-----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, QOKoTcT3PZzD4y38LZLRj/HyjD3rpa7bK+G/XhySaHS4FCQFjKXEKqOcVhsbYx2N 32UN1MN1U2dChxVudfLxjw== 0000950170-01-000281.txt : 20010307 0000950170-01-000281.hdr.sgml : 20010307 ACCESSION NUMBER: 0000950170-01-000281 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20001130 FILED AS OF DATE: 20010228 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LENNAR CORP /NEW/ CENTRAL INDEX KEY: 0000920760 STANDARD INDUSTRIAL CLASSIFICATION: GEN BUILDING CONTRACTORS - RESIDENTIAL BUILDINGS [1520] IRS NUMBER: 954337490 STATE OF INCORPORATION: DE FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-11749 FILM NUMBER: 1557650 BUSINESS ADDRESS: STREET 1: 700 NW 107TH AVE STREET 2: STE 400 CITY: MIAMI STATE: FL ZIP: 33172 BUSINESS PHONE: 3055594000 MAIL ADDRESS: STREET 1: 700 NW 107TH AVE STREET 2: STE 400 CITY: MIAMI STATE: FL ZIP: 33172 FORMER COMPANY: FORMER CONFORMED NAME: PACIFIC GREYSTONE CORP /DE/ DATE OF NAME CHANGE: 19940323 10-K 1 0001.txt ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended November 30, 2000 Commission file number 1-11749 Lennar Corporation (Exact name of registrant as specified in its charter) Delaware 95-4337490 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 700 Northwest 107th Avenue, Miami, Florida 33172 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (305) 559-4000 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 10 (cent) New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of January 31, 2001, registrant had outstanding 53,245,331 shares of common stock and 9,848,112 shares of Class B common stock (which can be converted into common stock). Of the total shares outstanding, 52,096,377 shares of common stock and 29,251 shares of Class B common stock, having a combined aggregate market value (assuming the Class B shares were converted) on that date of $1,918,223,110, were held by non-affiliates of the registrant. Documents incorporated by reference: Related Section Documents - -------------------------------------------------------------------------------- II Pages 36 through 64 of the Annual Report to Stockholders for the year ended November 30, 2000. III Definitive Proxy Statement to be filed pursuant to Regulation 14A on or before March 30, 2001. ================================================================================ PART I Item 1. Business. General Development of Business Lennar Corporation (together with its subsidiaries, the "Company") is one of the nation's largest homebuilders and is a provider of residential financial services. The Company's homebuilding operations include the sale and construction of single-family attached and detached homes, as well as the purchase, development and sale of residential land directly and through its partnerships. The financial services operations provide mortgage financing, title insurance and closing services for Lennar homebuyers and others, package and resell residential mortgage loans, perform mortgage loan servicing activities and provide high speed Internet access, cable television and home monitoring services to residents of Lennar communities and others. On May 3, 2000, the Company acquired U.S. Home Corporation ("U.S. Home") in a transaction in which U.S. Home stockholders received a total of approximately $243 million in cash and 13 million shares of the Company's common stock amounting to approximately $267 million. U.S. Home is primarily a homebuilder, with operations in 13 states. U.S. Home had total revenues of $1.8 billion and net income of $72.4 million in 1999, and it delivered 9,246 homes (including joint ventures) during that year. Financial Information about Operating Segments The Company has two operating segments - homebuilding and financial services. The financial information related to these operating segments is contained in the financial statements incorporated by reference to pages 44 through 63 of the Company's 2000 Annual Report to Stockholders. Narrative Description of Business HOMEBUILDING The Company and its predecessor began building homes in Florida in 1954. The Company believes that since its acquisition of Development Corporation of America in 1986, it has delivered more homes in Florida each year than any other homebuilder. The Company has been building homes in Arizona since 1972, where it currently is one of the leading homebuilders. In 1991, the Company began building homes in Dallas, Texas. In 1992, it started homebuilding operations in Houston, Texas. During 1995, the Company entered the California homebuilding market through the acquisition of Bramalea California, Inc. and expanded in this market in 1996 through the acquisition of Renaissance Homes, Inc. and through several partnership investments. During 1996, the Company also significantly expanded its operations in Texas with the acquisition of the assets and operations of Houston-based Village Builders (a homebuilder) and Friendswood Development Company (a developer of master-planned communities). During 1997, the Company continued its expansion in California through homesite acquisitions and additional partnership investments. Additionally during 1997, the Company acquired Pacific Greystone Corporation which further expanded its operations in California and Arizona and brought it into the Nevada homebuilding market. During 1998, the Company acquired the properties of two California homebuilders, ColRich Communities and Polygon Communities, and acquired a Northern California homebuilder, Winncrest Homes. During 2000, the Company expanded its operations into New Jersey, Maryland/Virginia, Minnesota, Ohio, Colorado, North Carolina and Michigan with the acquisition of U.S. Home. 1 Under the Lennar Family of Builders banner, the Company includes the following brand names: Lennar Homes, U.S. Home, Greystone, Village Builders, Renaissance, Orrin Thompson, Lundgren Bros., Winncrest and Rutenberg Homes. The Company's active adult and retiree communities are primarily marketed under the Heritage and Greenbriar brand names. The Company, through its own efforts and partnerships in which it has interests, is involved in all phases of planning and building in its residential communities, including land acquisition, site planning, preparation and improvement of land, and design, construction and marketing of homes. The Company subcontracts virtually all aspects of development and construction. The Company primarily sells single-family attached and detached homes. The homes are targeted primarily at first-time, move-up, active adult and retiree homebuyers. The average sales price of a Lennar home was $226,000 in fiscal 2000. Current Homebuilding Activities The table on the following page summarizes information about the Company's recent homebuilding activities: 2 HOMEBUILDING ACTIVITIES
Homesites at November 30, 2000 ---------------------------------------------------------- Lennar Corporation Partnerships ------------------ ---------------------- Estimated number Estimated number of homes that could of homes that could Homes delivered be constructed on be constructed on land in the years ended land currently owned currently controlled November 30, or controlled (1)(2) (1)(2)(3) Total ----------------------------- ------------------ ------- owned and Region 2000 1999 1998 Owned Controlled Controlled controlled - ------------------- ------- ------- ------- ------- ------- ------- ------- Florida 5,361 4,241 3,761 15,557 10,092 18,691 44,340 Maryland/Virginia 466 -- -- 2,442 1,045 242 3,729 New Jersey 328 -- -- 1,161 927 462 2,550 ------- ------- ------- ------- ------- ------- ------- East Region 6,155 4,241 3,761 19,160 12,064 19,395 50,619 ------- ------- ------- ------- ------- ------- ------- Texas 4,696 3,107 2,484 12,472 1,848 9,332 23,652 Minnesota 472 -- -- 2,229 3,508 -- 5,737 Ohio 35 -- -- 282 -- -- 282 ------- ------- ------- ------- ------- ------- ------- Central Region 5,203 3,107 2,484 14,983 5,356 9,332 29,671 ------- ------- ------- ------- ------- ------- ------- California 3,805 3,731 3,029 13,090 2,147 16,388 31,625 Colorado 984 -- -- 5,397 1,461 2,113 8,971 Arizona 1,568 1,064 1,090 4,150 -- 1,752 5,902 Nevada 521 446 413 1,037 391 -- 1,428 ------- ------- ------- ------- ------- ------- ------- West Region 6,878 5,241 4,532 23,674 3,999 20,253 47,926 ------- ------- ------- ------- ------- ------- ------- Joint ventures 342 17 -- -- -- 1,280 1,280 ------- ------- ------- ------- ------- ------- ------- Total 18,578 12,606 10,777 57,817 21,419 50,260 129,496 ======= ======= ======= ======= ======= ======= =======
Notes: (1) Based on current management estimates, which are subject to change. (2) Includes homesites that may be sold to other builders. (3) Represents partnerships and similar entities in which the Company has less than a controlling interest and are accounted for by the equity method. 3 Management and Operating Structure The Company balances a local operating structure with centralized corporate-level management. The Company's local managers, who have significant experience in the homebuilding industry generally and in their respective markets, are responsible for operating decisions regarding land identification, home design, construction and marketing. Decisions related to overall Company strategy, acquisitions of land and businesses, financing and cash management are centralized at the corporate level. The Company views partnerships and similar entities as a means to both expand its market opportunities and manage its risk profile. Typically, the Company acts as the general partner and the day-to-day manager. Property Acquisition From time-to-time, the Company acquires land for its development and sales programs. Such land is utilized in the Company's homebuilding operations and is also sold to third parties. Land acquisitions are subject to strict underwriting criteria and may be made directly or through partnerships with other entities to diversify risk. In some instances, the Company acquires land through option contracts, enabling it to purchase parcels as they are needed to build homes on them. Most of the Company's land is not subject to mortgages. The majority of land acquired by partnerships is subject to purchase money mortgages. The Company generally does not acquire land for speculation. Construction and Development The Company supervises and controls the development and building of its own residential communities. It employs subcontractors for site improvements and virtually all of the work involved in the construction of homes. In almost all instances, the arrangements between the Company and the subcontractors commit the subcontractors to complete specified work in accordance with written price schedules. These price schedules normally change to meet changes in labor and material costs. The Company does not own heavy construction equipment and generally only has a labor force used to supervise development and construction and perform routine maintenance and minor amounts of other work. The Company generally finances construction and land activities with cash generated from operations as well as from borrowings under its unsecured working capital lines and issuances of public debt. Marketing The Company generally has an inventory of homes under construction. A majority of these homes are sold (i.e., the Company has received executed sales contracts and deposits) before the Company starts construction. The Company employs sales associates who are paid salaries, commissions or both to make on-site sales of the Company's homes. The Company also sells through independent brokers. The Company advertises its communities through local media and through its web site, www.lennar.com. In addition, the Company advertises its active adult and retiree communities in areas where potential active adults and retirees live. The Company markets under its "Everything's Included SM" and "Design Studio SM" programs. The Company sells primarily from models that it has designed and constructed. Mortgage Financing The Company's financial services subsidiaries make conventional, FHA-insured and VA-guaranteed mortgage loans available to qualified purchasers of the Company's homes. Because of the availability of mortgage loans from the Company's financial services subsidiaries, as well as independent mortgage lenders, the Company believes access to financing has not been, and is not, a significant problem for most purchasers of the Company's homes. 4 Quality Service The Company employs a process which is intended to provide a positive atmosphere for each customer throughout the pre-sale, sale, building, closing and post-closing periods. The participation of sales representatives, on-site construction supervisors and post-closing customer care personnel, working in a team effort, is intended to foster the Company's reputation for quality service and ultimately lead to enhanced customer retention and referrals. Competition The housing industry is highly competitive. In its activities, the Company competes with numerous developers and builders in and near the areas where the Company's communities are located, including homebuilders with nationwide operations. Competition is on the basis of location, design, quality, amenities and price. Some of the Company's principal competitors include KB Home, Centex Corporation, D.R. Horton, Inc. and Pulte Corporation. However, in many instances, the Company's principal competitors are local or regional homebuilders. FINANCIAL SERVICES The Company's financial services subsidiaries provide mortgage financing, title insurance and closing services for Lennar homebuyers and others, package and resell residential mortgage loans, perform mortgage loan servicing activities and provide high speed Internet access, cable television and home monitoring services to residents of Lennar communities and others. Mortgage Origination The Company provides conventional, FHA-insured and VA-guaranteed mortgage loans to buyers of the Company's homes and others through the Company's financial services subsidiaries: (1) Universal American Mortgage Company in Florida, California, Arizona, Texas and Nevada; (2) U.S. Home Mortgage Corporation in Florida, California, Arizona, Texas, Nevada, Virginia, Maryland, New Jersey, Colorado, Minnesota and Ohio; (3) Eagle Home Mortgage, Inc. in Nevada, Oregon, Utah and Washington; and (4) AmeriStar Financial Services, Inc. in California and Nevada. In 2000, loans to buyers of the Company's homes represented approximately 61% of the Company's $3.2 billion of loan originations. The Company sells the loans it originates into the secondary mortgage market, generally on a non-recourse basis. The Company either retains the servicing on the loans it sells or sells the servicing rights on the loans it originates. The Company has a corporate risk management policy under which it hedges its interest rate locked loan commitments and loans held for sale against exposure to interest rate fluctuations. The Company finances its mortgage loan and servicing activities with borrowings under the financial services subsidiaries' warehouse lines of credit. At November 30, 2000, the Company had two lines of credit totaling $360 million which were collateralized by mortgage loans and servicing rights. Mortgage Servicing The Company generates earnings from servicing loans originated or acquired by its financial services subsidiaries. It services loans for the Government National Mortgage Association (Ginnie Mae), the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac) and other mortgage investors. At November 30, 2000, it had a servicing portfolio of approximately 29,000 loans with an unpaid principal balance of approximately $2.3 billion. Title Insurance and Closing Services The Company arranges title insurance for, and provides closing services to, buyers of the Company's homes and others. It provided these services in connection with approximately 120,000 real estate transactions during 2000. The Company provides these services through Universal Title Insurors in Florida, Regency Title, Southwest Land Title and Texas Professional Title in Texas, TitleAmerica Insurance in Florida and Texas and North American Title in California, Arizona and Colorado. 5 Strategic Technologies The Company's subsidiary, Strategic Technologies, Inc., provides high speed Internet access, cable television and home monitoring services to residents of the Company's communities and others. At November 30, 2000, the Company had approximately 3,300 cable television subscribers in California and approximately 8,800 alarm monitoring customers in Florida and California. RELATIONSHIP WITH LNR In connection with the 1997 transfer of the Company's commercial real estate investment and management business to LNR, and the spin-off of LNR to the Company's stockholders, the Company entered into an agreement which, among other things, prevents the Company from engaging at least until 2002 in any of the businesses in which LNR was engaged, or anticipated becoming engaged, at the time of the spin-off, and prohibited LNR from engaging, at least until 2002, in any of the businesses in which the Company was engaged, or anticipated becoming engaged, at the time of the spin-off (except in limited instances in which the activities or anticipated activities of the Company and LNR overlapped). Specifically, the Company is precluded, at least until 2002, from engaging in the business of (i) acquiring and actively managing commercial or residential multi-family rental real estate, other than as an incident to, or otherwise in connection with, their homebuilding business, (ii) acquiring portfolios of commercial mortgage loans or real estate assets acquired through foreclosures of mortgage loans, other than real estate acquired as sites of homes to be built or sold as part of its homebuilding business, (iii) making or acquiring mortgage loans, other than mortgage loans secured by detached or attached homes or residential condominium units, (iv) constructing office buildings or other commercial or industrial buildings, other than small shopping centers, professional office buildings and similar facilities which will be adjuncts to its residential developments, (v) purchasing commercial mortgage-backed securities or real estate asset-backed securities or (vi) acting as a servicer or special servicer with regard to securitized commercial mortgage pools. The Company is not, however, prevented from owning or leasing office buildings in which it occupies a majority of the space; acquiring securities backed by pools of residential mortgages; acquiring an entity which, when it is acquired, is engaged in one of the prohibited activities as an incidental part of its activities; owning as a passive investor an interest of less than 10% of a publicly traded company which is engaged in a prohibited business; acquiring commercial paper or short-term debt instruments of entities engaged in one or more of the prohibited businesses; or owning an interest in, and managing, Lennar Land Partners. The Company and LNR are separate publicly-traded companies and neither company has any financial interest in the other. The Company and LNR each have 50% interests in a number of partnerships. Stuart Miller, the Company's President and Chief Executive Officer, is the Chairman of the Board of Directors of LNR, and Steven Saiontz, one of the Company's Directors, is the Chief Executive Officer and a Director of LNR. In addition, Leonard Miller, the Chairman of the Board of Directors of the Company, owns stock which gives him voting control of both companies. There are provisions both in the by-laws of Lennar and in those of LNR requiring approval by an Independent Directors Committee of any significant transactions between the Company and LNR or any of its subsidiaries. The Company leases some office space, including its principal offices, from LNR. REGULATIONS Homes and residential communities built by the Company must comply with state and local laws and regulations relating to, among other things, zoning, treatment of waste, construction materials which must be used, density requirements, building design and minimum elevation of properties. These include laws requiring use of construction materials which reduce the need for energy-consuming heating and cooling systems. These laws and regulations are subject to frequent change and often increase construction costs. In some cases, there are laws which require that commitments to provide roads and other offsite infrastructure be in place prior to the commencement of new construction. These laws and regulations are usually administered by individual counties and municipalities and may result in fees and assessments or building moratoriums. In addition, certain new development projects are subject to assessments for schools, parks, streets and highways and other public improvements, the costs of which can be substantial. 6 The residential homebuilding industry also is subject to a variety of local, state and federal statutes, ordinances, rules and regulations concerning the protection of health and the environment. Environmental laws and conditions may result in delays, may cause the Company to incur substantial compliance and other costs, and can prohibit or severely restrict homebuilding activity in environmentally sensitive regions or areas. In recent years, several cities and counties in which the Company has developments have submitted to voters "slow growth" initiatives and other ballot measures which could impact the affordability and availability of homes and land within those localities. Although many of these initiatives have been defeated, the Company believes that if similar initiatives were approved, residential construction by the Company and others within certain cities or counties could be seriously impacted. In order to make it possible for purchasers of some of the Company's homes to obtain FHA-insured or VA-guaranteed mortgages, the Company must construct those homes in compliance with regulations promulgated by those agencies. The Company has registered condominium communities with the appropriate authorities in Florida and California. Sales in other states would require compliance with laws in those states regarding sales of condominium homes. The Company's title insurance agency subsidiaries must comply with applicable insurance laws and regulations. The Company's mortgage financing subsidiaries must comply with applicable real estate lending laws and regulations. The Company's subsidiaries which underwrite title insurance are licensed in the states in which they do business and must comply with laws and regulations in those states regarding title insurance companies. These laws and regulations include provisions regarding capitalization, investments, forms of policies and premiums. 7 MARKET RISK The tables on the following pages provide information at November 30, 2000 and 1999 about the Company's significant derivative financial instruments and other financial instruments used for purposes other than trading that are sensitive to changes in interest rates. For mortgage loans held for sale or disposition, mortgage loans, investments and mortgage notes and other debts payable, the tables present principal cash flows and related weighted average effective interest rates by expected maturity dates and estimated fair market values at November 30, 2000 and 1999. Weighted average variable interest rates are based on the variable interest rates at November 30, 2000 and 1999. For interest rate swaps, the tables present notional amounts and weighted average interest rates by contractual maturity dates and estimated fair market values at November 30, 2000 and 1999. Notional amounts are used to calculate the contractual cash flows to be exchanged under the contracts. See Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 and Notes 1 and 12 of Notes to Consolidated Financial Statements in Item 14 for a further discussion of these items and the Company's strategy of mitigating its interest rate risk. 8 Information Regarding Interest Rate Sensitivity Principal (Notional) Amount by Expected Maturity Average Interest Rate
Years Ending November 30, Fair Market Value ----------------------------------------------- There- at November 30, (Dollars in millions) 2001 2002 2003 2004 2005 after Total 2000 - ----------------------------------------------------------------------------------------------------------------------------------- ASSETS Financial Services: Mortgage loans held for sale or disposition, net: Fixed rate $ -- -- -- -- -- 374.5 374.5 377.5 Average interest rate -- -- -- -- -- 7.8% -- -- Variable rate $ -- -- -- -- -- 2.0 2.0 2.0 Average interest rate -- -- -- -- -- 7.9% -- -- Mortgage loans and investments: Fixed rate $ 23.6 1.1 3.3 1.3 0.3 25.4 55.0 54.5 Average interest rate 6.4% 9.6% 8.3% 7.2% 9.4% 9.2% -- -- LIABILITIES Homebuilding: Mortgage notes and other debts payable: Fixed rate $ 14.8 19.4 5.4 5.3 6.5 1,203.3 1,254.7 1,287.9 Average interest rate 9.0% 8.3% 8.2% 9.0% 8.7% 7.9% -- -- Financial Services: Notes and other debts payable: Fixed rate $ 0.7 0.1 0.1 -- -- -- 0.9 0.9 Average interest rate 4.9% 9.8% 9.8% -- -- -- -- -- Variable rate $ 428.1 -- -- -- -- -- 428.1 428.1 Average interest rate 6.7% -- -- -- -- -- -- -- OFF-BALANCE SHEET FINANCIAL INSTRUMENTS Homebuilding: Interest rate swaps: Variable to fixed- notional amount $ -- -- -- -- 100.0 300.0 400.0 (5.7) Average pay rate -- -- -- -- 6.7% 6.6% -- -- Average receive rate LIBOR LIBOR
9 Information Regarding Interest Rate Sensitivity Principal (Notional) Amount by Expected Maturity Average Interest Rate
Years Ending November 30, Fair Market Value ------------------------------------------------ There- at November 30, (Dollars in millions) 2000 2001 2002 2003 2004 after Total 1999 - ----------------------------------------------------------------------------------------------------------------------------------- ASSETS Financial Services: Mortgage loans held for sale or disposition, net: Fixed rate $ -- -- -- -- -- 191.8 191.8 193.9 Average interest rate -- -- -- -- -- 7.8% -- -- Variable rate $ -- -- -- -- -- 37.2 37.2 37.2 Average interest rate -- -- -- -- -- 7.2% -- -- Mortgage loans and investments: Fixed rate $ 8.4 1.3 0.3 1.5 1.4 18.6 31.5 31.0 Average interest rate 5.3% 7.3% 9.4% 7.0% 7.3% 9.4% -- -- LIABILITIES Homebuilding: Mortgage notes and other debts payable: Fixed rate $ 11.3 4.9 -- -- -- 507.5 523.7 466.3 Average interest rate 7.4% 9.3% -- -- -- 6.2% -- -- Financial Services: Notes and other debts payable: Fixed rate $ 0.7 0.7 0.1 0.2 -- -- 1.7 1.6 Average interest rate 7.2% 4.9% 11.0% 9.0% -- -- -- -- Variable rate $ 248.8 1.4 1.1 -- -- -- 251.3 251.3 Average interest rate 5.1% 8.3% 8.3% -- -- -- -- -- OFF-BALANCE SHEET FINANCIAL INSTRUMENTS Homebuilding: Interest rate swaps: Variable to fixed- notional amount $ -- -- 200.0 -- -- -- 200.0 1.7 Average pay rate -- -- 6.1% -- -- -- -- -- Average receive rate 30-day LIBOR
10 CAUTIONARY STATEMENTS Certain statements in this Report may be "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. By their nature, forward-looking statements involve risks, uncertainties and other factors that may cause actual results to differ materially from those which are anticipated. With regard to the Company, these factors include, but are not limited to, changes in general economic conditions, the market for homes generally and in areas where the Company has developments, the availability and cost of land suitable for residential development, materials prices, labor costs, interest rates, consumer confidence, competition, environmental factors and government regulations affecting the Company's operations. The following factors, among others, could particularly affect the Company's operations and financial results and cause results to differ from those anticipated by forward-looking statements in this Report. Real Estate, Economic and Certain Other Conditions The residential homebuilding industry is cyclical and is highly sensitive to changes in general economic conditions, such as levels of employment, consumer confidence and income, availability of financing, interest rate levels and demand for housing. Sales of new homes are also affected by the condition of the resale market for used homes, including foreclosed homes. The residential homebuilding industry has, from time-to-time, experienced fluctuating lumber prices and supply, as well as shortages of materials and labor, including insulation, drywall, concrete, carpenters, electricians and plumbers. Delays in construction of homes due to these factors or due to weather conditions could have an adverse effect upon the Company's operations. Inflation can increase the cost of building materials and labor and other construction related costs. Conversely, deflation can reduce the value of the Company's inventory and make it more difficult to include the full cost of previously purchased land in home sale prices. Interest Rates and Mortgage Financing Virtually all of the purchasers of the Company's homes finance their acquisitions through the Company's financial services subsidiaries or third-party lenders. In general, housing demand is adversely affected by increases in interest rates and by decreases in the availability of mortgage financing. If effective mortgage interest rates increase and the ability or willingness of prospective buyers to finance home purchases is adversely affected, the Company's operating results may be negatively affected. The Company's homebuilding activities also are dependent upon the availability and cost of mortgage financing for buyers of homes currently owned by potential purchasers of the Company's homes, who cannot purchase the Company's homes until they sell their current homes. Variability of Results The Company has historically experienced, and in the future expects to continue to experience, variability in operating results on a quarterly basis. Factors which may contribute to this variability include, among others (i) the timing of home closings; (ii) the timing of land sales; (iii) the timing of receipt of regulatory approvals for the construction of homes; (iv) the condition of the real estate market and general economic conditions; (v) the cyclical nature of the homebuilding industry; (vi) prevailing interest rates and availability of mortgage financing; (vii) pricing policies of the Company's competitors; (viii) the timing of the opening of new residential communities; (ix) weather and (x) the cost and availability of materials and labor. The Company's historical financial performance is not necessarily a meaningful indicator of future results and, in particular, the Company expects its financial results to continue to vary from quarter to quarter. 11 Dependence on Key Personnel The success of the Company depends to a significant degree on the efforts of the Company's senior management. The Company's operations may be adversely affected if one or more members of senior management cease to be active in the Company. The Company has designed its compensation structure and employee benefit programs to encourage long-term employment of executive officers. EMPLOYEES At November 30, 2000, the Company employed 7,140 individuals of whom 4,460 were involved in homebuilding operations and 2,680 were involved in financial services operations. The Company does not have collective bargaining agreements relating to any of its employees. However, some of the subcontractors the Company uses have employees who are represented by labor unions. Item 2. Properties. For information about properties owned by the Company for use in its homebuilding activities, see Item 1. The Company leases and maintains its executive offices, financial services subsidiary headquarters and principal Miami-Dade County, Florida homebuilding office in an office complex built by the Company and now owned by LNR. The leases for these offices expire in 2002. Other Company offices are located in Company-owned communities or in leased space. Item 3. Legal Proceedings. The Company and certain subsidiaries are parties to various claims and lawsuits which arise in the ordinary course of business. Although the specific allegations in the lawsuits differ, most of them involve claims that the Company failed to construct buildings in particular communities in accordance with plans and specifications and applicable construction codes, and seek reimbursement for sums allegedly needed to remedy the alleged deficiencies, or assert contract issues or relate to personal injuries. Suits of these types are common within the homebuilding industry. The Company does not believe that these claims or lawsuits will have a material effect upon the Company. Item 4. Submission of Matters to a Vote of Security Holders. Not applicable. PART II Item 5. Market for the Registrant's Common Stock and Related Security Holder Matters. Information concerning the market data for the Company's common stock and related security holder matters is incorporated by reference to page 64 of the Company's 2000 Annual Report to Stockholders. Item 6. Selected Financial Data. Selected financial data is incorporated by reference to page 36 of the Company's 2000 Annual Report to Stockholders. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Management's discussion and analysis of financial condition and results of operations is incorporated by reference to pages 37 through 41 of the Company's 2000 Annual Report to Stockholders. 12 Item 7A. Market Risk. For information on the Company's market risk, see Item 1. Item 8. Financial Statements and Supplementary Data. Consolidated financial statements and supplementary data about the Company are incorporated by reference to pages 44 through 63 of the Company's 2000 Annual Report to Stockholders. 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 about the Company's directors is incorporated by reference to the Company's definitive proxy statement, which will be filed with the Securities and Exchange Commission not later than March 30, 2001 (120 days after the end of the Company's fiscal year). The following people were the executive officers of Lennar Corporation on February 21, 2001: Name/Position Age Year of Election ------------- --- ---------------- Stuart A. Miller, President and Chief Executive Officer 43 1997 Robert J. Strudler, Vice Chairman and Chief Operating Officer 58 2000 Bruce E. Gross, Vice President and Chief Financial Officer 42 1997 Marshall H. Ames, Vice President 57 1982 Diane J. Bessette, Vice President and Controller 40 1997 Jonathan M. Jaffe, Vice President 41 1994 Craig M. Johnson, Vice President, Community Development 47 2000 Waynewright Malcolm, Vice President and Treasurer 37 1997 David B. McCain, Vice President, General Counsel and Secretary 40 1998 Allan J. Pekor, Vice President 64 1997 The year of election represents the year that the executive officer was elected to his or her current position. Mr. Stuart Miller (who is the son of Leonard Miller, the Chairman of the Board of Directors of the Company) has been President and Chief Executive Officer since April 1997 and is a Director of the Company. Prior to that, Mr. Miller held various executive positions with the Company and had been a Vice President since 1985. Mr. Miller is also the Chairman of the Board of LNR Property Corporation. Mr. Strudler has been Vice Chairman of the Board of Directors and Chief Operating Officer since May 2000. Prior to that, Mr. Strudler was the Chairman and Co-Chief Executive Officer of U.S. Home Corporation. 13 Mr. Gross has been Vice President and Chief Financial Officer since 1997. Prior to that, Mr. Gross was employed as Senior Vice President, Controller and Treasurer of Pacific Greystone Corporation since its inception in 1991. Mr. Ames has been a Vice President since 1982 and has held various positions in the Company's Homebuilding Division. Ms. Bessette has been employed by the Company since 1995, has been the Company's Controller since 1997 and became a Vice President in 2000. Prior to that, Ms. Bessette was employed as a Financial Senior Manager at the Holson Burnes Group, Inc. and before that, was employed by Price Waterhouse LLP. Mr. Jaffe has been a Vice President since 1994 and serves as a Regional President in the Company's Homebuilding Division. Mr. Jaffe is a Director of the Company. Mr. Johnson has been a Vice President of the Company since May 2000 and is President of Strategic Technologies, Inc. Prior to that, Mr. Johnson was Senior Vice President of U.S. Home Corporation. Mr. Malcolm joined the Company as Treasurer in 1997 and became a Vice President in 2000. Prior to that, Mr. Malcolm was employed as Director, Finance and Regulatory Affairs at Citizens Utilities Company. Mr. McCain has been employed by the Company since 1998 as Vice President, General Counsel and Secretary. Prior to joining the Company, Mr. McCain was employed at John Alden Asset Management Company for more than 10 years, where he last served as Vice President, General Counsel and Secretary. Mr. Pekor has held various executive positions with the Company since 1979. Mr. Pekor presently serves as Vice President of the Company and has served as President of Lennar Financial Services, Inc. since 1997. Item 11. Executive Compensation. The information called for by this item is incorporated by reference to the Company's definitive proxy statement, which will be filed with the Securities and Exchange Commission not later than March 30, 2001 (120 days after the end of the Company's fiscal year). Item 12. Security Ownership of Certain Beneficial Owners and Management. The information called for by this item is incorporated by reference to the Company's definitive proxy statement, which will be filed with the Securities and Exchange Commission not later than March 30, 2001 (120 days after the end of the Company's fiscal year). Item 13. Certain Relationships and Related Transactions. The information called for by this item is incorporated by reference to the Company's definitive proxy statement, which will be filed with the Securities and Exchange Commission not later than March 30, 2001 (120 days after the end of the Company's fiscal year). 14 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a) Documents filed as part of this Report. 1. The following financial statements are incorporated by reference in Item 8: Page in 2000 Annual Financial Statements Report to Stockholders -------------------- ---------------------- Report of Independent Auditors 42 Consolidated Balance Sheets as of November 30, 2000 and 1999 44 Consolidated Statements of Earnings for the Years Ended November 30, 2000, 1999 and 1998 45 Consolidated Statements of Stockholders' Equity for the Years Ended November 30, 2000, 1999 and 1998 46 Consolidated Statements of Cash Flows for the Years Ended November 30, 2000, 1999 and 1998 47 Notes to Consolidated Financial Statements 49 2. The following financial statement schedule is included in this Report: Financial Statement Schedule Page in this Report ---------------------------- ------------------- Independent Auditors' Report on Schedule 21 II - Valuation and Qualifying Accounts 22 Information required by other schedules has either been incorporated in the financial statements and accompanying notes or is not applicable to the Company. 3. The following exhibits are filed with this Report or incorporated by reference: 1(a). Purchase Agreement, dated April 28, 2000, by and among Lennar Corporation, Deutsche Bank Securities Inc. and Banc One Capital Markets, Inc., Banc of America Securities LLC, Credit Lyonnais Securities USA Inc. and Wachovia Securities, Inc. (the "Initial Purchasers") - Incorporated by reference to Registration Statement No. 333-41316. 