclusions of law. (h) Each party shall each bear its own costs and expenses and an equal share of the arbitrators' costs and administrative fees of arbitration. 12.14 CONSENT TO JURISDICTION. BORROWER AND EACH BANK HEREBY IRREVOCABLY SUBMIT TO THE NON-EXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL OR ARIZONA STATE COURT SITTING IN PHOENIX, ARIZONA IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO ANY LOAN DOCUMENTS AND BORROWER AND EACH BANK HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT AND IRREVOCABLY WAIVE ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT OR THAT SUCH COURT IS AN INCONVENIENT FORUM. NOTHING IN THIS SECTION 12.14 SHALL LIMIT THE RIGHT OF AGENT OR ANY BANK OR ISSUING BANK TO BRING PROCEEDINGS AGAINST BORROWER IN THE COURTS OF ANY OTHER JURISDICTION. SUBJECT TO THE PROVISIONS OF SECTION 12.13, UNLESS PROHIBITED BY LAW, ANY JUDICIAL PROCEEDING BY BORROWER AGAINST AGENT OR ANY BANK OR ISSUING BANK OR ANY AFFILIATE OF AGENT OR ANY BANK OR ISSUING BANK INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH ANY LOAN DOCUMENT SHALL BE BROUGHT IN A COURT IN PHOENIX, ARIZONA. 12.15 WAIVER OF JURY TRIAL. SUBJECT TO THE PROVISIONS OF SECTION 12.13, BORROWER, AGENT AND EACH BANK AND ISSUING BANK HEREBY WAIVE TRIAL BY JURY IN ANY JUDICIAL PROCEEDING INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER (WHETHER SOUNDING IN TORT, CONTRACT OR OTHERWISE) IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH ANY LOAN DOCUMENT OR THE RELATIONSHIP ESTABLISHED THEREUNDER. -83- 12.16 Confidentiality. Bank and Agent agree to use commercially reasonable efforts to keep confidential any financial reports and other information from time to time supplied to them by Borrower hereunder to the extent that such information is not and does not become publicly available through or with the consent or acquiescence of Borrower, except for disclosure (i) to Agent and the other Banks or to a Transferee, (ii) to legal counsel, accountants, and other professional advisors to a Bank, Agent or a Transferee, (iii) to regulatory officials, (iv) to any Person as required by law, regulation, or legal process, (v) to any Person in connection with any legal proceeding to which that Bank is a party, and (vi) permitted by Section 15.4. Any Bank or Agent disclosing such information shall use commercially reasonable efforts to advise the Person to whom such information is disclosed of the foregoing confidentiality agreement and to direct such Person to comply therewith. ARTICLE XIII AGENT ----- 13.1 Appointment. Bank One is hereby appointed Agent hereunder and under each other Loan Document, and each of Banks irrevocably authorizes Agent to act as the agent of such Bank. Agent agrees to act as such upon the express conditions contained in this Article XIII. Agent shall not have a fiduciary relationship in respect of Borrower, any Bank or the Issuing Bank by reason of this Agreement. 13.2 Powers. Agent shall have and may exercise such powers under the Loan Documents as are specifically delegated to Agent by the terms of each thereof, together with such powers as are reasonably incidental thereto. Agent shall have no implied duties to Banks, or any obligation to Banks to take any action thereunder except any action specifically provided by the Loan Documents to be taken by Agent. Agent shall have the sole and exclusive right to take any actions or to give any notices relating to this Agreement pursuant to the Indenture. 13.3 General Immunity. Neither Agent (in its capacity as Agent and not in its capacity as a Bank) nor any of its directors, officers, agents or employees shall be liable to Borrower or any Bank for action taken or omitted to be taken by it or them hereunder or under any other Loan Document or in connection herewith or therewith except for its or their own gross negligence or willful misconduct. 13.4 No Responsibility for Loans, Recitals, etc. Neither Agent nor any of its directors, officers, agents or employees shall be responsible for or have any duty to ascertain, inquire into, or verify (i) any statement, warranty or representation made in connection with any Loan Document or any borrowing or any request for the issuance, amendment or extension of any Facility Letter of Credit hereunder; (ii) the performance or observance of any of the covenants or agreements of any obligor under any Loan Document or Reimbursement Agreement, including, without limitation, any agreement by an obligor to furnish information directly to each Bank; (iii) the satisfaction of any condition specified in Article IV or V, except receipt of items required to -84- be delivered to Agent; or (iv) the validity, effectiveness or genuineness of any Loan Document (including without limitation any Reimbursement Agreement) or any other instrument or writing furnished in connection with any of the foregoing. Agent shall have no duty to disclose to Banks information that is not required to be furnished by Borrower to Agent at such time, but is voluntarily furnished by Borrower to Agent (either in its capacity as Agent or in its individual capacity). 13.5 Action on Instructions of Banks. Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder and under any other Loan Document in accordance with written instructions signed by the Required Banks (except as otherwise provided in Section 11.2), and such instructions and any action taken or failure to act pursuant thereto shall be binding on all of Banks and on all holders of Notes. Agent shall be fully justified in failing or refusing to take any action hereunder and under any other Loan Document unless it shall first be indemnified to its satisfaction by Banks pro rata against any and all liability, cost and expense that it may incur by reason of taking or continuing to take any such action. 13.6 Employment of Agents and Counsel. Agent may execute any of its duties as Agent hereunder and under any other Loan Document by or through employees, agents, and attorneys-in-fact and shall not be answerable to Banks, except as to money or securities or other Property received by it or its authorized agents, for the default or misconduct of any such agents or attorneys-in-fact selected by it with reasonable care. Agent shall be entitled to advice of counsel concerning all matters pertaining to the agency hereby created and its duties hereunder and under any other Loan Document. 13.7 Reliance on Documents; Counsel. Agent shall be entitled to rely upon any Note, notice, consent, certificate, affidavit, letter, telegram, statement, paper or document believed by it to be genuine and correct and to have been signed or sent by the proper person or persons, and, in respect to legal matters, upon the opinion of counsel selected by Agent, which counsel may be employees of Agent. 13.8 Agent's Reimbursement and Indemnification. Banks agree to reimburse and indemnify Agent ratably in proportion to their respective Commitments (i) for any amounts not reimbursed by Borrower for which Agent is entitled to reimbursement by Borrower under the Loan Documents, (ii) for any other expenses incurred by Agent on behalf of Banks, in connection with the preparation, execution, delivery, administration and enforcement of the Loan Documents, and (iii) for any liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind and nature whatsoever which may be imposed on, incurred by or asserted against Agent in any way relating to or arising out of the Loan Documents or any other document delivered in connection therewith or the transactions contemplated thereby, or the enforcement of any of the terms thereof or of any such other documents, provided that no Bank shall be liable for any of the foregoing to the extent they arise from the gross negligence or willful misconduct of Agent. The obligations of Banks under this Section 13.8 shall survive payment of the Obligations and termination of this Agreement. -85- 13.9 Rights as a Bank or Issuing Bank. In the event Agent is a Bank, Agent shall have the same rights and powers hereunder and under any other Loan Document as any Bank and may exercise the same as though it were not Agent, and the term "Bank" or "Banks" shall, at any time when Agent is a Bank, unless the context otherwise indicates, include Agent in its individual capacity. In the event Agent is an Issuing Bank, Agent shall have the rights and powers of the Issuing Bank hereunder and may exercise the same as though it were not Agent, and the term "Issuing Bank" shall, at any time when Agent is the Issuing Bank, unless the context otherwise indicates, include and mean Agent in its capacity as the Issuing Bank. Agent may accept deposits from, lend money to, and generally engage in any kind of trust, debt, equity or other transaction, in addition to those contemplated by this Agreement or any other Loan Document, with Borrower or any of its Subsidiaries in which Borrower or such Subsidiary is not restricted hereby from engaging with any other Person. 13.10 Bank Credit Decision. Each Bank acknowledges that it has, independently and without reliance upon Agent or any other Bank and based on the financial statements prepared by Borrower and Guarantors and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement and the other Loan Documents. Each Bank also acknowledges that it will, independently and without reliance upon Agent or any other Bank and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement and the other Loan Documents. 13.11 Successor Agent. Agent may resign at any time by giving written notice thereof to Banks and Borrower, such resignation to be effective upon the appointment of a successor Agent or, if no successor Agent has been appointed, sixty (60) days after the retiring Agent gives notice of its intention to resign. Agent may be removed at any time with or without cause by written notice received by Agent from the Majority Banks, such removal to be effective on the date specified by such Banks. The consent of Borrower shall be required prior to any removal of Agent becoming effective; provided, however, that if an Event of Default has occurred and is continuing, the consent of Borrower shall not be required. Upon any such resignation or removal, the Majority Banks shall have the right to appoint, on behalf of Borrower and Banks, a successor Agent. Any Bank can be a successor Agent upon the approval of the Majority Banks. Any other successor Agent shall be appointed only with the prior reasonable consent of Borrower. If no successor Agent shall have been so appointed by the Majority Banks within forty-five (45) days after the resigning Agent's giving notice of its intention to resign, then the resigning Agent may appoint, on behalf of Borrower and Banks, a successor Agent. If Agent has resigned or been removed and no successor Agent has been appointed, Banks may perform all the duties of Agent hereunder and Borrower shall make all payments in respect of the Obligations to the applicable Bank and for all other purposes shall deal directly with Banks. No successor Agent shall be deemed to be appointed hereunder until such successor Agent has accepted the appointment. Any such successor Agent shall be a commercial bank having capital and retained earnings of at least $50,000,000.00. Upon the acceptance of any appointment as -86- 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 resigning or removed Agent. Upon the effectiveness of the resignation or the Loan Documents, all amounts payable by Borrower under this Agreement shall be determined as if such Bank had not sold such participating interests, and Borrower, Agent and the Issuing Bank shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under the Loan Documents. 