3(a). Certificate of Amendment of Certificate of Incorporation, dated April 9, 1999. 3(b). Amended and Restated Certificate of Incorporation, dated April 28, 1998 - Incorporated by reference to Annual Report on Form 10-K for the year ended November 30, 1998. 3(c). Bylaws - Incorporated by reference to Form 8-K dated October 31, 1997, file number 1-11749. 15 4(a). Indenture, dated as of December 31, 1997, between Lennar Corporation and The First National Bank of Chicago, as trustee - Incorporated by Reference to Registration Statement No. 333-45527. 4(b). First Supplemental Indenture, dated as of July 29, 1998, between Lennar Corporation and The First National Bank of Chicago, as trustee (relating to Lennar's Zero Coupon Senior Convertible Debentures due 2018) - Incorporated by reference to Form 8-K dated July 24, 1998, file number 1-11749. 4(c). Second Supplemental Indenture, dated as of February 19, 1999, between Lennar Corporation and The First National Bank of Chicago, as trustee (relating to Lennar's 7 5/8% Senior Notes due 2009) - Incorporated by reference to Form 8-K dated February 19, 1999, file number 1-11749. 4(d). Third Supplemental Indenture, dated May 3, 2000, by and among Lennar Corporation and Bank One Trust Company, N.A., as successor trustee to The First National Bank of Chicago (relating to Lennar's 7 5/8% Senior Notes due 2009). 4(e). Fourth Supplemental Indenture, dated May 3, 2000, by and among Lennar Corporation and Bank One Trust Company, N.A., as successor trustee to The First National Bank of Chicago (relating to Lennar's Zero Coupon Senior Convertible Debentures due 2018). 4(f). Indenture, dated May 3, 2000, by and among the Lennar Corporation and Bank One Trust Company, N.A., as trustee, including Form of 9.95% Series A Senior Notes due 2010 and Form of 9.95% Series B Senior Notes due 2010 - Incorporated by reference to Registration Statement No. 333-41316. 4(g). Registration Rights Agreement, dated May 3, 2000, by and among Lennar Corporation and the Initial Purchasers - Incorporated by reference to Registration Statement No. 333-41316. 10(a). Amended and Restated Lennar Corporation 1997 Stock Option Plan - Incorporated by reference to Annual Report on Form 10-K for the year ended November 30, 1997. 10(b). Lennar Corporation 1991 Stock Option Plan - Incorporated by reference to Registration Statement No. 33-45442. 10(c). Lennar Corporation Employee Stock Ownership Plan and Trust - Incorporated by reference to Registration Statement No. 2-89104. 10(d). Amendment dated December 13, 1989 to Lennar Corporation Employee Stock Ownership Plan - Incorporated by reference to Annual Report on Form 10-K for the year ended November 30, 1990. 10(e). Lennar Corporation Employee Stock Ownership/401k Trust Agreement dated December 13, 1989 - Incorporated by reference to Annual Report on Form 10-K for the year ended November 30, 1990. 10(f). Amendment dated April 18, 1990 to Lennar Corporation Employee Stock Ownership/401k Plan - Incorporated by reference to Annual Report on Form 10-K for the year ended November 30, 1990. 16 10(g). Partnership Agreement for Lennar Land Partners by and between Lennar Land Partners Sub, Inc. and LNR Land Partners Sub, Inc., dated October 24, 1997 - Incorporated by reference to Annual Report on Form 10-K for the year ended November 30, 1997. Lennar Land Partners Sub II, Inc. and LNR Land Partners Sub II, Inc. entered into an identical Partnership Agreement for Lennar Land Partners II on June 28, 1999. 10(h). Separation and Distribution Agreement, dated June 10, 1997, between Lennar Corporation and LNR Property Corporation - Incorporated by reference to Registration Statement No. 333-35671. 10(i). Credit Agreement, dated October 31, 1997, by and among Lennar Land Partners and the Lenders named therein and a Guaranty Agreement of Lennar Corporation, dated October 31, 1997 - Incorporated by reference to Annual Report on Form 10-K for the year ended November 30, 1997. 10(j). Revolving Credit Agreement (Facilities A and B), dated October 31, 1997, among Lennar Corporation and Certain Subsidiaries and The First National Bank of Chicago, as agent - Incorporated by reference to Annual Report on Form 10-K for the year ended November 30, 1997. 10(k). First Amendment to Revolving Credit Agreement (Facilities A and B) dated January 20, 1998, among Lennar Corporation and Certain Subsidiaries and The First National Bank of Chicago, as agent - Incorporated by reference to Annual Report on Form 10-K for the year ended November 30, 1997. 10(l). Equity Draw-Down Agreement, dated March 25, 1998, between Lennar Corporation and HSBC James Capel Canada, Inc. - Incorporated by reference to Annual Report on Form 10-K for the year ended November 30, 1998. 10(m). Voting Agreement, dated June 10, 1997, between Lennar Corporation, Warburg Pincus Investors, L.P. and Pacific Greystone Corporation - Incorporated by reference to Form 8-K dated June 10, 1997, file number 1-11749. 10(n). Plan and Agreement of Merger, dated as of February 16, 2000, between Lennar Corporation, U.S. Home Corporation and Len Acquisition Corporation - Incorporated by reference to Form 8-K dated February 23, 2000, file number 1-11749. 10(o). Credit Agreement, dated May 3, 2000, among Lennar Corporation and various lenders. 10(p). Lennar Corporation 2000 Stock Option and Restricted Stock Plan, which is subject to stockholder approval at the 2001 annual meeting of the Company's stockholders. 13. Pages 36 through 64 of the 2000 Annual Report to Stockholders. 21. List of subsidiaries. 23. Independent Auditors' Consent. 99. Financial statements of Lennar Corporation's guarantor subsidiaries. 17 (b) Reports on Form 8-K filed during the quarter ended November 30, 2000. Not applicable. (c) The exhibits to this Report are listed in Item 14(a)3. (d) The financial statement schedules required by Regulation S-X which are excluded from the Annual Report to Stockholders as permitted by Rule 14a-3(b)(1) are listed in Item 14(a)2. 18 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. LENNAR CORPORATION /s/ Stuart A. Miller ---------------------------------------- Stuart A. Miller President, Chief Executive Officer and Director Date: February 28, 2001 19 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated: Principal Executive Officer: ---------------------------- Stuart A. Miller /s/ STUART A. MILLER President, Chief Executive Officer and Director ----------------------------- Date: February 28, 2001 Principal Financial Officer: ---------------------------- Bruce E. Gross /s/ BRUCE E. GROSS Vice President and Chief Financial Officer ----------------------------- Date: February 28, 2001 Principal Accounting Officer: ----------------------------- Diane J. Bessette /s/ DIANE J. BESSETTE Vice President and Controller ----------------------------- Date: February 28, 2001 Directors: ---------- Irving Bolotin /s/ IRVING BOLOTIN ----------------------------- Date: February 28, 2001 Steven L. Gerard /s/ STEVEN L. GERARD ----------------------------- Date: February 28, 2001 Jonathan M. Jaffe /s/ JONATHAN M. JAFFE ----------------------------- Date: February 28, 2001 R. Kirk Landon /s/ R. KIRK LANDON ----------------------------- Date: February 28, 2001 Sidney Lapidus /s/ SIDNEY LAPIDUS ----------------------------- Date: February 28, 2001 Leonard Miller /s/ LEONARD MILLER ----------------------------- Date: February 28, 2001 Herve Ripault /s/ HERVE RIPAULT ----------------------------- Date: February 28, 2001 Arnold P. Rosen /s/ ARNOLD P. ROSEN ----------------------------- Date: February 28, 2001 Steven J. Saiontz /s/ STEVEN J. SAIONTZ ----------------------------- Date: February 28, 2001 Robert J. Strudler /s/ ROBERT J. STRUDLER ----------------------------- Date: February 28, 2001 20 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Lennar Corporation: We have audited the consolidated financial statements of Lennar Corporation and subsidiaries (the "Company") as of November 30, 2000 and 1999 and for each of the three years in the period ended November 30, 2000, and have issued our report thereon dated January 9, 2001; such financial statements and report are included in your 2000 Annual Report to Stockholders and are incorporated herein by reference. Our audits also included the financial statement schedule of the Company, listed in Item 14(a)2. The financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ DELOITTE & TOUCHE LLP Certified Public Accountants Miami, Florida January 9, 2001 21 LENNAR CORPORATION AND SUBSIDIARIES Schedule II Valuation and Qualifying Accounts Years Ended November 30, 2000, 1999 and 1998
Additions ---------------------- Charged Charged Beginning to costs to other Ending Description balance and expenses accounts Deductions balance - ------------------------------------------------------------ ---------- --------- --------- ---------- ---------- Year ended November 30, 2000 Allowances deducted from assets to which they apply: Allowances for doubtful accounts and notes receivable $2,471,000 3,834,000 28,000 (1,145,000) 5,188,000 ========== ========= ========= ========== ========== Deferred income and unamortized discounts $1,128,000 -- 7,896,000 (679,000) 8,345,000 ========== ========= ========= ========== ========== Loan loss reserve $3,778,000 -- -- (133,000) 3,645,000 ========== ========= ========= ========== ========== Valuation allowance $1,249,000 -- 903,000 (775,000) 1,377,000 ========== ========= ========= ========== ========== Deferred tax asset valuation allowance $8,508,000 -- -- (1,391,000) 7,117,000 ========== ========= ========= ========== ========== Year ended November 30, 1999 Allowances deducted from assets to which they apply: Allowances for doubtful accounts and notes receivable $4,075,000 2,011,000 38,000 (3,653,000) 2,471,000 ========== ========= ========= ========== ========== Deferred income and unamortized discounts $ 231,000 -- 1,156,000 (259,000) 1,128,000 ========== ========= ========= ========== ========== Loan loss reserve $3,090,000 1,200,000 21,000 (533,000) 3,778,000 ========== ========= ========= ========== ========== Valuation allowance $1,903,000 93,000 56,000 (803,000) 1,249,000 ========== ========= ========= ========== ========== Deferred tax asset valuation allowance $7,659,000 -- 849,000 -- 8,508,000 ========== ========= ========= ========== ========== Year ended November 30, 1998 Allowances deducted from assets to which they apply: Allowances for doubtful accounts and notes receivable $1,952,000 1,505,000 1,091,000 (473,000) 4,075,000 ========== ========= ========= ========== ========== Deferred income and unamortized discounts $ 85,000 -- 146,000 -- 231,000 ========== ========= ========= ========== ========== Loan loss reserve $3,531,000 722,000 -- (1,163,000) 3,090,000 ========== ========= ========= ========== ========== Valuation allowance $2,176,000 -- 290,000 (563,000) 1,903,000 ========== ========= ========= ========== ========== Deferred tax asset valuation allowance $7,659,000 -- -- -- 7,659,000 ========== ========= ========= ========== ==========
22 EXHIBIT INDEX EXHIBIT DESCRIPTION - ------- ----------- 4(d). Third Supplemental Indenture, dated May 3, 2000, by and among Lennar Corporation and Bank One Trust Company, N.A., as successor trustee to The First National Bank of Chicago (relating to Lennar's 7 5/8% Senior Notes due 2009). 4(e). Fourth Supplemental Indenture, dated May 3, 2000, by and among Lennar Corporation and Bank One Trust Company, N.A., as successor trustee to The First National Bank of Chicago (relating to Lennar's Zero Coupon Senior Convertible Debentures due 2018). 10(o). Credit Agreement, dated May 3, 2000, among Lennar Corporation and various lenders. 10(p). Lennar Corporation 2000 Stock Option and Restricted Stock Plan, which is subject to stockholder approval at the 2001 annual meeting of the Company's stockholders. 13. Pages 36 through 64 of the 2000 Annual Report to Stockholders. 21. List of subsidiaries. 23. Independent Auditors' Consent. 99. Financial statements of Lennar Corporation's guarantor subsidiaries. EX-4.(D) 2 0002.txt ================================================================================ Exhibit 4.(d) LENNAR CORPORATION, Issuer, THE GUARANTORS NAMED HEREIN and BANK ONE TRUST COMPANY, N.A., as successor to THE FIRST NATIONAL BANK OF CHICAGO, Trustee ---------------------------- Third Supplemental Indenture Dated as of May 3, 2000 To Indenture Dated as of December 31, 1997 ---------------------------- Relating To Lennar Corporation's 7 5/8% Senior Notes Due 2009 ================================================================================ THIRD SUPPLEMENTAL INDENTURE, dated as of May 3, 2000 (the "Supplemental Indenture"), to Indenture, dated as of December 31, 1997, between Lennar Corporation (the "Company"), a Delaware corporation, each of the parties named as Guarantors on the signature pages of this Supplemental Indenture and Bank One Trust Company, N.A., as successor to The First National Bank of Chicago, a national banking association, organized under the laws of the United States of America, as trustee (the "Trustee"). RECITALS OF THE COMPANY WHEREAS, the Company has heretofore executed and delivered to the Trustee an Indenture, dated as of December 31, 1997 (the "Base Indenture"), providing for the issuance from time to time of its notes and other evidences of unsecured indebtedness, to be issued in one or more series as therein provided ("Securities"); WHEREAS, Section 2.02 of the Base Indenture provides that the Company and the Trustee, at any time and from time to time, may enter into an indenture which supplements the Base Indenture to establish the terms of securities of any series; WHEREAS, the Company and the Trustee are parties to a Second Supplemental Indenture to the Base Indenture, dated as of February 19, 1999 (the "Second Supplemental Indenture"), governing the Company's 7 5/8% Senior Notes Due 2009 (the "Notes"); and WHEREAS, the Company and the Trustee are entering into this Supplemental Indenture in order to (1) provide the Notes with the benefits of the Guarantees (as defined below) and (2) recognize that the Notes are secured on an equal and ratable basis with the Company's obligations under its Credit Agreement, dated May 3, 2000 (the "Credit Agreement"), among the Company, Bank One, NA, Bankers Trust Company and the other lenders named therein (the "Lenders"), all as provided in the Company Pledge Agreement, dated May 3, 2000, between the Company and Bank One, NA, the Subsidiary Pledge Agreement, dated May 3, 2000, between the Pledgors named therein and Bank One, NA and the Collateral Trust Agreement, dated May 3, 2000, between the Company and Bank One, NA. NOW, THEREFORE, THIS THIRD SUPPLEMENTAL INDENTURE WITNESSETH: For and in consideration of the premises and the purchase of the Notes by the Holders thereof, each party agrees for the benefit of each other party and for the equal and ratable benefit of the Holders of the Notes, as follows: ARTICLE ONE DEFINITIONS SECTION 1.01. Capitalized terms used but not defined in this Supplemental Indenture shall have the meanings ascribed to them in the Indenture. SECTION 1.02. References in this Supplemental Indenture to section numbers shall be deemed to be references to section numbers of this Supplemental Indenture unless otherwise specified. SECTION 1.03. In the case of capitalized terms defined in this Supplemental Indenture that are also defined in the Indenture, the meanings ascribed to such terms in this Supplemental Indenture shall control with respect to the Notes. SECTION 1.04. For purposes of this Supplemental Indenture, the following terms have the meanings ascribed to them as follows: "Capital Stock" means, with respect to any Person, any and all shares, interests, participations or other equivalents (however designated) of or in such Person's capital stock or other equity interests, and options, rights or warrants to purchase such capital stock or other equity interests, whether now outstanding or issued after May 3, 2000, including, without limitation, all Disqualified Stock and Preferred Stock. "Collateral Trust Agreement" means the Collateral Trust Agreement, dated as of May 3, 2000, by and among the Company, the Guarantors and Bank One, NA, as Trustee "Guarantee" means any obligation, contingent or otherwise, of any Person directly or indirectly guaranteeing any Indebtedness or other obligation of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (1) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or other obligation of such other Person (whether arising by virtue of partnership arrangements, or by agreement to keep-well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement conditions or otherwise) or (2) entered into for purposes of assuring in any other manner the obligee of such Indebtedness or other obligation of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part) (but if in part, only to the extent thereof); provided, however, that the term "guarantee" shall not include (A) endorsements for collection or deposit in the ordinary course of business and (B) guarantees (other than guarantees of Indebtedness) by Lennar in respect of assisting one or more Subsidiaries in the ordinary course of their respective businesses, including without limitation guarantees of trade obligations and operating leases, on ordinary business terms. The term "guarantee" used as a verb has a corresponding meaning. "Guarantor" means (1) initially, each of the Guarantors named on the signature pages of this Supplemental Indenture, and (2) each of the Company's Subsidiaries which becomes a guarantor of the Notes pursuant to the provisions of this Supplemental Indenture. "Guarantors" means (1) initially, those parties named as Guarantors on the signature pages of this Supplemental Indenture, and (2) each of Lennar's Subsidiaries which becomes a guarantor of the Notes pursuant to the provisions of this Supplemental Indenture. "Holder" means the Person in whose name a Note is registered in the books of the Registrar for the Notes. "Indenture" means the Base Indenture together with the Second Supplemental Indenture. "Investments" shall have the meaning ascribed to it under the New Indenture. "New Indenture" means the indenture dated as of May 3, 2000, relating to the relating to an issue of the Company's 9.95% Senior Notes Due 2010. "Non-Recourse Indebtedness" shall have the meaning ascribed to it under the New Indenture. "Obligations" means all obligations for principal, premium, interest, penalties, fees, indemnifications, reimbursements, damages and other liabilities payable under the documentation governing any Indebtedness. "Officer" means, with respect to any Person, the Chairman of the Board of Directors, the Chief Executive Officer, the President, any Vice President, the Chief Financial Officer, the Treasurer, the Controller, or the Secretary of such Person, or any other officer designated by the Board of Directors serving in a similar capacity. "Officers' Certificate" means a certificate signed by the Chairman of the Board of Directors, the Chief Executive Officer, the President or any Vice President and the Chief Financial Officer, Controller or any Treasurer of Lennar and otherwise complying with the requirements of the Indenture. "Opinion of Counsel" means a written opinion from legal counsel who is reasonably acceptable to the Trustee complying with the requirements of the Indenture, as they relate to the giving of an Opinion of Counsel. "Person" means any individual, corporation, partnership, limited liability company, joint venture, incorporated or unincorporated association, joint stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Pledge Agreements" means the Company Pledge Agreement, dated as of May 3, 2000, by and between the Company and Bank One, NA, as Trustee and the Subsidiary Pledge Agreement, dated as of May 3, 2000, by and between the Pledgors named therein and Bank One, NA, as Trustee ARTICLE TWO GUARANTEE OF NOTES SECTION 2.01. Unconditional Guarantee. Each Guarantor, if any, hereby jointly and severally, unconditionally and irrevocably guarantees (such guarantee to be referred to herein as a "Guarantee") to each Holder of a Note authenticated and delivered by the Trustee and to the Trustee and its successors and assigns, that: (a) all amounts due with respect to the Notes shall be duly and punctually paid in full when due, whether at maturity, upon redemption at the option of Holders pursuant to the provisions of the Notes relating thereto, by acceleration or otherwise, and interest on the overdue principal and (to the extent permitted by law) interest, if any, on the Notes and all other obligations of the Company or the Guarantors to the Holders or the Trustee hereunder or under the Indenture (including amounts due the Trustee under Section 7.7 of the Base Indenture) and all other obligations shall be promptly paid in full or performed, all in accordance with the terms hereof or of the Indenture; and (b) in case of any extension of time of payment or renewal of any Notes or any of such other obligations, the same shall be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, whether at maturity, by acceleration or otherwise. Failing payment when due of any amount so guaranteed, or failing performance of any other obligation of the Company to the Holders under the Indenture or under the Notes, for whatever reason, each Guarantor shall be obligated to pay, or to perform or cause the performance of, the same immediately. An Event of Default under the Indenture or the Notes shall constitute an event of default under this Guarantee, and shall entitle the Holders of Notes 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 unconditional, irrespective of the validity, regularity or enforceability of the Notes or the Indenture, the absence of any action to enforce the same, any waiver or consent by any Holder of the Notes with respect to any provisions of the Notes or the Indenture, 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 Note, 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 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 shall not be discharged except by complete performance of the obligations contained in the Notes, the Indenture and this Guarantee. This Guarantee is a guarantee of payment and not of collection. 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, this 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 Notes and the Trustee, on the other hand, (a) subject to this Article Two, the maturity of the obligations guaranteed hereby may be accelerated as provided in Article VI of the Base Indenture and/or Article V of the Second Supplemental Indenture for the purposes of this 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 acceleration of such obligations as provided in Article VI of the Base Indenture and/or Article V of the Second Supplemental Indenture, such obligations (whether or not due and payable) shall forthwith become due and payable by the Guarantors for the purpose of this Guarantee. No stockholder, officer, director, employee or incorporator, past, present or future, of any Guarantor, as such, shall have any personal liability under this Guarantee by reason of his, her or its status as such stockholder, officer, director, employee or incorporator. Each Guarantor that makes a payment or distribution under its Guarantee shall be entitled to a contribution from each other Guarantor in an amount pro rata, based on the net assets of each Guarantor, determined in accordance with GAAP. SECTION 2.02. Limitations on Guarantees. The obligations of each Guarantor under its Guarantee will be limited to the maximum amount which, after giving effect to all other contingent and fixed liabilities of such Guarantor and after giving effect to any collections from or payments made by or on behalf of any other Guarantor in respect of the obligations of such other Guarantor under its Guarantee or pursuant to its contribution obligations under the Indenture will result in the obligations of such Guarantor under its Guarantee not constituting a fraudulent conveyance or fraudulent transfer under federal or state law. The Guarantors shall include (i) each of the Guarantors named on the signature pages of this Supplemental Indenture, (ii) each of the Company's Subsidiaries that in the future executes a supplemental indenture in which such Subsidiary agrees to be bound by the terms hereof as a Guarantor; and (iii) any subsidiary designated as a "Restricted Subsidiary" pursuant to the New Indenture, whether formed or acquired after May 3, 2000, that guarantees any outstanding Indebtedness of the Company or any Restricted Subsidiary pursuant to the New Indenture; provided, however, that if any Guarantor is released from its guarantee of the outstanding Indebtedness of the Company or any Restricted Subsidiary, such Guarantor shall be automatically released from its obligations as Guarantor and, from and after such date, such Guarantor shall cease to constitute a Guarantor. SECTION 2.03 Execution and Delivery of Guarantee. To further evidence the Guarantee set forth in Section 2.01, each Guarantor hereby agrees to execute and deliver to the Trustee a Guarantee in substantially the form of Exhibit A hereto. Such Guarantee shall be executed on behalf of each Guarantor by either manual or facsimile signature of two Officers of each Guarantor, each of whom, in each case, shall have been duly authorized to so execute by all requisite corporate action. The validity and enforceability of any Guarantee shall not be affected by the fact that it is not affixed to any Note or Notes. If an Officer of a Guarantor whose signature is on the Indenture, this Supplemental Indenture or a Guarantee no longer holds that office at the time the Trustee authenticates the Note on which such Guarantee is endorsed or at any time thereafter, such Guarantor's Guarantee of such Note shall be valid nevertheless. The delivery of any Note by the Trustee, after the authentication thereof hereunder, shall constitute due delivery of any Guarantee set forth in this Supplemental Indenture on behalf of each Guarantor. SECTION 2.04 Release of a Guarantor. If no Default exists or would exist under the Indenture, upon the sale or disposition of 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 or Subsidiary), or if any Guarantor is dissolved or liquidated, or if a Guarantor is designated an Unrestricted Subsidiary in accordance with the New Indenture, such Guarantor and each Subsidiary of such Guarantor that is also a Guarantor shall be deemed released from all obligations under this Article Two without any further action required on the part of the Trustee or any Holder. 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 Notes and under this Article Two. Nothing contained in the Indenture, this Supplemental Indenture or in any of the Notes 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. SECTION 2.05 Waiver of Subrogation. Until the Indenture is discharged and all of the Notes are discharged and paid in full, each Guarantor hereby irrevocably waives and agrees not to exercise any claim or other rights which it may now or hereafter acquire against the Company that arise from the existence, payment, performance or enforcement of the Company's obligations under the Notes or the Indenture and such Guarantor's obligations under this Supplemental Indenture, the Guarantee and the Indenture, in any such instance including, without limitation, any right of subrogation, reimbursement, exoneration, contribution, indemnification, and any right to participate in any claim or remedy of the Holders against the Company, whether or not such claim, remedy or right arises in equity, or under contract, statute or common law, including, without limitation, the right to take or receive from the Company, directly or indirectly, in cash or other property or by set-off or in any other manner, payment or security on account of such claim or other rights. If any amount shall be paid to any Guarantor in violation of the preceding sentence and any amounts owing to the Trustee or the Holders of Notes under the Notes, the Indenture, or any other document or instrument delivered under or in connection with such agreements or instruments, shall not have been paid in full, such amount shall have been deemed to have been paid to such Guarantor for the benefit of, and held in trust for the benefit of, the Trustee or the Holders and shall forthwith be paid to the Trustee for the benefit of itself or such Holders to be credited and applied to the obligations in favor of the Trustee or the Holders, as the case may be, whether matured or unmatured, in accordance with the terms of the Indenture. Each Guarantor acknowledges that it will receive direct and indirect benefits from the financing arrangements contemplated by the Indenture and that the waiver set forth in this Section 2.05 is knowingly made in contemplation of such benefits. SECTION 2.06. No Set-Off. Each payment to be made by a Guarantor hereunder in respect of its Obligations shall be payable in the currency or currencies in which such Obligations are denominated, and shall be made without set-off, counterclaim, reduction or diminution of any kind or nature. SECTION 2.07. Obligations Absolute. The obligations of each Guarantor hereunder are and shall be absolute and unconditional and any monies or amounts expressed to be owing or payable by each Guarantor hereunder which may not be recoverable from such Guarantor on the basis of a Guarantee shall be recoverable from such Guarantor as a primary obligor and principal debtor in respect thereof. SECTION 2.08. Obligations Continuing. The obligations of each Guarantor hereunder shall be continuing and shall remain in full force and effect until all the Obligations have been paid and satisfied in full. Each Guarantor agrees with the Trustee that it will from time to time deliver to the Trustee suitable acknowledgments of its continued liability hereunder and under any other instrument or instruments in such form as counsel to the Trustee may advise and as will prevent any action brought against it in respect of any default hereunder being barred by any statute of limitations now or hereafter in force and, in the event of the failure of a Guarantor so to do, it hereby irrevocably appoints the Trustee the attorney and agent of such Guarantor to make, execute and deliver such written acknowledgment or acknowledgments or other instruments as may from time to time become necessary or advisable, in the judgment of the Trustee on the advice of counsel, to fully maintain and keep in force the liability of such Guarantor hereunder. SECTION 2.09. Obligations Not Reduced. The obligations of each Guarantor hereunder shall not be satisfied, reduced or discharged except solely by the payment of such principal, premium, if any, interest, fees and other monies or amounts as may at any time prior to discharge of the Indenture be or become owing or payable under or by virtue of or otherwise in connection with the Notes or the Indenture. SECTION 2.10. Obligations Reinstated. The obligations of each Guarantor hereunder shall continue to be effective or shall be reinstated, as the case may be, if at any time any payment which would otherwise have reduced the obligations of any Guarantor hereunder (whether such payment shall have been made by or on behalf of the Company or by or on behalf of a Guarantor) is rescinded or reclaimed from the Trustee or any of the Holders upon the insolvency, bankruptcy, liquidation or reorganization of the Company or any Guarantor or otherwise, all as though such payment had not been made. If demand for, or acceleration of the time for, payment by the Company is stayed upon the insolvency, bankruptcy, liquidation or reorganization of the Company, all such Indebtedness otherwise subject to demand for payment or acceleration shall nonetheless be payable by each Guarantor as provided herein. SECTION 2.11 Obligations Not Affected. The obligations of each Guarantor hereunder shall not be affected, impaired or diminished in any way by any act, omission, matter or thing whatsoever, occurring before, upon or after any demand for payment hereunder (and whether or not known or consented to by any Guarantor or any of the Holders) which, but for this provision, might constitute a whole or partial defense to a claim against any Guarantor hereunder or might operate to release or otherwise exonerate any Guarantor from any of its obligations hereunder or otherwise affect such obligations, whether occasioned by default of any of the Holders or otherwise, including, without limitation: (a) any limitation of status or power, disability, incapacity or other circumstance relating to the Company or any other person, including any insolvency, bankruptcy, liquidation, reorganization, readjustment, composition, dissolution, winding up or other proceeding involving or affecting the Company or any other person; (b) any irregularity, defect, unenforceability or invalidity in respect of any indebtedness or other obligation of the Company or any other person under the Indenture, the Notes or any other document or instrument; (c) any failure of the Company, whether or not without fault on its part, to perform or comply with any of the provisions of the Indenture, this Supplemental Indenture or the Notes, or to give notice thereof to a Guarantor; (d) the taking or enforcing or exercising or the refusal or neglect to take or enforce or exercise any right or remedy from or against the Company or any other Person or their respective assets or the release or discharge of any such right or remedy; (e) the granting of time, renewals, extensions, compromises, concessions, waivers, releases, discharges and other indulgences to the Company or any other Person; (f) any change in the time, manner or place of payment of, or in any other term of, any of the Notes, or any other amendment, variation, supplement, replacement or waiver of, or any consent to departure from, any of the Notes, this Supplemental Indenture or the Indenture, including, without limitation, any increase or decrease in any amount due with respect to any of the Notes; (g) any change in the ownership, control, name, objects, businesses, assets, capital structure or constitution of the Company or a Guarantor; (h) any merger or amalgamation of the Company or a Guarantor with any Person or Persons; (i) the occurrence of any change in the laws, rules, regulations or ordinances of any jurisdiction by any present or future action of any governmental authority or court amending, varying, reducing or otherwise affecting, or purporting to amend, vary, reduce or otherwise affect, any of the Obligations or the obligations of a Guarantor under its Guarantee; and (j) any other circumstance, including release of the Guarantor pursuant to Section 2.04 (other than by complete, irrevocable payment) that might otherwise constitute a legal or equitable discharge or defense of the Company under the Indenture or the Notes or of a Guarantor in respect of its Guarantee hereunder. SECTION 2.12. Waiver. Without in any way limiting the provisions of Section 2.01 hereof, each Guarantor hereby waives notice of acceptance hereof, notice of any liability of any Guarantor hereunder, notice or proof of reliance by the Holders upon the obligations of any Guarantor hereunder, and diligence, presentment, demand for payment on the Company, protest, notice of dishonor or non-payment of any of the Obligations, or other notice or formalities to the Company or any Guarantor of any kind whatsoever. SECTION 2.13. No Obligation to Take Action Against the Company. Neither the Trustee nor any other Person shall have any obligation to enforce or exhaust any rights or remedies or to take any other steps under any security for the Obligations of the Company under the Indenture and the Notes and of the Guarantors hereunder or against the Company or any other Person or any Property of the Company or any other Person before the Trustee is entitled to demand payment and performance by any or all Guarantors of their liabilities and obligations under their Guarantees, under this Supplemental Indenture or under the Indenture. SECTION 2.14. Dealing with the Company and Others. The Holders, without releasing, discharging, limiting or otherwise affecting in whole or in part the obligations and liabilities of any Guarantor hereunder and without the consent of or notice to any Guarantor, may (a) grant time, renewals, extensions, compromises, concessions, waivers, releases, discharges and other indulgences to the Company or any other Person; (b) take or abstain from taking security or collateral from the Company or from perfecting security or collateral of the Company; (c) release, discharge, compromise, realize, enforce or otherwise deal with or do any act or thing in respect of (with or without consideration) any and all collateral, mortgages or other security given by the Company or any third party with respect to the obligations or matters contemplated by the Indenture or the Notes; (d) accept compromises or arrangements from the Company; (e) apply all monies at any time received from the Company or from any security upon such part of the Obligations of the Company under the Indenture and the Notes as the Holders may see fit or change any such application in whole or in part from time to time as the Holders may see fit; and (f) otherwise deal with, or waive or modify their right to deal with, the Company and all other Persons and any security as the Holders or the Trustee may see fit. SECTION 2.15. Default and Enforcement. If any Guarantor fails to pay in accordance with Section 2.01 hereof, the Trustee may proceed in its name as trustee hereunder in the enforcement of the Guarantee of any such Guarantor and such Guarantor's obligations thereunder and hereunder by any remedy provided by law, whether by legal proceedings or otherwise, and to recover from such Guarantor the obligations. SECTION 2.16. Amendment, Etc. No amendment, modification or waiver of any provision of the Indenture nor of this Supplemental Indenture relating to any Guarantor or consent to any departure by any Guarantor or any other Person from any such provision will in any event be effective unless it is signed by such Guarantor and the Trustee. SECTION 2.17. Acknowledgment. Each Guarantor hereby acknowledges communication of the terms of this Supplemental Indenture and consents to and approves of the same. SECTION 2.18. Costs and Expenses. Each Guarantor shall pay on demand by the Trustee any and all costs, fees and expenses (including, without limitation, legal fees on a solicitor and client basis) incurred by the Trustee, its agents, advisors and counsel or any of the Holders in enforcing any of their rights under any Guarantee. SECTION 2.19. No Merger or Waiver; Cumulative Remedies. No Guarantee shall operate by way of merger of any of the obligations of a Guarantor under any other agreement, including, without limitation, the Indenture. No failure to exercise and no delay in exercising, on the part of the Trustee or the Holders, any right, remedy, power or privilege hereunder or under the Indenture or the Notes, shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder or under the Indenture or the Notes preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges in the Guarantee and under the Indenture, the Notes and any other document or instrument between a Guarantor and/or the Company and the Trustee are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law. SECTION 2.20. Survival of Obligations. Without prejudice to the survival of any of the other obligations of each Guarantor hereunder, the obligations of each Guarantor under Section 2.01 shall survive the payment in full of the Obligations of the Company under the Indenture and the Notes and shall be enforceable against such Guarantor without regard to and without giving effect to any defense, right of offset or counterclaim available to or which may be asserted by the Company or any Guarantor. SECTION 2.21. Guarantee in Addition to Other Obligations. The obligations of each Guarantor under its Guarantee, this Supplemental Indenture and the Indenture are in addition to and not in substitution for any other obligations to the Trustee or to any of the Holders in relation to the Indenture or the Notes and any guarantees or security at any time held by or for the benefit of any of them. SECTION 2.22. Severability. Any provision of this Article Two which is prohibited or unenforceable in any jurisdiction shall not invalidate the remaining provisions and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction unless its removal would substantially defeat the basic intent, spirit and purpose of the Indenture and this Article Two. SECTION 2.23 Successors and Assigns. Each Guarantee shall be binding upon and inure to the benefit of each Guarantor and the Trustee and the other Holders and their respective successors and permitted assigns, except that no Guarantor may assign any of its obligations hereunder or thereunder. ARTICLE THREE ADDITIONAL SECURITY FOR NOTES SECTION 3.01. Pledges of Additional Security. In order for the Company to satisfy its obligations under Section 4.01 of the Second Supplemental Indenture, the Company and certain of its subsidiaries have entered into the Pledge Agreements and the Collateral Trust Agreement providing for a lien on certain assets of the Company and certain of its subsidiaries to secure the obligations of the Company under the Notes on an equal and ratable basis with the Company's obligations under the Credit Agreement and the Company's Zero Coupon Senior Convertible Debentures due 2018. ARTICLE FOUR MISCELLANEOUS SECTION 4.01. TIA Controls. If any provision hereof limits, qualifies or conflicts with the duties imposed by Section 310 through 317 of the TIA, the imposed duties shall control. SECTION 4.02. Conflict with Indenture. To the extent not expressly amended or modified by this Supplemental Indenture, the Indenture shall remain in full force and effect. If any provision of this Supplemental Indenture relating to the Notes is inconsistent with any provision of the Indenture, the provision of this Supplemental Indenture shall control with regard to the Notes. SECTION 4.03. Governing Law. This Supplemental Indenture and the Notes shall be governed by and construed in accordance with the laws of the State of New York. the Company submits to the jurisdiction of the courts of the State of New York sitting in the Borough of Manhattan, City of New York, and of the United States District Court for the Southern District of New York, in any action or proceeding to enforce any of its obligations under this Supplemental Indenture or with regard to the Notes, and agrees not to seek a transfer of any such action or proceeding on the basis of inconvenience of the forum or otherwise (but the Company shall not be prevented from removing any such action or proceeding from a state court to the United States District Court for the Southern District of New York). the Company agrees that process in any such action or proceeding may be served upon it by registered mail or in any other manner permitted by the rules of the court in which the action or proceeding is brought. SECTION 4.04. Successors. All agreements of the Company in the Indenture, this Supplemental Indenture and the Notes shall bind its successors. All agreements of the Trustee in the Indenture and this Supplemental Indenture shall bind its successors. SECTION 4.05. Counterparts. This instrument may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. IN WITNESS WHEREOF, the parties to this Supplemental Indenture have caused it to be duly executed as of the day and year first above written. BANK ONE TRUST COMPANY, N.A. By: ------------------------------------- Name: Title: LENNAR CORPORATION By: /s/ STUART A. MILLER ------------------------------------- Name: Stuart A. Miller Title: Chief Executive Officer GUARANTORS BCDC CORP., BOCA GREENS, INC., BOCA ISLES CLUB, INC., BOCA ISLES SOUTH CLUB, INC., BRAMALEA CALIFORNIA, INC., BRAMALEA CALIFORNIA PROPERTIES, INC., BRAMALEA CALIFORNIA REALTY, INC., CLODINE-BELLAIRE LP, INC., CLUB PEMBROKE ISLES, INC., DCA AT BANYAN TREE, INC., DCA AT NORTH LAUDERDALE, INC., DCA AT PEMBROKE POINTE, INC., DCA AT WIGGINS BAY, INC., DCA GENERAL CONTRACTORS, INC., DCA HOMES OF CENTRAL FLORIDA, INC., DCA NJ REALTY, INC., DCA OF BROWARD COUNTY, INC., DCA OF HIALEAH, INC., DCA OF LAKE WORTH, INC., DCA OF NEW JERSEY, INC., DEVCO LAND CORP., DYEING & FINISHING, INC., FIRST ATLANTIC BUILDING CORP., GREYSTONE CONSTRUCTION, INC., GREYSTONE HOMES, INC., GREYSTONE HOMES OF NEVADA, INC., GREYSTONE NEVADA, LLC, HARRIS COUNTY LP, INC., HILLSIDE, INC., INACTIVE CORPORATIONS, INC., KINGS ISLE RECREATION CORP., KINGS RIDGE GOLF CORPORATION, KINGS RIDGE RECREATION CORPORATION, KINGS WOOD DEVELOPMENT CORPORATION, LENNAR ACQUISITION CORP. II, LENNAR.COM, INC., LENNAR COMMUNITIES, INC., LENNAR COMMUNITIES DEVELOPMENT, INC., LENNAR CONSTRUCTION, INC., LENNAR FINANCIAL SERVICES, INC., LENNAR HOMES, INC., LENNAR HOMES OF ARIZONA, INC., LENNAR HOMES OF CALIFORNIA, INC., **LENNAR HOMES OF TEXAS LAND AND CONSTRUCTION, LTD., **LENNAR HOMES OF TEXAS SALES AND MARKETING, LTD., LENNAR LA PAZ LIMITED, INC., LENNAR LA PAZ, INC., LENNAR LAND PARTNERS SUB, INC., LENNAR LAND PARTNERS SUB II, INC., LENNAR MANAGEMENT, INC., LENNAR NEVADA, INC., LENNAR NORTHLAND I, INC., LENNAR NORTHLAND II, INC., LENNAR NORTHLAND III, INC., LENNAR NORTHLAND IV, INC., LENNAR NORTHLAND V, INC., LENNAR NORTHLAND VI, INC., LENNAR OCEANSIDE, LLC, *LENNAR PACIFIC, INC., *LENNAR PACIFIC, L.P., *LENNAR PACIFIC PROPERTIES, INC., LENNAR REALTY, INC., LENNAR RENAISSANCE, INC., LENNAR SACRAMENTO, INC., LENNAR SALES CORP., LENNAR SAN JOSE HOLDINGS, INC., LENNAR SOUTHLAND I, INC., LENNAR SOUTHLAND II, INC., LENNAR SOUTHLAND III, INC., LENNAR SOUTHWEST HOLDING CORP., LENNAR TEXAS HOLDING COMPANY, LENNAR TITLE SERVICES, INC., LONG POINT DEVELOPMENT CORPORATION, LUCERNE GREENS, INC., LUCERNE MERGED CONDOMINIUMS, INC., M.A.P. BUILDERS, INC., M.A.P. VINEYARDS OF PLANTATION, INC., MARLBOROUGH DEVELOPMENT CORPORATION, MIDLAND HOUSING INDUSTRIES CORP., MIDLAND INVESTMENT CORPORATION, MISSION VIEJO HOLDINGS, INC., MISSION VIEJO 12S VENTURE, LP, MONTEREY VILLAGE DEVELOPMENT CORP., QUALITY ROOF TRUSS COMPANY, RANCHO SUMMIT, LLC, REGENCY TITLE COMPANY, RIVIERA LAND CORP., SANTA FE LAKES, L.P., SAVELL GULLEY DEVELOPMENT CORPORATION, SILVER LAKES-GATEWAY CLUBHOUSE, INC., SLTC, INC., STRATEGIC HOLDINGS, INC., STRATEGIC TECHNOLOGIES, INC., STRATEGIC TECHNOLOGIES COMMUNICATIONS OF CALIFORNIA, INC., SUPERIOR REALTY & MARKETING, INC., UNIVERSAL TITLE INSURORS, INC., U.S. HOME CORPORATION (f/k/a LEN ACQUISITION CORPORATION), W. B. HOMES, INC., WESTCHASE, INC., BRUSHMASTERS, INC., CANTERBURY CORPORATION, COUNTRYPLACE GOLF COURSE, INC., E.M.J.V. CORP., HOMECRAFT CORPORATION, IMPERIAL HOMES CORPORATION, LUNDGREN BROS. CONSTRUCTION, INC., MID-COUNTY UTILITIES, INC., OCEANPOINTE DEVELOPMENT CORPORATION, ORRIN THOMPSON CONSTRUCTION COMPANY, ORRIN THOMPSON HOMES CORP., PAPARONE CONSTRUCTION CO., PRARIE LAKE CORPORATION, RIVENHOME CORPORATION, RUTENBERG HOMES, INC. (FL), RUTENBERG HOMES, INC. (TX), STONEY CORPORATION, SUMMERWAY INVESTMENT CORP., U.S. HOME & DEVELOPMENT CORPORATION, U.S. HOME OF ARIZONA CONSTRUCTION CO., U.S. HOME OF COLORADO REAL ESTATE, INC., U.S. HOME REALTY CORPORATION, U.S. HOME REALTY, INC. (MD), U.S. HOME REALTY, INC. (TX), U.S.H. CORPORATION OF NEW YORK, U.S. H. LOS PRADOS, INC., USH ACQUISITION CORP., USH EQUITY CORPORATION, USH HOLDING, INC., USH MILLENNIUM VENTURES CORP., USH/MJR, INC., USH (WEST LAKE), INC., USH WOODBRIDGE, INC. and WESTSTONE CORPORATION, By: /s/ DAVID B. MCCAIN ------------------------------------- Name: David B. McCain Title: Vice President - --------------- * Executed by authorized agent. ** Executed by Lennar Texas Holding Company, as General Partner. EXHIBIT A GUARANTEE For value received, the undersigned hereby unconditionally guarantees, as principal obligor and not only as a surety, to the Holder of this Note the cash payments in United States Dollars of any amounts due with respect to the Notes in the amounts and at the times when due and interest on all overdue amounts, if lawful, and the payment or performance of all other obligations of the Company under the Indenture, dated as of December 30, 1997 between Lennar Corporation and Bank One Trust Company, N.A. (the "Base Indenture"), as supplemented by the Second Supplemental Indenture, dated as of February 24, 1999 between Lennar Corporation and Bank One Trust Company, N.A. (the "Second Supplemental Indenture"), as further supplemented by the Third Supplemental Indenture dated as of May 3, 2000, among Lennar Corporation, the Guarantors named therein and Bank One Trust Company, as trustee (the "Third Supplemental Indenture"), or the Notes, to the Holder of this Note and the Trustee, all in accordance with and subject to the terms and limitations of this Note, Article Two of the Third Supplemental Indenture and this Guarantee. This Guarantee will become effective in accordance with Article Two of the Third Supplemental Indenture upon execution of the Third Supplemental Indenture and its terms shall be evidenced therein. The validity and enforceability of any Guarantee shall not be affected by the fact that it is not affixed to any particular Note. Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Base indenture, as supplemented by the Second Supplemental Indenture and the Third Supplemental Indenture. The obligations of the undersigned to the Holders of Notes and to the Trustee pursuant to this Guarantee and the Third Supplemental Indenture are expressly set forth in Article Two of the Third Supplemental Indenture and reference is hereby made to the Third Supplemental Indenture for the precise terms of the Guarantee and all of the other provisions of the Third Supplemental Indenture to which this Guarantee relates. THIS GUARANTEE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW. Each Guarantor hereby agrees to submit to the jurisdiction of the courts of the State of New York in any action or proceeding arising out of or relating to this Guarantee. This Guarantee is subject to release upon the terms set forth in the Third Supplemental Indenture. The undersigned acknowledges that this Guarantee shall be subject to the TIA if and when the Third Supplemental Indenture is so subject, and the undersigned agrees to discharge its duties under the TIA. IN WITNESS WHEREOF, each Guarantor has caused its Guarantee to be duly executed. Dated: ------------------------------ BCDC CORP., BOCA GREENS, INC., BOCA ISLES CLUB, INC., BOCA ISLES SOUTH CLUB, INC., BRAMALEA CALIFORNIA, INC., BRAMALEA CALIFORNIA PROPERTIES, INC., BRAMALEA CALIFORNIA REALTY, INC., CLODINE-BELLAIRE LP, INC., CLUB PEMBROKE ISLES, INC., DCA AT BANYAN TREE, INC., DCA AT NORTH LAUDERDALE, INC., DCA AT PEMBROKE POINTE, INC., DCA AT WIGGINS BAY, INC., DCA GENERAL CONTRACTORS, INC., DCA HOMES OF CENTRAL FLORIDA, INC., DCA NJ REALTY, INC., DCA OF BROWARD COUNTY, INC., DCA OF HIALEAH, INC., DCA OF LAKE WORTH, INC., DCA OF NEW JERSEY, INC., DEVCO LAND CORP., DYEING & FINISHING, INC., FIRST ATLANTIC BUILDING CORP., GREYSTONE CONSTRUCTION, INC., GREYSTONE HOMES, INC., GREYSTONE HOMES OF NEVADA, INC., GREYSTONE NEVADA, LLC, HARRIS COUNTY LP, INC., HILLSIDE, INC., INACTIVE CORPORATIONS, INC., KINGS ISLE RECREATION CORP., KINGS RIDGE GOLF CORPORATION, KINGS RIDGE RECREATION CORPORATION, KINGS WOOD DEVELOPMENT CORPORATION, LENNAR ACQUISITION CORP. II, LENNAR.COM, INC., LENNAR COMMUNITIES, INC., LENNAR COMMUNITIES DEVELOPMENT, INC., LENNAR CONSTRUCTION, INC., LENNAR FINANCIAL SERVICES, INC., LENNAR HOMES, INC., LENNAR HOMES OF ARIZONA, INC., LENNAR HOMES OF CALIFORNIA, INC., **LENNAR HOMES OF TEXAS LAND AND CONSTRUCTION, LTD., **LENNAR HOMES OF TEXAS SALES AND MARKETING, LTD., LENNAR LA PAZ LIMITED, INC., LENNAR LA PAZ, INC., LENNAR LAND PARTNERS SUB, INC., LENNAR LAND PARTNERS SUB II, INC., LENNAR MANAGEMENT, INC., LENNAR NEVADA, INC., LENNAR NORTHLAND I, INC., LENNAR NORTHLAND II, INC., LENNAR NORTHLAND III, INC., LENNAR NORTHLAND IV, INC., LENNAR NORTHLAND V, INC., LENNAR NORTHLAND VI, INC., LENNAR OCEANSIDE, LLC, *LENNAR PACIFIC, INC., *LENNAR PACIFIC, L.P., *LENNAR PACIFIC PROPERTIES, INC., LENNAR REALTY, INC., LENNAR RENAISSANCE, INC., LENNAR SACRAMENTO, INC., LENNAR SALES CORP., LENNAR SAN JOSE HOLDINGS, INC., LENNAR SOUTHLAND I, INC., LENNAR SOUTHLAND II, INC., LENNAR SOUTHLAND III, INC., LENNAR SOUTHWEST HOLDING CORP., LENNAR TEXAS HOLDING COMPANY, LENNAR TITLE SERVICES, INC., LONG POINT DEVELOPMENT CORPORATION, LUCERNE GREENS, INC., LUCERNE MERGED CONDOMINIUMS, INC., M.A.P. BUILDERS, INC., M.A.P. VINEYARDS OF PLANTATION, INC., MARLBOROUGH DEVELOPMENT CORPORATION, MIDLAND HOUSING INDUSTRIES CORP., MIDLAND INVESTMENT CORPORATION, MISSION VIEJO HOLDINGS, INC., MISSION VIEJO 12S VENTURE, LP, MONTEREY VILLAGE DEVELOPMENT CORP., QUALITY ROOF TRUSS COMPANY, RANCHO SUMMIT, LLC, REGENCY TITLE COMPANY, RIVIERA LAND CORP., SANTA FE LAKES, L.P., SAVELL GULLEY DEVELOPMENT CORPORATION, SILVER LAKES-GATEWAY CLUBHOUSE, INC., SLTC, INC., STRATEGIC HOLDINGS, INC., STRATEGIC TECHNOLOGIES, INC., STRATEGIC TECHNOLOGIES COMMUNICATIONS OF CALIFORNIA, INC., SUPERIOR REALTY & MARKETING, INC., UNIVERSAL TITLE INSURORS, INC., U.S. HOME CORPORATION (f/k/a LEN ACQUISITION CORPORATION), W. B. HOMES, INC., WESTCHASE, INC., BRUSHMASTERS, INC., CANTERBURY CORPORATION, COUNTRYPLACE GOLF COURSE, INC., E.M.J.V. CORP., HOMECRAFT CORPORATION, IMPERIAL HOMES CORPORATION, LUNDGREN BROS. CONSTRUCTION, INC., MID-COUNTY UTILITIES, INC., OCEANPOINTE DEVELOPMENT CORPORATION, ORRIN THOMPSON CONSTRUCTION COMPANY, ORRIN THOMPSON HOMES CORP., PAPARONE CONSTRUCTION CO., PRARIE LAKE CORPORATION, RIVENHOME CORPORATION, RUTENBERG HOMES, INC. (FL), RUTENBERG HOMES, INC. (TX), STONEY CORPORATION, SUMMERWAY INVESTMENT CORP., U.S. HOME & DEVELOPMENT CORPORATION, U.S. HOME OF ARIZONA CONSTRUCTION CO., U.S. HOME OF COLORADO REAL ESTATE, INC., U.S. HOME REALTY CORPORATION, U.S. HOME REALTY, INC. (MD), U.S. HOME REALTY, INC. (TX), U.S.H. CORPORATION OF NEW YORK, U.S. H. LOS PRADOS, INC., USH ACQUISITION CORP., USH EQUITY CORPORATION, USH HOLDING, INC., USH MILLENNIUM VENTURES CORP., USH/MJR, INC., USH (WEST LAKE), INC., USH WOODBRIDGE, INC. and WESTSTONE CORPORATION, as Guarantors By: /s/ DAVID B. MCCAIN ------------------------------------- Name: David B. McCain Title: Vice President - --------------- * Executed by authorized agent. ** Executed by Lennar Texas Holding Company, as General Partner. EX-4.(E) 3 0003.txt ================================================================================ Exhibit 4.(e) LENNAR CORPORATION, Issuer, THE GUARANTORS NAMED HEREIN and BANK ONE TRUST COMPANY, NATIONAL ASSOCIATION, as successor to THE FIRST NATIONAL BANK OF CHICAGO, Trustee ------------------------------ Fourth Supplemental Indenture Dated as of May 3, 2000 To Indenture Dated as of December 31, 1997 ------------------------------ Relating To Lennar Corporation's Zero Coupon Senior Convertible Debentures Due 2018 ================================================================================ FOURTH SUPPLEMENTAL INDENTURE, dated as of May 3, 2000 (the "Supplemental Indenture"), to Indenture, dated as of December 31, 1997, between Lennar Corporation (the "Company"), a Delaware corporation, each of the parties named as Guarantors on the signature pages of this Supplemental Indenture and Bank One Trust Company, National Association, as successor to The First National Bank of Chicago, a national banking association, organized under the laws of the United States of America, as trustee (the "Trustee"). RECITALS OF THE COMPANY WHEREAS, the Company has heretofore executed and delivered to the Trustee an Indenture, dated as of December 31, 1997 (the "Base Indenture"), providing for the issuance from time to time of its notes and other evidences of unsecured indebtedness, to be issued in one or more series as therein provided ("Securities"); WHEREAS, Section 2.02 of the Base Indenture provides that the Company and the Trustee, at any time and from time to time, may enter into an indenture which supplements the Base Indenture to establish the terms of securities of any series; WHEREAS, the Company and the Trustee are parties to a First Supplemental Indenture to the Base Indenture, dated as of July 29, 1998 (the "First Supplemental Indenture"), governing the Company's Zero Coupon Senior Convertible Debentures Due 2018 (the "Debentures"); and WHEREAS, the Company and the Trustee are entering into this Supplemental Indenture in order to (1) provide the Debentures with the benefits of the Guarantees (as defined below) and (2) recognize that the Debentures are secured on an equal and ratable basis with the Company's obligations under its Credit Agreement, dated May 3, 2000 (the "Credit Agreement"), among the Company, Bank One, National Association, Bankers Trust Company and the other lenders named therein (the "Lenders"), all as provided in the Company Pledge Agreement, dated May 3, 2000, between the Company and Bank One, National Association, the Subsidiary Pledge Agreement, dated May 3, 2000, between the Pledgors named therein and Bank One, National Association, and the Collateral Trust Agreement, dated May 3, 2000, between the Company and Bank One, National Association. NOW, THEREFORE, THIS FOURTH SUPPLEMENTAL INDENTURE WITNESSETH: For and in consideration of the premises and the purchase of the Debentures by the Holders thereof, each party agrees for the benefit of each other party and for the equal and ratable benefit of the Holders of the Debentures, as follows: ARTICLE ONE DEFINITIONS SECTION 1.01. Capitalized terms used but not defined in this Supplemental Indenture shall have the meanings ascribed to them in the Indenture. SECTION 1.02. References in this Supplemental Indenture to section numbers shall be deemed to be references to section numbers of this Supplemental Indenture unless otherwise specified. SECTION 1.03. In the case of capitalized terms defined in this Supplemental Indenture that are also defined in the Indenture, the meanings ascribed to such terms in this Supplemental Indenture shall control with respect to the Debentures. SECTION 1.04. For purposes of this Supplemental Indenture, the following terms have the meanings ascribed to them as follows: "Capital Stock" means, with respect to any Person, any and all shares, interests, participations or other equivalents (however designated) of or in such Person's capital stock or other equity interests, and options, rights or warrants to purchase such capital stock or other equity interests, whether now outstanding or issued after May 3, 2000, including, without limitation, all Disqualified Stock and Preferred Stock. "Collateral Trust Agreement" means the Collateral Trust Agreement, dated as of May 3, 2000, by and among the Company, the Guarantors and Bank One, National Association, as Trustee. "Guarantee" means any obligation, contingent or otherwise, of any Person directly or indirectly guaranteeing any Indebtedness or other obligation of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (1) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or other obligation of such other Person (whether arising by virtue of partnership arrangements, or by agreement to keep-well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement conditions or otherwise) or (2) entered into for purposes of assuring in any other manner the obligee of such Indebtedness or other obligation of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part) (but if in part, only to the extent thereof); provided, however, that the term "guarantee" shall not include (A) endorsements for collection or deposit in the ordinary course of business and (B) guarantees (other than guarantees of Indebtedness) by Lennar in respect of assisting one or more Subsidiaries in the ordinary course of their respective businesses, including without limitation guarantees of trade obligations and operating leases, on ordinary business terms. The term "guarantee" used as a verb has a corresponding meaning. "Guarantor" means (1) initially, each of the Guarantors named on the signature pages of this Supplemental Indenture, and (2) each of the Company's Subsidiaries which becomes a guarantor of the Debentures pursuant to the provisions of this Supplemental Indenture. "Guarantors" means (1) initially, those parties named as Guarantors on the signature pages of this Supplemental Indenture, and (2) each of Lennar's Subsidiaries which becomes a guarantor of the Debentures pursuant to the provisions of this Supplemental Indenture. "Holder" means the Person in whose name a Debenture is registered in the books of the Registrar for the Debentures. "Indenture" means the Base Indenture together with the First Supplemental Indenture. "Investments" shall have the meaning ascribed to it under the New Indenture. "New Indenture" means the indenture dated as of May 3, 2000, relating to the relating to an issue of the Company's 9.95% Senior Notes Due 2010. "Non-Recourse Indebtedness" shall have the meaning ascribed to it under the New Indenture. "Obligations" means all obligations for principal, premium, interest, penalties, fees, indemnifications, reimbursements, damages and other liabilities payable under the documentation governing any Indebtedness. "Officer" means, with respect to any Person, the Chairman of the Board of Directors, the Chief Executive Officer, the President, any Vice President, the Chief Financial Officer, the Treasurer, the Controller, or the Secretary of such Person, or any other officer designated by the Board of Directors serving in a similar capacity. "Officers' Certificate" means a certificate signed by the Chairman of the Board of Directors, the Chief Executive Officer, the President or any Vice President and the Chief Financial Officer, Controller or any Treasurer of Lennar and otherwise complying with the requirements of the Indenture. "Opinion of Counsel" means a written opinion from legal counsel who is reasonably acceptable to the Trustee complying with the requirements of the Indenture, as they relate to the giving of an Opinion of Counsel. "Person" means any individual, corporation, partnership, limited liability company, joint venture, incorporated or unincorporated association, joint stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Pledge Agreements" means the Company Pledge Agreement, dated as of May 3, 2000, by and between the Company and Bank One, National Association, as Trustee and the Subsidiary Pledge Agreement, dated as of May 3, 2000, by and between the Pledgors named therein and Bank One, National Association, as Trustee. ARTICLE TWO GUARANTEE OF DEBENTURES SECTION 2.01. Unconditional Guarantee. Each Guarantor, if any, hereby jointly and severally, unconditionally and irrevocably guarantees (such guarantee to be referred to herein as a "Guarantee") to each Holder of a Debenture authenticated and delivered by the Trustee and to the Trustee and its successors and assigns, that: (a) all amounts due with respect to the Debentures shall be duly and punctually paid in full when due, whether at maturity, upon redemption at the option of Holders pursuant to the provisions of the Debentures relating thereto, by acceleration or otherwise, and interest on the overdue principal and (to the extent permitted by law) interest, if any, on the Debentures and all other obligations of the Company or the Guarantors to the Holders or the Trustee hereunder or under the Indenture (including amounts due the Trustee under Section 7.7 of the Base Indenture) and all other obligations shall be promptly paid in full or performed, all in accordance with the terms hereof or of the Indenture; and (b) in case of any extension of time of payment or renewal of any Debentures or any of such other obligations, the same shall be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, whether at maturity, by acceleration or otherwise. Failing payment when due of any amount so guaranteed, or failing performance of any other obligation of the Company to the Holders under the Indenture or under the Debentures, for whatever reason, each Guarantor shall be obligated to pay, or to perform or cause the performance of, the same immediately. An Event of Default under the Indenture or the Debentures shall constitute an event of default under this Guarantee, and shall entitle the Holders of Debentures 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 unconditional, irrespective of the validity, regularity or enforceability of the Debentures or the Indenture, the absence of any action to enforce the same, any waiver or consent by any Holder of the Debentures with respect to any provisions of the Debentures or the Indenture, 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 Debenture, 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 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 shall not be discharged except by complete performance of the obligations contained in the Debentures, the Indenture and this Guarantee. This Guarantee is a guarantee of payment and not of collection. 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, this 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 Debentures and the Trustee, on the other hand, (a) subject to this Article Two, the maturity of the obligations guaranteed hereby may be accelerated as provided in Article VI of the Base Indenture and/or Article V of the First Supplemental Indenture for the purposes of this 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 acceleration of such obligations as provided in Article VI of the Base Indenture and/or Article V of the First Supplemental Indenture, such obligations (whether or not due and payable) shall forthwith become due and payable by the Guarantors for the purpose of this Guarantee. No stockholder, officer, director, employee or incorporator, past, present or future, of any Guarantor, as such, shall have any personal liability under this Guarantee by reason of his, her or its status as such stockholder, officer, director, employee or incorporator. Each Guarantor that makes a payment or distribution under its Guarantee shall be entitled to a contribution from each other Guarantor in an amount pro rata, based on the net assets of each Guarantor, determined in accordance with GAAP. SECTION 2.02. Limitations on Guarantees. The obligations of each Guarantor under its Guarantee will be limited to the maximum amount which, after giving effect to all other contingent and fixed liabilities of such Guarantor and after giving effect to any collections from or payments made by or on behalf of any other Guarantor in respect of the obligations of such other Guarantor under its Guarantee or pursuant to its contribution obligations under the Indenture will result in the obligations of such Guarantor under its Guarantee not constituting a fraudulent conveyance or fraudulent transfer under federal or state law. The Guarantors shall include (i) each of the Guarantors named on the signature pages of this Supplemental Indenture, (ii) each of the Company's Subsidiaries that in the future executes a supplemental indenture in which such Subsidiary agrees to be bound by the terms hereof as a Guarantor; and (iii) any subsidiary designated as a "Restricted Subsidiary" pursuant to the New Indenture, whether formed or acquired after May 3, 2000, that guarantees any outstanding Indebtedness of the Company or any Restricted Subsidiary pursuant to the New Indenture; provided, however, that if any Guarantor is released from its guarantee of the outstanding Indebtedness of the Company or any Restricted Subsidiary, such Guarantor shall be automatically released from its obligations as Guarantor and, from and after such date, such Guarantor shall cease to constitute a Guarantor. SECTION 2.03 Execution and Delivery of Guarantee. To further evidence the Guarantee set forth in Section 2.01, each Guarantor hereby agrees to execute and deliver to the Trustee a Guarantee in substantially the form of Exhibit A hereto. Such Guarantee shall be executed on behalf of each Guarantor by either manual or facsimile signature of two Officers of each Guarantor, each of whom, in each case, shall have been duly authorized to so execute by all requisite corporate action. The validity and enforceability of any Guarantee shall not be affected by the fact that it is not affixed to any Debenture or Debentures. If an Officer of a Guarantor whose signature is on the Indenture, this Supplemental Indenture or a Guarantee no longer holds that office at the time the Trustee authenticates the Debenture on which such Guarantee is endorsed or at any time thereafter, such Guarantor's Guarantee of such Debenture shall be valid nevertheless. The delivery of any Debenture by the Trustee, after the authentication thereof hereunder, shall constitute due delivery of any Guarantee set forth in this Supplemental Indenture on behalf of each Guarantor. SECTION 2.04 Release of a Guarantor. If no Default exists or would exist under the Indenture, upon the sale or disposition of 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 or Subsidiary), or if any Guarantor is dissolved or liquidated, or if a Guarantor is designated an Unrestricted Subsidiary in accordance with the New Indenture, such Guarantor and each Subsidiary of such Guarantor that is also a Guarantor shall be deemed released from all obligations under this Article Two without any further action required on the part of the Trustee or any Holder. 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 Debentures and under this Article Two. Nothing contained in the Indenture, this Supplemental Indenture or in any of the Debentures 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. SECTION 2.05 Waiver of Subrogation. Until the Indenture is discharged and all of the Debentures are discharged and paid in full, each Guarantor hereby irrevocably waives and agrees not to exercise any claim or other rights which it may now or hereafter acquire against the Company that arise from the existence, payment, performance or enforcement of the Company's obligations under the Debentures or the Indenture and such Guarantor's obligations under this Supplemental Indenture, the Guarantee and the Indenture, in any such instance including, without limitation, any right of subrogation, reimbursement, exoneration, contribution, indemnification, and any right to participate in any claim or remedy of the Holders against the Company, whether or not such claim, remedy or right arises in equity, or under contract, statute or common law, including, without limitation, the right to take or receive from the Company, directly or indirectly, in cash or other property or by set-off or in any other manner, payment or security on account of such claim or other rights. If any amount shall be paid to any Guarantor in violation of the preceding sentence and any amounts owing to the Trustee or the Holders of Debentures under the Debentures, the Indenture, or any other document or instrument delivered under or in connection with such agreements or instruments, shall not have been paid in full, such amount shall have been deemed to have been paid to such Guarantor for the benefit of, and held in trust for the benefit of, the Trustee or the Holders and shall forthwith be paid to the Trustee for the benefit of itself or such Holders to be credited and applied to the obligations in favor of the Trustee or the Holders, as the case may be, whether matured or unmatured, in accordance with the terms of the Indenture. Each Guarantor acknowledges that it will receive direct and indirect benefits from the financing arrangements contemplated by the Indenture and that the waiver set forth in this Section 2.05 is knowingly made in contemplation of such benefits. SECTION 2.06. No Set-Off. Each payment to be made by a Guarantor hereunder in respect of its Obligations shall be payable in the currency or currencies in which such Obligations are denominated, and shall be made without set-off, counterclaim, reduction or diminution of any kind or nature. SECTION 2.07. Obligations Absolute. The obligations of each Guarantor hereunder are and shall be absolute and unconditional and any monies or amounts expressed to be owing or payable by each Guarantor hereunder which may not be recoverable from such Guarantor on the basis of a Guarantee shall be recoverable from such Guarantor as a primary obligor and principal debtor in respect thereof. SECTION 2.08. Obligations Continuing. The obligations of each Guarantor hereunder shall be continuing and shall remain in full force and effect until all the Obligations have been paid and satisfied in full. Each Guarantor agrees with the Trustee that it will from time to time deliver to the Trustee suitable acknowledgments of its continued liability hereunder and under any other instrument or instruments in such form as counsel to the Trustee may advise and as will prevent any action brought against it in respect of any default hereunder being barred by any statute of limitations now or hereafter in force and, in the event of the failure of a Guarantor so to do, it hereby irrevocably appoints the Trustee the attorney and agent of such Guarantor to make, execute and deliver such written acknowledgment or acknowledgments or other instruments as may from time to time become necessary or advisable, in the judgment of the Trustee on the advice of counsel, to fully maintain and keep in force the liability of such Guarantor hereunder. SECTION 2.09. Obligations Not Reduced. The obligations of each Guarantor hereunder shall not be satisfied, reduced or discharged except solely by the payment of such principal, premium, if any, interest, fees and other monies or amounts as may at any time prior to discharge of the Indenture be or become owing or payable under or by virtue of or otherwise in connection with the Debentures or the Indenture. SECTION 2.10. Obligations Reinstated. The obligations of each Guarantor hereunder shall continue to be effective or shall be reinstated, as the case may be, if at any time any payment which would otherwise have reduced the obligations of any Guarantor hereunder (whether such payment shall have been made by or on behalf of the Company or by or on behalf of a Guarantor) is rescinded or reclaimed from the Trustee or any of the Holders upon the insolvency, bankruptcy, liquidation or reorganization of the Company or any Guarantor or otherwise, all as though such payment had not been made. If demand for, or acceleration of the time for, payment by the Company is stayed upon the insolvency, bankruptcy, liquidation or reorganization of the Company, all such Indebtedness otherwise subject to demand for payment or acceleration shall nonetheless be payable by each Guarantor as provided herein. SECTION 2.11 Obligations Not Affected. The obligations of each Guarantor hereunder shall not be affected, impaired or diminished in any way by any act, omission, matter or thing whatsoever, occurring before, upon or after any demand for payment hereunder (and whether or not known or consented to by any Guarantor or any of the Holders) which, but for this provision, might constitute a whole or partial defense to a claim against any Guarantor hereunder or might operate to release or otherwise exonerate any Guarantor from any of its obligations hereunder or otherwise affect such obligations, whether occasioned by default of any of the Holders or otherwise, including, without limitation: (a) any limitation of status or power, disability, incapacity or other circumstance relating to the Company or any other person, including any insolvency, bankruptcy, liquidation, reorganization, readjustment, composition, dissolution, winding up or other proceeding involving or affecting the Company or any other person; (b) any irregularity, defect, unenforceability or invalidity in respect of any indebtedness or other obligation of the Company or any other person under the Indenture, the Debentures or any other document or instrument; (c) any failure of the Company, whether or not without fault on its part, to perform or comply with any of the provisions of the Indenture, this Supplemental Indenture or the Debentures, or to give notice thereof to a Guarantor; (d) the taking or enforcing or exercising or the refusal or neglect to take or enforce or exercise any right or remedy from or against the Company or any other Person or their respective assets or the release or discharge of any such right or remedy; (e) the granting of time, renewals, extensions, compromises, concessions, waivers, releases, discharges and other indulgences to the Company or any other Person; (f) any change in the time, manner or place of payment of, or in any other term of, any of the Debentures, or any other amendment, variation, supplement, replacement or waiver of, or any consent to departure from, any of the Debentures, this Supplemental Indenture or the Indenture, including, without limitation, any increase or decrease in any amount due with respect to any of the Debentures; (g) any change in the ownership, control, name, objects, businesses, assets, capital structure or constitution of the Company or a Guarantor; (h) any merger or amalgamation of the Company or a Guarantor with any Person or Persons; (i) the occurrence of any change in the laws, rules, regulations or ordinances of any jurisdiction by any present or future action of any governmental authority or court amending, varying, reducing or otherwise affecting, or purporting to amend, vary, reduce or otherwise affect, any of the Obligations or the obligations of a Guarantor under its Guarantee; and (j) any other circumstance, including release of the Guarantor pursuant to Section 2.04 (other than by complete, irrevocable payment) that might otherwise constitute a legal or equitable discharge or defense of the Company under the Indenture or the Debentures or of a Guarantor in respect of its Guarantee hereunder. SECTION 2.12. Waiver. Without in any way limiting the provisions of Section 2.01 hereof, each Guarantor hereby waives notice of acceptance hereof, notice of any liability of any Guarantor hereunder, notice or proof of reliance by the Holders upon the obligations of any Guarantor hereunder, and diligence, presentment, demand for payment on the Company, protest, notice of dishonor or non-payment of any of the Obligations, or other notice or formalities to the Company or any Guarantor of any kind whatsoever. SECTION 2.13. No Obligation to Take Action Against the Company. Neither the Trustee nor any other Person shall have any obligation to enforce or exhaust any rights or remedies or to take any other steps under any security for the Obligations of the Company under the Indenture and the Debentures and of the Guarantors hereunder or against the