13.12 Agent's Fee. Borrower agrees to pay to Agent, for its own account, the fees agreed to by Borrower and Agent pursuant to that certain letter agreement of even date herewith, or as otherwise agreed from time to time. ARTICLE XIV SETOFF; RATABLE PAYMENTS ------------------------ 14.1 Setoff. In addition to, and without limitation of, any rights of any Bank or any Issuing Bank under applicable law, if Borrower becomes insolvent, however evidenced, or any Event of Default occurs, any and all deposits (including all account balances, whether provisional or final and whether or not collected or available) and any other Indebtedness at any time held or owing by any Bank or Issuing Bank to or for the credit or account of Borrower may be offset and applied toward the payment of the Obligations owing to such Bank or Issuing Bank, whether or not the Obligations, or any part thereof, shall then be due. 14.2 Ratable Payments. If any Bank (whether by setoff or otherwise) has payment made to it upon its Loans (other than payments received pursuant to Sections 3.1, 3.2 or 3.4) in a greater proportion than that received by any other Bank, such Bank agrees, promptly upon demand, to purchase a portion of the Loans held by the other Banks so that after such purchase each Bank will hold its ratable proportion of Loans. If any Bank, whether in connection with setoff or amounts which might be subject to setoff or otherwise, receives collateral or other protection for its Obligations or such amounts which may be subject to setoff, such Bank agrees, promptly upon demand, to take such action necessary such that all Banks share in the benefits of such collateral ratably in proportion to their Loans. In case any such payment is prevented, restricted or otherwise impeded by legal process, or otherwise, appropriate further adjustments shall be made. ARTICLE XV BENEFIT OF AGREEMENT, ASSIGNMENTS; PARTICIPATIONS ------------------------------------------------- 15.1 Successors and Assigns. The terms and provisions of the Loan Documents shall be binding upon and inure to the benefit of Borrower, Agent, Banks and the Issuing Bank and their respective successors and assigns, except that (i) no Borrower shall have the right to assign -87- its rights or obligations under the Loan Documents (except as otherwise permitted under Section 8.3), and (ii) any assignment by any Bank must be made in compliance with Section 15.3. Notwithstanding clause (ii) of this Section, any Bank may at any time, without the consent of Borrower or Agent, assign all or any portion of its rights under this Agreement and its Notes to a Federal Reserve Bank; provided, however, that no such assignment shall release the transferor Bank from its obligations hereunder. Agent may treat the payee of any Note as the owner thereof for all purposes hereof unless and until such payee complies with Section 15.3 in the case of an assignment thereof or, in the case of any other transfer, a written notice of the transfer is filed with Agent. Any assignee or transferee of a Note agrees by acceptance thereof to be bound by all the terms and provisions of the Loan Documents. Any request, authority or consent of any Person, who at the time of making such request or giving such authority or consent is the holder of any Note, shall be conclusive and binding on any subsequent holder, transferee or assignee of such Note or of any Note or Notes issued in exchange therefor. 15.2 Participations. 15.2.1Permitted Participants; Effect. Any Bank may, in the ordinary course of its business and in accordance with applicable law, at any time sell to one or more banks or other Persons that are not, and that are not Affiliates of a Person, in the home building business ("Participants") participating interests in any Loan owing to such Bank, any Note held by such Bank, any Commitment of such Bank or any other interest of such Bank under the Loan Documents in an amount of not less than $5,000,000.00, so long as immediately following such sale the selling Bank shall retain at least one-half (1/2) of its Commitment. In the event of any such sale by a Bank of participating interests to a Participant, such Bank's obligations under the Loan Documents shall remain unchanged, such Bank shall remain solely responsible to the other parties hereto for the performance of such obligations, such Bank shall remain the holder of any such Note for all purposes under the Loan Documents, all amounts payable by Borrower under this Agreement shall be determined as if such Bank has not sold such participating interests, and Borrower, Agent and the Issuing Bank shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under the Loan Documents. 15.2.2Voting Rights. Each Bank shall retain the sole right to approve, and/or grant its consent to, without the consent of any Participant, any amendment, modification or waiver or other matter relating to any provision of the Loan Documents. 15.2.3Benefit of Setoff. Borrower agrees that each Participant shall be deemed to have the right of setoff provided in Section 14.1 in respect of its participating interest in amounts owing under the Loan Documents to the same extent as if the amount of its participating interest were owing directly to it as a Bank under the Loan Documents, provided that each Bank shall retain the right of setoff provided in Section 14.1 with respect to the amount of participating interests sold to each Participant. Banks agree to share with each Participant, and each Participant, by exercising the right of setoff provided in Section 14.1, agrees to share with each -88- Bank, any amount received pursuant to the exercise of its right of setoff, such amounts to be shared in accordance with Section 14.2 as if each Participant were a Lender. 15.3 Assignments 15.3.1 Permitted Assignments. Any Bank may, in the ordinary course of its business and in accordance with applicable law, at any time assign to one or more banks or other financial institutions that are not, and that are not Affiliates of a Person, in the home building business ("Purchasers") all or any part of its rights and obligations under the Loan Documents in the amount of not less than $10,000,000.00, provided that each such assignment shall be of a constant, and not a varying, percentage of the assigning Bank's rights and obligations under the Loan Documents; and provided further, that immediately following such assignment, the assigning Bank either (i) shall retain a Commitment of not less than $10,000,000.00 or, if the assigning Bank is Agent, not less than $40,000,000.00, or (ii) shall have assigned all of its Commitment and have no remaining interest in the Obligations. Such assignment shall be substantially in the form of Exhibit K hereto or in such other form as may be agreed to by the parties thereto. The consent of Borrower and Agent shall be required prior to an assignment becoming effective, such consent not to be unreasonably withheld or delayed; provided, however, that if an Event of Default has occurred and is continuing, the consent of Borrower shall not be required. 15.3.2 Effect; Effective Date. Upon (i) delivery to Agent of a notice of assignment, substantially in the form attached as Exhibit "1" to Exhibit K hereto (a "Notice of Assignment"), together with any consents required by Section 15.3.1, and (ii) payment by the Bank of a $5,000.00 fee to Agent for processing such assignment, such assignment shall become effective on the effective date specified in such Notice of Assignment. The Notice of Assignment shall contain a representation by the Purchaser to the effect that none of the consideration used to make the purchase of the Commitment and Loans under the applicable assignment agreement are "plan assets" as defined under ERISA and that the rights and interests of the Purchaser in and under the Loan Documents will not be "plan assets" under ERISA. On and after the effective date of such assignment, such Purchaser shall for all purposes be a Bank party to this Agreement and any other Loan Document executed by Banks and shall have all the rights and obligations of a Bank under the Loan Documents, to the same extent as if it were an original party hereto, and no further consent or action by Borrower, Banks or Agent shall be required to release the transferor Bank with respect to the percentage of the Aggregate Commitment and Loans assigned to such Purchaser. Upon the consummation of any assignment to a Purchaser pursuant to this Section 15.3.2, the transferor Bank, Agent and Borrower shall make appropriate arrangements so that replacement Notes are issued to such transferor Bank and new Notes or, as appropriate, replacement Notes, are issued to such Purchaser, in each case in principal amounts reflecting their Commitment, as adjusted pursuant to such assignment. 15.4 Dissemination of Information. Borrower authorizes each Bank to disclose to any Participant or Purchaser or any other Person acquiring an interest in the Loan Documents by -89- operation of law (each a "Transferee") and any prospective Transferee any and all public information in such Bank's possession concerning the creditworthiness of Borrower, Guarantors and their Subsidiaries; provided that each Transferee and prospective Transferee agrees to be bound by Section 12.16 of this Agreement. 15.5 Tax Treatment. If any interest in any Loan Document is transferred to any Transferee which is organized under the laws of any jurisdiction other than the United States or any State thereof, the transferor Bank shall cause such Transferee, concurrently with the effectiveness of such transfer, to comply with the provisions of Section 2.20. ARTICLE XVI NOTICES ------- 16.1 Giving Notice. Except as otherwise permitted by Section 2.14 with respect to borrowing notices, all notices and other communications provided to any party hereto under this Agreement or any other Loan Document shall be in writing and sent by a nationally recognized overnight courier, or by personal delivery, or by registered or certified U.S. mail, postage prepaid and return receipt requested, addressed or delivered to such party at its address set forth below its signature hereto or at such other address as may be designated by such party in a notice to the other parties. Any notice given in the manner set forth herein shall be deemed given on the earlier of (i) one (1) Business Day after sent by such overnight courier, (ii) the day of delivery, if sent by personal delivery, or (iii) two (2) Business Days after deposit in the U.S. Mail in the manner described above. 16.2 Change of Address. Borrower, Agent, any Bank and the Issuing Bank may each change the address for service of notice upon it by a notice in writing to the other parties hereto. ARTICLE XVII COUNTERPARTS ------------ This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one agreement, and any of the parties hereto may execute this Agreement by signing any such counterpart. This Agreement shall be effective when it has been executed -90- by Borrower, Agent, and Banks and each party has notified Agent by telex or telephone, that it has taken such action. IN WITNESS WHEREOF, Borrower, Banks, and Agent have executed this Agreement as of the date first above written. BORROWER: CONTINENTAL HOMES HOLDING CORP., a Delaware corporation By:/s/ Donald R. Loback -------------------------------------- Name: Donald R. Loback Title: Chairman of the Board and Chief Executive Officer 7001 North Scottsdale Road Suite 2050 Scottsdale, Arizona 85253 Attention: Julie E. Collins Phone: (602) 483-0006 Facsimile: (602) 483-8237 -91- Commitments BANKS: ----------- $65,000,000.00 BANK ONE, ARIZONA, NA, a national banking association, Individually and as Agent By:/s/ Rhonda R. Williams ----------------------------------- Name: Rhonda R. Williams Vice President Western Region Real Estate Department A-383 241 North Central Avenue Phoenix, Arizona 85004 Attention: Rhonda R. Williams Phone: (602) 221-1783 Facsimile: (602) 221-1372 $25,000,000.00 THE FIRST NATIONAL BANK OF BOSTON By:/s/ Kevin C. Hake ----------------------------------- Name: Kevin C. Hake Vice President 115 Perimeter Center Place N.E. Suite 1500 Atlanta, Georgia 30346 Attention: Kevin C. Hake Phone: (770) 390-6584 Facsimile: (770) 390-8434 -92- $20,000,000.00 NORWEST BANK ARIZONA, N.A., a national banking association By:/s/ Vicki Slade ----------------------------------- Name: Vicki Slade Vice President 3300 North Central Avenue MS-9008 Phoenix, Arizona 85012-2501 Attention: Vicki Slade Phone: (602) 248-1240 Facsimile: (602) 248-3661 -93- EX-10.6 4 PROMISSORY NOTE Exhibit 10.6 PROMISSORY NOTE --------------- $65,000,000.00 June 27, 1996 Phoenix, Arizona FOR VALUE RECEIVED, CONTINENTAL HOMES HOLDING CORP., a Delaware corporation ("Maker"), hereby promises and agrees to pay to the order of