Company or any other Person or any Property of the Company or any other Person before the Trustee is entitled to demand payment and performance by any or all Guarantors of their liabilities and obligations under their Guarantees, under this Supplemental Indenture or under the Indenture. SECTION 2.14. Dealing with the Company and Others. The Holders, without releasing, discharging, limiting or otherwise affecting in whole or in part the obligations and liabilities of any Guarantor hereunder and without the consent of or notice to any Guarantor, may (a) grant time, renewals, extensions, compromises, concessions, waivers, releases, discharges and other indulgences to the Company or any other Person; (b) take or abstain from taking security or collateral from the Company or from perfecting security or collateral of the Company; (c) release, discharge, compromise, realize, enforce or otherwise deal with or do any act or thing in respect of (with or without consideration) any and all collateral, mortgages or other security given by the Company or any third party with respect to the obligations or matters contemplated by the Indenture or the Debentures; (d) accept compromises or arrangements from the Company; (e) apply all monies at any time received from the Company or from any security upon such part of the Obligations of the Company under the Indenture and the Debentures as the Holders may see fit or change any such application in whole or in part from time to time as the Holders may see fit; and (f) otherwise deal with, or waive or modify their right to deal with, the Company and all other Persons and any security as the Holders or the Trustee may see fit. SECTION 2.15. Default and Enforcement. If any Guarantor fails to pay in accordance with Section 2.01 hereof, the Trustee may proceed in its name as trustee hereunder in the enforcement of the Guarantee of any such Guarantor and such Guarantor's obligations thereunder and hereunder by any remedy provided by law, whether by legal proceedings or otherwise, and to recover from such Guarantor the obligations. SECTION 2.16. Amendment, Etc. No amendment, modification or waiver of any provision of the Indenture nor of this Supplemental Indenture relating to any Guarantor or consent to any departure by any Guarantor or any other Person from any such provision will in any event be effective unless it is signed by such Guarantor and the Trustee. SECTION 2.17. Acknowledgment. Each Guarantor hereby acknowledges communication of the terms of this Supplemental Indenture and consents to and approves of the same. SECTION 2.18. Costs and Expenses. Each Guarantor shall pay on demand by the Trustee any and all costs, fees and expenses (including, without limitation, legal fees on a solicitor and client basis) incurred by the Trustee, its agents, advisors and counsel or any of the Holders in enforcing any of their rights under any Guarantee. SECTION 2.19. No Merger or Waiver; Cumulative Remedies. No Guarantee shall operate by way of merger of any of the obligations of a Guarantor under any other agreement, including, without limitation, the Indenture. No failure to exercise and no delay in exercising, on the part of the Trustee or the Holders, any right, remedy, power or privilege hereunder or under the Indenture or the Debentures, shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder or under the Indenture or the Debentures preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges in the Guarantee and under the Indenture, the Debentures and any other document or instrument between a Guarantor and/or the Company and the Trustee are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law. SECTION 2.20. Survival of Obligations. Without prejudice to the survival of any of the other obligations of each Guarantor hereunder, the obligations of each Guarantor under Section 2.01 shall survive the payment in full of the Obligations of the Company under the Indenture and the Debentures and shall be enforceable against such Guarantor without regard to and without giving effect to any defense, right of offset or counterclaim available to or which may be asserted by the Company or any Guarantor. SECTION 2.21. Guarantee in Addition to Other Obligations. The obligations of each Guarantor under its Guarantee, this Supplemental Indenture and the Indenture are in addition to and not in substitution for any other obligations to the Trustee or to any of the Holders in relation to the Indenture or the Debentures and any guarantees or security at any time held by or for the benefit of any of them. SECTION 2.22. Severability. Any provision of this Article Two which is prohibited or unenforceable in any jurisdiction shall not invalidate the remaining provisions and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction unless its removal would substantially defeat the basic intent, spirit and purpose of the Indenture and this Article Two. SECTION 2.23 Successors and Assigns. Each Guarantee shall be binding upon and inure to the benefit of each Guarantor and the Trustee and the other Holders and their respective successors and permitted assigns, except that no Guarantor may assign any of its obligations hereunder or thereunder. ARTICLE THREE ADDITIONAL SECURITY FOR DEBENTURES SECTION 3.01. Pledges of Additional Security. In order for the Company to satisfy its obligations under Section 4.01 of the First Supplemental Indenture, the Company and certain of its subsidiaries have entered into the Pledge Agreements and the Collateral Trust Agreement providing for a lien on certain assets of the Company and certain of its subsidiaries to secure the obligations of the Company under the Debentures on an equal and ratable basis with the Company's obligations under the Credit Agreement and the Company's 7 5/8% Senior Notes Due 2009. ARTICLE FOUR MISCELLANEOUS SECTION 4.01. TIA Controls. If any provision hereof limits, qualifies or conflicts with the duties imposed by Section 310 through 317 of the TIA, the imposed duties shall control. SECTION 4.02. Conflict with Indenture. To the extent not expressly amended or modified by this Supplemental Indenture, the Indenture shall remain in full force and effect. If any provision of this Supplemental Indenture relating to the Debentures is inconsistent with any provision of the Indenture, the provision of this Supplemental Indenture shall control with regard to the Debentures. SECTION 4.03. Governing Law. This Supplemental Indenture and the Debentures shall be governed by and construed in accordance with the laws of the State of New York. the Company submits to the jurisdiction of the courts of the State of New York sitting in the Borough of Manhattan, City of New York, and of the United States District Court for the Southern District of New York, in any action or proceeding to enforce any of its obligations under this Supplemental Indenture or with regard to the Debentures, and agrees not to seek a transfer of any such action or proceeding on the basis of inconvenience of the forum or otherwise (but the Company shall not be prevented from removing any such action or proceeding from a state court to the United States District Court for the Southern District of New York). the Company agrees that process in any such action or proceeding may be served upon it by registered mail or in any other manner permitted by the rules of the court in which the action or proceeding is brought. SECTION 4.04. Successors. All agreements of the Company in the Indenture, this Supplemental Indenture and the Debentures shall bind its successors. All agreements of the Trustee in the Indenture and this Supplemental Indenture shall bind its successors. SECTION 4.05. Counterparts. This instrument may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. IN WITNESS WHEREOF, the parties to this Supplemental Indenture have caused it to be duly executed as of the day and year first above written. BANK ONE TRUST COMPANY, NATIONAL ASSOCIATION By: ------------------------------------- Name: Title: LENNAR CORPORATION By: /s/ STUART A. MILLER ------------------------------------- Name: Stuart A. Miller Title: Chief Executive Officer GUARANTORS BCDC CORP., BOCA GREENS, INC., BOCA ISLES CLUB, INC., BOCA ISLES SOUTH CLUB, INC., BRAMALEA CALIFORNIA, INC., BRAMALEA CALIFORNIA PROPERTIES, INC., BRAMALEA CALIFORNIA REALTY, INC., CLODINE-BELLAIRE LP, INC., CLUB PEMBROKE ISLES, INC., DCA AT BANYAN TREE, INC., DCA AT NORTH LAUDERDALE, INC., DCA AT PEMBROKE POINTE, INC., DCA AT WIGGINS BAY, INC., DCA GENERAL CONTRACTORS, INC., DCA HOMES OF CENTRAL FLORIDA, INC., DCA NJ REALTY, INC., DCA OF BROWARD COUNTY, INC., DCA OF HIALEAH, INC., DCA OF LAKE WORTH, INC., DCA OF NEW JERSEY, INC., DEVCO LAND CORP., DYEING & FINISHING, INC., FIRST ATLANTIC BUILDING CORP., GREYSTONE CONSTRUCTION, INC., GREYSTONE HOMES, INC., GREYSTONE HOMES OF NEVADA, INC., GREYSTONE NEVADA, LLC, HARRIS COUNTY LP, INC., HILLSIDE, INC., INACTIVE CORPORATIONS, INC., KINGS ISLE RECREATION CORP., KINGS RIDGE GOLF CORPORATION, KINGS RIDGE RECREATION CORPORATION, KINGS WOOD DEVELOPMENT CORPORATION, LENNAR ACQUISITION CORP. II, LENNAR.COM, INC., LENNAR COMMUNITIES, INC., LENNAR COMMUNITIES DEVELOPMENT, INC., LENNAR CONSTRUCTION, INC., LENNAR FINANCIAL SERVICES, INC., LENNAR HOMES, INC., LENNAR HOMES OF ARIZONA, INC., LENNAR HOMES OF CALIFORNIA, INC., **LENNAR HOMES OF TEXAS LAND AND CONSTRUCTION, LTD., **LENNAR HOMES OF TEXAS SALES AND MARKETING, LTD., LENNAR LA PAZ LIMITED, INC., LENNAR LA PAZ, INC., LENNAR LAND PARTNERS SUB, INC., LENNAR LAND PARTNERS SUB II, INC., LENNAR MANAGEMENT, INC., LENNAR NEVADA, INC., LENNAR NORTHLAND I, INC., LENNAR NORTHLAND II, INC., LENNAR NORTHLAND III, INC., LENNAR NORTHLAND IV, INC., LENNAR NORTHLAND V, INC., LENNAR NORTHLAND VI, INC., LENNAR OCEANSIDE, LLC, *LENNAR PACIFIC, INC., *LENNAR PACIFIC, L.P., *LENNAR PACIFIC PROPERTIES, INC., LENNAR REALTY, INC., LENNAR RENAISSANCE, INC., LENNAR SACRAMENTO, INC., LENNAR SALES CORP., LENNAR SAN JOSE HOLDINGS, INC., LENNAR SOUTHLAND I, INC., LENNAR SOUTHLAND II, INC., LENNAR SOUTHLAND III, INC., LENNAR SOUTHWEST HOLDING CORP., LENNAR TEXAS HOLDING COMPANY, LENNAR TITLE SERVICES, INC., LONG POINT DEVELOPMENT CORPORATION, LUCERNE GREENS, INC., LUCERNE MERGED CONDOMINIUMS, INC., M.A.P. BUILDERS, INC., M.A.P. VINEYARDS OF PLANTATION, INC., MARLBOROUGH DEVELOPMENT CORPORATION, MIDLAND HOUSING INDUSTRIES CORP., MIDLAND INVESTMENT CORPORATION, MISSION VIEJO HOLDINGS, INC., MISSION VIEJO 12S VENTURE, LP, MONTEREY VILLAGE DEVELOPMENT CORP., QUALITY ROOF TRUSS COMPANY, RANCHO SUMMIT, LLC, REGENCY TITLE COMPANY, RIVIERA LAND CORP., SANTA FE LAKES, L.P., SAVELL GULLEY DEVELOPMENT CORPORATION, SILVER LAKES-GATEWAY CLUBHOUSE, INC., SLTC, INC., STRATEGIC HOLDINGS, INC., STRATEGIC TECHNOLOGIES, INC., STRATEGIC TECHNOLOGIES COMMUNICATIONS OF CALIFORNIA, INC., SUPERIOR REALTY & MARKETING, INC., UNIVERSAL TITLE INSURORS, INC., U.S. HOME CORPORATION (f/k/a LEN ACQUISITION CORPORATION), W. B. HOMES, INC., WESTCHASE, INC., BRUSHMASTERS, INC., CANTERBURY CORPORATION, COUNTRYPLACE GOLF COURSE, INC., E.M.J.V. CORP., HOMECRAFT CORPORATION, IMPERIAL HOMES CORPORATION, LUNDGREN BROS. CONSTRUCTION, INC., MID-COUNTY UTILITIES, INC., OCEANPOINTE DEVELOPMENT CORPORATION, ORRIN THOMPSON CONSTRUCTION COMPANY, ORRIN THOMPSON HOMES CORP., PAPARONE CONSTRUCTION CO., PRARIE LAKE CORPORATION, RIVENHOME CORPORATION, RUTENBERG HOMES, INC. (FL), RUTENBERG HOMES, INC. (TX), STONEY CORPORATION, SUMMERWAY INVESTMENT CORP., U.S. HOME & DEVELOPMENT CORPORATION, U.S. HOME OF ARIZONA CONSTRUCTION CO., U.S. HOME OF COLORADO REAL ESTATE, INC., U.S. HOME REALTY CORPORATION, U.S. HOME REALTY, INC. (MD), U.S. HOME REALTY, INC. (TX), U.S.H. CORPORATION OF NEW YORK, U.S. H. LOS PRADOS, INC., USH ACQUISITION CORP., USH EQUITY CORPORATION, USH HOLDING, INC., USH MILLENNIUM VENTURES CORP., USH/MJR, INC., USH (WEST LAKE), INC., USH WOODBRIDGE, INC. and WESTSTONE CORPORATION, By: /s/ DAVID B. MCCAIN ------------------------------------- Name: David B. McCain Title: Vice President - --------------- * Executed by authorized agent. ** Executed by Lennar Texas Holding Company, as General Partner. EXHIBIT A GUARANTEE For value received, the undersigned hereby unconditionally guarantees, as principal obligor and not only as a surety, to the Holder of this Debenture the cash payments in United States Dollars of any amounts due with respect to the Debentures in the amounts and at the times when due and interest on all overdue amounts, if lawful, and the payment or performance of all other obligations of the Company under the Indenture, dated as of December 30, 1997 between Lennar Corporation and Bank One Trust Company, National Association (the "Base Indenture"), as supplemented by the First Supplemental Indenture, dated as of July 29, 1998 between Lennar Corporation and Bank One Trust Company, National Association (the "First Supplemental Indenture"), as further supplemented by the Fourth Supplemental Indenture dated as of May 3, 2000, among Lennar Corporation, the Guarantors named therein and Bank One Trust Company, as trustee (the "Fourth Supplemental Indenture"), or the Debentures, to the Holder of this Debenture and the Trustee, all in accordance with and subject to the terms and limitations of this Debenture, Article Two of the Fourth Supplemental Indenture and this Guarantee. This Guarantee will become effective in accordance with Article Two of the Fourth Supplemental Indenture upon execution of the Fourth Supplemental Indenture and its terms shall be evidenced therein. The validity and enforceability of any Guarantee shall not be affected by the fact that it is not affixed to any particular Debenture. Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Base indenture, as supplemented by the First Supplemental Indenture and the Fourth Supplemental Indenture. The obligations of the undersigned to the Holders of Debentures and to the Trustee pursuant to this Guarantee and the Fourth Supplemental Indenture are expressly set forth in Article Two of the Fourth Supplemental Indenture and reference is hereby made to the Fourth Supplemental Indenture for the precise terms of the Guarantee and all of the other provisions of the Fourth Supplemental Indenture to which this Guarantee relates. THIS GUARANTEE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW. Each Guarantor hereby agrees to submit to the jurisdiction of the courts of the State of New York in any action or proceeding arising out of or relating to this Guarantee. This Guarantee is subject to release upon the terms set forth in the Fourth Supplemental Indenture. The undersigned acknowledges that this Guarantee shall be subject to the TIA if and when the Fourth Supplemental Indenture is so subject, and the undersigned agrees to discharge its duties under the TIA. IN WITNESS WHEREOF, each Guarantor has caused its Guarantee to be duly executed. Dated: ------------------------------ BCDC CORP., BOCA GREENS, INC., BOCA ISLES CLUB, INC., BOCA ISLES SOUTH CLUB, INC., BRAMALEA CALIFORNIA, INC., BRAMALEA CALIFORNIA PROPERTIES, INC., BRAMALEA CALIFORNIA REALTY, INC., CLODINE-BELLAIRE LP, INC., CLUB PEMBROKE ISLES, INC., DCA AT BANYAN TREE, INC., DCA AT NORTH LAUDERDALE, INC., DCA AT PEMBROKE POINTE, INC., DCA AT WIGGINS BAY, INC., DCA GENERAL CONTRACTORS, INC., DCA HOMES OF CENTRAL FLORIDA, INC., DCA NJ REALTY, INC., DCA OF BROWARD COUNTY, INC., DCA OF HIALEAH, INC., DCA OF LAKE WORTH, INC., DCA OF NEW JERSEY, INC., DEVCO LAND CORP., DYEING & FINISHING, INC., FIRST ATLANTIC BUILDING CORP., GREYSTONE CONSTRUCTION, INC., GREYSTONE HOMES, INC., GREYSTONE HOMES OF NEVADA, INC., GREYSTONE NEVADA, LLC, HARRIS COUNTY LP, INC., HILLSIDE, INC., INACTIVE CORPORATIONS, INC., KINGS ISLE RECREATION CORP., KINGS RIDGE GOLF CORPORATION, KINGS RIDGE RECREATION CORPORATION, KINGS WOOD DEVELOPMENT CORPORATION, LENNAR ACQUISITION CORP. II, LENNAR.COM, INC., LENNAR COMMUNITIES, INC., LENNAR COMMUNITIES DEVELOPMENT, INC., LENNAR CONSTRUCTION, INC., LENNAR FINANCIAL SERVICES, INC., LENNAR HOMES, INC., LENNAR HOMES OF ARIZONA, INC., LENNAR HOMES OF CALIFORNIA, INC., **LENNAR HOMES OF TEXAS LAND AND CONSTRUCTION, LTD., **LENNAR HOMES OF TEXAS SALES AND MARKETING, LTD., LENNAR LA PAZ LIMITED, INC., LENNAR LA PAZ, INC., LENNAR LAND PARTNERS SUB, INC., LENNAR LAND PARTNERS SUB II, INC., LENNAR MANAGEMENT, INC., LENNAR NEVADA, INC., LENNAR NORTHLAND I, INC., LENNAR NORTHLAND II, INC., LENNAR NORTHLAND III, INC., LENNAR NORTHLAND IV, INC., LENNAR NORTHLAND V, INC., LENNAR NORTHLAND VI, INC., LENNAR OCEANSIDE, LLC, *LENNAR PACIFIC, INC., *LENNAR PACIFIC, L.P., *LENNAR PACIFIC PROPERTIES, INC., LENNAR REALTY, INC., LENNAR RENAISSANCE, INC., LENNAR SACRAMENTO, INC., LENNAR SALES CORP., LENNAR SAN JOSE HOLDINGS, INC., LENNAR SOUTHLAND I, INC., LENNAR SOUTHLAND II, INC., LENNAR SOUTHLAND III, INC., LENNAR SOUTHWEST HOLDING CORP., LENNAR TEXAS HOLDING COMPANY, LENNAR TITLE SERVICES, INC., LONG POINT DEVELOPMENT CORPORATION, LUCERNE GREENS, INC., LUCERNE MERGED CONDOMINIUMS, INC., M.A.P. BUILDERS, INC., M.A.P. VINEYARDS OF PLANTATION, INC., MARLBOROUGH DEVELOPMENT CORPORATION, MIDLAND HOUSING INDUSTRIES CORP., MIDLAND INVESTMENT CORPORATION, MISSION VIEJO HOLDINGS, INC., MISSION VIEJO 12S VENTURE, LP, MONTEREY VILLAGE DEVELOPMENT CORP., QUALITY ROOF TRUSS COMPANY, RANCHO SUMMIT, LLC, REGENCY TITLE COMPANY, RIVIERA LAND CORP., SANTA FE LAKES, L.P., SAVELL GULLEY DEVELOPMENT CORPORATION, SILVER LAKES-GATEWAY CLUBHOUSE, INC., SLTC, INC., STRATEGIC HOLDINGS, INC., STRATEGIC TECHNOLOGIES, INC., STRATEGIC TECHNOLOGIES COMMUNICATIONS OF CALIFORNIA, INC., SUPERIOR REALTY & MARKETING, INC., UNIVERSAL TITLE INSURORS, INC., U.S. HOME CORPORATION (f/k/a LEN ACQUISITION CORPORATION), W. B. HOMES, INC., WESTCHASE, INC., BRUSHMASTERS, INC., CANTERBURY CORPORATION, COUNTRYPLACE GOLF COURSE, INC., E.M.J.V. CORP., HOMECRAFT CORPORATION, IMPERIAL HOMES CORPORATION, LUNDGREN BROS. CONSTRUCTION, INC., MID-COUNTY UTILITIES, INC., OCEANPOINTE DEVELOPMENT CORPORATION, ORRIN THOMPSON CONSTRUCTION COMPANY, ORRIN THOMPSON HOMES CORP., PAPARONE CONSTRUCTION CO., PRARIE LAKE CORPORATION, RIVENHOME CORPORATION, RUTENBERG HOMES, INC. (FL), RUTENBERG HOMES, INC. (TX), STONEY CORPORATION, SUMMERWAY INVESTMENT CORP., U.S. HOME & DEVELOPMENT CORPORATION, U.S. HOME OF ARIZONA CONSTRUCTION CO., U.S. HOME OF COLORADO REAL ESTATE, INC., U.S. HOME REALTY CORPORATION, U.S. HOME REALTY, INC. (MD), U.S. HOME REALTY, INC. (TX), U.S.H. CORPORATION OF NEW YORK, U.S. H. LOS PRADOS, INC., USH ACQUISITION CORP., USH EQUITY CORPORATION, USH HOLDING, INC., USH MILLENNIUM VENTURES CORP., USH/MJR, INC., USH (WEST LAKE), INC., USH WOODBRIDGE, INC. and WESTSTONE CORPORATION, as Guarantors By: /s/ DAVID B. MCCAIN ------------------------------------- Name: David B. McCain Title: Vice President - --------------- * Executed by authorized agent. ** Executed by Lennar Texas Holding Company, as General Partner. EX-10.(O) 4 0004.txt Exhibit 10.(o) CREDIT AGREEMENT among LENNAR CORPORATION, and the Lenders Party Hereto and BANK ONE, NA, As Administrative Agent, BANKERS TRUST COMPANY, As Syndication Agent, BANK OF AMERICA, N.A., As Co-Documentation Agent, CREDIT LYONNAIS ATLANTA AGENCY, As Co-Documentation Agent, GUARANTY FEDERAL BANK, F.S.B., As Senior Managing Agent, WACHOVIA BANK, N.A., As Senior Managing Agent COMERICA BANK, as Managing Agent SUNTRUST BANK, as Managing Agent and U.S. BANK NATIONAL ASSOCIATION, as Co-Agent with BANC ONE CAPITAL MARKETS, INC. and DEUTSCHE BANK SECURITIES, INC., as Co-Lead Arrangers Dated: May 3, 2000 Table of Contents ARTICLE I CERTAIN DEFINED TERMS.....................................1 SECTION 1.01. Certain Defined Terms...................................1 SECTION 1.02. Computation of Time Periods............................30 SECTION 1.03. Accounting Terms.......................................30 ARTICLE II THE CREDITS..............................................31 SECTION 2.01. Facility A Commitment..................................31 SECTION 2.02. Facility B Commitment..................................32 SECTION 2.03. Facility C Commitment..................................32 SECTION 2.04. Swing Line Loans.......................................33 SECTION 2.05. Types of Advances......................................34 SECTION 2.06. Principal Payments.....................................34 SECTION 2.07. Commitment Fees; Reductions of Commitments.............40 SECTION 2.08. Method of Borrowing....................................41 SECTION 2.09. Method of Selecting Types and Interest Periods for Advances...................................41 SECTION 2.10. Method of Selecting Types and Interest Periods for Conversion and Continuation of Advances................43 SECTION 2.11. Minimum Amount of Each Advance.........................43 SECTION 2.12. Rate after Maturity....................................44 SECTION 2.13. Method of Payment......................................44 SECTION 2.14. Notes; Telephonic Notices..............................44 SECTION 2.15. Interest Payment Dates; Interest and Fee Basis.........45 SECTION 2.16. Notification of Advances, Interest Rates, Prepayments and Commitment Reductions..............................45 SECTION 2.17. Lending Installations..................................45 SECTION 2.18. Increase in Facility A or Facility C...................46 SECTION 2.19. Extension of Facility B Termination Date...............48 SECTION 2.20. Facility B Term-Out....................................50 SECTION 2.21. Facility Letters of Credit.............................51 SECTION 2.22. Non-Receipt of Funds by the Administrative Agent.......58 SECTION 2.23. Withholding Tax Exemption..............................59 SECTION 2.24. Unconditional Obligation to Make Payment...............59 SECTION 2.25. Compensating Balances..................................59 SECTION 2.26. Co-Borrower............................................60 SECTION 2.27. Replacement of Certain Lenders.........................61 ARTICLE III CHANGE IN CIRCUMSTANCES..................................62 SECTION 3.01. Yield-Protection.......................................62 SECTION 3.02. Changes in Capital Adequacy Regulation.................62 SECTION 3.03. Availability of Types of Advances......................63 SECTION 3.04. Funding Indemnification................................63 SECTION 3.05. Lender Statements Survival of Indemnity................63 ARTICLE IV REPRESENTATIONS AND WARRANTIES...........................64 SECTION 4.01. Organization, Powers, etc..............................64 SECTION 4.02. Authorization and Validity of this Agreement, etc......64 SECTION 4.03. Financial Statements...................................65 SECTION 4.04. No Material Adverse Effect.............................66 SECTION 4.05. Title to Properties....................................66 SECTION 4.06. Litigation.............................................67 i SECTION 4.07. Payment of Taxes.......................................67 SECTION 4.08. Agreements.............................................67 SECTION 4.09. Foreign Direct Investment Regulations..................67 SECTION 4.10. Federal Reserve Regulations............................68 SECTION 4.11. Consents, etc..........................................68 SECTION 4.12. Compliance with Applicable Laws........................68 SECTION 4.13. Relationship of the Loan Parties.......................69 SECTION 4.14. Subsidiaries; Joint Ventures...........................69 SECTION 4.15. ERISA..................................................69 SECTION 4.16. Investment Company Act.................................70 SECTION 4.17. Public Utility Holding Company Act.....................70 SECTION 4.18. Subordinated Debt......................................70 SECTION 4.19. Post-Retirement Benefits...............................70 SECTION 4.20. Insurance..............................................70 SECTION 4.21. Environmental Representations..........................70 SECTION 4.22. Merger.................................................71 SECTION 4.23. Minimum Adjusted Tangible Net Worth....................71 SECTION 4.24. Co-Borrower Termination Conditions.....................71 SECTION 4.25. No Misrepresentation...................................71 ARTICLE V CONDITIONS PRECEDENT; TERMINATION........................71 SECTION 5.01. Conditions of Effectiveness............................71 SECTION 5.02. Conditions Precedent to All Advances and Facility Letters of Credit.............................76 ARTICLE VI AFFIRMATIVE COVENANTS....................................77 SECTION 6.01. Existence, Properties, etc.............................77 SECTION 6.02. Notice.................................................78 SECTION 6.03. Payments of Debts, Taxes, etc..........................78 SECTION 6.04. Accounts and Reports...................................78 SECTION 6.05. Access to Premises and Records.........................83 SECTION 6.06. Maintenance of Properties and Insurance................83 SECTION 6.07. Financing: New Investing...............................83 SECTION 6.08. Compliance with Applicable Laws........................84 SECTION 6.09. Advances to the Mortgage Banking Subsidiaries..........84 SECTION 6.10. Use of Proceeds........................................85 ARTICLE VII NEGATIVE COVENANTS.......................................85 SECTION 7.01. Minimum Tangible Net Worth.............................85 SECTION 7.02. Limitation on Indebtedness.............................85 SECTION 7.03. Guaranties.............................................86 SECTION 7.04. Sale of Assets; Acquisitions; Merger...................86 SECTION 7.05. Investments............................................87 SECTION 7.06. Disposition; Encumbrance or Issuance of Certain Stock..88 SECTION 7.07. Other Indebtedness.....................................88 SECTION 7.08. Housing Units..........................................88 SECTION 7.09. Construction in Progress...............................88 SECTION 7.10. No Margin Stock........................................89 SECTION 7.11. Mortgage Banking Subsidiaries' Capital Ratio...........89 SECTION 7.12. Transactions with Affiliates...........................89 SECTION 7.13. Restrictions on Advances to Mortgage Banking Subsidiaries........................89 SECTION 7.14. Mortgage Banking Subsidiaries Adjusted Net Worth.......90 ii SECTION 7.15. Investments in Land....................................90 SECTION 7.16. Liens and Encumbrances.................................90 SECTION 7.17. Merger Documents.......................................90 ARTICLE VIII COLLATERAL...............................................90 SECTION 8.01. Pledge Agreement.......................................90 SECTION 8.02. Mortgage Banking Subsidiaries Note.....................91 SECTION 8.03. Collateral Trusts......................................92 ARTICLE IX EVENTS OF DEFAULT........................................93 SECTION 9.01. Events of Default......................................93 SECTION 9.02. Remedies...............................................94 SECTION 9.03. Application of Payments................................95 ARTICLE X THE ADMINISTRATIVE AGENT.................................96 SECTION 10.01. Appointment...........................................96 SECTION 10.02. Powers................................................97 SECTION 10.03. General Immunity......................................97 SECTION 10.04. No Responsibility for Loans, Recitals, Etc............97 SECTION 10.05. Employment of Agents and Counsel......................97 SECTION 10.06. Reliance on Documents; Counsel........................97 SECTION 10.07. No Waiver of Rights...................................98 SECTION 10.08. Knowledge of Event of Default.........................98 SECTION 10.09. Administrative Agent's Reimbursement and Indemnification...................................98 SECTION 10.10. Notices to the Company................................98 SECTION 10.11. Action on Instructions of Lenders.....................99 SECTION 10.12. Lender Credit Decision................................99 SECTION 10.13. Collateral............................................99 SECTION 10.14. Resignation or Removal of the Administrative Agent...100 SECTION 10.15. Benefits of Article X................................101 ARTICLE XI SETOFF; RATABLE PAYMENTS................................101 SECTION 11.01. Set-off..............................................101 SECTION 11.02. Ratable Payments.....................................101 ARTICLE XII BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS.......102 SECTION 12.01. Successors and Permitted Assigns.....................102 SECTION 12.02. Participations.......................................102 SECTION 12.03. Assignments..........................................103 ARTICLE XIII MISCELLANEOUS...........................................104 SECTION 13.01. Notice...............................................104 SECTION 13.02. Survival of Representations..........................104 SECTION 13.03. Expenses.............................................105 SECTION 13.04. Indemnification of the Lenders and the Administrative Agent.................................105 SECTION 13.05. Maximum Interest Rate................................105 SECTION 13.06. Modification of Agreement............................106 SECTION 13.07. Register.............................................107 SECTION 13.08. Preservation of Rights...............................108 SECTION 13.09. Several Obligations of Lenders.......................108 SECTION 13.10. Severability.........................................108 iii SECTION 13.11. Counterparts.........................................108 SECTION 13.12. The Company as Agent for the Co-Borrower.............108 SECTION 13.13. Loss, etc., Notes....................................109 SECTION 13.14. Governmental Regulation..............................109 SECTION 13.15. Taxes................................................109 SECTION 13.16. Headings.............................................109 SECTION 13.17. Entire Agreement.....................................109 SECTION 13.18. CHOICE OF LAW........................................109 SECTION 13.19. CONSENT TO JURISDICTION..............................109 SECTION 13.20. WAIVER OF JURY TRIAL.................................110 iv SCHEDULES Schedule Description References - -------- ----------- ---------- I Lenders Preamble and Section 12.03(a) II Existing Letters Definitions of "Existing Letters Of Credit Of Credit" and "Issuer" and Section 2.21(i) III Real Estate Definition of "Joint Venture" and Sections 4.05 and 6.04(h) IV Permitted Liens Definition V Consents Section 4.11 VI Subsidiaries Section 4.14 VII Subsidiaries Not Definition of "Co-Borrower Required to Deliver Subsidiary" and Sections 4.14, Guaranties 5.01(b), 7.03 and 7.05 VIII Subordinated Section 4.18 Debt IX Loan Facilities To Section 5.01(r) Required To Be Repaid X Permitted Section 7.04(a) Despositions EXHIBITS Exhibit Description Reference - ------- ----------- --------- A Co-Borrower Facility A Note Definition B Co-Borrower Facility Note Definition C Requirements for Entitled Land Definition of "Entitled Land" D Facility A Note Definition E Facility B Revolver Note Definition F Facility B Term Note Definition E Facility B Revolver Note Definition F Facility B Term Note Definition G Facility C Note Definition H Guaranty Definition I Intercreditor Agreement Definition J Lennar Guaranty Definition K Second Amended and Restated Definition of "Mortgage Mortgage Banking Subsidiaries Banking Subsidiaries Note" Note L-1 Company Pledge Agreement Definition of "Pledge Agreement" L-2 Subsidiary Pledge Agreement Definition of "Pledge Agreement" M Pricing Grid Definition N Swing Line Note Definition O Commitment and Acceptance Section 2.18(a) P Intentionally Omitted Q Co-Borrower Pledge Agreement Section 5.01(s) R Co-Borrower Guaranty Section 5.01(s) S Intentionally Omitted T Collateral Trust Agreement Section 8.03(a) U Co-Borrower Collateral Trust Section 8.03(b) Agreement V Assignment and Assumption Section 12.03(a) CREDIT AGREEMENT, dated as of May 3, 2000, among LENNAR CORPORATION, a corporation organized and existing under the laws of the State of Delaware (the "Company"), the lenders listed in Schedule I hereto (hereinafter collectively referred to as the "Lenders"), and BANK ONE, NA, as Administrative Agent (the "Administrative Agent"). AGREEMENT In consideration of the mutual covenants and agreements hereinafter set forth, the parties hereto hereby agree as follows: ARTICLE I CERTAIN DEFINED TERMS SECTION 1.01. Certain Defined Terms. As used herein, each of the following terms shall have the meaning ascribed to it below, which meaning shall be applicable to both the singular and plural forms of the terms defined: "Acquisition" means any transaction, or any series of related transactions, consummated after the Closing Date, by which the Company or any of its Subsidiaries (a) acquires any going business or all or substantially all of the assets of any firm, corporation or division thereof, whether through purchase of assets, merger or otherwise or (b) directly or indirectly acquires (in one transaction or as the most recent transaction in a series of transactions) at least a majority (in the 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 of voting power) of the outstanding equity interests of another Person. "Adjusted Tangible Net Worth" means, at any date, Tangible Net Worth at such date less, to the extent not already deducted in the definition of Tangible Net Worth, the aggregate of all of the following at such date: (a) the consolidated stockholders' equity of the Mortgage Banking Subsidiaries, and (b) the stockholders' equity of each other Subsidiary of the Company which is not a Loan Party. "Administrative Agent" means Bank One, NA in its capacity as Administrative Agent for the Lenders pursuant to Article X, and not in its individual capacity as a Lender, and any successor Administrative Agent appointed pursuant to Article X. "Advance" means, with respect to a Facility, a borrowing hereunder (or the conversion or continuation thereof) consisting of the aggregate amount of the several loans made by the Lenders under such Facility to the Borrower of the same Type and, in the case of Eurodollar Rate Advances, for the same Interest Period. "Affiliate" of any Person means any other Person directly or indirectly controlling, controlled by or under common control with such Person. Solely for purposes of this definition, a Person shall be deemed to control another Person if the controlling Person owns 50% 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. "AFSI" means Ameristar Financial Services, Inc. "Aggregate Commitment" means, at any time, the sum of the then applicable Aggregate Facility A Commitment, the then applicable Aggregate Facility B Commitment, the then outstanding principal balance of the Facility B Term Loans and the then outstanding principal balance of the Facility C Loans. "Aggregate Facility A Commitment" means $700,000,000, as such amount may be increased pursuant to Section 2.18 hereof, reduced from time to time pursuant to the terms of this Agreement or temporarily unavailable as provided in Section 2.06(b)(i)(B) or Section 2.07(c) hereof. "Aggregate Facility B Commitment" means $300,000,000, as such amount may be reduced from time to time pursuant to the terms of this Agreement or temporarily unavailable as provided in Section 2.06(b)(i)(B) or Section 2.07(c) hereof. "Aggregate Facility C Commitment" means $400,000,000 as such amount may be increased pursuant to Section 2.18 hereof. "Aggregate Letter of Credit Commitment" means $100,000,000, as such amount may be reduced from time to time pursuant to the terms hereof. "Agreement" means this Credit Agreement, including the exhibits and schedules hereto, as it may be amended, renewed, modified or restated and in effect from time to time. "Agreement Date" means May 3, 2000. "Alternate Base Rate" means, for any day, a rate per annum equal to the higher of (a) the Prime Rate for such day or (b) the sum of the Federal Funds Effective Rate plus 0.5%, in each case changing when and as the Prime Rate and the Federal Funds Effective Rate change. "Applicable Commitment Fee Rate" means (a) with respect to Facility A, a rate per annum equal to the "Facility A Unused Commitment Fee" as determined from time to time pursuant to the Pricing Grid, and (b) with respect to Facility B, a rate per annum equal to the "Facility B Unused Commitment Fee" as determined from time to time pursuant to the Pricing Grid. "Applicable Margin" means (a) with respect to Eurodollar Rate Loans for Facility A and Facility B, a rate per annum equal to the "Applicable Margin for Facility A and Facility B Eurodollar Rate Loans" as determined from time to time pursuant to the Pricing Grid; (b) with respect to Eurodollar Rate Loans for Facility C, a rate per annum equal to the "Applicable Margin for Facility C Eurodollar Rate Loans" as determined from time to time pursuant to the Pricing Grid; (c) with respect to Floating Rate Loans for Facility A and Facility B, a rate per annum equal to the "Applicable Margin for Facility A and Facility B Floating Rate Loans" determined from time to time pursuant to the Pricing Grid; and (d) with respect to Floating Rate 2 Loans for Facility C, a rate per annum equal to the "Applicable Margin for Facility C Floating Rate Loans" as determined from time to time pursuant to the Pricing Grid. "Applicable Pro Rata Share" means, for any Lender, such Lender's Facility A Pro Rata Share, Facility B Revolver Pro Rata Share, Facility B Term Pro Rata Share or Facility C Pro Rata Share, as applicable. "Article" means an article of this Agreement unless another document is specifically referenced. "Asset Sale" means, with respect to any Person, (a) the sale, conveyance, disposition or other transfer by such Person of (i) any of its Real Estate other than in the ordinary course of business, or (ii) any of the equity Securities of any Subsidiary of such Person or (b) any Bulk Land Sale by such Person. "Assignment and Assumption Agreement" is defined in Section 12.03(a). "Authorized Financial Officer" means any of the chief financial officer, treasurer or controller of the Company. "Authorized Officer" means any of Stuart Miller, Bruce Gross, Waynewright Malcolm, David McCain, Diane Bessette or any other Person designated by the Borrower in writing to act as an Authorized Officer hereunder, acting singly. "Bank One" means Bank One, NA, in its individual capacity, and its successors. "Borrower" means the Company, provided, however, that, unless and until the Co-Borrower Termination Conditions are satisfied, the term "Borrower" shall also mean, with respect to Loans to and Facility Letters of Credit issued to the Co-Borrower, the Co-Borrower. "Borrowing Base" means, from time to time, the sum of the following amounts, all as reflected from time to time in accordance with GAAP consistently applied in the consolidated balance sheet of the Company: (a) 100% of the Loan Parties' unrestricted cash up to a maximum of $30,000,000 (with any excess cash being excluded from the Borrowing Base); (b) 100% of the Net Housing Unit Proceeds due to any Loan Party at closing as a result of the consummation of the sale of any Housing Unit, which Net Housing Unit Proceeds have been paid to the closing agent handling such sale but which have not yet been received by such Loan Party; provided, however, that if, and to the extent that, such Net Housing Unit Proceeds which are reported as outstanding on the last day of any fiscal quarter of the Company are not received by such Loan Party on or before the tenth (10th) day following the end of any such fiscal quarter, such Net Housing Unit Proceeds shall not be included in the Borrowing Base; (c) 90% of the Net Book Value of all Housing Units Under Contract; (d) 75% of the Net Book Value of all Housing Units (including, without limitation, model Housing Units) that are not subject to a contract for sale; (e) 70% of the Net Book Value of all Finished Lots; (f) 50% of the Net Book Value of all Land Under Development; and (g) 30% of the Net Book Value of all Unimproved Entitled Land, provided that the sum of the amounts determined pursuant to clauses (f) and (g) shall not exceed 30% of the Borrowing Base (with any excess being excluded from the Borrowing Base); provided further, that notwithstanding anything to the contrary provided herein, any asset which 3 is encumbered by a Lien shall not be included in the calculation of the Borrowing Base pursuant to clauses (a) through (g) above. "Borrowing Base Debt" means all Indebtedness of the Loan Parties (on a consolidated basis), including without limitation the Secured Obligations and the Indebtedness under the Existing U.S. Home Debt Issues (whether senior or senior subordinated), but excluding (a) any Subordinated Debt of the Company and (b) any Non-Recourse Indebtedness secured solely by Real Estate that is owned by any Loan Party and that, if the same did not secure such Indebtedness, would be included in the determination of the Borrowing Base. "Borrowing Base Limitation" is defined in Section 7.02. "Borrowing Date" means a date on which an Advance is made hereunder. "Borrowing Notice" is defined in Section 2.09. "Bridge Loan" means, collectively, those bridge loans made to the Company pursuant to the Bridge Loan Commitment in the aggregate principal amount of not more than $300,000,000 (which bridge loans may be converted to term loans as provided in the Bridge Loan Commitment). "Bridge Loan Commitment" means that certain letter dated March 15, 2000 from Bankers Trust Corporation and First Chicago Capital Corporation to the Company, accepted by the Company on March 16, 2000, as amended. "Bulk Land Sale" means the sale of all or any part of a Project (or more than one Project), whether or not in the ordinary course of business, in a single transaction (or a series of related transactions), to a single purchaser, or to purchasers that are Affiliates of each other, for which the aggregate consideration paid in such transaction (or series of related transactions) exceeds $20,000,000. "Business Day" means (a) with respect to any borrowing, payment or rate selection of Eurodollar Rate Advances, a day (other than a Saturday or Sunday) on which banks are open for business in Chicago, Illinois and New York, New York and on which dealings in United States dollars are carried on in the London interbank market, (b) with respect to Facility Letters of Credit, a day (other than a Saturday or Sunday) on which banks are open for business in Chicago, Illinois, and the city in which the office of the applicable Issuer is located and (c) for all other purposes, a day (other than a Saturday or Sunday) on which banks are open for business in Chicago, Illinois and New York, New York. "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. "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. 4 "Capitalized Mortgage Servicing" of the Mortgaged Banking Subsidiaries means, at any date, the following capitalized assets of the Mortgaged Banking Subsidiaries net of any amortization or write downs with respect thereto, all as determined in accordance with GAAP: (a) purchased mortgage servicing rights, (b) originated mortgage servicing rights and (c) excess servicing. "Capital Stock" means, with respect to any corporation, any and all shares, interests, rights to purchase (other than convertible or exchangeable Indebtedness), warrants, options, participations or other equivalents of or interests (however designated) in stock issued by that corporation. "Change in Control" means 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, as amended) of the outstanding shares of voting stock of the Company that hold in excess of 50% of the voting rights held by all stockholders of all classes of common stock of the Company. "Closing Date" means the date on which the Lenders shall first become obligated to make Advances after satisfaction or waiver of all of the conditions precedent set forth in Sections 5.01 and 5.02. "Co-Borrower" means Len Acquisition Corporation, a Delaware corporation. Following the Merger the Co-Borrower will change its name to "U.S. Home Corporation." "Co-Borrower Collateral" means, at any time, any assets owned by the Co-Borrower or Co-Borrower Subsidiaries that are subject to a security interest or other Lien in favor of the Administrative Agent (or the collateral trustee provided for in Section 8.03(b)) for the benefit of the Facility C Lenders as security for the Merger Loan (but not any other Secured Obligations). "Co-Borrower Collateral Documents" means the Co-Borrower Guaranties and the Co-Borrower Pledge Agreements. "Co-Borrower Facility A Note" means (a) a promissory note in substantially the form of Exhibit A hereto, executed and delivered by the Co-Borrower payable to the order of the Administrative Agent in the amount of the Co-Borrower Facility A Sublimit, including any amendment, modification, restatement, renewal or replacement of such promissory note, and (b) in the event that a Facility A Lender requests delivery of a Co-Borrower Facility A Note, a promissory note, satisfactory in form to the Administrative Agent, executed and delivered by the Co-Borrower payable to the order of such Facility A Lender in the amount of its Facility A Pro Rata Share of the Co-Borrower Facility A Sublimit, including any amendment, modification, restatement, renewal or replacement of such promissory note. "Co-Borrower Facility A Sublimit" means $-0-. "Co-Borrower Facility C Note" means (a) a promissory note in substantially the form of Exhibit B hereto, executed and delivered by the Co-Borrower payable to the order of the Administrative Agent in the amount of the Aggregate Facility C Commitment, including any 5 amendment, modification, restatement, renewal or replacement of such promissory note, and (b) in the event that any Facility C Lender requests a Co-Borrower Facility C Note in accordance with the provisions of this Agreement, a promissory note, satisfactory in form to the Administrative Agent, executed and delivered by the Co-Borrower payable to the order of such Facility C Lender in the amount of its Facility C Commitment, including any amendment, modification, restatement, renewal or replacement of such promissory note. "Co-Borrower Guaranties" is defined in Section 5.01(s), and includes any amendment, modification or restatement of such guaranties in effect from time to time. The Co-Borrower Guaranties shall guaranty the Merger Loan (but not any other Secured Obligations). "Co-Borrower L/C Sublimit" means $-0-. "Co-Borrower Notes" means the Co-Borrower Facility A Notes and Co-Borrower Facility C Notes. "Co-Borrower Pledge Agreements" is defined in Section 5.01(s) , and includes any amendment, modification or restatement of such amendments in effect from time to time. The Co-Borrower Pledge Agreements shall secure the Merger Loan (but not any other Secured Obligations). "Co-Borrower Subsidiary" means a Subsidiary of the Co-Borrower, excluding any Mortgage Banking Subsidiary and any Subsidiary of the Co-Borrower listed in Schedule VII. "Co-Borrower Termination Conditions" means (a) that either (i) the Company shall have accepted for purchase all of the Existing U.S. Home Debt Issues pursuant to the Existing U.S. Home Debt Tender Offer or all of the Existing U.S. Home Debt shall have ceased to be outstanding or (ii) if and to the extent that the condition set forth in clause (i) has not been satisfied, the indentures pursuant to which such Existing U.S. Home Debt Issues were issued shall have been amended, to the satisfaction of the Administrative Agent and the Syndication Agent, to delete any covenants that would be violated by the execution and delivery by the Co-Borrower and the Co-Borrower Subsidiaries of the Guaranties hereunder or the pledge, pursuant to the Pledge Agreements, of any Capital Stock or other equity interests in the Co-Borrower Subsidiaries and (b) if the conditions set forth in clause (a) above, are not satisfied as of the Closing Date, then, in addition to conditions set forth in clause (a) above, the conditions set forth in Section 2.26(b). "Code" means the Internal Revenue Code of 1986, as amended, reformed or otherwise modified from time to time. "Co-Lead Arrangers" means Banc One Capital Markets, Inc. and Deutsche Bank Securities, Inc. "Collateral" means, at any time, any assets owned by any Loan Party that then are subject to a security interest or other Lien in favor of the Administrative Agent (or a collateral trustee provided for in Section 8.03) for the benefit of the Lenders (or, in the case of the Co-Borrower 6 Collateral, the Facility C Lenders) as security for the Secured Obligations (or, in the case of the Co-Borrower Collateral, the Merger Loan). "Collateral Trust Agreement" is defined in Section 8.03(a). "Commitment" means, for each of the Lenders, the Facility A Commitment, Facility B Commitment and Facility C Commitment of such Lender. "Commitment and Acceptance" is defined in Section 2.18(a). "Commitment Fees" means the fees provided for in Section 2.07(a). "Company" is defined in the introductory paragraph of this Agreement. "Company Audited Financial Statements" is defined in Section 4.03(a). "Company Net Facility A Commitment" means, at any time, the amount by which the Aggregate Facility A Commitment exceeds the Co-Borrower Facility A Sublimit. "Company Net L/C Commitment" means, at any time, the amount by which the Aggregate Letter of Credit Commitment exceeds the Co-Borrower L/C Sublimit. "Company Unaudited Financial Statements" is defined in Section 4.03(a). "Completed Housing Unit" means, at any time, a Housing Unit the construction of which was commenced more than 10 months, in the case of a single family home, more than 12 months, in the case of a townhouse, or more than 18 months, in the case of a condominium, before that time or was completed prior to the expiration of the applicable period. "Consolidated EBITDA" means, for any period, the Consolidated Net Income of the Loan Parties plus, to the extent deducted from revenues in determining Consolidated Net Income, (a) Consolidated Interest Expense, (b) expense for income taxes paid or accrued, (c) depreciation, (d) amortization and (e) extraordinary losses incurred other than in the ordinary course of business, minus, to the extent included in Consolidated Net Income, extraordinary gains realized other than in the ordinary course of business, all calculated for the Loan Parties (and excluding the Mortgage Banking Subsidiaries and any other Subsidiary of the Company that is not a Loan Party) on a consolidated basis. To the extent that the period for which Consolidated EBITDA is to be determined includes any period prior to the Merger, U.S. Home and any of its Subsidiaries that are Loan Parties shall be included in such determination. "Consolidated Interest Expense" means, for any period, the interest expense of the Loan Parties (and excluding the Mortgage Banking Subsidiaries and any other Subsidiary of the Company that is not a Loan Party) calculated on a consolidated basis for such period. "Consolidated Interest Incurred" means, for any period, the aggregate amount (without duplication and determined in each case in accordance with GAAP) of (a) interest incurred, whether such interest was expensed or capitalized, paid, accrued, or scheduled to be paid or accrued by any of the Loan Parties (and excluding the Mortgage Banking Subsidiaries and any 7 other Subsidiary of the Company that is not a Loan Party) during such period, including (i) original issue discount and non-cash interest payments or accruals on any Indebtedness, (ii) the interest portion of all deferred payment obligations, and (iii) all commissions, discounts and other fees and charges owed with respect to bankers' acceptances and letter of credit financings and interest swap and hedging obligations, in each case to the extent attributable to such period plus (b) the amount of dividends accrued or payable by the Loan Parties (and excluding the Mortgage Banking Subsidiaries and any other Subsidiary of the Company that is not a Loan Party) in respect of Disqualified Capital Stock (excluding any amount payable to any Loan Party), which amount shall be "grossed up" to include applicable taxes on income that would be used to pay such dividends, provided, however, that interest, dividends or other payments or accruals of a consolidated Subsidiary that is not wholly owned shall be included only to the extent of the interest of such Person in such Subsidiary. For purposes of this definition, (x) interest on Capitalized Lease Obligations shall be deemed to accrue at an interest rate reasonably determined by the Company to be the rate of interest implicit in such Capitalized Lease Obligations in accordance with GAAP, (y) interest expense attributable to any Indebtedness represented by the guaranty of an obligation of another Person shall be deemed to be the interest expense attributable to the Indebtedness guaranteed and (z) to the extent that the period for which Consolidated Interest Incurred is to be determined includes any period prior to the Merger, U.S. Home and any of its Subsidiaries that are Loan Parties shall be included in such determination. "Consolidated Net Income" means, with respect to any Person for any period, the net income (or loss) of such Person and its Subsidiaries for such period, determined on a consolidated basis in accordance with GAAP; provided, that (a) net income (or loss) of any other Person which is not a Subsidiary of the Person or is accounted for by such specified Person by the equity method of accounting shall be included only to the extent of the amount of dividends or distributions paid to the specified Person or a Subsidiary of such Person, (b) the net income (or loss) of any other Person acquired by such specified Person or a Subsidiary of such Person in a pooling of interests transaction for any period prior to the date of such acquisition shall be excluded, (c) all gains and losses which are either extraordinary (as determined in accordance with GAAP) or are either unusual or nonrecurring (including any gain from the sale or other disposition of assets outside the ordinary course of business or from the issuance or sale of any Capital Stock), shall be excluded, and (d) the net income, if positive, of any of such Person's consolidated Subsidiaries (other than non-guarantor Subsidiaries) to the extent that the declaration or payment of dividends or similar distributions is not at the time permitted by operation of the terms of its charter or bylaws or any other agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to such consolidated Subsidiary shall be excluded, provided, however, in the case of exclusions from Consolidated Net Income set forth in clauses (b), (c) and (d) above, such amounts shall be excluded only to the extent included in computing such net income (or loss) in accordance with GAAP and without duplication; provided further, however, that for purposes of determining Consolidated Net Income of the Loan Parties, the net income of the Mortgage Banking Subsidiaries and any other Subsidiary of the Company that is not a Loan Party shall be excluded. "Contingent Obligation" of a Person means any agreement, undertaking or arrangement by which such Person assumes, guarantees, endorses, contingently agrees to purchase or provide funds for the payment of, or otherwise becomes or is contingently liable upon, the obligation or 8 liability of any other Person, or agrees to maintain the net worth or working capital or other financial condition of any other Person, or otherwise assures any creditor of such other Person against loss, including, without limitation, any comfort letter, operating agreement, take-or-pay contract, "put" agreement or other similar arrangement. With respect to each Loan Party, Contingent Obligation includes, without limitation of the foregoing, obligations under reimbursement agreements with financial institutions (including the Lenders) relating to Letters of Credit (other than Performance Letters of Credit) issued by such financial institutions for the account of such Loan Party and does not include reimbursement obligations to an issuer of a performance bond. "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 the Company or any of its Subsidiaries, are treated as a single employer under Section 414 of the Code. "Conversion/Continuation Notice" is defined in Section 2.10(d). "Default Rate" means, for any day, a rate per annum equal to the sum of (a) the Alternate Base Rate for such date plus (b) five percent (5%) per annum. "Disqualified Capital Stock" means (a) except as set forth in clause (b) below, with respect to any Person, Capital Stock of such Person that, by its terms or by the terms of any security into which it is convertible, exercisable or exchangeable, is, or upon the happening of an event or the passage of time would be, required to be redeemed or repurchased (including at the option of the holder thereof) by such Person or any of its Subsidiaries, in whole or in part, on or prior to the stated maturity of the securities, and (b) with respect to any Subsidiary of such Person (including with respect to any Subsidiary of the Company), any Capital Stock other than any common stock with no preference, privileges, or redemption or repayment provisions. "Dollars" and the sign "$" each means lawful money of the United States of America. "Duff & Phelps" means Duff & Phelps Credit Rating Co. or any Person succeeding to the securities rating business of such company. "Eligible Assignee" means a commercial bank, financial institution, other "accredited investor" (as defined in Regulation D of the Securities Act) or a "qualified institutional buyer" as defined in Rule 144A of the Securities Act. "Entitled Land" means a parcel of Real Estate owned by a Loan Party which is to be developed primarily for residential dwelling units and which satisfies the requirements for the state and county wherein it is located as more particularly described in the Requirements for Entitled Land attached hereto as Exhibit C. "Environmental Laws" means any and all federal, state, local and foreign statutes, laws, judicial decisions, regulations, ordinances, rules, judgments, orders, decrees, plans, injunctions, permits, concessions, grants, franchises, licenses, agreements and other governmental restrictions relating to (a) the protection of the environment, (b) the effect of the environment on human health, (c) emissions, discharges or releases of pollutants, contaminants, Hazardous Substances 9 or wastes into surface water, ground water or land, or (d) the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, Hazardous Substances or wastes or the clean-up or other remediation thereof. "Equity Investment" means the ownership of, or participation in the ownership of, an equity interest in Real Estate or an equity interest in a Person in the business of owning, developing, improving, operating or managing Real Estate. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and any rule or regulation issued thereunder. "Eurodollar Base Rate" means, with respect to a Eurodollar Rate Advance for the relevant Eurodollar Interest Period, the applicable London Interbank offered rate for deposits in U.S. dollars appearing on Reuters screen FRBD at 11:00 a.m. (London time) two Business Days prior to the first day of such Eurodollar Interest Period, having a maturity approximately equal to such Eurodollar Interest Period. "Eurodollar Interest Period" means, with respect to a Eurodollar Rate Advance, a period of one, two, three or six months, as available, commencing on a Business Day selected by the Borrower pursuant to this Agreement (subject to the provisions of the last sentence of this paragraph). Such Eurodollar Interest Period shall end on (but exclude) the day which corresponds numerically to such date one, two, three or six months thereafter, provided, however, that if there is no such numerically corresponding day in such next, second, third or sixth succeeding month, such Eurodollar Interest Period shall end on the last Business Day of such next, second, third or sixth succeeding month. If a Eurodollar Interest Period would otherwise end on a day which is not a Business Day, such Eurodollar Interest Period shall end on the next succeeding Business Day, provided, however, that if said next succeeding Business Day falls in a new calendar month, such Eurodollar Interest Period shall end on the immediately preceding Business Day. Notwithstanding the foregoing, Eurodollar Interest Periods of seven days shall be permitted, at the discretion of the Administrative Agent and Syndication Agent, to the extent provided for in Section 2.05(b). "Eurodollar Rate" means, with respect to a Eurodollar Rate Advance for the relevant Eurodollar Interest Period, the sum of (a) the quotient of (i) the Eurodollar Base Rate applicable to such Eurodollar Interest Period, divided by (ii) one minus the Reserve Requirement (expressed as a decimal) applicable to such Eurodollar Interest Period, plus (b) the Applicable Margin for the Facility with respect to which the Eurodollar Rate is being determined. The Eurodollar Rate shall be rounded to the next higher multiple of 1/16 of 1% if the rate is not such a multiple. "Eurodollar Rate Advance" means an Advance which bears interest at a Eurodollar Rate. "Eurodollar Rate Loan" means a Loan which bears interest at a Eurodollar Rate. "Event" means an event, circumstance, condition or state of facts. "Event of Default" is defined in Section 9.01. 10 "Exchange Notes" means those certain "Exchange Notes" that the holders of the Bridge Loan may require the Company to issue, at any time on or after the first anniversary of the Closing Date, in an aggregate amount equal to the outstanding principal amount of the Bridge Loan (as converted to a term loan) having a maturity date that is seven years after the conversion of the Bridge Loan to a term loan, as provided in the Bridge Loan Commitment. "Existing Company Public Debt" means the Company's 7-5/8% Senior Notes due 2009 and the Company's Zero Coupon Senior Convertible Debentures due 2018. "Existing Letters of Credit" means the outstanding Letters of Credit listed in Schedule II hereto issued for the account of the Company or the Co-Borrower prior to the Agreement Date by the applicable Facility A Lender identified in Schedule II. "Existing U.S. Home Debt Issues" means the following debt Securities issued by U.S. Home prior to the Merger: (i) the 7.95% Senior Notes due 2001, (ii) the 8.25% Senior Notes due 2004, (iii) the 7.75% Senior Notes due 2005, (iv) the 8.88% Senior Subordinated Notes due 2007 and (v) the 8.875% Senior Subordinated Notes due 2009. "Existing U.S. Home Debt Tender Offer" means the Offer to Purchase and Consent Solicitation dated March 31, 2000 by Len Acquisition offering to purchase the Existing U.S. Home Debt Issues and to pay a consent fee in connection therewith. "Existing U.S. Home Senior Debt Issues" means the debt Securities identified in clauses (i), (ii) and (iii) of the definition of "Existing U.S. Home Debt Issues." "Extension Request" is defined in Section 2.19(a). "Facilities" means Facility A, Facility B and Facility C. "Facility A" means the revolving credit, swing line and letter of credit facilities described in Sections 2.01, 2.04 and 2.21, respectively. "Facility A Advance" means an Advance of Facility A. "Facility A Commitment" means, for each of the Facility A Lenders, the obligation of such Facility A Lender to make revolving credit loans pursuant to Facility A and to purchase participations in Facility Letters of Credit in the aggregate not exceeding the amount set forth in Schedule I hereto as its "Facility A Commitment," as such amount may be decreased from time to time pursuant to the terms hereof, temporarily unavailable as provided in Section 2.06(b)(i)(B) or Section 2.07(c) hereof or increased pursuant to Section 2.18 hereof; provided, however, that the Facility A Commitment of a Lender may not be increased without its prior written approval. "Facility A Lender" means each of the Lenders holding an interest in Facility A. "Facility A Loan" means, with respect to a Facility A Lender, a loan made by such Facility A Lender with respect to Facility A pursuant to Section 2.01 and any conversion or continuation thereof. 11 "Facility A Maturity Date" means the date upon which the outstanding principal amount of the Facility A Notes and (if applicable) Co-Borrower Facility A Notes, all accrued and unpaid interest thereon, and all other Facility A Obligations become due and payable, whether as a result of the occurrence of the stated maturity date or the acceleration of maturity pursuant to the terms of any of the Loan Documents. "Facility A Note" means (a) a promissory note in substantially the form of Exhibit D hereto, executed and delivered by the Company payable to the order of the Administrative Agent in the amount of the Aggregate Facility A Commitment, including any amendment, modification, restatement, renewal or replacement of such promissory note, and (b) in the event that any Facility A Lender requests a Facility A Note in accordance with this Agreement, a promissory note satisfactory in form to the Administrative Agent, executed and delivered by the Company payable to the order of such Facility A Lender in the amount of its Facility A Commitment, including any amendment, modification, restatement, renewal or replacement of such promissory note. "Facility A Obligations" means all unpaid principal of and accrued and unpaid interest on the Facility A Loans and Swing Line Loans, all accrued and unpaid fees with respect to Facility A, the Swing Line Loans and the Facility Letters of Credit, and all expenses, reimbursements, indemnities and other obligations of the Loan Parties to the Facility A Lenders or to any Facility A Lender, the Swing Line Lender, any Issuer, the Administrative Agent or any indemnified party with respect to Facility A, the Swing Line Loans and the Facility Letters of Credit arising under the Loan Documents. "Facility A Pro Rata Share" means, at any time for any Facility A Lender, the ratio that such Facility A Lender's Facility A Commitment bears to the Aggregate Facility A Commitment. "Facility A Termination Date" means May 2, 2005, subject, however, to earlier termination in whole of the Aggregate Facility A Commitment pursuant to the terms of this Agreement. "Facility B" means the revolving credit facility described in Section 2.02 (subject to conversion of revolving credit loans to term loans pursuant to Section 2.19 or Section 2.20). "Facility B Advance" means a Facility B Revolver Advance or an Advance of a Facility B Term Loan (as applicable). "Facility B Commitment" means, for each of the Facility B Revolver Lenders, the obligation of such Facility B Revolver Lender to make Facility B Revolver Loans in the aggregate not exceeding the amount set forth in Schedule I hereto as its "Facility B Commitment," as such amount may be decreased from time to time pursuant to the terms hereof or temporarily unavailable as provided in Section 2.06(b)(i)(B) or Section 2.07(c) hereof. "Facility B Lender" means each of the Lenders holding an interest in Facility B. "Facility B Obligations" means all unpaid principal of and accrued and unpaid interest on the Facility B Loans, all accrued and unpaid fees and all expenses, reimbursements, indemnities 12 and other obligations of the Loan Parties to the Facility B Lenders or to any Facility B Lender, the Administrative Agent or any indemnified party arising under the Loan Documents. "Facility B Revolver Advance" means an Advance of Facility B but does not include an Advance of a Facility B Term Loan. "Facility B Revolver Lender" means each of the Lenders that has a Facility B Commitment. "Facility B Revolver Loan" means, with respect to a Facility B Lender, a revolving credit loan made by such Facility B Lender with respect to Facility B pursuant to Section 2.02 and any conversion or continuation thereof but does not include any Facility B Term Loan. "Facility B Revolver Maturity Date" means the date upon which the outstanding principal amount of the Facility B Revolver Notes, all accrued but unpaid interest thereon, and all other Facility B Obligations (but not necessarily the Facility B Term Notes) become due and payable, whether as a result of the occurrence of the stated maturity date or the acceleration of maturity pursuant to the terms of any of the Loan Documents. "Facility B Revolver Note" means (a) a promissory note in substantially the form of Exhibit E hereto, executed and delivered by the Company and payable to the order of the Administrative Agent in the amount of the Aggregate Facility B Commitment, including any amendment, modification, restatement, renewal or replacement of such promissory note and (b) in the event that any Facility B Revolver Lender requests a Facility B Revolver Note in accordance with this Agreement, a promissory note, satisfactory in form to the Administrative Agent, executed and delivered by the Company payable to the order of such Facility B Lender in the amount of its Facility B Commitment, including any amendment, modification, restatement, renewal or replacement of such promissory note. "Facility B Revolver Pro Rata Share" means, at any time for any Facility B Revolver Lender, the ratio that its Facility B Commitment bears to the Aggregate Facility B Commitment. "Facility B Term Lender" means each of the Lenders holding an interest in the Facility B Term Loans. "Facility B Term Loan" means a loan under Facility B which is converted to a term loan pursuant to Section 2.19 or Section 2.20. "Facility B Term Maturity Date" means May 2, 2005. "Facility B Term Note" means (a) a promissory note in substantially the form of Exhibit F hereto, executed and delivered by the Company payable to the order of the Administrative Agent in the amount of the Aggregate Facility B Commitment, including any amendment, modification, restatement, renewal or replacement of such promissory note, and (b) in the event that any Facility B Term Lender requests a Facility B Term Note in accordance with this Agreement, a promissory note, satisfactory in form to the Administrative Agent, executed and delivered by the Company payable to the order of such Facility B Term Lender in the amount of 13 its Facility B Commitment, including any amendment, modification, restatement, renewal or replacement of such promissory note. "Facility B Term Pro Rata Share" means, at any time for any Facility B Term Lender, the ratio that the outstanding principal balance of its Facility B Term Loans bears to the aggregate principal balance of all Facility B Term Loans. "Facility B Termination Date" means May 1, 2001, or such later date, if any, to which the Aggregate Facility B Commitment is extended pursuant to Section 2.19, subject, however, to earlier termination in whole of the Aggregate Facility B Commitment pursuant to the terms of this Agreement. "Facility C" means the term loan facility described in Section 2.03. "Facility C Advance" means the Advance of Facility C on the Closing Date. "Facility C Commitment" means, for each of the Facility C Lenders, the obligation of such Facility C Lender to make on the Closing Date a term loan pursuant to Facility C in the amount set forth in Schedule I hereto as its "Facility C Commitment." "Facility C Lender" means each of the Lenders holding an interest in Facility C. "Facility C Loan" means, with respect to a Facility C Lender, a loan made by such Facility C Lender with respect to Facility C pursuant to Section 2.03 or by a New Facility C Lender pursuant to Section 2.18 and any conversion or continuation of any such Loan. "Facility C Maturity Date" means the date upon which the outstanding principal amount of the Facility C Notes, all accrued and unpaid interest thereon, and all other Facility C Obligations become due and payable, whether as a result of the occurrence of the stated maturity date or the acceleration of maturity pursuant to the terms of any of the Loan Documents. "Facility C Note" means (a) a promissory note in substantially the form of Exhibit G hereto, executed and delivered by the Company payable to the order of the Administrative Agent in the amount of the Aggregate Facility C Commitment, including any amendment, modification, restatements, renewal or replacement of such promissory note, and (b) in the event that any Facility C Lender requests a Facility C Note in accordance with this Agreement, a promissory note, satisfactory in form to the Administrative Agent, executed and delivered by the Company payable to the order of such Facility C Lender in the amount of its Facility C Commitment, including any amendment, modification, restatement, renewal or replacement of such promissory note. "Facility C Obligations" means all unpaid principal of and accrued and unpaid interest on the Facility C Loans, all accrued and unpaid fees with respect to Facility C and all expenses, reimbursements, indemnities and other obligations of the Loan Parties to the Facility C Lenders or to any Facility C Lender, the Administrative Agent or any indemnified party with respect to Facility C arising under the Loan Documents. 