BANK ONE, ARIZONA, NA, a national banking association ("Payee"), the principal sum of SIXTY-FIVE MILLION AND NO/100 DOLLARS ($65,000,000.00) in lawful money of the United States of America, or, if less than such principal amount, the aggregate unpaid principal amount of all Advances made to Maker by the Payee pursuant to the Credit Agreement hereinafter referenced. Such payment shall be made on the Facility Termination Date, as defined in the Credit Agreement. Maker shall pay interest from the date hereof on the unpaid principal amount of this Note from time to time outstanding during the period from the date hereof until such principal amount is paid in full at the rates, determined in the manner, and on the dates or occurrences specified in the Credit Agreement (as hereinafter defined). This promissory note is one of the Notes referred to in the Credit Agreement dated as of June 27, 1996, among Maker, Bank One, Arizona, NA, as Agent, and the Banks named therein (as the same may be amended, modified, replaced, or renewed from time to time, the "Credit Agreement") and is entitled to the benefits of the Credit Agreement and the Loan Documents. Capitalized terms used in this Note without definition shall have the same meanings as are ascribed to such terms in the Credit Agreement. Both principal and interest are payable to the Agent for the account of Payee pursuant to the terms of the Credit Agreement. All Advances made by Payee pursuant to the Credit Agreement and all payments of the principal amount of such Advances, shall be endorsed by the holder of this Note on the schedule attached hereto. Failure to record such Advances or payment shall not diminish any rights of Payee or relieve Maker of any liability hereunder or under the Credit Agreement. This Note is subject to prepayment and its maturity is subject to acceleration, in each case upon the terms provided in the Credit Agreement. This Note may not be modified or discharged orally, by course of dealing or otherwise, but only by a writing duly executed by the holder hereof. In the event that any action, suit or proceeding is brought by the holder hereof to collect this Note, Maker agrees to pay and shall be liable for all costs and expenses of collection, including without limitation, reasonable attorneys' fees and disbursements. Maker and all sureties, Guarantors and/or endorsers hereof (or of any obligation hereunder) and accommodation parties hereon (all of which, including Maker, are severally each hereinafter called a "Surety") each: (a) agree that the liability under this Note of all parties hereto is joint and several; (b) severally waive any homestead or exemption laws and right thereunder affecting the full collection of this Note; (c) severally waive any and all formalities in connection with this Note to the maximum extent allowed by law, including (but not limited to) demand, diligence, presentment for payment, protest and demand, and notice of extension, dishonor, protest, demand and nonpayment of this Note; and (d) consent that Holder may extend the time of payment or otherwise modify the terms of payment of any part or the whole of the debt evidenced by this Note, at the request of any other person liable hereon, and such consent shall not alter nor diminish the liability of any person hereon. In addition, each Surety waives and agrees not to assert: (a) any right to require the holder hereof to proceed against any other Surety, to proceed against or exhaust any security for the Note, to pursue any other remedy available to the holder hereof, or to pursue any remedy in any particular order or manner; (b) the benefit of any statute of limitations affecting its liability hereunder or the enforcement hereof; (c) the benefits of any legal or equitable doctrine or principle of marshaling; (d) notice of the existence, creation or incurring of new or additional indebtedness of Maker to the holder hereof; (e) the benefits of any statutory provision limiting the liability of a surety, including without limitation the provisions of Sections 12-1641, et seq., of the Arizona Revised Statutes; (f) any defense arising by reason of any disability or other defense of any Maker or by reason of the cessation from any cause whatsoever (other than payment in full) of the liability of Maker for payment of this Note; and (g) the benefits of any statutory provision limiting the right of the holder hereof to recover a deficiency judgment, or to otherwise proceed against any person or entity obligated for payment of this Note, after any foreclosure or trustee's sale of any security for this Note, including without limitation the benefits, if any, to a Surety of Arizona Revised Statutes Section 33-814. Until payment in full of this Note and the holder hereof has no obligation to make any further advances of the proceeds hereof, no Surety shall have any right of subrogation and each hereby waives any right to enforce any remedy which the holder hereof now has, or may hereafter have, against Maker or any other Surety, and waives any benefit of, and any right to participate in, any security now or hereafter held by the holder hereof. Maker agrees that to the extent any Surety makes any payment to the holder hereof in connection with the indebtedness evidenced by this Note, and all or any part of such payment is subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid by Holder or paid over to a trustee, receiver or any other entity, whether under any bankruptcy act or otherwise (any such payment is hereinafter referred to as a "Preferential Payment"), then the indebtedness of Maker under this Note shall continue or shall be reinstated, as the case may be, and, to the extent of such payment or repayment by the holder hereof, the indebtedness evidenced by this Note or part thereof intended to be satisfied by such Preferential Payment shall be revived and continued in full force and effect as if said Preferential Payment had not been made. This Note has been delivered in the City of Phoenix and State of Arizona, and shall be enforced under and governed by the laws of the State of Arizona applicable to contracts made and to be performed entirely within said state, without references to any choice or conflicts of law principles. CONTINENTAL HOMES HOLDING CORP., a Delaware corporation By: /s/ Donald R. Loback 7 -------------------------------- Name: Donald R. Loback Title: Chairman of the Board and Chief Executive Officer EX-10.7 5 PROMISSORY NOTE Exhibit 10.7 PROMISSORY NOTE --------------- $25,000,000.00 June 27, 1996 Phoenix, Arizona FOR VALUE RECEIVED, CONTINENTAL HOMES HOLDING CORP., a Delaware corporation ("Maker"), hereby promises and agrees to pay to the order of THE FIRST NATIONAL BANK OF BOSTON ("Payee"), the principal sum of TWENTY-FIVE MILLION AND NO/100 DOLLARS ($25,000,000.00) in lawful money of the United States of America, or, if less than such principal amount, the aggregate unpaid principal amount of all Advances made to Maker by the Payee pursuant to the Credit Agreement hereinafter referenced. Such payment shall be made on the Facility Termination Date, as defined in the Credit Agreement. Maker shall pay interest from the date hereof on the unpaid principal amount of this Note from time to time outstanding during the period from the date hereof until such principal amount is paid in full at the rates, determined in the manner, and on the dates or occurrences specified in the Credit Agreement (as hereinafter defined). This promissory note is one of the Notes referred to in the Credit Agreement dated as of June 27, 1996, among Maker, Bank One, Arizona, NA, as Agent, and the Banks named therein (as the same may be amended, modified, replaced, or renewed from time to time, the "Credit Agreement") and is entitled to the benefits of the Credit Agreement and the Loan Documents. Capitalized terms used in this Note without definition shall have the same meanings as are ascribed to such terms in the Credit Agreement. Both principal and interest are payable to the Agent for the account of Payee pursuant to the terms of the Credit Agreement. All Advances made by Payee pursuant to the Credit Agreement and all payments of the principal amount of such Advances, shall be endorsed by the holder of this Note on the schedule attached hereto. Failure to record such Advances or payment shall not diminish any rights of Payee or relieve Maker of any liability hereunder or under the Credit Agreement. This Note is subject to prepayment and its maturity is subject to acceleration, in each case upon the terms provided in the Credit Agreement. This Note may not be modified or discharged orally, by course of dealing or otherwise, but only by a writing duly executed by the holder hereof. In the event that any action, suit or proceeding is brought by the holder hereof to collect this Note, Maker agrees to pay and shall be liable for all costs and expenses of collection, including without limitation, reasonable attorneys' fees and disbursements. Maker and all sureties, Guarantors and/or endorsers hereof (or of any obligation hereunder) and accommodation parties hereon (all of which, including Maker, are severally each hereinafter called a "Surety") each: (a) agree that the liability under this Note of all parties hereto is joint and several; (b) severally waive any homestead or exemption laws and right thereunder affecting the full collection of this Note; (c) severally waive any and all formalities in connection with this Note to the maximum extent allowed by law, including (but not limited to) demand, diligence, presentment for payment, protest and demand, and notice of extension, dishonor, protest, demand and nonpayment of this Note; and (d) consent that Holder may extend the time of payment or otherwise modify the terms of payment of any part or the whole of the debt evidenced by this Note, at the request of any other person liable hereon, and such consent shall not alter nor diminish the liability of any person hereon. In addition, each Surety waives and agrees not to assert: (a) any right to require the holder hereof to proceed against any other Surety, to proceed against or exhaust any security for the Note, to pursue any other remedy available to the holder hereof, or to pursue any remedy in any particular order or manner; (b) the benefit of any statute of limitations affecting its liability hereunder or the enforcement hereof; (c) the benefits of any legal or equitable doctrine or principle of marshaling; (d) notice of the existence, creation or incurring of new or additional indebtedness of Maker to the holder hereof; (e) the benefits of any statutory provision limiting the liability of a surety, including without limitation the provisions of Sections 12-1641, et seq., of the Arizona Revised Statutes; (f) any defense arising by reason of any disability or other defense of any Maker or by reason of the cessation from any cause whatsoever (other than payment in full) of the liability of Maker for payment of this Note; and (g) the benefits of any statutory provision limiting the right of the holder hereof to recover a deficiency judgment, or to otherwise proceed against any person or entity obligated for payment of this Note, after any foreclosure or trustee's sale of any security for this Note, including without limitation the benefits, if any, to a Surety of Arizona Revised Statutes Section 33-814. Until payment in full of this Note and the holder hereof has no obligation to make any further advances of the proceeds hereof, no Surety shall have any right of subrogation and each hereby waives any right to enforce any remedy which the holder hereof now has, or may hereafter have, against Maker or any other Surety, and waives any benefit of, and any right to participate in, any security now or hereafter held by the holder hereof. Maker agrees that to the extent any Surety makes any payment to the holder hereof in connection with the indebtedness evidenced by this Note, and all or any part of such payment is subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid by Holder or paid over to a trustee, receiver or any other entity, whether under any bankruptcy act or otherwise (any such payment is hereinafter referred to as a "Preferential Payment"), then