14 "Facility C Pro Rata Share" means, at any time for any Facility C Lender, (a) prior to the making of the Facility C Loans, the ratio that such Facility C Lender's Facility C Commitment bears to the Aggregate Facility C Commitment and (b) after the making of the Facility C Loans, the ratio that the outstanding principal balance of such Facility C Lender's Facility C Loan bears to the outstanding principal balance of all Facility C Loans. "Facility Increase" is defined in Section 2.18(a). "Facility Letter of Credit" means (a) each of the Existing Letters of Credit and (b) a Letter of Credit issued by an Issuer pursuant to Section 2.21. "Facility Letter of Credit Fee" is defined in Section 2.21(f). "Facility Letter of Credit Fee Rate" means a rate per annum equal to the Applicable Margin with respect to Eurodollar Rate Loans under Facility A in effect from time to time during the term of any Facility Letter of Credit. "Facility Letter of Credit Obligations" means, as at the time of determination thereof, without duplication, an amount equal to the sum of (a) the aggregate of the amount then available for drawing under each of the Facility Letters of Credit, (b) the face amount of all outstanding drafts on Facility Letters of Credit, which drafts have been honored by the applicable Issuer, (c) the aggregate amount of all Reimbursement Obligations at such time and (d) the face amount of all Facility Letters of Credit requested by the Borrower but not yet issued (unless the request for an unissued Facility Letter of Credit has been denied or revoked). "Facility Termination Date" means (a) with respect to Facility A, the Facility A Termination Date and (b) with respect to Facility B, the Facility B Termination Date. "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. (Chicago time) on such day on such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by the Administrative Agent in its sole discretion. "Fee Letters" means (a) that certain letter dated March 15, 2000 from the Co-Lead Arrangers, the Administrative Agent and the Syndication Agent to the Company, and accepted by the Company on March 16, 2000 and (b) that certain letter dated March 15, 2000 from the Administrative Agent to the Company, and accepted by the Company on March 16, 2000. "Finished Lot" means a parcel of Entitled Land which satisfies the requirements for Land Under Development and in which the owner thereof has invested 85% or more of the cost to complete the Improvements thereon, and which constitutes a valid, legally subdivided lot within the meanings of the applicable laws of the states, county and/or municipality within which it is located, and other requirements governing the subdivision of land and constitutes a lot reflected on a duly recorded plat, subdivision map or parcel map in compliance with the requirements of 15 all applicable laws and other requirements governing the subdivision of land and approved by the appropriate Governmental Authority. "Fitch" means Fitch Investors Service, L.P. or any Person succeeding to the securities rating business of such company. "Floating Rate" means, for any day, a rate per annum equal to the sum of (a) the Alternate Base Rate for such day plus (b) the Applicable Margin for such day Floating Rate Advances with respect to the Facility for which such Floating Rate is determined. "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 United States generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as approved by a significant segment of the accounting profession as in effect from time to time, applied on a consistent basis from time to time. "Governmental Authority" means any foreign governmental authority, the United States of America, any state of the United States of America and any subdivision of any of the foregoing, and any agency, department, commission, board, authority or instrumentality, bureau or court having jurisdiction over the Lender, the Company, any Subsidiaries of the Company or any of their respective properties. "Guarantor" means a Subsidiary of the Company which executes a Guaranty as of the Closing Date and each Subsidiary of the Company that executes a Guaranty, or a Supplemental Guaranty in the form provided for in the Guaranty, after the Closing Date and includes, without limitation, upon its execution of a Guaranty or such Supplemental Guaranty (when the Co-Borrower Termination Conditions are satisfied), Len Acquisition and each Co-Borrower Subsidiary that executes a Guaranty or such Supplemental Guaranty. "Guaranty" means each of those certain guaranties, in substantially the form of Exhibit H hereto, executed from time to time by Subsidiaries of the Company, in favor of the Administrative Agent, for the benefit of the Holders of Secured Obligations, as amended, restated, supplemented or otherwise modified from time to time. The term "Guaranty" does not include the Lennar Guaranty or any Co-Borrower Guaranty. "Hazardous Substances" means any toxic or hazardous wastes, pollutants or substances, including, without limitation, asbestos, PCBs, petroleum products and by-products, substances defined or listed as "hazardous substances" or "toxic substances" or similarly identified in or pursuant to the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C.ss.9061 et seq., hazardous materials identified in or pursuant to the Hazardous Materials Transportation Act 49 U.S.C.ss.1802 et seq., hazardous wastes identified in or pursuant to The Resource Conservation and Recovery Act, 42 U.S.C.ss.6901 et seq., any chemical substance or mixture regulated under the Toxic Substance Control Act of 1976, as 16 amended, 15 U.S.C.ss.2601 et seq., any "toxic pollutant" under the Clean Water Act, 33 U.S.C.ss.466 et seq., as amended, any hazardous air pollutant under the Clean Air Act, 42 U.S.C.ss.7401 et seq., and any hazardous or toxic substance or pollutant regulated under any other applicable federal, state or local Environmental Laws. "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 (a) any and all agreements, devices or arrangements designed to protect at least one of the parties thereto from the fluctuations of interest rates, commodity prices, 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, interest rate cap or collar protection agreements, forward rate currency or interest rate options, puts and warrants, and (b) any and all cancellations, buy backs, reversals, terminations or assignments of any of the foregoing. "Holders of Secured Obligations" means the holders of the Secured Obligations from time to time and shall include their respective successors, transferees and assigns. "Housing Unit" means a residential housing unit owned by a Loan Party that is (or, upon completion of construction thereof, will be) available for sale. "Housing Unit Closing" means a closing of the sale of a Housing Unit by a Loan Party to a bona fide purchaser for value that is not an Affiliate of a Loan Party. "Housing Unit Under Contract" means a Housing Unit owned by a Loan Party as to which such Loan Party has a bona fide contract of sale, in a form customarily employed by such Loan Party and reasonably satisfactory to the Administrative Agent, entered into not more than 15 months prior to the date of determination with a Person who is not an Affiliate of a Loan Party, under which contract no defaults then exist; provided, however, that in the case of any Housing Unit the purchase of which is to be financed in whole or in part by a loan insured by the Federal Housing Administration or guaranteed by the Veterans Administration, the minimum down payment shall be the amount (if any) required under the rules of the relevant agency. "Improvements" means on and off-site development work, including but not limited to filling to grade, main water distribution and sewer collection systems and drainage system installation, paving, and other improvements necessary for the use of residential dwelling units and as required pursuant to development agreements which may have been entered into with Governmental Authorities. "Indebtedness" of any Person means, without duplication, (a) all liabilities and obligations, contingent or otherwise, of such Person, (i) in respect of borrowed money (whether or not the recourse of the lender is to the whole of the assets of such Person or only to a portion thereof), (ii) evidenced by bonds, notes, debentures or similar instruments, (iii) representing the balance deferred and unpaid of the purchase price of any property or services, except those incurred in the ordinary course of its business that would constitute ordinarily a trade payable to trade creditors (but specifically excluding from such exception the deferred purchase price of 17 Real Estate), (iv) evidenced by bankers' acceptances, (v) consisting of obligations, whether or not assumed, secured by Liens or payable out of the proceeds or production from property now or hereafter owned or acquired by such Person, (vi) consisting of Capitalized Lease Obligations (including any Capitalized Leases entered into as a part of a sale/leaseback transaction), (vii) consisting of liabilities and obligations under any receivable sales transactions, (viii) consisting of a Letter of Credit, other than a Performance Letter of Credit, or a reimbursement obligation of such Person with respect to any Letter of Credit, (ix) consisting of Hedging Obligations, (x) consisting of Off-Balance Sheet Liabilities or (xi) consisting of Contingent Obligations; and (b) obligations of such Person to purchase Securities or other property arising out of or in connection with the sale of the same or substantially similar securities or property. With respect to the Company, Indebtedness includes, without limitation of the foregoing, (x) the Loans and (y) the Company's and any Joint Venture Subsidiary's pro rata shares of the Indebtedness of any Joint Venture (excluding any Indebtedness in which recourse is limited to the Joint Venture, provided that the Company's or Joint Venture Subsidiary's Investments in such Joint Venture are excluded from Tangible Net Worth). "Intercreditor Agreement" means the Intercreditor Agreement of even date herewith, by and among the Company, the Administrative Agent, UAMC, UAMC Asset Corp. II and certain lenders to UAMC and UAMC Asset Corp. II, substantially in the form of Exhibit I hereto, as the same may be amended, modified, supplemented or restated from time to time. "Interest Coverage Ratio" on any date means the ratio of (a) Consolidated EBITDA for the four fiscal quarters ended on such date to (b) total Consolidated Interest Incurred for such fiscal quarters. "Interest Period" means a Eurodollar Interest Period. "Investment" of a Person means any loan, advance (other than commission, travel and similar advances to officers and employees made in the ordinary course of business), extension of credit (other than accounts receivable arising in the ordinary course of business on terms customary in the trade), deposit account or contribution of capital by such Person to any other Person or any investment in, or purchase or other acquisition of, the stock, partnership interests, membership interests, notes, debentures or other securities of any other Person made by such Person. "Issuance Date" is defined in Section 2.21(c)(i)(B). "Issuance Notice" is defined in Section 2.21(c)(iii). "Issuer" means, with respect to each Existing Letter of Credit, the Issuer thereof identified in Schedule II, and with respect to each Facility Letter of Credit issued on or after the Closing Date, Bank One or such other Facility A Lender selected by the Borrower with the approval of the Administrative Agent, to issue such Facility Letter of Credit, provided such other Facility A Lender consents to act in such capacity. "Joint Venture" means a joint venture (whether in the form of a corporation, a partnership, limited liability company or otherwise) (a) to which the Company or a Joint Venture Subsidiary is or becomes a party (other than the tenancies in common listed in Schedule III 18 annexed hereto), (b) whether or not Company is required to consolidate the joint venture in its financial statements in accordance with GAAP, and (c) in which the Company or any Joint Venture Subsidiary has or will have a total investment exceeding $25,000 or which has total assets plus contingent liabilities exceeding $100,000. For the purposes of this definition, the Company's or Joint Venture Subsidiary's investment in a joint venture shall be deemed to include any Securities of the joint venture owned by the Company or any Joint Venture Subsidiary, any loans, advances or accounts payable to the Company or any Joint Venture Subsidiary from the joint venture, any commitment, arrangement or other agreement by the Company or any Joint Venture Subsidiary to provide funds or credit to the joint venture and the Company's or Joint Venture Subsidiary's share of the undistributed profits of the joint venture. "Joint Venture Subsidiary" means a Subsidiary of the Company which is a partner, shareholder or other equity owner in a Joint Venture which is not a Loan Party. "Land Under Development" means Entitled Land upon which construction of Improvements has commenced but not been completed and for which: (a) to the extent required, a performance bond, surety or other security has been issued to and in favor of and unconditionally accepted by each local agency and all relevant Governmental Authorities, including any municipal utility district in which the Real Estate is situated with regard to all work to be performed pursuant to each and all of said subdivision improvement agreements or other agreements; (b) all necessary plans have been approved by all relevant Governmental Authorities for the installation of any and all Improvements required to be installed upon such Real Estate; (c) all necessary permits have been issued for the installation of said Improvements; and (d) utility services necessary for construction of Improvements and residential dwelling units and the operation thereon for the purpose intended will be available to such Real Estate upon completion of the Improvements and there exists a binding obligation on the part of each and every utility company to deliver necessary utility services to such Real Estate. "Len Acquisition" means Len Acquisition Corporation, a Delaware corporation, which is also sometimes herein referred to as the "Co-Borrower." "Lenders" means the lending institutions listed on the signature pages of this Agreement and the respective successors and permitted assigns of such lending institutions. "Lending Installation" means, with respect to a Lender or the Administrative Agent, any office, branch, subsidiary or affiliate of such Lender or the Administrative Agent. "Lennar Guaranty" means a guaranty of the Obligations of the Co-Borrower executed by the Company substantially in the form attached hereto as Exhibit J, as the same may be amended, modified, supplemented or restated from time to time. "Letter of Credit" of a Person means a letter of credit or similar instrument which is issued upon the application of such Person or upon which such Person is an account party or for which such Person is in any way liable. "Letter of Credit Collateral Account" is defined in Section 2.21(h). 19 "Letter of Credit Commitment" means, for each Facility A Lender, the obligation of such Facility A Lender to participate in Facility Letters of Credit in an amount not exceeding the lesser of (a) its Facility A Pro Rata Share of the Aggregate Letter of Credit Commitment or (b) its Facility A Pro Rata Share of the Unused Commitment for Facility A. "Letter of Credit Request" is defined in Section 2.21(c)(i). "Leverage Ratio" means a fraction (expressed as the decimal equivalent), the numerator of which is the sum of (i) all Obligations, including Facility Letter of Credit Obligations (other than with respect to Performance Letters of Credit), plus (ii) all other Indebtedness of the Loan Parties, less (iii) unrestricted cash of the Loan Parties in excess of $15,000,000, and the denominator of which is the sum of (x) the Adjusted Tangible Net Worth and (y) the lesser of (A) $300,000,000 and (B) 50% of the Subordinated Debt. "Lien" means any lien (statutory or other), mortgage (including, without limitation, purchase money mortgages), pledge, hypothecation, assignment, deposit arrangement, encumbrance or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including, without limitation, the interest of a vendor or lessor under any conditional sale, Capitalized Lease or other title retention agreement or any financing lease having substantially the same economic effect as any of the foregoing) and, in the case of Securities, any purchase option, call or similar right of any Person (other than the issuer of such Securities) with respect to such Securities. "LLP" means each of Lennar Land Partners, a Florida general partnership, and Lennar Land Partners II, a Florida general partnership. "LLP Partner" means each of Lennar Land Partners Sub, Inc., a Delaware corporation and wholly-owned Subsidiary of the Company which holds a 50% interest in Lennar Land Partners, and Lennar Land Partners Sub II, Inc., a Delaware corporation and wholly-owned Subsidiary of the Company which holds a 50% interest in Lennar Land Partners II. "LNR" means LNR Property Corporation, a Delaware corporation, and its successors. "Loan" means a Facility A Loan, Swing Line Loan, Facility B Revolver Loan, Facility B Term Loan or Facility C Loan, as applicable. "Loan Documents" means (a) this Agreement, the Facility A Notes, the Swing Line Note, the Facility B Revolver Notes, the Facility B Term Notes, the Guaranties, the Pledge Agreements, and (if and when delivered) the Facility C Notes and the Mortgage Banking Subsidiaries Note Pledge Agreement, (b) unless and until the Co-Borrower Termination Conditions are satisfied, the Co-Borrower Notes, the Lennar Guaranty and the Co-Borrower Collateral Documents and (c) any and all other instruments or documents delivered or to be delivered by the Loan Parties pursuant hereto or pursuant to any of the other documents described in clause (a) or (b) above, as such documents in clause (a), (b) or (c) may be amended or modified and in effect from time to time. 20 "Loan Parties" means the Company, Len Acquisition, the Guarantors (including any Subsidiary that executes and delivers a Guaranty after the Closing Date) and the Co-Borrower Subsidiaries that execute Co-Borrower Guaranties; "Loan Party" means any of the Loan Parties. "Material Adverse Effect" means a material adverse effect on (a) the business, properties, assets, condition (financial or otherwise), results of operations, or prospects of (i) the Loan Parties, taken as a whole, or (ii) if so specified, the Company, the Co-Borrower or any Guarantor, provided that the consummation of the Merger shall be deemed not to result in a material adverse effect under this clause (a), (b) the ability of any Loan Party to perform any of its obligations under the Loan Documents, or (c) the validity or enforceability of any of the Loan Documents or the rights or remedies of the Administrative Agent or the Lenders thereunder. "Merger" means the merger of U.S. Home into Len Acquisition pursuant to the Merger Agreement. "Merger Agreement" means the Plan and Agreement of Merger dated as of February 16, 2000, among U.S. Home, the Company and Len Acquisition, and the Voting Agreement dated as of February 16, 2000 among U.S. Home and certain stockholders of the Company. "Merger Documents" means the (a) the Merger Agreement, (b) the Registration Statement on Form S-4 filed by the Company with the Securities and Exchange Commission on March 21, 2000 and as declared effective on March 31, 2000 pertaining to the Merger, and all amendments thereto, and (c) all other documents which are an integral part of the Merger. "Merger Loan" means the portion of Facility C used to finance the acquisition of U.S. Home pursuant to the Merger in the amount set forth in Section 6.10, any interest thereon, and any other Obligations of the Co-Borrower or Co-Borrower Subsidiaries with respect to such portion of Facility C or the Co-Borrower Collateral Documents. "Minimum Interest Coverage Ratio" means an Interest Coverage Ratio of not less than two (2) to one (1). "Moody's" means Moody's Investors Service, Inc. or any Person succeeding to the securities rating business of such company. "Monthly Payment Date" means the first Business Day of each calendar month, commencing in June, 2000. "Mortgage" means any mortgage, deed of trust or other security deed in Real Estate, or in rights or interests, including leasehold interests, in Real Estate. "Mortgage Banking Subsidiaries Adjusted Net Worth" means, at any date, the Net Worth of the Mortgage Banking Subsidiaries on a consolidated basis as determined in accordance with GAAP (including in the assets used to determine Net Worth the amount of the Capitalized Mortgage Servicing as of such date), less the amount of all goodwill and other assets that are properly classified as "intangible assets" at such date in accordance with GAAP. 21 "Mortgage Banking Subsidiaries Note" means the promissory note dated the Closing Date, in the principal amount of $150,000,000, executed by the Mortgage Banking Subsidiaries as joint makers payable to the order of the Company and each Guarantor that lends funds to any of the Mortgage Banking Subsidiaries, which is to be held by the Administrative Agent pursuant to Section 6.09. Notwithstanding the foregoing, unless the Co-Borrower Termination Conditions are satisfied as of the Closing Date, the Mortgage Banking Subsidiaries that are Subsidiaries of the Co-Borrower shall not be makers of the Mortgage Banking Subsidiaries Note payable to the Company but shall be joint makers of a separate note payable to the Co-Borrower and any of its Subsidiaries that lends funds to any of such Mortgage Banking Subsidiaries, and such note shall also be held by the Administrative Agent pursuant to Section 6.09 and shall also constitute a Mortgage Banking Subsidiaries Note hereunder. Each Mortgage Banking Subsidiaries Note shall be in form and substance as provided in Exhibit K attached hereto. "Mortgage Banking Subsidiaries Note Pledge Agreement" is defined in Section 8.02(b)(i), and includes any amendment, supplement, restatement or other modification of such agreement. "Mortgage Banking Subsidiary" means a Subsidiary of the Company which is engaged or hereafter engages in the mortgage banking business, including the origination, servicing, packaging and/or selling of mortgages on residential single- and multi-family dwellings and/or commercial property, and in any event shall include AFSI, UAMC, USHMC, UAMC Asset Corp. II, Universal American Mortgage Corporation of California and Eagle Home Mortgage, Inc. "Multiemployer Plan" means a Plan maintained pursuant to a collective bargaining agreement or any other arrangement to which the Company or any member of the Controlled Group is a party to which more than one employer is obligated to make contributions. "Net Asset Sale Proceeds" means, with respect to any Asset Sale by any Person, (a) cash received by such Person or any Subsidiary of such Person 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 (i) provisions for all income or other taxes measured by or resulting from such Asset Sale, (ii) payment of all brokerage commissions and other fees and expenses and commissions related to such Asset Sale provided that, if the same are payable to an Affiliate of a Loan Party, such costs comply with Section 7.12, (iii) repayment of Indebtedness (and any premium or penalty thereon) secured by a Lien on any asset disposed of in such Asset Sale or which is or may be required (by the express terms of the instrument governing such Indebtedness or by applicable law) to be repaid in connection with such Asset Sale (including payments made to obtain or avoid the need for the consent of any holder of such Indebtedness), and (iv) deduction of appropriate amounts to be provided by such Person or a Subsidiary of such Person after such Asset Sale and (b) cash payments in respect of any other consideration received by such Person or any Subsidiary of such Person from such Asset Sale upon receipt of such cash payments by such Person or such Subsidiary. "Net Book Value" means, with respect to an asset owned by a Loan Party, the gross investment of such Loan Party in the asset, less all reserves (including loss reserves and reserves 22 for depreciation) attributable to that asset, all determined in accordance with GAAP consistently applied, including, in the case of Unimproved Entitled Land, any unamortized land credits. "Net Housing Unit Proceeds" means, in connection with the sale of any Housing Unit by a Loan Party, the gross sales price less (a) all bona fide prorations and adjustments to the sales price required to be made pursuant to the terms of the sales contract and (b) the aggregate amount of bona fide closing costs due to any Person, provided that if such closing costs are due to an Affiliate of a Loan Party, such costs comply with Section 7.12. "Net Worth" means, at any date, with respect to any Person the amount of consolidated stockholders' equity of such Person and its consolidated Subsidiaries as shown on its balance sheet as of such date in accordance with GAAP. "New Facility A Lender" is defined in Section 2.18(a). "New Facility C Lender" is defined in Section 2.18(a). "New Lenders" is defined in Section 2.18(a). "Non-Consenting Facility B Lenders" is defined in Section 2.19(a). "Non-Recourse Indebtedness" means Indebtedness of a Loan Party for which its liability is limited to the Real Estate upon which it grants a Lien to the holder of such Indebtedness as security for such Indebtedness, but only to the extent that the amount of such Indebtedness does not exceed such Loan Party's original cost of purchase of such Real Estate or the most current appraised value of such Real Estate. "Notes" means, collectively, the Facility A Notes, the Swing Line Note, the Facility B Revolver Notes, the Facility B Term Notes, and, if and when delivered, the Facility C Notes and Co-Borrower Notes; and "Note" means any one of the Notes. "Obligations" means all Loans, Facility Letter of Credit Obligations, advances, debts, liabilities, obligations, covenants and duties owing by any Loan Party to the Administrative Agent, any Lender, the Swing Line Bank, the Co-Lead Arrangers, any Affiliate of the Administrative Agent or any Lender, any Issuer or any Person entitled to indemnification by any Loan Party under this Agreement or any other Loan Document, of any kind or nature, present or future, arising under this Agreement or any other Loan Documents, whether or not evidenced by any note, guaranty or other instrument, whether or not for the payment of money, whether arising by reason of an extension of credit, loan, guaranty, indemnification, or in any other manner, whether direct or indirect (including those acquired by assignment), absolute or contingent, due or to become due, now existing or hereafter arising and however acquired. The term includes, without limitation, all Facility A Obligations, Facility B Obligations and Facility C Obligations, all interest, charges, expenses, fees, reasonable attorneys' fees and disbursements, reasonable paralegals' fees and any other sum chargeable to any Loan Party under this Agreement or any other Loan Document. "Off-Balance Sheet Liabilities" of a Person means (a) any repurchase obligation or liability of such Person or any of its Subsidiaries with respect to accounts or notes receivable 23 sold by such Person or any of its Subsidiaries, (b) any liability of such Person or any of its Subsidiaries under any financing lease, any synthetic lease (under which all or a portion of the rent payments made by the lessee are treated, for tax purposes, as payments of interest, notwithstanding that the lease may constitute an operating lease under GAAP) or any other similar lease transaction, or (c) any obligations of such Person or any of its Subsidiaries arising with respect to any other transaction which is the functional equivalent of or takes the place of borrowing and which has an actual or implied interest component but which does not constitute a liability on the consolidated balance sheets of such Person and its Subsidiaries. "Participants" is defined in Section 12.02. "PBGC" means the Pension Benefit Guaranty Corporation, or any successor thereto. "Performance Letter of Credit" means a Letter of Credit issued to a Governmental Authority or a quasi-governmental agency to insure the completion by a Loan Party of a development of land improvements or to insure payment by a Loan Party of escrow accounts. "Permitted Dispositions" is defined in Section 7.04(a). "Permitted Hedging Agreement" means an interest rate swap, collar or similar agreement entered into by the Company and any Lender or Affiliate of a Lender, pursuant to which the Company hedges its actual interest rate risk under this Agreement, in a notional amount not to exceed, in the aggregate, the amount of the Aggregate Commitment at the time the Company enters into such agreement. In the event a Lender or any of its Affiliates elects to enter into any Permitted Hedging Agreement with the Company, the Hedging Obligations of the Company under such Permitted Hedging Agreement shall be Secured Obligations secured by the Collateral. "Permitted Liens" means (a) Liens existing on the date of this Agreement and described on Schedule IV hereto; (b) Liens imposed by governmental authorities for taxes, assessments or other charges not yet subject to penalty or which are being contested in good faith and by appropriate proceedings, if adequate reserves with respect thereto are maintained on the books of the Company in accordance with GAAP; (c) statutory liens of carriers, warehousemen, mechanics, materialmen, landlords, repairmen or other like Liens arising by operation of law in the ordinary course of business provided that (i) the underlying obligations are not overdue for a period of more than 30 days or (ii) such Liens are being contested in good faith and by appropriate proceedings and adequate reserves with respect thereto are maintained on the books of the Company in accordance with GAAP; (d) Liens securing the performance of bids, trade contracts (other than borrowed money), leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business; (e) easements, rights-of-way, zoning restrictions, assessment district or similar Liens in connection with municipal financing, and similar restrictions, encumbrances or title defects which, singly or in the aggregate, do not in any case materially detract from the value of the Real Estate subject thereto (as such Real Estate is used by the Company or any of its Subsidiaries) or interfere with the ordinary conduct of the business of the Company or any of its Subsidiaries; (f) Liens arising by operation of law in connection with judgments, only to the extent, for an amount and for a period not resulting in a default with respect thereto; (g) pledges or deposits made in 24 the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security legislation; (h) Liens securing Indebtedness of a Person existing at the time such Person becomes a Subsidiary or is merged with or into the Company or a Subsidiary or Liens securing Indebtedness incurred in connection with an acquisition of Real Estate, provided that (1) such Liens were in existence prior to the date of such acquisition, merger or consolidation, were not incurred in anticipation thereof, and do not extend to any other assets or (2) such Liens are granted to the seller of such Real Estate to secure the purchase price therefor; (i) Liens securing Indebtedness incurred to refinance any Indebtedness that was previously so secured and permitted hereunder (which refinancing Indebtedness may exceed the amount refinanced, provided such refinancing Indebtedness is otherwise permitted under this Agreement) in a manner no more adverse to the Lenders than the terms of the Liens securing such refinanced Indebtedness; and (j) Liens securing the Secured Obligations, which Liens may also secure, equally and ratably, to the extent provided in Section 8.03(a), senior debt Securities of the Company or, to the extent provided in Section 8.03(b), the Existing U.S. Home Senior Debt Issues. "Person" means any natural person, corporation, firm, enterprise, trust, association, company, partnership, limited liability company, joint venture 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 the Borrower or any member of the Controlled Group may have any liability. "Pledge Agreement" means a Pledge Agreement executed by the Company substantially in the form of Exhibit L-1 (or, in the case of a pledge with respect to the equity interests of any Significant Subsidiary that is not a corporation, a similar form of pledge agreement satisfactory to the Administrative Agent in form and substance) or by a Guarantor substantially in the form of Exhibit L-2 (or, in the case of a pledge with respect to the equity interests of any Significant Subsidiary that is not a corporation, a similar form of pledge agreement satisfactory to the Administrative Agent in form and substance), including in each case any amendment, modification, renewal or restatement thereof. "Pricing Grid" means the pricing grid attached hereto as Exhibit M. "Prime Rate" means the rate per annum equal to the prime rate of interest announced by Bank One from time to time as its "prime rate" (it being acknowledged that such announced prime rate may not necessarily be the lowest rate charged by Bank One to any of its customers), changing when and as said prime rate changes. "Pro Forma Financial Statements" is defined in Section 4.03(c). "Project" means a parcel of Real Estate owned by a Loan Party which is to be developed or sold as part of a common scheme. "Pro Rata Share" means, for each Lender at any time, the ratio that the aggregate amount of such Lender's Facility A Commitment, Facility B Commitment, the outstanding balance of 25 such Lender's Facility B Term Loans and the outstanding balance of such Lender's Facility C Loans bears to the Aggregate Commitment, all as determined at such time. "Qualified Finished Lots" means, at any date, the sum of (a) the Net Book Value of Finished Lots that are under a bona fide contract for sale by a Loan Party to a Person that is not an Affiliate of a Loan Party and (b) the lesser of (i) the product of (A) the total number of Housing Units with respect to which the Loan Parties entered into such contracts during the period of six consecutive calendar months most recently ended at such date, multiplied by (B) the average Net Book Value of all Finished Lots as of the end of such six-month period and (ii) an amount equal to 40% of Adjusted Tangible Net Worth at such date; provided, however, that the Housing Units with respect to which the Loan Parties entered into such contracts during the six-month period immediately preceding the Closing Date shall include those Housing Units with respect to which U.S. Home and its Subsidiaries that are Loan Parties entered into such contracts during such period. "Quarterly Payment Date" means the first Business Day of each January, April, July and October, commencing in July, 2000. "Rating Agency" means any one of Duff & Phelps, Fitch, Moody's or S&P. "Real Estate" means land, rights in land and interests therein (including, without limitation, leasehold interests), and equipment, structures, improvements, furnishings, fixtures and buildings (including a mobile home of the type usually installed on a developed site) located on or used in connection with land, rights in land or interests therein (including leasehold interests), but shall not include Mortgages or interests therein. "Real Estate Business" means homebuilding, housing construction, home sales, real estate development or construction and related real estate activities, including the provision of mortgage financing, title insurance and other goods and services to home buyers, home owners and other occupants of homes, including without limitation, cable TV services, home security, home design, broadband communications and other communications services and home office support services. "Recent Balance Sheet" is defined in Section 4.05. "Register" is defined in Section 13.07. "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. "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 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. 26 "Reimbursement Obligations" means at any time, the aggregate of the Obligations of the Company and, if applicable, the Co-Borrower to the Facility A Lenders, the Issuers and the Administrative Agent in respect of all unreimbursed payments or disbursements made by the Facility A Lenders, the Issuers and the Administrative Agent under or in respect of the Facility Letters of Credit. "Reinvestment Period" is defined in Section 2.06(b)(i)(C). "Replacement Lender" is defined in Section 2.27. "Reply Date" is defined in Section 2.19(a). "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 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 Section 412(d) of the Code. "Required Lenders" means, subject to the provisions of Section 13.06(c), (a) except as otherwise provided in clause (b) below, Lenders whose Pro Rata Shares, in the aggregate, are greater than 66-2/3%; provided, however, that if all of the Commitments have been terminated pursuant to the terms of this Agreement, "Required Lenders" means Lenders whose aggregate ratable shares (stated as a percentage) of the aggregate outstanding principal balance of all Loans and Facility Letter of Credit Obligations are greater than 66-2/3%, and (b) solely with respect to any amendment, modification or waiver of the provisions of Section 2.06(b)(iii), Lenders whose Facility A Pro Rata Shares, in the aggregate, are greater than 66-2/3% and Lenders whose Facility B Pro Rata Shares, in the aggregate, are greater than 66-2/3% and Lenders whose Facility C Pro Rata Shares, in the aggregate, are greater than 66-2/3%; provided, however, that if all of the Commitments have been terminated pursuant to the terms of this Agreement, "Required Lenders" under this clause (b) means Facility A Lenders whose aggregate ratable shares (stated as a percentage) of the aggregate outstanding principal balance of all Facility A Loans and Facility Letter of Credit Obligations are greater than 66-2/3%, and Facility B Lenders whose aggregate ratable shares (stated as a percentage) of the aggregate outstanding principal balance of all Facility B Loans are greater than 66-2/3% and Facility C Lenders whose aggregate ratable shares (stated as a percentage) of the aggregate outstanding principal balance of all Facility C Loans are greater than 66-2/3%. "Reserve Requirement" means, with respect to a Eurodollar Interest Period, the maximum aggregate reserve requirement (including all basic, supplemental, marginal and other reserves) which is imposed under Regulation D on Eurocurrency liabilities. "Section" means a numbered section of this Agreement, unless another document is specifically referenced. 27 "Secured Obligations" means, collectively, (i) the Obligations and (ii) all Hedging Obligations owing under Permitted Hedging Agreements to any Lender or any Affiliate of any Lender. "Securities" of any Person means equity securities and debt securities and any other instrument commonly understood to be a security issued by that Person. "Securities Act" is defined in Section 6.04(j). "Significant Joint Venture" means a Joint Venture of the Company which has total assets that exceed an amount equal to 2 1/2% of the total assets of the Company and its Subsidiaries on a consolidated basis as of the end of the most recently completed fiscal quarter. "Significant Subsidiary" means a Subsidiary of the Company which meets any of the following conditions: (a) such Subsidiary is a direct Subsidiary of the Company; or (b) the total assets of such Subsidiary exceed an amount equal to 2 1/2% of the total assets of the Company and its Subsidiaries on a consolidated basis as of the end of the most recently completed fiscal quarter; or (c) such Subsidiary is a Joint Venture Subsidiary with respect to which a Pledge Agreement is required to be executed and delivered pursuant to Section 7.05 hereof. "Single Employer Plan" means a Plan maintained by the Company or any member of the Controlled Group for employees of the Borrower or any member of the Controlled Group. "S&P" means Standard & Poor's Ratings Services, a division of The McGraw Hill Companies, Inc., or any Person succeeding to the securities rating business of such company. "Subordinated Debt" means any Indebtedness of the Company which by its terms is subordinated, in form and substance and in a manner satisfactory to the Administrative Agent, in time and right of payment to the prior payment in full of the Obligations, but which in any event matures not earlier than twelve months after the latest of the Facility A Termination Date, Facility B Termination Date and Facility C Maturity Date. "Subsidiary" of a Person means (a) any corporation more than 50% of the outstanding securities having ordinary voting power of which shall at the time be owned or controlled, 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 (b) any partnership, limited liability company, association, joint venture 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. Except where otherwise provided herein, references to Subsidiaries of the Borrower include Len Acquisition and its Subsidiaries. "Swing Line Bank" means Bank One or any other Facility A Lender as a successor Swing Line Bank. 28 "Swing Line Commitment' means the obligation of the Swing Line Bank to make Swing Line Loans up to a maximum of $30,000,000 at any one time outstanding. "Swing Line Loan" means a Loan made available to the Company by the Swing Line Bank pursuant to Section 2.04 hereof. "Swing Line Note" means a promissory note, in substantially the form of Exhibit N hereto, duly executed by the Company and payable to the order of the Swing Line Bank in the amount of its Swing Line Commitment, including any amendment, modification, renewal, restatement or replacement of such note. "Syndication Agent" means Bankers Trust Company. "Tangible Net Worth" means, at any date, the Net Worth of the Company and its Subsidiaries less the aggregate amount of all goodwill and other assets that are properly classified as "intangible assets" at such date in accordance with GAAP. "Term Out Notice" is defined in Section 2.20(a). "Transferee" is defined in Section 12.03(c). "Type" means, with respect to any Advance, its nature as a Floating Rate Advance or Eurodollar Rate Advance. "UAMC" means Universal American Mortgage Company. "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 all such Plan assets allocable to such benefits, all determined as of the then most recent valuation date for such Plans. "Unimproved Entitled Land" means Entitled Land upon which no Improvements have been commenced. "Unmatured Default" means an event, act or condition which but for the lapse of time or the giving of notice, or both, would constitute an Event of Default. "Unused Commitment" means, at any date, (i) with respect to each Facility A Lender, the amount by which its Facility A Commitment exceeds the sum of the outstanding balance of its Facility A Loans and its Facility A Pro Rata Share of the aggregate amount then available for drawing under the Facility Letters of Credit and (ii) with respect to each Facility B Revolver Lender, the amount by which its Facility B Commitment exceeds the outstanding principal balance of its Facility B Revolver Loans. "USHMC" means U.S. Home Mortgage Corporation. "U.S. Home" means U.S. Home Corporation, a Delaware corporation, which shall be merged into Len Acquisition as of the Closing Date. 29 "U.S. Home Audited Financial Statements" is defined in Section 4.03(b). "U.S. Home Unaudited Financial Statements" is defined in Section 4.03(b). "Wholly-Owned Subsidiary" of a Person means (i) any Subsidiary all of the outstanding voting securities of which shall at the time be owned or controlled, 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 or similar business organization 100% of the ownership interests having ordinary voting power of which shall at the time be so owned or controlled. SECTION 1.02. Computation of Time Periods. For the purposes of this Agreement, in the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including", the words "to" and "until" each means "to but excluding" and the word "through" means "to and including". SECTION 1.03. Accounting Terms. (a) All accounting terms used and not specifically defined herein shall be construed in accordance with GAAP. All references herein to GAAP shall be deemed to refer to those principles; provided, however, that notwithstanding the requirements imposed by GAAP which require the consolidation of the operations of the Mortgage Banking Subsidiaries with the operations of the Company, for the purposes of the calculations set forth in Article VII hereof, the operations of such Subsidiary shall be so included only as specifically provided for herein. (b) In the event that the Company shall acquire, pursuant to a transaction permitted under this Agreement, all of the equity Securities of a corporation (the "Acquired Company") which have ordinary voting power for the election of directors of the Acquired Company and, provided that (i) the Company shall have furnished to the Administrative Agent, and the Administrative Agent shall have approved (A) consolidated balance sheets and related consolidated statements of earnings, stockholders' equity and cash flows of the Acquired Company for the most recently concluded fiscal year of the Acquired Company, prepared in accordance with GAAP consistently applied and audited and reported upon by a firm of independent certified public accountants of recognized standing acceptable to the Administrative Agent (such audit to be unqualified) and (B) for any quarters of the next succeeding fiscal year that are concluded as of the date of such Acquisition, a consolidated balance sheet of the Acquired Company as of the end of the most recent quarter, and the related consolidated statement of earnings and cash flows of the Acquired Company for the period from the beginning of the current fiscal year to the end of that quarter, all prepared in accordance with GAAP consistently applied, unaudited but certified to be true and accurate, subject to normal year-end audit adjustments, by the chief financial officer of the Acquired Company and (ii) the Acquired Company shall either become or be merged into a Guarantor hereunder, then, from and after such Acquisition, the Company shall include in the determination of Consolidated EBITDA, Consolidated Interest Expense, Consolidated Interest Incurred and Consolidated Net Income, for any applicable period for which such amounts are to be determined pursuant to this Agreement, such Acquired Company as if such Acquired Company had been a Loan Party during such period. 