the indebtedness of Maker under this Note shall continue or shall be reinstated, as the case may be, and, to the extent of such payment or repayment by the holder hereof, the indebtedness evidenced by this Note or part thereof intended to be satisfied by such Preferential Payment shall be revived and continued in full force and effect as if said Preferential Payment had not been made. This Note has been delivered in the City of Phoenix and State of Arizona, and shall be enforced under and governed by the laws of the State of Arizona applicable to contracts made and to be performed entirely within said state, without references to any choice or conflicts of law principles. CONTINENTAL HOMES HOLDING CORP., a Delaware corporation By: /s/ Donald R. Loback ------------------------------------ Name: Donald R. Loback Title: Chairman of the Board and Chief Executive Officer EX-10.8 6 PROMISSORY NOTE Exhibit 10.8 PROMISSORY NOTE --------------- $20,000,000.00 June 27, 1996 Phoenix, Arizona FOR VALUE RECEIVED, CONTINENTAL HOMES HOLDING CORP., a Delaware corporation ("Maker"), hereby promises and agrees to pay to the order of NORWEST BANK ARIZONA, NA, a national banking association ("Payee"), the principal sum of TWENTY MILLION AND NO/100 DOLLARS ($20,000,000.00) in lawful money of the United States of America, or, if less than such principal amount, the aggregate unpaid principal amount of all Advances made to Maker by the Payee pursuant to the Credit Agreement hereinafter referenced. Such payment shall be made on the Facility Termination Date, as defined in the Credit Agreement. Maker shall pay interest from the date hereof on the unpaid principal amount of this Note from time to time outstanding during the period from the date hereof until such principal amount is paid in full at the rates, determined in the manner, and on the dates or occurrences specified in the Credit Agreement (as hereinafter defined). This promissory note is one of the Notes referred to in the Credit Agreement dated as of June 27, 1996, among Maker, Bank One, Arizona, NA, as Agent, and the Banks named therein (as the same may be amended, modified, replaced, or renewed from time to time, the "Credit Agreement") and is entitled to the benefits of the Credit Agreement and the Loan Documents. Capitalized terms used in this Note without definition shall have the same meanings as are ascribed to such terms in the Credit Agreement. Both principal and interest are payable to the Agent for the account of Payee pursuant to the terms of the Credit Agreement. All Advances made by Payee pursuant to the Credit Agreement and all payments of the principal amount of such Advances, shall be endorsed by the holder of this Note on the schedule attached hereto. Failure to record such Advances or payment shall not diminish any rights of Payee or relieve Maker of any liability hereunder or under the Credit Agreement. This Note is subject to prepayment and its maturity is subject to acceleration, in each case upon the terms provided in the Credit Agreement. This Note may not be modified or discharged orally, by course of dealing or otherwise, but only by a writing duly executed by the holder hereof. In the event that any action, suit or proceeding is brought by the holder hereof to collect this Note, Maker agrees to pay and shall be liable for all costs and expenses of collection, including without limitation, reasonable attorneys' fees and disbursements. Maker and all sureties, Guarantors and/or endorsers hereof (or of any obligation hereunder) and accommodation parties hereon (all of which, including Maker, are severally each hereinafter called a "Surety") each: (a) agree that the liability under this Note of all parties hereto is joint and several; (b) severally waive any homestead or exemption laws and right thereunder affecting the full collection of this Note; (c) severally waive any and all formalities in connection with this Note to the maximum extent allowed by law, including (but not limited to) demand, diligence, presentment for payment, protest and demand, and notice of extension, dishonor, protest, demand and nonpayment of this Note; and (d) consent that Holder may extend the time of payment or otherwise modify the terms of payment of any part or the whole of the debt evidenced by this Note, at the request of any other person liable hereon, and such consent shall not alter nor diminish the liability of any person hereon. In addition, each Surety waives and agrees not to assert: (a) any right to require the holder hereof to proceed against any other Surety, to proceed against or exhaust any security for the Note, to pursue any other remedy available to the holder hereof, or to pursue any remedy in any particular order or manner; (b) the benefit of any statute of limitations affecting its liability hereunder or the enforcement hereof; (c) the benefits of any legal or equitable doctrine or principle of marshaling; (d) notice of the existence, creation or incurring of new or additional indebtedness of Maker to the holder hereof; (e) the benefits of any statutory provision limiting the liability of a surety, including without limitation the provisions of Sections 12-1641, et seq., of the Arizona Revised Statutes; (f) any defense arising by reason of any disability or other defense of any Maker or by reason of the cessation from any cause whatsoever (other than payment in full) of the liability of Maker for payment of this Note; and (g) the benefits of any statutory provision limiting the right of the holder hereof to recover a deficiency judgment, or to otherwise proceed against any person or entity obligated for payment of this Note, after any foreclosure or trustee's sale of any security for this Note, including without limitation the benefits, if any, to a Surety of Arizona Revised Statutes Section 33-814. Until payment in full of this Note and the holder hereof has no obligation to make any further advances of the proceeds hereof, no Surety shall have any right of subrogation and each hereby waives any right to enforce any remedy which the holder hereof now has, or may hereafter have, against Maker or any other Surety, and waives any benefit of, and any right to participate in, any security now or hereafter held by the holder hereof. Maker agrees that to the extent any Surety makes any payment to the holder hereof in connection with the indebtedness evidenced by this Note, and all or any part of such payment is subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid by Holder or paid over to a trustee, receiver or any other entity, whether under any bankruptcy act or otherwise (any such payment is hereinafter referred to as a "Preferential Payment"), then the indebtedness of Maker under this Note shall continue or shall be reinstated, as the case may be, and, to the extent of such payment or repayment by the holder hereof, the indebtedness evidenced by this Note or part thereof intended to be satisfied by such Preferential Payment shall be revived and continued in full force and effect as if said Preferential Payment had not been made. This Note has been delivered in the City of Phoenix and State of Arizona, and shall be enforced under and governed by the laws of the State of Arizona applicable to contracts made and to be performed entirely within said state, without references to any choice or conflicts of law principles. CONTINENTAL HOMES HOLDING CORP., a Delaware corporation By: /s/ Donald R. Loback ---------------------------------- Name: Donald R. Loback Title: Chairman of the Board and Chief Executive Officer EX-11 7 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS Exhibit 11 CONTINENTAL HOMES HOLDING CORP. COMPUTATION OF EARNINGS PER SHARE (In thousands, except per share data)
Years ended May 31, ------------------- 1996 1995 ---- ---- Fully diluted: Income from Operations $ 25,787 $ 13,821 Interest expense on convertible subordinated notes, net of income taxes 2,778 1,604 -------- -------- $ 28,565 $ 15,425 ======== ======== Net income $ 18,869 $ 13,821 Interest expense on convertible subordinated notes, net of income taxes 2,778 1,604 -------- -------- $ 21,647 $ 15,425 ======== ======== Weighted average number of shares outstanding 6,960 6,948 Conversion of convertible subordinated notes (42.105 shares per $1,000 principal amount of notes) 2,490 1,489 Incremental shares relating to stock options exercisable 85 46 -------- -------- Weighted average number of shares outstanding assuming full dilution 9,535 8,483 ======== ======== Fully diluted income from operations per share $ 3.00 $ 1.82 ======== ======== Fully diluted net income per share $ 2.27 $ 1.82 ======== ========
EX-13 8 FINANCIAL REPORTS FINANCIAL HIGHLIGHTS (In thousands, except per share and unit backlog data)
1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Revenues $600,608 $432,452 $348,620 $207,033 $170,424 Gross profit from home sales 107,975 75,430 62,153 38,052 29,674 Net Income 18,869 13,821 13,083 7,100 6,591 Earnings per common share 2.71 1.99 2.11 1.38 1.39 Cash dividends per common share .20 .20 .20 .20 .20 Total assets 438,434 386,833 305,490 187,525 162,774 Total debt 250,526 232,825 168,319 114,787 101,741 Stockholders' equity 128,949 110,479 98,560 51,550 44,428 Stockholders' equity per common share 18.21 15.95 14.15 9.93 8.71 Units in backlog at end of period 2,070 1,493 1,136 900 669 Aggregate sales value of backlog 295,484 198,126 147,242 107,499 76,215
PRICE RANGE OF COMMON SHARES The Company's Common Stock is traded on the NYSE (Symbol: CON). The following table sets forth the high and low closing sales prices of the Company's Common Stock for the periods indicated: First Quarter Second Quarter Third Quarter Fourth Quarter 1996 $15.13-$21.00 $18.13-$22.50 $18.88-$24.63 $20.00-$25.25 1995 $13.38-$15.75 $13.50-$17.25 $11.63-$14.13 $11.00-$15.88 Since the first fiscal quarter of 1991, the Company has paid a quarterly cash dividend of $.05 per share. See Note E to the consolidated financial statements for restrictions related to the payment of dividends. Management's Discussion and Analysis of Results of Operations and Financial Condition RESULTS OF OPERATIONS HOMEBUILDING The following table sets forth, for the periods indicated, unit activity, average sales price and revenue from home sales for the Company: Years ended May 31, ---------------------------------- 1996 1995 1994 ---------------------------------- Units delivered 4,367 3,202 2,831 Average sales price $ 132,144 $ 129,518 $ 120,110 Revenue from home sales (000's) $ 577,073 $ 414,718 $ 340,031 Percentage increase from prior year 39.2% 22.0% Change due to volume 36.4% 13.1% Change due to average sales price 2.8% 8.9% The increase in volume in fiscal 1996 compared to fiscal 1995 resulted from improved sales in each market during the fiscal year. The Company believes that relatively low interest rates and the economic strength in certain of its markets contributed to improved sales. The volume increase in fiscal 1995 was attributable to the addition of the Texas operations during fiscal 1994 and the South Florida operations during fiscal 1995. Without Texas and South Florida, the Company's unit volume was 8% less during fiscal 1995 compared to fiscal 1994. Significant volume increases in early fiscal 1994 resulted in the Company selling out of several subdivisions in Phoenix faster than anticipated. This resulted in fewer homes available for sale in Phoenix in the third and fourth fiscal quarters of fiscal 1994 compared to the same periods in fiscal 1993. As a result of the inventory shortage, deliveries in the early quarters of fiscal 1995 in Phoenix were less than in the prior year. The increase in average sales price in fiscal 1995 was primarily due to deliveries in Phoenix and Denver, where sales prices have increased as a result of rising costs. Revenues from land sales were $11,844,000 in fiscal 1996, $10,658,000 in fiscal 1995 and $1,095,000 in fiscal 1994. The following table summarizes information related to the Company's backlog at the dates indicated:
May 31, -------------------------------------------------------------------------------- 1996 1995 1994 -------------------------------------------------------------------------------- (Dollars in thousands) Units Dollars Units Dollars Units Dollars -------------------------------------------------------------------------------- Phoenix 832 $ 110,530 821 $ 102,503 659 $ 84,818 Texas 652 71,791 396 43,140 348 38,403 Denver 292 57,746 98 18,185 100 18,178 Florida 189 24,597 86 12,228 -- -- California 105 30,820 92 22,070 29 5,843 ----- ------------ ----- ------------ ----- ----------- 2,070 $ 295,484 1,493 $ 198,126 1,136 $ 147,242 ===== ============ ===== ============ ===== ===========
12 The increase in backlog at May 31, 1996 resulted from improved sales in each market during the six months ended May 31, 1996. The increase in backlog in fiscal 1995 resulted from improved sales in Phoenix, Texas and Southern California during the fourth fiscal quarter and the Company's expansion into the Florida market. The aggregate sales value of consolidated new contracts signed increased 52% for fiscal 1996 to $669,205,000 representing 4,944 homes (including $39,935,000 in South Florida representing 303 homes) as compared with $441,309,000 representing 3,427 homes (including $12,603,000 in South Florida representing 87 homes) for fiscal 1995. Sales in South Florida were included from November 1, 1994. The following table summarizes information related to the cost of home sales and selling, general and administrative ("SG&A") expenses and interest, net for homebuilding:
Years ended May 31, -------------------------------------------------------------- 1996 1995 1994 -------------------------------------------------------------- Dollars % Dollars % Dollars % -------------------------------------------------------------- (Dollars in thousands) Revenue from home sales $ 577,073 100.0% $ 414,718 100.0% $ 340,031 100.0% Cost of home sales 469,098 81.3 339,288 81.8 277,878 81.7 ---------- --- --------- --- ---------- --- Gross profit 107,975 18.7 75,430 18.2 62,153 18.3 SG&A expenses 62,247 10.8 46,308 11.2 37,065 10.9 ---------- --- --------- --- ---------- --- Operating income from homebuilding 45,728 7.9 29,122 7.0 25,088 7.4 Interest, net 5,510 .9 4,993 1.2 4,456 1.3 ---------- --- --------- --- ---------- --- Pre-tax profit from homebuilding $ 40,218 7.0% $ 24,129 5.8% $ 20,632 6.1% ========== === ========= === ========== ===
Gross profit from home sales was 18.7% in fiscal 1996 compared to 18.2% and 18.3% in fiscal 1995 and 1994, respectively. In connection with acquisitions in Texas and South Florida, the Company capitalized a portion of the purchase price and includes such capitalized purchase price in the cost of home sales when the related units are delivered (purchase accounting adjustments). Gross profit from home sales, exclusive of the purchase accounting adjustments was 18.8% in fiscal 1996 compared to 18.6% and 18.9% in fiscal 1995 and 1994, respectively. The decrease in gross profit during fiscal 1995 was primarily the result of sales incentives and discounts that were offered for a time during the year in the Austin market. The increase in total SG&A expenses for fiscal 1996 was due primarily to higher variable marketing costs (sales commissions, advertising and model furniture amortization) due to the increase in the number of homes delivered, higher salaries and higher customer service costs. Additionally, fiscal 1996 included $3,249,000 of SG&A expenses from South Florida compared with $2,227,000 during the period from November 1, 1994 (acquisition) through May 31, 1995. The increase in total SG&A expenses for fiscal 1995 was primarily due to the addition of the Texas operations during fiscal 1994 and the South Florida operations during fiscal 1995. The 1995 fiscal year included $15,805,000 of SG&A expenses from Texas for the full fiscal year compared to $11,794,000 for a partial year during fiscal 1994. Additionally, the Company experienced higher adver- 13 tising and selling expenses associated with the opening of new subdivisions, which occurred at a faster rate in fiscal 1995. SG&A expenses for each home delivered were $14,254, $14,462 and $13,092 in fiscal 1996, 1995 and 1994, respectively. The Company capitalizes certain SG&A expenses for homebuilding and includes such capitalized SG&A in cost of home sales when the related units are delivered. Accordingly, total SG&A expenses incurred for homebuilding were $70,117,000, $53,109,000 and $42,040,000 in fiscal 1996, 1995 and 1994, respectively. The Company capitalizes certain interest costs for its homebuilding operations and includes such capitalized interest in cost of home sales when the related units are delivered. Accordingly, total interest incurred by the Company's homebuilding operations was $22,422,000, $19,528,000 and $13,378,000 in fiscal 1996, 1995 and 1994, respectively. Interest, net for homebuilding was $5,510,000, $4,993,000 and $4,456,000 in fiscal 1996, 1995 and 1994, respectively. The increase in interest during each of fiscal 1996 and 1995, both incurred and expensed, was due to higher debt levels which resulted primarily from the South Florida acquisition. The increase in pre-tax profit in fiscal 1996 was due primarily to improved results in Texas, Southern California and Phoenix partially offset by the negative impact from the inclusion of South Florida results. South Florida's pre-tax loss was primarily caused by weather related delays in the opening of a new subdivision and delays in the municipalities issuing permits. These delays resulted in fewer deliveries from South Florida through October 1995. The Company's pre-tax profit from homebuilding for fiscal 1996 was $40,218,000 compared to $24,129,000 for the year ended May 31, 1995 and $20,632,000 for the year ended May 31, 1994. Pre-tax profit increased in fiscal 1995 due primarily to improved results from Denver and Southern California and the inclusion of Texas results for the full fiscal year, which collectively contributed an additional $3,411,000 of pre-tax profit in fiscal 1995 compared to fiscal 1994. MORTGAGE BANKING The Company's mortgage banking operations are conducted through its wholly-owned subsidiary CH Mortgage Company ("CHMC"). The following table summarizes operating information for the Company's mortgage banking operations: Years ended May 31, ----------------------------- 1996 1995 1994 ----------------------------- (Dollars in thousands) Number of loans originated 2,916 1,949 2,451 Loan origination fees $ 2,758 $ 1,845 $ 2,186 Sale of servicing and marketing gains 6,177 2,744 3,046 Other revenues 1,013 628 459 ------- ------- ------- Total revenues 9,948 5,217 5,691 General and administrative expenses 6,041 4,724 3,930 ------- ------- ------- Operating income from mortgage banking 3,907 493 1,761 Interest, net (316) (199) (233) ------- ------- ------- Pre-tax profit from mortgage banking $ 4,223 $ 692 $ 1,994 ======= ======= ======= 14 Revenues and general and administrative expenses from mortgage banking increased in fiscal 1996 primarily as a result of an increase in the percentage of Phoenix and Texas homebuyers utilizing the Company's mortgage banking operations. Additionally, revenues increased due to higher servicing release premiums received on the sale of servicing and the sale of approximately $47,705,000 in servicing rights from the servicing portfolio resulting in approximately $932,000 of income. Revenues from mortgage banking operations decreased in fiscal 1995 compared to fiscal 1994 primarily as a result of a decrease in third party originations in Texas. General and administrative expenses increased in fiscal 1995 compared to fiscal 1994 primarily as a result of the inclusion of the Texas operations for the full fiscal year. CONSOLIDATED OPERATIONS Net income was $18,869,000 ($2.71 per share, $2.27 fully diluted) in fiscal 1996 compared to $13,821,000 ($1.99 per share, $1.82 fully diluted) and $13,083,000 ($2.11 per share, $1.88 fully diluted) in fiscal 1995 and 1994, respectively. The decrease in per share earnings in fiscal 1995 compared to fiscal 1994 was the result of the Company issuing an additional 1,704,400 shares in November, 1993. LIQUIDITY AND CAPITAL RESOURCES The Company's financing needs depend primarily upon sales volume, asset turnover, land acquisitions and inventory balances. The Company has financed, and expects to continue to finance, its working capital needs through funds generated by operations and borrowings. Funds for future land acquisitions and construction costs are expected to be provided primarily by cash flows from operations and future borrowings as permitted under the Company's loan agreements. On June 27, 1996 the Company entered into a credit agreement ("Credit Agreement") with a group of banks which provides for a $110 million unsecured revolving line of credit. Borrowings under the Credit Agreement bear interest at LIBOR plus 1.75% or prime plus .125% at the Company's election and subject to the rating on its senior debt. Available borrowings under the Credit Agreement are limited to certain percentages of housing unit costs, finished lots, land under development and receivables as defined in the Credit Agreement. The Credit Agreement replaced the credit facilities (other than the warehouse line) the Company had in place at May 31, 1996. At May 31, 1996, the Company had unsecured lines of credit from two lenders for aggregate borrowings (excluding the mortgage warehouse line) of up to $30,000,000. Additionally, the Company assumed $55 million of credit facilities ($15 million of which were unsecured) in connection with the Texas and Florida acquisitions. At May 31, 1996, there was $19,108,000 outstanding in the aggregate under these credit lines. The Company believes that amounts generated from operations and such additional borrowings will provide funds adequate to finance its homebuilding activities and meet its debt service requirements. The Company does not have any current commitments for capital expenditures. CHMC has a warehouse line of credit for $25,000,000 which is guaranteed by the Company. Pursuant to the warehouse line of credit, the Company issues drafts to fund its mortgage loans. The amount represented by a draft is drawn on the warehouse line of credit when the draft is presented for payment. At May 31, 1996, the amount outstanding under the warehouse line of credit and the amount of funding drafts that had not been presented for payment was $5,359,000. The Company believes that this line is sufficient for its mortgage banking operations. 15 On November 10, 1995, the Company completed the sale of $75,000,000 principal amount of its 6-7/8% Convertible Subordinated Notes due November 2002. On December 5, 1995, the Company sold an additional $11,250,000 of such notes. The net proceeds were used to redeem the Company's 6-7/8% Convertible Subordinated Notes due March 2002 and to reduce temporarily outstanding amounts under certain of the Company's revolving lines of credit (including the warehouse line of credit). In connection with the redemption of the notes, the Company recorded, in the third quarter of fiscal 1996, an extraordinary loss, net of taxes, of approximately $859,000 due to the write-off of unamortized discount and debt issuance costs. The Convertible Notes are immediately convertible into shares of the Company's common stock at a rate of 42.105 shares for each $1,000 principal amount of Convertible Notes. On April 18, 1996 the Company completed the sale of $130,000,000 principal amount of its 10% Senior Notes due April 2006. The Company used approximately $107,542,000 of the net proceeds to repurchase $98,500,000 aggregate principal amount of its 12% Senior Notes due 1999. The remaining proceeds were used to reduce temporarily outstanding amounts under certain of the Company's revolving lines of credit. In connection with the repurchase of the 12% Senior Notes, the Company recorded, in the fourth quarter of fiscal 1996, an extraordinary loss, net of taxes, of approximately $6,059,000 related primarily to a tender offer premium. INFLATION AND EFFECTS OF CHANGING PRICES Real estate and residential housing prices are affected by inflation, which can cause increases in the prices of land, raw materials and subcontracted labor. In the past three years, the Company has not experienced any significant inflationary pressure on land, raw materials or labor. Unless costs are recovered through higher sales prices, gross profit margins will decrease. As interest rates increase, construction and financing costs as well as the cost of borrowing funds also increase, which can result in lower gross profits. Relatively low interest rates during fiscal 1996 have made the Company's homes more affordable in each of its markets. High mortgage interest rates make it more difficult for the Company's customers to qualify for home mortgage loans. These factors have a much more significant effect on the Company's operations than does seasonality, in part because homes can be constructed year-round. 16 Report of Independent Public Accountants Arthur Andersen LLP To Continental Homes Holding Corp. We have audited the accompanying consolidated balance sheets of CONTINENTAL HOMES HOLDING CORP. (a Delaware corporation) and subsidiaries as of May 31, 1996 and 1995, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended May 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Continental Homes Holding Corp. and subsidiaries as of May 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended May 31, 1996, in conformity with generally accepted accounting principles. Arthur Andersen LLP Phoenix, Arizona, June 19, 1996. 17 CONTINENTAL HOMES HOLDINGS CORP. Consolidated Balance Sheets