30 ARTICLE II THE CREDITS SECTION 2.01. Facility A Commitment. (a) Commitment. On and after the Closing Date and prior to the Facility A Termination Date, upon the terms and conditions set forth in this Agreement and in reliance upon the representations and warranties of the Company and the Co-Borrower herein set forth, each Facility A Lender severally agrees to make Facility A Advances to the Company or, to the extent provided for in Section 2.26, the Co-Borrower from time to time in amounts not to exceed in the aggregate at any one time outstanding the amount of its Facility A Commitment, provided that (i) in no event may the aggregate principal amount of all outstanding Facility A Advances (whether to the Company or to the Co-Borrower) exceed the Aggregate Facility A Commitment, (ii) in no event may the sum of the aggregate principal amount of all outstanding Facility A Advances (whether to the Company or to the Co-Borrower), all outstanding Swing Line Loans and the Facility Letter of Credit Obligations (whether of the Company or of the Co-Borrower) exceed the Aggregate Facility A Commitment, and (iii) unless and until the Co-Borrower Termination Conditions are satisfied, in no event may (A) the aggregate principal amount of all outstanding Facility A Advances to the Company, all outstanding Swing Line Loans and the Facility Letter of Credit Obligations of the Company exceed (B) the Company Net Facility A Commitment. Subject to the terms of this Agreement, the Company or, to the extent provided for in Section 2.26, the Co-Borrower may borrow, repay and reborrow under Facility A at any time prior to the Facility A Termination Date. If the Co-Borrower Termination Conditions are satisfied subsequent to the Closing Date, the Company shall assume the Facility A Obligations of the Co-Borrower as provided in Section 2.26(b). The Facility A Commitments to lend hereunder shall expire on the Facility A Termination Date. (b) Letter of Credit Commitment. On and after the Closing Date and prior to the Facility A Termination Date, each Facility A Lender severally agrees, on the terms and conditions set forth in this Agreement and in reliance upon the representations and warranties of Company and the Co-Borrower herein set forth, to participate in Facility Letters of Credit issued pursuant to Section 2.21 for the account of the Company or, to the extent provided for in Section 2.26, the Co-Borrower; provided that (i) in no event may the aggregate amount of all Facility Letter of Credit Obligations (whether of the Company or of the Co-Borrower) exceed the lesser of (A) the Aggregate Letter of Credit Commitment and (B) an amount equal to the Aggregate Facility A Commitment minus the sum of all outstanding Facility A Advances (whether to the Company or the Co-Borrower) and all outstanding Swing Line Loans and (ii) unless and until the Co-Borrower Termination Conditions are satisfied, in no event may the aggregate amount of all Facility Letter of Credit Obligations of the Company exceed the lesser of (A) the Company Net L/C Commitment and (B) an amount equal to the Company Net Facility A Commitment minus the sum of all outstanding Facility A Advances to the Company and all outstanding Swing Line Loans. (c) Advances and Participations Pro Rata. Facility A Advances hereunder shall be made ratably by the several Facility A Lenders in accordance with their respective Facility A Pro 31 Rata Shares. Participations in Facility Letters of Credit hereunder shall be ratable among the several Facility A Lenders in accordance with their respective Facility A Pro Rata Shares. (d) Maturity. All Facility A Obligations shall be due and payable by the Borrower on the Facility A Termination Date unless such Facility A Obligations shall sooner become due and payable pursuant to Section 9.02 or as otherwise provided in this Agreement. SECTION 2.02. Facility B Commitment. (a) Commitments. On and after the Closing Date and prior to the Facility B Termination Date, upon the terms and conditions set forth in this Agreement and in reliance upon the representations and warranties of the Company herein set forth, each Facility B Revolver Lender severally agrees to make Facility B Revolver Advances to the Company from time to time in amounts not to exceed in the aggregate at any one time outstanding the amount of its Facility B Commitment, provided that in no event may the aggregate principal amount of all outstanding Facility B Revolver Advances exceed the Aggregate Facility B Commitment. Subject to the terms of this Agreement, the Company may borrow, repay and reborrow under Facility B at any time prior to the Facility B Termination Date. The Facility B Commitments to lend hereunder shall expire on the Facility B Termination Date. (b) Advances Pro Rata. Facility B Revolver Advances hereunder shall be made by the Facility B Revolver Lenders ratably in accordance with their respective Facility B Revolver Pro Rata Shares. (c) Maturity. All Facility B Obligations shall be due and payable by the Company on the Facility B Termination Date except to the extent such Facility B Obligations are converted to Facility B Term Loans pursuant to Section 2.19 or Section 2.20 or shall sooner become due and payable pursuant to Section 9.02 or as otherwise provided in this Agreement. SECTION 2.03. Facility C Commitment. (a) Commitments. On the Closing Date, upon the terms and conditions set forth in this Agreement and in reliance upon the representations and warranties of the Company and the Co-Borrower herein set forth, each Facility C Lender severally agrees to make a Facility C Advance solely to the Company or, if the Co-Borrower Termination Conditions have not been satisfied as of the Closing Date, solely to the Co-Borrower in the amount of its Facility C Commitment. Facility C Loans that are repaid may not be reborrowed. If the Co-Borrower Termination Conditions are satisfied subsequent to the Closing Date, the Company shall assume the Facility C Obligations as provided in Section 2.26(b). The Facility C Commitment shall terminate immediately following the making of the Facility C Advance on the Closing Date, and there shall be no Facility C Advances after the Closing Date (except to the extent that the making of additional Facility C Loans is approved pursuant to Section 2.18). (b) Advances Pro Rata. Facility C Advances hereunder shall be made ratably by the several Facility C Lenders in accordance with their respective Facility C Pro Rata Shares (except for additional Facility C Loans made by a New Facility C Lender pursuant to Section 2.18). 32 (c) Maturity. All Facility C Obligations shall be due and payable by the Borrower on May 2, 2007 unless such Facility C Obligations shall sooner become due and payable pursuant to Section 9.02 or as otherwise provided in this Agreement. SECTION 2.04. Swing Line Loans. (a) Swing Line Commitment. In addition to the Advances pursuant to Sections 2.01, 2.02 and 2.03, but subject to the terms and conditions of this Agreement (including but not limited to those limitations set forth in Section 2.01), the Swing Line Bank agrees to make the Swing Line Loans to the Company in accordance with this Section 2.04 up to the amount of the Swing Line Commitment. Swing Line Loans shall not be limited by the amount of the Swing Line Bank's Facility A Commitment but shall be subject to the limitations set forth in Section 2.01. Amounts borrowed under this Section 2.04 may be borrowed, repaid and reborrowed to, but not including, the Facility A Termination Date. All outstanding Swing Line Loans shall bear interest at the Floating Rate. (b) Swing Line Request. The Company may request a Swing Line Loan from the Swing Line Bank on any Business Day before the Facility A Termination Date by giving the Administrative Agent and the Swing Line Bank notice by 1:00 p.m. (Chicago time) on such Borrowing Date specifying the aggregate amount of such Swing Line Loan, which shall be an amount not less than $500,000. The Administrative Agent shall promptly notify each Facility A Lender of such request. (c) Making of Swing Line Loans. The Swing Line Bank shall, no later than 3:00 p.m. (Chicago time) on such Borrowing Date, make the funds for such Swing Line Loan available to the Company at the Administrative Agent's address, or at such other place as indicated in written money transfer instructions from the Borrower, signed by an Authorized Officer. (d) Swing Line Note. The Swing Line Loans shall be evidenced by the Swing Line Note and each Swing Line Loan shall be paid in full by the Borrower on or before the earlier of the fifth Business Day after the Borrowing Date for such Swing Line Loan or the Facility A Termination Date. (e) Repayment of Swing Line Loans. The Company may at any time pay, without penalty or premium, all outstanding Swing Line Loans, or, in a minimum amount of $500,000, any portion of the outstanding Swing Line Loans upon notice to the Administrative Agent and the Swing Line Bank. In addition, the Administrative Agent: (i) may at any time in its sole discretion or (ii) shall on the fifth Business Day after the Borrowing Date for such Swing Line Loan, require the Facility A Lenders (including the Swing Line Bank) to make a Facility A Advance at the Floating Rate in an amount up to the amount of Swing Line Loans outstanding on such date for the purpose of repaying Swing Line Loans; provided, however, that the obligation of each Facility A Lender to make any such Advance is subject to the condition that the Swing Line Bank believed in good faith that all conditions under Section 5.02 were satisfied at the time the Swing Line Loan was made. If the Swing Line Bank receives notice from any Facility A Lender that a condition under Section 5.02 has not been satisfied, no Swing Line Loan shall be made until (A) such notice is withdrawn by that Facility A Lender or (B) the Required Lenders 33 have waived satisfaction of any such condition. The Facility A Lenders shall deliver the proceeds of such Facility A Advance to the Administrative Agent by 12:00 noon (Chicago time) on the applicable Borrowing Date for application to the Swing Line Bank's outstanding Swing Line Loans. Subject to the proviso contained in the second sentence of this Section 2.04(e), each Facility A Lender's obligation to make available its Facility A Pro Rata Share of the Facility A Advance referred to in this Section shall be absolute and unconditional and shall not be affected by any circumstances, including without limitation, (1) any set-off, counterclaim, recoupment, defense or other right which such Facility A Lender may have against the Swing Line Bank, or anyone else, (2) the occurrence or continuance of an Event of Default or Unmatured Default, (3) any adverse change in the condition (financial or otherwise) of the Company or (4) any Event whatsoever. If for any reason a Facility A Lender does not make available its Facility A Pro Rata Share of the foregoing Facility A Advance, such Facility A Lender shall be deemed to have unconditionally and irrevocably purchased from the Swing Line Bank, without recourse or warranty, an undivided interest and participation in each Swing Line Loan then being repaid, equal to its Facility A Pro Rata Share of all such Swing Line Loans being repaid, so long as such purchase would not cause such Facility A Lender to exceed its Facility A Commitment. If any portion of any amount paid (or deemed paid) to the Administrative Agent is recovered by or on behalf of the Company from the Administrative Agent in bankruptcy or otherwise, the loss of the amount so recovered shall be shared ratably among all Facility A Lenders in accordance with their respective Facility A Pro Rata Shares. SECTION 2.05. Types of Advances. (a) The Facility A Advances, Facility B Advances and Facility C Advances may be Floating Rate Advances, or Eurodollar Rate Advances, or a combination thereof, selected by the Borrower in accordance with Section 2.09; provided, however, that (i) the availability of Eurodollar Rate Advances shall be subject to the provisions of Section 2.05(b) below, (ii) there shall not be more than five Facility A Advances, five Facility B Advances and five Facility C Advances which are Eurodollar Rate Advances outstanding at any time and (iii) the Borrower may not select a Eurodollar Rate Advance if and for as long as the Facilities have no "Rating" from either Moody's or S&P. (b) Until the 31st day following the Closing Date, (i) the Eurodollar Rate Loans shall be available to the Borrower only at the discretion of the Administrative Agent and Syndication Agent, and (ii) without limitation of clause (i) above, the Administrative Agent and Syndication Agent may require that the Borrower may select a Eurodollar Rate Loan only if the Interest Period applicable thereto is a one-month period which begins and ends on the same date as all other one-month Interest Periods applicable to Eurodollar Rate Loans then outstanding or a one-week Interest Period that ends on or before the last day of any one-month Interest Period then in effect. SECTION 2.06. Principal Payments. (a) Optional Principal Payments. Subject to and except as otherwise provided in Section 2.06(f), 2.06(g) and Section 2.06(i), (i) the Borrower may from time to time pay with respect to any Facility, without penalty or premium, all outstanding Floating Rate Advances of such Facility, or, in a minimum aggregate amount of $5,000,000 or any integral multiple of 34 $1,000,000 in excess thereof, any portion of the outstanding Floating Rate Advances of such Facility upon one Business Day's prior notice to the Administrative Agent, and (ii) the Borrower may, upon three Business Days' prior notice to the Administrative Agent, (A) pay any Eurodollar Advance in full on the last day of the Interest Period for such Eurodollar Advance, and (B) prepay any Eurodollar Advance in full prior to the last day of the Interest Period for such Eurodollar Advance. (b) Asset Sales. (i) Provisions Applicable if Bridge Loan is Advanced. The provisions of this Section 2.06(b)(i) shall only apply if the Bridge Loan is advanced. (A) Within five (5) Business Days after receipt by any Loan Party, on or before the first anniversary of the Closing Date, of the Net Asset Sale Proceeds of any Asset Sale, the Company shall, and, with respect to Asset Sales by the Co-Borrower or the Co-Borrower Subsidiaries, the Co-Borrower shall, pay or cause to be paid to the Administrative Agent, as a mandatory principal payment of the Obligations as herein provided, such Net Asset Sale Proceeds and shall furnish to the Administrative Agent a statement, certified by an Authorized Financial Officer of the Company, setting forth, and including a calculation of, the amount of such Net Asset Sale Proceeds. (B) All amounts required to be paid to the Administrative Agent from the Net Asset Sale Proceeds of any Asset Sale provided for in Section 2.06(b)(i)(A) shall be applied, first, to the outstanding principal balance of the Facility B Loans, and then to the outstanding principal balance of the Facility A Loans. Until the first anniversary of the Closing Date, the availability of the Aggregate Facility B Commitment shall be temporarily reduced by the amounts so paid to the Administrative Agent (whether applied to the Facility B Loans or the Facility A Loans), and, if the entire amount of the Aggregate Facility B Commitment thereby becomes temporarily unavailable, the availability of the Aggregate Facility A Commitment shall be temporarily reduced by any additional amounts so paid to Administrative Agent. If the Bridge Loan is paid in full on or before the first anniversary of the Closing Date from the proceeds of unsecured debt or equity Securities (other than the Exchange Notes) issued by the Company, the temporary unavailability of amounts under the Aggregate Facility B Commitment or Aggregate Facility A Commitment provided for above shall terminate, and the full amounts thereof shall be available as provided in this Agreement. If the Bridge Loan is not paid in full on or before the first anniversary of the Closing Date from the proceeds of unsecured debt or equity Securities (other than the Exchange Notes) issued by the Company, then, on the first anniversary of the Closing Date, (1) the Company shall pay to the Administrative Agent (which payment may be made from the proceeds of Facility A Advances and Facility B Advances as provided in the next-to-last sentence of this 35 Section 2.06(b)(i)(B)), as a mandatory principal payment of the Facility C Obligations, an amount equal to a fractional portion of the aggregate amount of all Net Asset Sale Proceeds paid to the Administrative Agent pursuant to the provisions of Section 2.06(b)(i)(A) above, which fraction has as its numerator the aggregate amount of the Facility C Loans advanced on the Closing Date and as its denominator the Aggregate Commitment as of the Closing Date, provided however, that the application of such payments to Facility C shall be subject to the provisions of Section 2.06(g); (2) the amount (if any) of the Aggregate Facility A Commitment which is temporarily unavailable shall be reduced (thereby increasing availability) by an amount equal to the lesser of (x) the mandatory principal payment of the Facility C Obligations made under clause (1) above (taking into account any election by any Facility C Lender not to accept such principal payment as provided in Section 2.06(g)) and (y) the amount of such temporary unavailability; and (z) to the extent that the principal payment of the Facility C Obligations made under clause (1) above (taking into account any election by any Facility C Lender not to accept such principal payment as provided in Section 2.06(g)) exceeds the amount of the Aggregate Facility A Commitment that was temporarily unavailable, the amount of the Aggregate Facility B Commitment that was temporarily unavailable shall be reduced (thereby increasing availability) by the amount of such excess. If and to the extent that, after application of the provisions of clause (2) above, any amount of the Aggregate Facility A Commitment remains unavailable, the Aggregate Facility A Commitment shall be permanently reduced, as of the first anniversary of the Closing Date, by the amount of unavailability, and, if and to the extent that, after application of the provisions of clause (3) above, any amount of the Aggregate Facility B Commitment remains unavailable, the amount of the Aggregate Facility B Commitment shall be permanently reduced, as of the first anniversary of the Closing Date, by the amount of such unavailability. Any temporary unavailability or permanent reduction of the Aggregate Facility A Commitment under this Section 2.06(b)(i)(B) shall apply on a pro rata basis to the Co-Borrower Facility A Sublimit, and any increase in availability of the Aggregate Facility A Commitment under this Section 2.06(b)(i)(B) shall likewise apply to the Co-Borrower Facility A Sublimit on a pro rata basis. Any temporary unavailability, increase in availability or permanent reduction in the Aggregate Facility A Commitment or Aggregate Facility B Commitment provided for herein shall apply ratably to all Facility A Commitments or Facility B Commitments (as applicable). For purposes of the provisions of clause (1) above, the Company may elect to make the mandatory principal payment of the Facility C Obligations on the first anniversary of the Closing Date in accordance with the provisions of this Agreement, first, from Facility A Advances and, then, from Facility B Advances in amounts that were theretofore temporarily unavailable thereunder but that become available at the time of such Advances on the 36 first anniversary of the Closing Date in accordance with the provisions hereof. Notwithstanding the foregoing, unless and until the Co-Borrower Termination Conditions are satisfied, Net Asset Sale Proceeds of any Asset Sale by the Co-Borrower or any of the Co-Borrower Subsidiaries provided to be applied to the Obligations under this Section 2.06(b)(i)(B) shall be applied to the Co-Borrower's outstanding Facility A Loans and the Co-Borrower's Facility C Loans (as applicable as set forth above), and not to any other Obligations. (C) If the Bridge Loan is converted to a term loan or repaid from the proceeds of the Exchange Notes, then from and after such conversion or repayment the Company shall, and, with respect to Asset Sales by the Co-Borrower or the Co-Borrower Subsidiaries, the Co-Borrower shall, cause all Net Asset Sale Proceeds of any Asset Sale by any Loan Party (except to the extent reinvested as hereinafter provided) to be paid to the Administrative Agent as a mandatory principal payment of the Obligations to be applied to the Facilities in accordance with the provisions of Section 2.06(b)(iii). Within five (5) Business Days following the receipt by any Loan Party of any Net Asset Sale Proceeds of any Asset Sale from and after the conversion of the Bridge Loan to a term loan or the repayment of the Bridge Loan from the proceeds of the Exchange Notes, the Company shall furnish to the Administrative Agent a statement setting forth, and including a calculation of, the amount of the Net Asset Sale Proceeds and the amount thereof (if any) that such Loan Party intends to reinvest, in assets similar to those that were the subject of such Asset Sale, within 180 days following the receipt thereof (the "Reinvestment Period"). Any Net Asset Sale Proceeds that such Loan Party does not intend to reinvest within the Reinvestment Period shall be paid to the Administrative Agent, on the date on which the foregoing statement is due, as a mandatory principal payment of the Obligations to be applied to the Facilities as provided in Section 2.06(b)(iii). Within five (5) Business Days following the end of such Reinvestment Period, the Company shall furnish to the Administrative Agent a statement setting forth the amount, if any, of the Net Asset Sale Proceeds reinvested in similar assets during the Reinvestment Period, which statement shall include a description of the nature and amount of such reinvestment and the date or dates upon which the reinvestment occurred. To the extent that any Net Asset Sale Proceeds are not reinvested within such Reinvestment Period, such Net Asset Sale Proceeds shall be paid to the Administrative Agent, on the date on which the foregoing statement is due, as a mandatory principal payment of the Obligations to be applied to the Facilities as provided in Section 2.06(b)(iii). Each statement provided to be delivered hereunder with respect to the receipt or reinvestment of Net Asset Sale Proceeds of any Asset Sale shall be certified by an Authorized Financial Officer of the Company. 37 (D) If the Bridge Loan is paid in full prior to the first anniversary of the Closing Date from the proceeds of unsecured debt or equity Securities (other than the Exchange Notes) issued by the Company, neither the Company nor the Co-Borrower shall thereafter be required to pay or cause to be paid Net Asset Sale Proceeds of any Asset Sale to the Administrative Agent pursuant to the provisions of this Section 2.06(b)(i). (ii) Asset Sales Following Covenant Violation. At any time that the Company shall fail to maintain a Leverage Ratio that is less than or equal to 2.25 or shall fail to maintain an Interest Coverage Ratio that is greater than or equal to 2.0 to 1.0, the Company shall, and with respect to Asset Sales by the Co-Borrower or the Co-Borrower Subsidiaries, the Co-Borrower shall, cause all Net Asset Sale Proceeds of any Asset Sale by any Loan Party to be paid to the Administrative Agent as a mandatory principal payment of the Obligations to be applied to the Facilities in accordance with the provisions of Section 2.06(b)(iii). (iii) Application of Net Asset Sale Proceeds. All amounts required to be paid to the Administrative Agent from the Net Asset Sale Proceeds of any Asset Sale provided for in Section 2.06(b)(i)(C) or 2.06(b)(ii) shall be paid to the Administrative Agent and applied on a pro rata basis among the Facilities based upon the outstanding principal amounts thereof. Amounts to be applied to a Facility shall be paid to each Lender of such Facility in the amount of its Applicable Pro Rata Share thereof, provided, however, that, (A) to the extent that such Applicable Pro Rata Share exceeds the outstanding principal balance of such Facility held by such Lender, such excess shall be applied pro rata to the other Facilities and (B) any payment that a Facility C Lender elects not to accept pursuant to Section 2.06(g) shall be applied pro rata on a pro rata basis to Facility A and Facility B. Amounts applied to the outstanding principal balance of Facility A shall reduce the Aggregate Facility A Commitment by the amount so applied, and amounts applied to the outstanding principal balance of the Facility B Revolver Loans shall reduce the Aggregate Facility B Commitment by the amount so applied. In the event that, upon application of such payments to the Facilities as herein provided, the amount to be applied to Facility A or Facility B exceeds the outstanding principal balance thereof, the amounts to be applied to such Facility shall be limited to the outstanding principal balance of such Facility, but the Aggregate Facility A Commitment or Aggregate Facility B Commitment (as applicable) shall nevertheless be reduced (in addition to any reduction resulting from repayment of such Facilities as herein provided), on a pro rata basis, by the amount of such excess. Notwithstanding the foregoing, unless and until the Co-Borrower Termination Conditions are satisfied, Net Asset Sale Proceeds of any Asset Sale by the Co-Borrower or any of the Co-Borrower Subsidiaries provided to be applied to the Obligations under this Section 2.06(b)(iii) shall be applied on a pro rata basis among the Co-Borrower's outstanding Facility A Loans and the Co-Borrower's Facility 38 C Loans, and not to any other Obligations; amounts so applied to the outstanding principal balance of the Co-Borrower's Facility A Loans shall reduce the Aggregate Facility A Commitment and the Co-Borrower Facility A Sublimit by the amount so applied. (c) Facility C Amortization. The Borrower shall pay to the Administrative Agent for the benefit of the Facility C Lenders, on each Quarterly Payment Date commencing October 1, 2000, as a principal repayment of Facility C, the sum of $1,000,000 (subject to the pro rata reduction of the amount of any such quarterly payment as provided in Section 2.06(e)). The payments provided for in this Section 2.06(c) shall not be applied toward any additional Facility C Loan made by any New Facility C Lender under Section 2.18. (d) Payments of Mortgage Banking Subsidiaries Note. The Borrower shall prepay the principal of the Notes in the amount, and promptly upon its receipt, of any principal payment made with respect to the Mortgage Banking Subsidiaries Note from and after the date the Administrative Agent is granted a security interest therein pursuant to Section 8.02; provided, however, that if the Borrower does not designate which of the Facilities is to be reduced by such prepayment, the prepayment shall be applied (as applicable) first to any Facility C Obligations, then to any outstanding Facility B Obligations and then to any outstanding Facility A Obligations. (e) Reduction of Quarterly Payments. Any payments or prepayments of the Facility B Term Loans or the Facility C Loans, whether voluntary or otherwise (other than the regularly scheduled quarterly payments) shall reduce, on a pro rata basis, the amount of each quarterly payment thereafter required to be made to any Facility B Term Lender or Facility C Lender that received such payment or prepayment. (f) Prepayment Premium. At the time of any payment or prepayment of all or any portion of the Facility C Loans made on or prior to the first anniversary of the Closing Date (other than payments under Section 2.06(c)), the Borrower shall pay to the Administrative Agent, for the account of the Facility C Lenders that receive such payment or prepayment, a prepayment premium in an amount equal to one and one-half percent (1 1/2%) of the principal amount so paid or prepaid. (g) Rights of Facility C Lender Not to Accept Certain Payments. Upon receipt from the Administrative Agent of notice that the Borrower intends to make or has made an optional partial prepayment of Facility C or any payment of Facility C required to be made pursuant to Section 2.06(b), any Facility C Lender may elect not to accept such payment of Facility C, in which event the amount of the payment so rejected shall (except as otherwise expressly provided herein) be applied to the outstanding Loans under Facility A and Facility B on a pro rata basis, based upon the amounts thereof (if any) then outstanding. (h) Application of Payments to Facility B. Whenever this Agreement provides that any payment is to be applied to Facility B but does not specify that the same shall be applied to the Facility B Revolver Loans or the Facility B Term Loans, such payment shall be allocated among the Facility B Revolver Loans and Facility B Term Loans on a pro rata basis, based upon the amounts thereof (if any) then outstanding. 39 (i) Funding Indemnification. The provisions of Section 3.04 shall apply to any payment or prepayment provided for in this Section 2.06 or Section 2.18(d). (j) Application of Payments. Unless this Agreement specifically provides for the application of principal payments to specified Obligations, the Borrower may, as long as no Event of Default has occurred that is continuing, direct the Administrative Agent to apply prepayments of the principal amount of the Obligations against any of the Facilities. SECTION 2.07. Commitment Fees; Reductions of Commitments. (a) Commitment Fees. The Company agrees to pay (i) to the Administrative Agent for the account of each Facility A Lender a Commitment Fee, at a rate per annum equal to the Applicable Commitment Fee Rate for Facility A, on the daily average of such Facility A Lender's Unused Commitment for Facility A from the date hereof to and including the Facility A Termination Date, payable in arrears on each Quarterly Payment Date and on the Facility A Termination Date and (ii) to the Administrative Agent for the account of each Facility B Revolver Lender a Commitment Fee, at a rate per annum equal to the Applicable Commitment Fee Rate for Facility B, on the daily average of such Facility B Revolver Lender's Unused Commitment for Facility B from the date hereof to and including the Facility B Termination Date, payable in arrears on each Quarterly Payment Date and on the Facility B Termination Date. All accrued Commitment Fees with respect to Facility A under this Section 2.07 shall be payable on the effective date of any termination of the obligations of the Facility A Lenders to make Facility A Loans hereunder, and all accrued Commitment Fees with respect to Facility B under this Section 2.07 shall be payable to each Facility B Revolver Lender on the effective date of any termination of its obligations to make Facility B Revolver Loans hereunder. The fees payable under this Section 2.07, once paid, shall not be refundable for any reason. (b) Voluntary Reduction of Commitments. The Company may permanently reduce the Aggregate Facility A Commitment in whole, or in part ratably among the Facility A Lenders in the minimum amount of $5,000,000, and, if in excess thereof, in integral multiples of $1,000,000, upon at least three Business Days' written notice to the Administrative Agent, which notice shall specify the amount of any such reduction, provided, however, that (i) the amount of the Aggregate Facility A Commitment may not be reduced below the sum of (A) the aggregate principal amount of the outstanding Facility A Advances (whether to the Company or to the Co-Borrower) and Swing Line Loans and (B) the Facility Letter of Credit Obligations (whether of the Company or of the Co-Borrower), and (ii) any reduction of the Aggregate Facility A Commitment prior to the satisfaction of the Co-Borrower Termination Conditions shall result in a pro rata reduction of the Co-Borrower Facility A Sublimit, but in such event the Aggregate Facility A Commitment may not be reduced below the amount that would result in a reduction of the sum of the aggregate principal amount of the Co-Borrower's outstanding Facility A Advances and the Co-Borrower's Facility Letter of Credit Obligations below the Co-Borrower Facility A Sublimit. The Company may permanently reduce the Aggregate Facility B Commitment in whole, or in part ratably among the Facility B Lenders in the minimum amount of $5,000,000, and, if in excess thereof, in integral multiples of $1,000,000, upon at least three Business Days' written notice to the Administrative Agent, which notice shall specify the amount of any such reduction, provided, however, that the amount of the Aggregate Facility B Commitment may not be reduced below the aggregate principal amount of the outstanding 40 Facility B Revolver Advances. The Co-Borrower hereby acknowledges and agrees that any request for reduction of the Aggregate Facility A Commitment by the Company shall constitute a request by the Co-Borrower for the pro rata reduction of the Co-Borrower Facility A Sublimit provided for above. (c) Required Reduction of Commitments. To the extent that, as of the Closing Date, the Co-Borrower Termination Conditions have not been satisfied, (i) there shall be temporarily unavailable under the Aggregate Facility B Commitment and (to the extent herein provided) the Aggregate Facility A Commitment from and after the Closing Date and until the 91st day following the Closing Date, an amount equal to the outstanding principal amount of the Existing U.S. Home Debt Issues not accepted for purchase by the Company pursuant to the Existing U.S. Home Debt Tender Offer, (ii) the amount of any such temporary unavailability provided for in clause (i) shall, from time to time during such 91-day period, be decreased (thereby increasing availability) by the aggregate principal amount of the Existing U.S. Home Debt Issues that is retired after the Closing Date, whether pursuant to the exercise by any holder of the Existing U.S. Home Debt Issues of its change-of-control "put" right by reason of the Merger or otherwise, and (iii) on the 91st day following the Closing Date, the Aggregate Facility B Commitment and (to the extent herein provided) the Aggregate Facility A Commitment shall be permanently reduced by an amount equal to the outstanding principal amount of the Existing U.S. Home Debt Issues not accepted for purchase by the Company, less the principal amount thereof retired as provided in clause (ii) above. Any increase in availability provided for in clause (ii) above shall apply, first, to the Aggregate Facility A Commitment until no portion thereof is any longer unavailable pursuant to the provisions of this Section 2.07(c) and then to the Aggregate Facility B Commitment until no portion thereof is any longer unavailable pursuant to the provisions of this Section 2.07(c). Notwithstanding the temporary unavailability of the Aggregate Facility A Commitment or Aggregate Facility B Commitment, the amounts thereof that are otherwise temporarily unavailable shall be available for Advances to the Borrower solely to fund the retirement of the principal amount of the Existing U.S. Home Debt Issues after, but not more than 90 days after, the Closing Date. Any temporary unavailability or permanent reduction of Commitments under this Section 2.07(c) shall apply first to the Aggregate Facility B Commitment and then to the Aggregate Facility A Commitment. Any temporary unavailability or permanent reduction of the Aggregate Facility A Commitment under this Section 2.07(c) shall apply on a pro rata basis to the Co-Borrower Facility A Sublimit, and an increase in availability of the Aggregate Facility A Commitment under this Section 2.07(c) shall likewise apply to the Co-Borrower Facility A Sublimit on a pro rata basis. Any temporary unavailability, increase in availability or permanent reduction in the Aggregate Facility A Commitment or Aggregate Facility B Commitment shall apply ratably to the Facility A Commitments and Facility B Commitments (as applicable). SECTION 2.08. Method of Borrowing. Not later than noon (Chicago time) on each Borrowing Date with respect to a Facility, each Lender with respect to such Facility shall make available its Loan, in funds immediately available in Chicago to the Administrative Agent at its address specified pursuant to Section 13.01. The Administrative Agent will make the funds so received from the Lenders available to the Borrower by deposit into an account maintained by the Borrower at Bank One. SECTION 2.09. Method of Selecting Types and Interest Periods for Advances. 