May 31, ------- 1996 1995 --------- --------- (in thousands) ASSETS HOMEBUILDING Cash and cash equivalents (Notes A and E) $ 25,236 $ 12,848 Receivables (Note B) 16,693 10,108 Homes, lots and improvements in production (Notes A, C and E) 344,880 291,331 Property and equipment, net (Note A) 2,271 2,456 Prepaid expenses and other assets 16,797 20,516 Excess of cost over related net assets acquired (Note A) 11,715 13,400 --------- --------- 417,592 350,659 --------- --------- MORTGAGE BANKING Mortgage loans held for sale (Notes A and D) 20,350 17,593 Mortgage loans held for long-term investment, net (Notes A and D) 86 17,783 Other assets 406 798 --------- --------- 20,842 36,174 --------- --------- Total assets $ 438,434 $ 386,833 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY HOMEBUILDING Accounts payable and other liabilities $ 52,240 $ 39,405 Notes payable, senior and convertible subordinated debt (Notes A and E) 244,999 198,814 Deferred income taxes (Notes A and F) 1,236 2,048 --------- --------- 298,475 240,267 --------- --------- MORTGAGE BANKING Notes payable (Notes A and E) 5,359 16,072 Bonds payable (Notes D and E) 168 17,939 Other 686 2,076 --------- --------- 6,213 36,087 --------- --------- Total liabilities 304,688 276,354 --------- --------- Minority interest (Note A) 4,797 -- --------- --------- Commitments and contingencies (Notes E, H and I) Stockholders' equity (Notes E and G): Preferred stock, $.01 par value: Authorized - 2,000,000 shares - Issued - none -- -- Common stock, $.01 par value: Authorized - 20,000,000 shares - Issued - 7,080,900 shares 71 71 Treasury stock, at cost - 88,265 and 156,130 shares (384) (591) Capital in excess of par value 60,396 59,610 Retained earnings 68,866 51,389 --------- ---------- Total stockholders' equity 128,949 110,479 --------- ---------- Total liabilities and stockholders' equity $ 438,434 $ 386,833 ========= ==========
The accompanying notes to consolidated financial statements are an integral part of these consolidated balance sheets. 18 CONTINENTAL HOMES HOLDINGS CORP. Consolidated Statements of Income
Years ended May 31, ------------------- 1996 1995 1994 ----------- ----------- ---------- (in thousands, except share data) REVENUES Home sales $ 577,073 $ 414,718 $ 340,031 Land sales 11,844 10,658 1,095 Mortgage banking and title operations (Note D) 11,481 6,707 6,967 Other income, net 210 369 527 ----------- ----------- ----------- Total revenues 600,608 432,452 348,620 ----------- ----------- ----------- COSTS AND EXPENSES HOMEBUILDING Cost of home sales 469,098 339,288 277,878 Cost of land sales 11,907 10,958 1,499 Selling, general and administrative expenses 62,247 46,308 37,065 Interest, net (Notes A and C) 5,510 4,993 4,456 Minority interest (Note A) (248) -- -- MORTGAGE BANKING AND TITLE OPERATIONS Selling, general and administrative expenses 7,028 5,639 4,818 Interest, net (Note A) (316) (199) (233) ----------- ----------- ----------- Total costs and expenses 555,226 406,987 325,483 ----------- ----------- ----------- Income before income taxes and extraordinary loss 45,382 25,465 23,137 Income taxes (Note F) 19,595 11,644 10,054 ----------- ----------- ----------- Income from operations 25,787 13,821 13,083 Extraordinary loss: Loss on extinguishment of debt; net of income taxes of $4,807 in 1996 (Note E) (6,918) -- -- ----------- ----------- ----------- Net income $ 18,869 $ 13,821 $ 13,083 =========== =========== =========== Earnings per common share (Note A) Income from operations $ 3.71 $ 1.99 $ 2.11 Net income 2.71 1.99 2.11 Earnings per common share assuming full dilution (Note A) Income from operations $ 3.00 $ 1.82 $ 1.88 Net income 2.27 1.82 1.88 Cash dividends per share $ .20 $ .20 $ .20 =========== =========== =========== Weighted average number of shares outstanding 6,959,736 6,947,719 6,202,964 =========== =========== ===========
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. 19 CONTINENTAL HOMES HOLDING CORP. Consolidated Statements of Stockholders' Equity Years ended May 31, 1996, 1995 and 1994 (Dollars in thousands)
Common Stock Capital in --------------------- Treasury Excess of Retained Shares Amount Stock Par Value Earnings Total --------- --------- --------- --------- --------- --------- Balance, May 31, 1993 5,376,500 $ 54 $ (631) $ 25,033 $ 27,094 $ 51,550 Net income -- -- -- -- 13,083 13,083 Sale of common stock 1,704,400 17 -- 34,211 -- 34,228 Cash dividends -- -- -- -- (1,215) (1,215) Exercise of employee stock options -- -- 548 366 -- 914 --------- --------- --------- --------- --------- --------- Balance, May 31, 1994 7,080,900 71 (83) 59,610 38,962 98,560 Net income -- -- -- -- 13,821 13,821 Repurchase of common stock -- -- (556) -- -- (556) Cash dividends -- -- -- -- (1,394) (1,394) Exercise of employee stock options -- -- 48 -- -- 48 --------- --------- --------- --------- --------- --------- Balance, May 31, 1995 7,080,900 71 (591) 59,610 51,389 110,479 Net income -- -- -- -- 18,869 18,869 Cash dividends -- -- -- -- (1,392) (1,392) Exercise of employee stock options -- -- 207 786 -- 993 --------- --------- --------- --------- --------- --------- Balance, May 31, 1996 7,080,900 $ 71 $ (384) $ 60,396 $ 68,866 $ 128,949 ========= ========= ========= ========= ========= =========
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. 20 CONTINENTAL HOMES HOLDING CORP. Consolidated Statements of Cash Flows
Years ended May 31, ----------------------------------- 1996 1995 1994 --------- --------- --------- Cash flows from operating activities: (in thousands) Net income $ 18,869 $ 13,821 $ 13,083 Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation and amortization 3,190 3,050 2,410 Minority interest (248) -- -- Increase (decrease) in deferred income taxes 95 (1,209) (580) Tax benefit of employee stock options exercised 404 -- 366 Extraordinary loss on extinguishment of debt 11,725 -- -- Decrease (increase) in assets: Homes, lots and improvements in production (48,504) (52,973) (28,573) Receivables 8,458 2,304 16,748 Prepaid expenses and other assets 4,826 (6,987) (2,144) Increase in liabilities: Accounts payable and other liabilities 11,445 1,022 5,415 --------- --------- --------- Net cash provided (used) by operating activities 10,260 (40,972) 6,725 --------- --------- --------- Cash flows from investing activities: Net additions to property and equipment (581) (1,038) (513) Cash paid for acquisitions, net of cash acquired (705) (18,874) (14,024) --------- --------- --------- Net cash used by investing activities (1,286) (19,912) (14,537) --------- --------- --------- Cash flows from financing activities: Decrease (increase) in notes payable to financial institutions (46,424) 49,852 (29,602) Retirement of Convertible Subordinated Notes (33,250) -- -- Retirement of 12% Senior Notes (107,542) -- -- Retirement of bonds payable (17,771) (3,027) (10,140) Sale of common stock -- -- 34,228 Redemption of Series A Preferred Stock -- -- (6,200) Issuance of 12% Senior Notes -- -- 37,450 Issuance of Convertible Subordinated Notes 83,279 -- -- Issuance of 10% Senior Notes 125,925 -- -- Treasury stock acquired -- (556) -- Stock options exercised 589 48 548 Dividends paid (1,392) (1,394) (1,215) --------- --------- --------- Net cash provided by financing activities 3,414 44,923 25,069 --------- --------- --------- Net increase (decrease) in cash and cash equivalents 12,388 (15,961) 17,257 Cash and cash equivalents at beginning of year 12,848 28,809 11,552 --------- --------- --------- Cash and cash equivalents at end of year $ 25,236 $ 12,848 $ 28,809 ========= ========= ========= Supplemental disclosures of cash flow information: Cash paid during the year for: Interest, net of amounts capitalized $ 7,767 $ 7,780 $ 7,431 Income taxes $ 16,430 $ 16,539 $ 13,080
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. 21 Notes to Consolidated Financial Statements A. ACCOUNTING POLICIES NATURE OF OPERATIONS The Company designs, constructs and sells high quality single-family homes targeted primarily to entry-level and first-time move-up homebuyers. The Company is geographically diversified, currently operating in Phoenix, Arizona; Austin, San Antonio and Dallas, Texas; Denver, Colorado; South Florida; and Southern California. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and all wholly-owned subsidiaries after elimination of all significant intercompany balances and transactions. INCOME TAXES The Company accounts for income taxes using Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" ("FAS 109"). Among other things, FAS 109 requires the liability method and that current and deferred tax balances be determined based on tax rates and laws enacted as of the balance sheet date rather than the historical tax rates. See Note F. CASH AND CASH EQUIVALENTS Cash equivalents include amounts with initial maturities of less than 90 days. In the normal course of business, the Company receives deposits from its customers, maintains certain escrow funds and, in connection with its lines of credit, maintains certain compensating balances (see Note E). Such amounts, which totaled approximately $2,200,000 and $2,500,000 at May 31, 1996 and 1995, respectively, are included in cash and cash equivalents. CONSOLIDATED STATEMENTS OF CASH FLOWS Supplemental schedule of non-cash investing and financing activities: On July 29, 1993, the Company acquired Milburn Investments, Inc. and Subsidiaries. Non-cash consideration paid included the issuance of $6.2 million of Series A Preferred Stock. As a result of the acquisition, the Company recorded additional assets of $92,660,000 (primarily homes, lots and improvements in production and mortgage related assets) and liabilities of $66,590,000 (primarily notes payable to financial institutions and mortgage related debt). See Note J. On November 18, 1994, the Company acquired Heftler Realty Co. As a result of the acquisition, the Company recorded additional assets of $51,116,000 (primarily homes, lots and improvements in production) and liabilities of $22,616,000 (primarily notes payable to financial institutions). See Note J. During fiscal 1996, the Company entered into a joint venture whereby the Company contributed cash and the joint venture partners contributed assets (primarily land) valued at $5,045,000. 22 HOMES, LOTS AND IMPROVEMENTS IN PRODUCTION Homes, lots, and improvements in production are stated at the lower of accumulated cost or estimated net realizable value. Interest costs incurred during construction or development activities related to homes, lots and improvements in production and certain indirect project costs (employee related costs) are capitalized and subsequently charged to cost of home sales as the units associated with such costs are sold. See Note C. The components of homes, lots and improvements in production are as follows: May 31, ------- 1996 1995 ----------- --------- (In thousands) Homes and lots in production $ 169,615 $ 124,140 Land and developed lots held for housing 137,676 130,823 Unimproved land held for development or sale 30,839 29,825 Capitalized interest 6,750 6,543 ----------- --------- $ 344,880 $ 291,331 =========== ========= MINORITY INTEREST During fiscal 1996, the Company entered into a joint venture to develop an age restricted community. The Company contributed cash and the joint venture partners contributed assets (primarily land). The Company is entitled to 55% of the profits and/or losses and is the managing partner of the joint venture. Due to the control that the Company exercises, it has consolidated the financial position and results of operation of the joint venture. The partners' equity position is disclosed as a minority interest on the consolidated balance sheet. PROPERTY AND EQUIPMENT Property and equipment is stated at cost and consists primarily of office furniture and equipment. Depreciation expense is provided using the straight-line method over the estimated useful lives (three to five years). Depreciation expense was $773,000, $535,000 and $472,000 in 1996, 1995 and 1994, respectively. The costs of maintenance and repairs are charged to expense as incurred. EXCESS OF COST OVER RELATED NET ASSETS ACQUIRED The excess of cost over related net assets acquired of $18,048,000 is being amortized over periods ranging from three to twenty years using the straight-line method. Amortization expense was $1,401,000, $1,459,000 and $856,000 in 1996, 1995 and 1994, respectively. See Note J. USE OF ESTIMATES The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported periods. Actual results could differ from those estimates. 23 FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of cash and cash equivalents, receivables and trade payables approximate fair value because of the short maturity of these financial instruments. The homebuilding notes payable bear interest at a rate indexed to LIBOR or the prime rate, therefore, the carrying amounts of the outstanding borrowings at May 31, 1996 approximate fair value. The fair value of the Company's senior and subordinated debt is estimated based on quoted market prices. At May 31, 1996 and 1995, the estimated fair value of the Company's senior and subordinated debt was $233,157,000 and $140,750,000, respectively. Mortgage loans held for sale are stated at the lower of cost or market which approximates the fair value. The mortgage banking notes payable bear interest at a rate indexed to the prime rate, therefore, the carrying amounts of the outstanding borrowings at May 31, 1996 and 1995 approximate fair value. The mortgage loans held for long-term investment are considered held-to-maturity securities and mature through August 2017. The carrying amounts of mortgage loans held for long-term investment and mortgage-backed bonds approximate fair value. 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 and involve uncertainties and matters of significant judgment, and therefore, cannot be determined with precision. Changes in assumptions could significantly affect estimates. STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS During the fourth quarter of 1996, the Company elected to adopt early Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of" ("FAS 121") retroactive to June 1, 1995. The adoption of FAS 121 did not impact the Company's results of operations or financial position and did not result in a restatement of any of the financial results for the prior three quarters of fiscal 1996. The Company believes the adoption of FAS 121 would not have had a material effect in fiscal 1995 and 1994 had FAS 121 been applied to those years. Under FAS 121 real estate assets are to be reviewed for possible impairment whenever events or circumstances indicate the carrying amount of an asset may not be recoverable. If indications are that the carrying amount of the assets may not be recoverable, FAS 121 requires an estimate of the future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If these cash flows are less than the carrying amount of the asset, an impairment loss must be recognized to write down the asset to its estimated fair value less costs to sell. The fair value calculation under FAS 121 would result in a lower valuation of the asset than under the net realizable value method previously required. Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("FAS 123"), issued in October 1995, establishes financial accounting and reporting standards for stock-based employee compensation plans. FAS 123 requires either the recognition of compensation cost in the financial statements for those companies that adopt the new fair value based method or expanded disclosure of pro forma net income and earnings per share information for those companies that retain the current method set forth in APB Opinion 25, "Accounting for Stock Issued to Employees." 24 FAS 123 will be effective for the Company's fiscal year ending May 31, 1997. The Company plans to retain the current method set forth in APB Opinion 25 and will present the expanded disclosure in the fiscal 1997 financial statements. SALES RECOGNITION The Company recognizes income from home and land sales in accordance with Statement of Financial Accounting Standards No. 66. The Company includes the discounts incurred in obtaining permanent financing for its customers in cost of home sales. MORTGAGE BANKING FEE RECOGNITION Loan origination fees are recognized as income in accordance with Statements of Financial Accounting Standards Nos. 65 and 91. INTEREST, NET The summary of the components of interest, net is as follows: Years ended May 31, ------------------- 1996 1995 1994 ----------- ----------- ----------- (In thousands) Interest expense, homebuilding $ 5,982 $ 5,420 $ 4,724 Interest income, homebuilding (472) (427) (268) ----------- ----------- ----------- $ 5,510 $ 4,993 $ 4,456 =========== =========== =========== Interest expense, mortgage banking $ 1,785 $ 2,360 $ 2,707 Interest income, mortgage banking (2,101) (2,559) (2,940) ----------- ----------- ----------- $ (316) $ (199) $ (233) =========== ========== =========== EARNINGS PER COMMON SHARE Earnings per common share has been computed using the weighted average number of common shares outstanding during the period. Earnings per common share assuming full dilution has been computed assuming the conversion of the Convertible Subordinated Notes due November 2002. B. RECEIVABLES Notes and accounts receivable are as follows: May 31, ------- 1996 1995 ----------- ----------- (In thousands) Proceeds receivable arising from home sales $ 10,361 $ 4,135 Municipal Utility District receivables 2,788 3,457 Other notes and accounts receivable 3,544 2,516 ----------- ----------- $ 16,693 $ 10,108 =========== =========== C. INTEREST CAPITALIZATION The Company follows the practice of capitalizing for its homebuilding operations certain interest costs incurred on land under development and homes under construction. Such capitalized interest is included in cost of home sales when the units are delivered. The Company capitalized interest in the amount of $16,440,000, $14,108,000 and $8,654,000 and expensed as a component of cost of home sales $16,233,000, $10,687,000 and $7,734,000 in fiscal 1996, 1995 and 1994, respectively. 25 D. CONSOLIDATED MORTGAGE SUBSIDIARIES The Company's consolidated financial statements include its wholly-owned mortgage banking and finance subsidiaries. Financial data of the mortgage banking and finance subsidiaries is summarized as follows: May 31, ------- 1996 1995 ------- ------- (In thousands) Current assets, principally mortgage loans held for sale $14,035 $28,451 Total assets, principally mortgage loans and mortgage-backed securities 14,420 46,792 Current liabilities, principally notes payable 6,032 18,613 Total liabilities, principally notes and bonds payable 7,684 36,552 Stockholder's equity 6,736 10,240 Years ended May 31, ------------------------ 1996 1995 1994 ------ ------ ------ (In thousands) Total revenues $9,948 $5,217 $5,691 Net interest income 316 199 233 Net income 2,596 396 1,176 Mortgage loans held for sale are stated at the lower of cost or market determined in the aggregate. Mortgage loans held for sale consist of: May 31, ------- 1996 1995 -------- -------- (In thousands) Single-family first mortgage loans $ 20,877 $ 17,765 Market discount (527) (172) -------- -------- $ 20,350 $ 17,593 ======== ======== E. NOTES, BONDS AND SENIOR AND CONVERTIBLE SUBORDINATED DEBT HOMEBUILDING Notes payable, senior and convertible subordinated debt consist of: May 31, ------- 1996 1995 --------- --------- (In thousands) Notes payable $ 19,108 $ 54,729 10% senior notes, due 2006, net of discount of $1,972 128,028 -- 12% senior notes due 1999, net of premium of $113 and $1,430 11,613 111,430 6-7/8% convertible subordinated notes, due 2002 86,250 32,655 --------- --------- $ 244,999 $ 198,814 ========= ========= 26 At May 31, 1996, the Company had available unsecured bank lines of credit for borrowings (excluding mortgage warehouse lines) of up to $30,000,000 and, subject to available collateral, a $5,000,000 revolving purchase money line. Additionally, the Company assumed $55 million of credit facilities ($15 million of which are unsecured) in connection with the acquisitions described in Note J. Interest rates range from LIBOR plus 2-1/4% to prime plus 1/2%. These lines of credit mature through November 1997. During fiscal 1996, the weighted average interest rate on the average month end balance was 9.0% and the year end weighted average rate was 8.7%. The average month end outstanding balance during the year was $36,998,000 and the maximum amount outstanding at any month end was $53,681,000. The Company is required to maintain $750,000 of compensating balance deposits with lenders, minimum levels of liquidity and tangible net worth and maximum levels of debt to net worth in conjunction with the unsecured lines of credit. In April 1996, the Company issued $130,000,000 principal amount of 10% Senior Notes due April 15, 2006. The Company used approximately $107,542,000 of the net proceeds to repurchase $98,500,000 aggregate principal amount of its 12% Senior Notes due 1999. The remaining proceeds were used to reduce temporarily outstanding amounts under certain of the Company's revolving lines of credit. In connection with the repurchase of the 12% Senior Notes, the Company recorded, in the fourth quarter of fiscal 1996, an extraordinary loss, net of taxes, of approximately $6,059,000 related primarily to a tender offer premium. The Senior Notes will be 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 Senior Notes are senior unsecured obligations of the Company and are guaranteed, on a joint and several basis, by all of the Restricted Subsidiaries (as defined in the indenture). The indentures relating to the Company's 10% and 12% Senior Notes contain certain covenants which impose certain limitations on the ability of the Company to, among other things, incur additional indebtedness, pay dividends or make certain other restricted payments and investments, consummate certain asset sales, enter into certain transactions with affiliates, incur liens, merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its assets. In addition, the indentures provide that in the event of defined changes in control or if the consolidated tangible net worth of the Company falls below a specified level or, in certain circumstances, upon sales of assets, the Company is required to make an offer to repurchase certain specified amounts of outstanding Senior Notes. In November 1995, the Company issued $86,250,000 principal amount of 6- 7/8% Convertible Subordinated Notes due November 1, 2002. The Notes are convertible at a rate of 42.105 shares of Common Stock per $1,000 principal amount of Notes at any time prior to maturity. The Notes are redeemable in whole or in part at the option of the Company at any time on or after November 1, 1998, at redemption prices decreasing from 103.438%. The Notes are subordinated to all senior indebtedness of the Company. The net proceeds were used to redeem the Company's 6-7/8% Convertible Subordinated Notes due March 2002 and to reduce temporarily outstanding amounts under certain of the Company's revolving lines of credit (including the warehouse line of credit). In connection with the redemption of the notes, the Company recorded an extraordinary loss, net of taxes, of approximately $859,000 due to the write-off of unamortized discount and debt issuance costs. 27 Subsequent to year end, the Company entered into a credit agreement ("Credit Agreement") with a group of banks which provides for a $110 million unsecured revolving line of credit. Borrowings under the Credit Agreement bear interest at LIBOR plus 1.75% or prime plus .125% at the Company's election and subject to the rating on its senior debt. Available borrowings under the Credit Agreement are limited to certain percentages of housing unit costs, finished lots, land under development and receivables as defined in the Credit Agreement. The Credit Agreement replaced the credit facilities (other than the warehouse line) the Company had in place at May 31, 1996. MORTGAGE BANKING Mortgage warehousing notes payable enable CH Mortgage Company ("CHMC") to perform its loan origination and warehousing functions. At May 31, 1996, CHMC had a warehouse line of credit of $25,000,000 which is guaranteed by the Company. Borrowings are secured by the mortgage loans held for sale, mature on December 1, 1996 and bear interest at Libor plus 1.75%. At May 31, 1996, no amounts were outstanding under this line of credit and $5,359,000 of funding drafts were issued thereunder. At May 31, 1995, $14,438,000 was outstanding under this line of credit and $1,634,000 of funding drafts were issued thereunder. F. INCOME TAXES The Company will file a consolidated Federal income tax return which will include all subsidiaries. Components of current and deferred income taxes follow: Current Deferred Total -------- -------- -------- (In thousands) Year ended May 31, 1996 Federal $ 17,484 $ 81 $ 17,565 State and other 2,016 14 2,030 -------- -------- -------- $ 19,500 $ 95 $ 19,595 ======== ======== ======== Year ended May 31, 1995 Federal $ 10,126 $ (952) $ 9,174 State and other 2,727 (257) 2,470 -------- -------- -------- $ 12,853 $ (1,209) $ 11,644 ======== ======== ======== Year ended May 31, 1994 Federal $ 8,344 $ (455) $ 7,889 State and other 2,290 (125) 2,165 -------- -------- -------- $ 10,634 $ (580) $ 10,054 ======== ======== ======== The effective income tax rate differs from the Federal statutory tax rate for the following reasons: Years ended May 31, ---------------------- 1996 1995 1994 ---- ---- ---- U.S. statutory tax rate 35% 35% 35% State income taxes, net of Federal tax benefit 6 6 6 Amortization and other, net 2 5 2 ---- ---- ---- 43% 46% 43% ==== ==== ==== 28 The components of the net deferred tax liability are as follows: May 31, ------- 1996 1995 ------ ------ Deferred tax assets: (In thousands) Inventory basis differences $ 441 $ 345 Other, net 1,269 1,424 ------ ------ 1,710 1,769 ------ ------ Deferred tax liabilities: Capitalized interest 1,903 2,108 Receivable basis differences 1,043 1,709 ------ ------ 2,946 3,817 ------ ------ Net deferred tax liability $1,236 $2,048 ====== ====== G. STOCK OPTIONS The Company has two stock incentive plans (the "Plans"). The 1988 Stock Incentive Plan was approved by the Board of Directors on July 29, 1988 and the stockholders on August 26, 1988 and amended by the Board of Directors on July 23, 1992 and the stockholders on August 26, 1992. The 1986 Stock Incentive Plan was approved by the Board of Directors and the stockholders of the Company on July 26, 1986. The Plans are intended to provide an incentive to officers and key employees of the Company and its subsidiaries to remain with the Company. The Board of Directors has authorized the reservation of 700,000 shares of the Company's common stock for issuance under the Plans. Options may be granted at a price equal to the market value on the date of the grant (or 85% of market value in the case of non-qualified options) and may not be exercised for one year (six months in the case of non-qualified options) from the date of the grant. Under the Plans, options must be exercised within 10 years (5 years for a 10% holder) from the date the options were granted. The following summarizes the stock option transactions for the two years ended May 31, 1996: Number Option of shares Price --------- ----- Outstanding at May 31, 1994 205,635 $4.00 - $21.375 Granted 46,000 12.125 - $14.875 Exercised (7,000) $4.00 - $12.50 ------- Outstanding at May 31, 1995 244,635 $4.00 - $21.375 Granted 35,000 $ 18.25 Canceled (8,000) $12.50 - $21.375 Exercised (67,865) $4.00 - $21.375 ------- Outstanding at May 31, 1996 203,770 $6.50 - $21.375 ======= Exerciseable at May 31, 1996 101,095 $6.50 - $21.375 ======= At May 31, 1996, there were 162,995 shares reserved for future grants. H. CONTINGENCIES In management's opinion, the Company is not involved in any legal proceedings which will have a material effect on the Company's financial position or operating results. 29 I. COMMITMENTS Rental expense for the Company was $1,454,000, $1,233,000 and $914,000 in 1996, 1995 and 1994, respectively. The following is a schedule by year of future minimum rental payments required under operating leases as of May 31, 1996: Fiscal year ending May 31, (In thousands) 1997 $ 903 1998 785 1999 711 2000 685 2001 508 Thereafter 615 --------- Total minimum lease payments $ 4,207 ========= J. ACQUISITION OF MILBURN INVESTMENTS, INC. AND HEFTLER REALTY CO. On July 29, 1993, the Company completed the acquisition of 100% of the Common Stock of Milburn Investments, Inc. ("Milburn"), an Austin, Texas homebuilder, for approximately $26.2 million. The consideration consisted of approximately $20 million in cash and $6.2 million in Series A Preferred Stock issued by the Company. On November 4, 1993, the Company redeemed the Series A Preferred Stock. The acquisition was accounted for by the purchase method with the results of operations of Milburn included for the ten month period beginning August 1, 1993. The excess of cost over related net assets acquired is being amortized over periods ranging from five to ten years using the straight-line method. Milburn was the subject of an Internal Revenue Service ("IRS") audit for periods prior to its acquisition by the Company. In December, 1994, the IRS completed their examination and the Company paid the resulting tax liability (including interest) of approximately $4,900,000. Such payment exceeded the tax liability recorded by the Company at the time Milburn was acquired. The Company recorded this excess payment of approximately $3,400,000 (including interest) as an adjustment to the purchase price of Milburn. The Company believes that it may recover all or a portion of the excess payment from the seller (under the terms of the acquisition agreement) or other parties. On November 18, 1994, the Company completed the acquisition of 100% of the Common Stock of Heftler Realty Co. ("Heftler"), a South Florida homebuilder, for $29.2 million in cash. The acquisition was accounted for by the purchase method with the results of operations of Heftler included for the seven month period beginning November 1, 1994. The excess of cost over related net assets acquired is being amortized over periods ranging from five to ten years using the straight-line method. The following unaudited pro forma combined financial data give effect to the Heftler acquisition as if it had occurred on the first day of the period. This pro forma information has been prepared utilizing the historical consolidated financial statements of the Company and Heftler. The pro forma financial data are provided for comparative purposes only and do not purport to be indicative of the results which would have been obtained if the acquisition had been effected during the period presented. The pro forma financial information is based on the purchase method of accounting and reflects adjustments to record the profit of acquired inventories, amortize the non-compete agreement and 30 the excess purchase price over the underlying value of net assets acquired, reflect the additional interest on acquisition indebtedness assumed and adjust income taxes for the pro forma adjustments. Year ended May 31, ------------------ 1995 ---- (In thousands) Total revenues $ 446,730 Net income 13,897 Earnings per common share 2.00 Earnings per common share assuming full dilution 1.83 K. SELECTED UNAUDITED QUARTERLY CONSOLIDATED FINANCIAL INFORMATION Unaudited quarterly consolidated financial information for the years ended May 31, 1996 and 1995 is summarized as follows:
Three months ended ------------------ August 31 November 30 February 28 May 31 --------- ----------- ----------- ------ (In thousands, except share data) 1996 Revenues $ 146,405 $ 138,365 $ 140,996 $ 174,842 Gross profit from home sales 24,520 24,953 25,270 33,232 Net income 5,224 5,315 5,301 3,029 Earnings per share: Primary: Income from operations $ .75 $ .77 $ .88 $ 1.30 Net income .75 .77 .76 .43 Fully diluted: Income from operations .66 .64 .65 .93 Net income .66 .64 .57 .36 Weighted average shares outstanding 6,927,672 6,946,666 6,974,427 6,990,196 1995 Revenues $ 107,043 $ 97,942 $ 114,051 $ 113,416 Gross profit from home sales 19,483 17,143 18,932 19,872 Net income 4,516 3,092 3,073 3,140 Earnings per share: Primary: Net income $ .65 $ .44 $ .44 $ .45 Fully diluted: Net income .58 .41 .41 .42 Weighted average shares outstanding 6,962,770 6,963,341 6,939,998 6,924,770
31 EX-21 9 LIST OF SUBSIDIARIES LIST OF SUBSIDIARIES Exhibit 21 -------------------- 1. The Company holds 100% of the outstanding capital stock of: Continental Homes, Inc. ("CHI") (Delaware) KDB Homes, Inc. (Delaware) L&W Investments, Inc. (California) Continental Ranch, Inc. (Delaware) Continental Homes of Texas, Inc. (Texas) Miltex Management, Inc. ("MMI") (Texas) Milburn Investments, Inc. ("MII") (Texas) Heftler Realty Co. (Florida) CH Texas of Dallas, Inc. (Delaware) 2. CHI holds 100% of the outstanding capital stock of: CH Mortgage Company ("CHMC") (Colorado) CHI Construction Company (Arizona) 3. CHI is a 55% joint venture partner of: Surprise Village North L.L.C. Continental Traditions L.L.C. 4. CHMC holds 100% of the outstanding capital stock of: CHI Finance Corp. (Arizona) 5. MMI holds 1% of the partnership interest of: Miltex Mortgage of Texas Limited Partnership 6. MII holds 99% of the partnership interest of: Miltex Mortgage of Texas Limited Partnership 7. MII holds 100% of the outstanding capital stock of: Travis County Title Company (Texas) Acheter, Inc. ("Acheter") (Texas) R.O.S. Corporation (Texas) CHTEX of Austin, Inc. ("CHTEX/Austin") (Delaware) CH Investments of Texas II, Inc. ("CH Investments II") (Delaware) 8. Acheter holds 100% of the outstanding capital stock of: Settlement Corporation (Texas) 9. Continental Homes of Texas, Inc. holds 100% of the outstanding capital stock of: CHTEX of San Antonio, Inc. ("CHTEX/SA") (Delaware) CH Investments of Texas III, Inc. ("CH Investments III") (Delaware) 10. CH Texas of Dallas, Inc. holds 100% of the outstanding capital stock of: CHTEX of Dallas, Inc. ("CHTEX/Dallas") (Delaware) CH Investments of Texas, Inc. ("CH Investments") (Delaware) 11. Continental Homes of Dallas, L.P. (Texas) is a limited partnership comprised of: CHTEX/Dallas (1% g.p.) and CH Investments (99% l.p.) 12. Continental Homes of Austin, L.P. (Texas) is a limited partnership comprised of: CHTEX/Austin (1% g.p.) and CH Investments II (99% l.p.) 13. Continental Homes of San Antonio, L.P. (Texas) is a limited partnership comprised of: CHTEX/SA (1% g.p.) and CH Investments III (99% l.p.)
EX-23 10 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS Exhibit 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K, into the Company's previously filed Registration Statements on Forms S-8 (File Numbers 33-65912 and 33-33550) and Forms S-3 (File Numbers 33-69974, 33-52463, 33-63539 and 333-1669). /s/ Arthur Anderson LLP Phoenix, Arizona, August 16, 1996. EX-27 11 FINANCIAL DATA SCHEDULE
5 1,000 U.S. DOLLARS 12-MOS MAY-31-1996 JUN-01-1995 MAY-31-1996 1 25,236 0 37,129 0 344,880 0 2,271 0 438,434 0 250,526 71 0 0 128,878 438,434 577,073 600,608 469,098 0 0 0 5,194 45,382 19,595 25,787 0 (6,918) 0 18,869 2.71 2.27
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