41 (a) Borrowing Notices. The Borrower shall select the Type of each Advance and, in the case of each Eurodollar Rate Advance, the Interest Period applicable to each Advance from time to time. The Borrower shall give the Administrative Agent irrevocable notice (a "Borrowing Notice") not later than 10:00 a.m. (Chicago time) on the Borrowing Date for each Floating Rate Advance and prior to 10:00 a.m. (Chicago time) on the date which is two Business Days before the Borrowing Date for each Eurodollar Rate Advance, specifying: (i) the Borrowing Date, which shall be a Business Day, of such Advance, (ii) the aggregate amount of such Advance, (iii) the Type of Advance selected, and (iv) in the case of each Eurodollar Rate Advance, the Interest Period applicable thereto. The Company shall be entitled to obtain, on the Closing Date, only one Facility A Advance, only one Facility B Revolver Advance and (if the Co-Borrower Termination Conditions are satisfied as of the Closing Date) the entire Facility C Advance and, in any single Business Day after the Closing Date, only one Facility A Advance and only one Facility B Revolver Advance, any of which Advances may (subject to the provisions of Section 2.05) be comprised in whole or in part of any Eurodollar Rate Advance. If, and for as long as the Co-Borrower is entitled to request Advances hereunder, the Co-Borrower shall be entitled to obtain on the Closing Date, only one Facility A Advance and the entire Facility C Advance, and, in any single Business Day after the Closing Date, only one Facility A Advance, any of which Advances may (subject to the provisions of Section 2.05) be comprised in whole or in part of any Eurodollar Rate Advance. Eurodollar Rate Advances to the Company and the Co-Borrower shall not be aggregated into a single Eurodollar Rate Advance, notwithstanding that they may have identical Eurodollar Interest Periods. Changes in the rate of interest on that portion of any Advance maintained as a Floating Rate Advance will take effect simultaneously with each change in the Floating Rate. Each Eurodollar Rate 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 Eurodollar Rate Advance. The Borrower shall select Interest Periods with respect to Eurodollar Rate Advances so that it is not necessary to repay a Eurodollar Rate Advance prior to the last day of the applicable Interest Period in order to make any mandatory payment required to be made pursuant to this Agreement or to repay all Facility A Loans in full on the Facility A Maturity Date, to repay all Facility B Revolver Loans in full on the Facility B Termination Date, to repay all Facility B Term Loans in full on the Facility B Term Maturity Date and to repay all Facility C Loans in full on the Facility C Maturity Date. (b) Borrowing Notices Irrevocable. Each Borrowing Notice shall be irrevocable and binding on the Borrower and, in respect of the borrowing specified in the Borrowing Notice, the Borrower shall indemnify each Lender against any loss or expense incurred by that Lender as a result of any failure to fulfill the applicable conditions set forth in Section 5.02 on or before the proposed Borrowing Date specified in the Borrowing Notice, including, without limitation, any loss (including loss of profit) or expense incurred by reason of the liquidation or reemployment 42 of deposits or other funds acquired by any Lender to fund the Loan to be made by that Lender as part of that borrowing when that Loan, as a result of that failure, is not made on that date. SECTION 2.10. Method of Selecting Types and Interest Periods for Conversion and Continuation of Advances. (a) Right to Convert. The Borrower may elect from time to time, subject to the provisions of Section 2.10(c), to convert all or any part of an Advance of any Type into any other Type or Types of Advances; provided that any conversion of any Eurodollar Rate Advance shall be made on, and only on, the last day of the Interest Period applicable thereto. (b) Automatic Conversion and Continuation. Floating Rate Advances shall continue as Floating Rate Advances unless and until such Floating Rate Advances are converted into Eurodollar Rate Advances. Eurodollar Rate Advances of any Type shall continue as Eurodollar Rate Advances of such Type until the end of the then applicable Interest Period therefor, at which time such Eurodollar Rate Advance shall be automatically converted into a Floating Rate Advance unless the Borrower shall have given the Administrative Agent notice in accordance with Section 2.10(d), requesting that, at the end of such Interest Period, such Eurodollar Rate Advance either continue as a Eurodollar Rate Advance of such Type for the same or another Interest Period or be converted into an Advance of another Type. (c) No Conversion in Case of an Event of Default or Unmatured Default. Notwithstanding anything to the contrary contained in Section 2.10(a) or 2.10(b), no Advance may be converted into or continued as a Eurodollar Rate Advance (except with the consent of the Required Lenders) when any Event of Default or Unmatured Default has occurred and is continuing. (d) Conversion/Continuation Notice. The Borrower shall give the Administrative Agent irrevocable notice (a "Conversion/Continuation Notice") of each conversion of an Advance or continuation of a Eurodollar Rate Advance not later than 10:00 a.m. (Chicago time) on the day of any conversion into a Floating Rate Advance or prior to 10:00 a.m. (Chicago time) on the date which is two Business Days prior to the date of the requested conversion into or continuation of a Eurodollar Rate Advance, specifying: (i) the requested date (which shall be a Business Day) of such conversion or continuation; (ii) the amount and Type of the Advance 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 Eurodollar Rate Advance, the duration of the Interest Period applicable thereto. SECTION 2.11. Minimum Amount of Each Advance. Each Advance shall be in the minimum amount of $5,000,000 (and in multiples of $1,000,000 if in excess thereof) provided, however, that any Floating Rate Advance may be in the amount of the unused Aggregate Facility A Commitment or Aggregate Facility B Commitment (as applicable). 43 SECTION 2.12. Rate after Maturity. Any Advance which is not paid at maturity for such Advance, whether by acceleration or otherwise, shall bear interest until paid in full at a rate per annum equal to the Default Rate. SECTION 2.13. Method of Payment. All payments of principal, interest, and fees hereunder with respect to each Facility shall be made, without setoff, deduction, or counterclaim, in immediately available funds to the Administrative Agent at the Administrative Agent's address specified pursuant to Article XIII, or at any other Lending Installation of the Administrative Agent specified in writing by the Administrative Agent to the Borrower, by 1:00 p.m. (Chicago time) on the date when due and shall be made ratably by the Administrative Agent among the Lenders of such Facility with respect to their Loans. Each payment delivered to the Administrative Agent for the account of any Lender shall be delivered promptly by the Administrative Agent to such Lender in the same type of funds which the Administrative Agent received at its address specified pursuant to Article XIII or at any Lending Installation specified in a notice received by the Administrative Agent from such Lender. The Administrative Agent is hereby authorized to charge any account of the Borrower maintained with Bank One for each payment of principal, interest and fees as it becomes due hereunder. The Administrative Agent shall endeavor in good faith to provide telephonic notice to Borrower prior to any such charge, but the Administrative Agent shall not be liable to Borrower or any other Person if Administrative Agent fails to provide any such notice. If and to the extent payment owed to any Lender is not made by the Borrower to the Administrative Agent or that Lender, as the case may be, when due hereunder or under the Note held by that Lender, the Borrower further authorizes such Lender to charge from time to time against any or all of the accounts maintained by the Borrower with the Lender, its subsidiaries, affiliates or branches any amount so due, subject to the provisions of Article XI. SECTION 2.14. Notes; Telephonic Notices. (a) The Facility A Advances shall be evidenced by the Facility A Note payable to the order of the Administrative Agent and, if applicable, the Facility A Advances made to the Co-Borrower shall be evidenced by the Co-Borrower Facility A Note payable to the order of the Administrative Agent; the Facility B Revolver Loans shall be evidenced by the Facility B Revolver Note payable to the order of the Administrative Agent; the Facility B Term Loans shall be evidenced by the Facility B Term Note payable to the order of the Administrative Agent; and the Facility C Advances shall be evidenced by the Facility C Note payable to the order of the Administrative Agent or, if the Facility C Advance is made to the Co-Borrower hereunder, by the Co-Borrower Facility C Note payable to the Administrative Agent. Notwithstanding the foregoing, any Lender may request, by written notice to the Administrative Agent, that any Loans made or to be made by it hereunder each be evidenced by a Note or Notes payable to such Lender, and, in such event, the Company or, if applicable, the Co-Borrower shall execute and deliver to the Administrative Agent the applicable Note or Notes payable to the order of such Lender in a form approved by the Administrative Agent and consistent with the terms of this Agreement. Upon the execution and delivery of such Note or Notes, the Loans theretofore or thereafter made by such Lender shall be evidenced by the applicable Note or Notes payable to such Lender and shall no longer be evidenced by the applicable Note or Notes payable to the Administrative Agent. Payments under all Notes shall be made to the Administrative Agent 44 (b) The Borrower hereby authorizes the Administrative 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 persons the Administrative Agent or any Lender in good faith believes to be an Authorized Officer. All actions taken by the Lenders and the Administrative Agent upon such telephonic notices are hereby approved by the Borrower, and the Lenders and the Administrative Agent shall incur no liability as a result of any such actions. The Borrower agrees to deliver promptly to the Administrative Agent a written confirmation, if such confirmation is requested by the Administrative Agent or any Lender, of each telephonic notice signed by an Authorized Officer. If the written confirmation differs in any material respect from the action taken by the Administrative Agent and the Lenders, the records of the Administrative Agent and the Lenders shall govern absent manifest error. SECTION 2.15. Interest Payment Dates; Interest and Fee Basis. Interest accrued on each Floating Rate Advance shall be payable on each Monthly Payment Date, commencing with the first such date to occur after the date hereof, on any date on which the Floating Rate Loan is prepaid, whether due to acceleration or otherwise, and on the applicable Facility Termination Date. Interest accrued on that portion of the outstanding principal amount of any Floating Rate Advance converted into a Eurodollar Rate Advance on a day other than a Monthly Payment Date shall be payable on the date of conversion. Interest accrued on each Eurodollar Rate Advance shall be payable on the last day of its applicable Interest Period, on any date on which the Eurodollar Rate Advance is prepaid, whether by acceleration or otherwise, and at maturity. Interest accrued on each Eurodollar Rate Advance having an Interest Period longer than three months shall also be payable on the last day of each three-month interval during such Interest Period. Interest on Floating Rate Loans, Commitment Fees and Facility Letter of Credit Fees shall be calculated for actual days elapsed on the basis of a 365-day year; interest on Eurodollar Rate Loans shall be calculated for actual days elapsed on the basis of a 360-day year. 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 1:00 p.m. (Chicago time) at the place of payment. 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, in the case of a principal payment, such extension of time shall be included in computing interest in connection with such payment. SECTION 2.16. Notification of Advances, Interest Rates, Prepayments and Commitment Reductions. Promptly after receipt thereof, the Administrative Agent will notify each Lender of the contents of each notice of reduction of the Aggregate Facility A Commitment or Aggregate Facility B Commitment received by the Administrative Agent and will notify each Lender of a Facility of the contents of each Borrowing Notice, Conversion/Continuation Notice and repayment notice received by the Administrative Agent hereunder with respect to such Facility. The Administrative Agent will notify each Lender of a Facility of the interest rate applicable to each Eurodollar Rate Advance of such Facility promptly upon determination of such interest rate. SECTION 2.17. Lending Installations. Each Lender may book its Loans at any Lending Installation selected by such Lender 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 Lender for the benefit of such Lending Installation. Each Lender 45 may, by written or telex notice to the Administrative Agent and the Borrower, designate a Lending Installation through which Loans will be made by it and for whose account Loan payments are to be made. SECTION 2.18. Increase in Facility A or Facility C. (a) Request for Increase. Provided that the Co-Borrower Termination Conditions have been satisfied and that the Bridge Loan has been paid in full (other than from the proceeds of the Exchange Notes), the Company may, at any time and from time to time, request, by notice to the Administrative Agent, the Administrative Agent's approval of an increase of the Aggregate Facility A Commitment or additional Facility C Loans, or both (in either case, a "Facility Increase") within the limitations hereafter described, which request shall set forth the amount of each such requested Facility Increase. Within twenty (20) days of such request, the Administrative Agent shall advise the Company of its approval or disapproval of such request; failure to so advise the Company shall constitute disapproval. If the Administrative Agent approves any such Facility Increase, then (x) in the case of a Facility Increase for Facility A, the Aggregate Facility A Commitment may be so increased (up to the amount of such approved Facility Increase) either by having additional Persons that are Eligible Assignees and that are approved by the Company and the Administrative Agent become Facility A Lenders and/or by having any one or more of the then existing Facility A Lenders (at each such Facility A Lender's election in its sole discretion) that have been approved by the Company and the Administrative Agent, increase the amount of its Facility A Commitment (any such Person that becomes a Facility A Lender or that increases the amount of its Facility A Commitment being herein referred to as a "New Facility A Lender") and (y) in the case of a Facility Increase for Facility C, additional Facility C Loans may be made (up to the amount of such approved Facility Increase) either by having Persons that are Eligible Assignees and that are approved by the Company and the Administrative Agent become Facility C Lenders and make such additional Facility C Loans and/or having one or more of the Facility C Lenders (at each such Facility C Lender's election in its sole discretion) that have been approved by the Company and the Administrative Agent make such additional Facility C Loans (any such Person that becomes a Facility C Lender or any Facility C Lender that elects to make such additional Facility C Loans being herein referred to as a "New Facility C Lender" and referred to collectively with the New Facility A Lenders as the "New Lenders"), subject to and in accordance with the provisions of this Section 2.18. Any Facility Increase shall be subject to the following limitations and conditions: (i) any increase in the Aggregate Facility A Commitment or in any Facility A Commitment shall not be less than $5,000,000 (and shall be in integral multiples of $1,000,000 if in excess thereof); (ii) any additional Facility C Loans by any New Lender shall not be less than $5,000,000 (and shall be in integral multiples of $1,000,000 if in excess thereof); (iii) the aggregate amount of all Facility Increases pursuant to this Section 2.18 shall not exceed $100,000,000; (iv) the Company and each New Lender shall have executed and delivered a commitment and acceptance (the "Commitment and Acceptance") substantially in the form of Exhibit O hereto, and the Administrative Agent shall have accepted and executed the same; (v) the Company shall have executed and delivered to the Administrative Agent such Note or Notes as the Administrative Agent shall require to reflect such Facility Increase; (vi) the Company shall have delivered to the Administrative Agent opinions of counsel (substantially similar to the forms of opinions provided for in Section 5.01 modified to apply to the Facility Increase and each Note and Commitment and Acceptance executed and delivered in connection therewith); (vii) the 46 Guarantors and the pledgors under the Pledge Agreements shall have consented in writing to the Facility Increases and shall have agreed that their Guaranties and Pledge Agreements continue in full force and effect; and (viii) the Company and each New Lender shall otherwise have executed and delivered such other instruments and documents as the Administrative Agent shall have reasonably requested in connection with such Facility Increase. The form and substance of the documents required under clauses (iv) through (viii) above shall be fully acceptable to the Administrative Agent. The Administrative Agent shall provide written notice to all of the Lenders hereunder of any Facility Increase. (b) Loans by New Lenders. (i) Upon the effective date of any increase in the Aggregate Facility A Commitment pursuant to the provisions hereof, which effective date shall be mutually agreed upon by the Company, each New Facility A Lender and the Administrative Agent, each New Facility A Lender shall make a payment to the Administrative Agent in an amount sufficient, upon the application of such payments by all New Facility A Lenders to the reduction of the outstanding Facility A Advances held by the Facility A Lenders, to cause the principal amount outstanding under the Facility A Loans made by each Facility A Lender (including any New Facility A Lender) to be in the amount of its Facility A Pro Rata Share (upon the effective date of such increase) of all outstanding Facility A Loans. The Company hereby irrevocably authorizes each New Facility A Lender to fund to the Administrative Agent the payment required to be made pursuant to the immediately preceding sentence for application to the reduction of the outstanding Facility A Loans held by the other Facility A Lenders, and each such payment shall constitute a Facility A Loan hereunder. If, as a result of the repayment of the Facility A Advances provided for in this Section 2.18(b)(i), any payment of a Eurodollar Rate Advance occurs on a day which is not the last day of the applicable Interest Period, the Company will pay to the Administrative Agent for the benefit of any of the Facility A Lenders holding a Eurodollar Rate Loan any loss or cost incurred by such Facility A Lender resulting therefrom in accordance with Section 3.04. Upon the effective date of such increase in the Aggregate Facility A Commitment, all Facility A Loans outstanding hereunder (including any Facility A Loans made by the New Lenders on such date) shall be Floating Rate Loans, subject to the Company's right to convert the same to Eurodollar Rate Loans on or after such date in accordance with the provisions of Section 2.10. (ii) On the date on which such additional Facility C Loans are to be made by such New Facility C Lenders, which date shall be mutually agreed upon by the Company, each New Facility C Lender and the Administrative Agent, each New Facility C Lender shall make its additional Facility C Loans subject to and in accordance with the provisions of this Agreement relating to the making of Advances after the Closing Date, and all Facility C Loans (including such new Facility C Loans made on such date) shall be (or shall be converted to) Floating Rate Loans, subject to the Company's right to convert the same to Eurodollar Rate Loans on or after such date in accordance with the provisions of Section 2.10. If as a result of the conversion of Facility C Loans to Floating Rate Loans on the date of the making of such additional Facility C Loans, any payment of a Eurodollar Rate Advance occurs on a day which is not the last day of the applicable Interest Period, the Company will pay to the Administrative Agent for the benefit of any of the Facility C Lenders holding a Eurodollar Rate Loan any loss or cost incurred by such Facility C Lender resulting therefrom in accordance with Section 3.04. 47 (c) New Facility A Lenders' Participation in Facility Letters of Credit. Upon the effective date of any increase in the Aggregate Facility A Commitment and the making of the Facility A Loans by the New Facility A Lenders in accordance with the provisions of Section 2.18(b), each New Facility A Lender shall also be deemed to have irrevocably and unconditionally purchased and received, without recourse or warranty, from the Facility A Lenders party to this Agreement immediately prior to the effective date of such increase, an undivided interest and participation in any Facility Letter of Credit (whether issued for the account of the Company or of the Co-Borrower) then outstanding, ratably, such that each Facility A Lender (including each New Facility A Lender) holds a participation interest in each such Facility Letter of Credit in proportion to the ratio that such Facility A Lender's Facility A Commitment (upon the effective date of such increase in the Aggregate Facility A Commitment) bears to the Aggregate Facility A Commitment as so increased. (d) Amortization Payments with Respect to Facility C Increase. Commencing on the first Quarterly Payment Date following the advance of any additional Facility C Loan by any New Facility C Lender as provided in Section 2.18(b)(ii) above and on each Quarterly Payment Date thereafter, the Company shall pay to the Administrative Agent, for the benefit of such New Facility C Lender, as a principal repayment of such additional Facility C Loan, a sum equal to one quarter of one percent (1/4%) of the original principal amount of such additional Facility C Loan (subject to the pro rata reduction of the amount of any such quarterly payment as provided in Section 2.06(e)). (e) No Obligation to Increase Commitment. Nothing contained herein shall constitute, or otherwise be deemed to be, a commitment or agreement on the part of the Company or the Administrative Agent to give or grant any Lender the right to increase its Commitment hereunder or to make additional Facility C Loans at any time or a commitment or agreement on the part of any Lender to increase its Commitment hereunder at any time or to make any additional Facility C Loans, and no Commitment of a Lender shall be increased without its prior written approval. SECTION 2.19. Extension of Facility B Termination Date. (a) Extension Request. The Company may request an extension of the Facility B Termination Date by submitting a request for an extension to the Administrative Agent (an "Extension Request") not more than 90 nor less than 60 days prior to the Facility B Termination Date. The new Facility B Termination Date shall be no more than 364 days after the Facility B Termination Date in effect at the time the Extension Request is received, including the Facility B Termination Date as one of the days in the calculation of the days elapsed. Promptly following receipt of an Extension Request, the Administrative Agent shall notify each Facility B Revolver Lender of the contents thereof, shall request each Facility B Revolver Lender to approve the Extension Request, and shall specify the date (which must be at least 30 days after the Extension Request is delivered to the Facility B Revolver Lenders) as of which the Facility B Revolver Lenders must respond to the Extension Request (the "Reply Date"). Each Facility B Revolver Lender approving the Extension Request shall deliver its written consent no later than the Reply Date. If the consent of all of the Facility B Revolver Lenders is received by the Administrative Agent on or prior to the Reply Date, the Facility B Termination Date specified in the Extension Request shall (subject to the provisions of Section 2.20(b)) become effective on the existing 48 Facility B Termination Date and the Administrative Agent shall promptly notify the Company and each Lender of the new Facility B Termination Date. If Facility B Revolver Lenders whose Facility B Revolver Pro Rata Shares equal or exceed 66-2/3% in the aggregate, but less than 100%, of all Facility B Revolver Pro Rata Shares consent to such extension on or before the Reply Date, the Company may, by notice given to the Administrative Agent within ten days of the Administrative Agent's notification to the Company of the failure of such Facility B Revolver Lenders to consent to such extension, elect to take one of the following actions with respect to all Facility B Revolver Lenders (each a "Non-Consenting Facility B Lender") that do not consent to such extension: (i) to convert any outstanding Facility B Revolver Loans of the Non-Consenting Facility B Lenders to Facility B Term Loans as provided in Section 2.19(b), (ii) to terminate the Facility B Commitment of the Non-Consenting Facility B Lenders as provided in Section 2.19(c) or (iii) to replace the Non-Consenting Facility B Lenders in accordance with Section 2.19(d) and, to the extent that the Facility B Commitments of the Non-Consenting Facility B Lenders are not entirely replaced, to terminate the Facility B Commitment of such Non-Consenting Facility B Lenders. Any such election made by the Company pursuant to clause (i), (ii), or (iii) of the preceding sentence shall be made with respect to all Non-Consenting Facility B Lenders pursuant to such clause. Provided the Company gives the Administrative Agent timely notice of such election and, in the case of an election under clause (ii) or clause (iii), pays or causes to be paid to each of the Non-Consenting Facility B Lenders, on or before the Facility B Termination Date, an amount equal to all Facility B Obligations (other than those outstanding under any Facility B Term Notes) of such Non-Consenting Facility B Lender, then (A) the Facility B Termination Date shall be extended with respect to the Facility B Revolver Lenders that consented thereto (subject to the provisions of Section 2.20(b)) and (B) the Aggregate Facility B Commitments shall be reduced by the amount of the Non-Consenting Facility B Lenders' Facility B Commitments (except such as are replaced in accordance with Section 2.19(d)). Notwithstanding the foregoing, if the consent to such extension of the Facility B Termination Date is not given by Facility B Revolver Lenders whose Facility B Revolver Pro Rata Shares equal or exceed 66-2/3% of all Facility B Revolver Pro Rata Shares or such consent is given but the Company shall fail to give timely notice of an election under clauses (i), (ii) or (iii) above or, having given such notice, shall fail to pay or cause to be paid to the Non-Consenting Facility B Lenders, on or before the Facility Termination Date, the amounts required to be paid hereunder, then the Facility B Termination Date shall not be extended, and, on the Facility B Termination Date, all outstanding Facility B Revolver Loans shall convert to Facility B Term Loans and all Facility B Commitments shall terminate. The Company may not request more than four (4) extensions of the Facility B Termination Date pursuant to this Section. (b) Conversion of Non-Consenting Facility B Lenders' Facility B Revolver Loans. If Facility B Revolver Lenders whose Facility B Revolver Pro Rata Shares equal or exceed 66-2/3% in the aggregate, but less than 100%, of all Facility B Pro Rata Shares consent to an Extension Request and the Company gives the Administrative Agent timely notice of the Company's election to convert, pursuant to clause (i) of Section 2.19(a), the outstanding Facility B Revolver Loans of all Non-Consenting Facility B Lenders to Facility B Term Loans, the Administrative Agent shall so notify all Facility B Revolver Lenders, and, on such Facility B Termination Date, the outstanding Facility B Revolver Loans of all Non-Consenting Facility B Lenders shall convert to Facility B Term Loans, and the Facility B Commitments of all Non-Consenting Facility B Lenders shall terminate. 49 (c) Termination of Non-Consenting Facility B Lenders' Facility B Commitments. If Facility B Revolver Lenders whose Facility B Revolver Pro Rata Shares equal or exceed 66-2/3% in the aggregate, but less than 100%, of all Facility B Pro Rata Shares consent to an Extension Request and the Company gives the Administrative Agent timely notice of the Company's election to terminate, pursuant to clause (ii) of Section 2.19(a), the Facility B Commitments of all Non-Consenting Facility B Lenders, the Administrative Agent shall so notify all Facility B Revolver Lenders, and on or before such Facility B Termination Date the Company shall pay in full the Facility B Obligations (other than those outstanding under any Facility B Term Notes) of all Non-Consenting Facility B Lenders, and the Facility B Commitments of all Non-Consenting Facility B Lenders shall terminate on such Facility B Termination Date. (d) Replacement of Non-Consenting Facility B Lenders. If Facility B Revolver Lenders whose Facility B Revolver Pro Rata Shares equal or exceed 66-2/3% in the aggregate, but less than 100%, of all Facility B Pro Rata Shares consent to an Extension Request and the Company gives the Administrative Agent timely notice of the Company's election to replace, pursuant to clause (iii) of Section 2.19(a), the Facility B Commitments of all Non-Consenting Facility B Lenders, the Administrative Agent shall so notify all Facility B Revolver Lenders, and on or before such Facility B Termination Date the Company shall replace such Non-Consenting Facility B Lenders in accordance with Section 2.27 or, to the extent that it does not replace such Non-Consenting Facility B Lenders, shall pay in full the Facility B Obligations (other than those outstanding under any Facility B Term Notes) of all Non-Consenting Facility B Lenders. To the extent the Non-Consenting Facility B Lenders are not replaced, their Facility B Commitments shall terminate on such Facility B Termination Date. In no event shall any Lender have any obligation to issue a new or increased Commitment to replace all or any part of a Non-Consenting Facility B Lender's Facility B Commitment (e) Facility B Term Loans. Upon the conversion of any Facility B Revolver Loans to Facility B Term Loans as provided in Section 2.19(a) or 2.19(b), such Facility B Term Loans shall be governed by the provisions of Section 2.20(c). (f) Aggregate Facility B Commitment. The Aggregate Facility B Commitment shall be reduced by the amount of any Facility B Commitments that are terminated pursuant to this Section 2.19. (g) Term-Out Obligation. The provisions of this Section 2.19 are subject to the provisions of Section 2.20(b). SECTION 2.20. Facility B Term-Out. (a) Term-Out Option. Without limitation of the Company's obligations under Section 2.20(b), the Company shall have the option to convert the Facility B Revolver Loans outstanding on the Facility B Termination Date (as extended pursuant to Section 2.19) to Facility B Term Loans which shall mature and become due and payable in full on the Facility B Term Maturity Date. In order to request such conversion, the Company shall give written notice (the "Term-Out Notice") to the Administrative Agent not less than 30 or more than 90 days prior to the Facility B Termination Date, which notice shall specify the principal amount of the Facility B 50 Revolver Loans (the "Conversion Amount") which the Company desires to convert to Facility B Term Loans, provided, however, that the aggregate amount of the Facility B Revolver Loans that may be converted to Facility B Term Loans shall not be less than $1,000,000. Promptly following its receipt of the Term-Out Notice, the Administrative Agent shall send a copy of the Term-Out Notice to each of the Facility B Revolver Lenders. If the Company has given the Term-Out Notice as provided herein, the lesser of (i) the Conversion Amount or (ii) the Facility B Revolver Loans outstanding on the Facility B Termination Date shall automatically convert to Facility B Term Loans, with each Facility B Revolver Lender being deemed to have made its Facility B Revolver Pro Rata Share of such Facility B Term Loans, and the Administrative Agent shall promptly notify each Facility B Revolver Lender of the principal amount thereof. (b) Term-Out Obligation. Notwithstanding the provisions of Section 2.19, if the Facility B Termination Date is extended pursuant to Section 2.19 with respect to all or, to the extent permitted under Section 2.19, less than all of the Facility B Revolver Lenders but on the Facility B Termination Date (as determined prior to such extension), the Facilities have a rating from S&P of BB- or less or from Moody's of Ba3 or less, the outstanding principal balance of the Facility B Revolver Loans (including any Facility B Revolver Loans purchased by Replacement Lenders pursuant to Section 2.27) shall automatically convert to Facility B Term Loans on such Facility B Termination Date and the Aggregate Facility B Commitment shall be reduced by the amount of such Facility B Term Loans. (c) Facility B Term Loans. The principal amount of each Facility B Term Loan shall be repayable in full in equal quarterly installments on each Quarterly Payment Date (subject to reduction of such installments as provided in Section 2.06(e)), commencing with the first such date following the Facility B Termination Date on which the Facility B Revolver Loan is converted to a Facility B Term Loan (whether pursuant to Section 2.19 or this Section 2.20), with the final installment due and payable on the Facility B Term Maturity Date, unless such Facility B Term Loan shall sooner become due and payable pursuant to Section 9.02 or as otherwise provided in this Agreement. Facility B Term Loans shall be either Eurodollar Rate Loans or Floating Rate Loans, with interest accruing and being paid in the same manner as Facility B Revolver Loans, and with the Facility B Term Loans to be designated as, continued as, or converted into Eurodollar Rate Loans in the same manner as Facility B Revolver Loans could be designated as, continued as, or converted into Eurodollar Rate Loans or Floating Rate Loans as provided in Section 2.10. In the event of any conversion of Facility B Revolver Loans to Facility B Term Loans, the Facility B Term Note payable to and held by the Administrative Agent shall thereafter evidence such Facility B Term Loans, except that any Facility B Term Note payable to and held by any Facility B Term Lender shall thereafter evidence the Facility B Term Loans held by such Facility B Term Lender hereunder. SECTION 2.21. Facility Letters of Credit. (a) Obligation to Issue. Subject to the terms and conditions of this Agreement and in reliance upon the representations and warranties of the Company and the Co-Borrower herein set forth, each Issuer hereby agrees to issue upon the request of and for the account of the Company or, to the extent provided for in Section 2.21(i), the Co-Borrower, through such of the Issuer's Lending Installations or Affiliates as the Issuer and the Borrower may jointly agree, one or more Facility Letters of Credit in accordance with this Section 2.21 from time to time during the 51 period commencing on the Closing Date and ending on the fourteenth day prior to the Facility A Termination Date. (b) Conditions for Issuance. In addition to being subject to the satisfaction of the conditions contained in Section 5.02, the obligation of an Issuer to issue any Facility Letter of Credit is subject to the satisfaction in full of the following conditions: (i) the aggregate maximum amount then available for drawing under Facility Letters of Credit issued by such Issuer, after giving effect to the Facility Letter of Credit requested hereunder, shall not exceed any limit imposed by law or regulation upon such Issuer; (ii) after giving effect to the requested issuance of any Facility Letter of Credit, (A) the Facility Letter of Credit Obligations (whether of the Company or the Co-Borrower) do not exceed the lesser of (1) the Aggregate Letter of Credit Commitment, or (2) an amount equal to the Aggregate Facility A Commitment minus the sum of the outstanding Facility A Advances and all outstanding Swing Line Loans, (B) unless and until the Co-Borrower Termination Conditions are satisfied, the Facility Letter of Credit Obligations of the Company do not exceed the Company Net L/C Commitment and (C) unless and until the Co-Borrower Termination Conditions are satisfied, the Facility Letter of Credit Obligations of the Co-Borrower do not exceed the lesser of (1) the Co-Borrower Facility A Sublimit or (2) an amount equal to the Co-Borrower Facility A Sublimit minus the sum of the outstanding Facility A Advances to the Co-Borrower; (iii) the Facility Letter of Credit shall be a standby Letter of Credit and not a trade Letter of Credit, shall only provide for drawings by sight draft and shall be issued in U.S. Dollars; (iv) the requested Facility Letter of Credit has an expiration date not later than the earlier of (A) fourteen days prior to the Facility A Termination Date and (B) one year after its Issuance Date; provided, however, that the requested Facility Letter of Credit may provide for automatic renewal periodically beyond the first anniversary of its Issuance Date but not beyond the date provided for in clause (A) above; (v) the Borrower shall have delivered to such Issuer at such times and in such manner as such Issuer may reasonably prescribe such documents and materials as may be required pursuant to the terms of the proposed Facility Letter of Credit, and the proposed Facility Letter of Credit shall be satisfactory to such Issuer as to form and content; and (vi) as of the Issuance Date, no order, judgment or decree of any court, arbitrator or governmental authority shall purport by its terms to enjoin or restrain such Issuer from issuing the Facility Letter of Credit and no law, rule or regulation applicable to such Issuer and no request or directive (whether or not having the force of law) from any governmental authority with jurisdiction over the Issuer shall prohibit or request that such Issuer refrain from the issuance of Letters of Credit generally or the issuance of that Facility Letter of Credit (and in any such case, such Issuer shall promptly notify the Administrative Agent and the Borrower of such fact). 52 (c) Procedure for Issuance. (i) The Borrower shall give an Issuer and the Administrative Agent at least three Business Days' prior written notice of any requested issuance of a Facility Letter of Credit under this Agreement (a "Letter of Credit Request"). The Letter of Credit Request shall be in a form acceptable to the Administrative Agent, the Issuer and the Borrower and shall specify: (A) the stated amount of the Facility Letter of Credit requested; (B) the effective date (which day shall be a Business Day) of issuance of such requested Facility Letter of Credit (the "Issuance Date"); (C) the date on which such requested Facility Letter of Credit is to expire (which date shall comply with the provisions of Section 2.21(b)(iv)); (D) the name of the Issuer chosen by the Borrower to issue the requested Facility Letter of Credit; (E) the purpose for which such Facility Letter of Credit is to be issued; and (F) the Person for whose benefit the requested Facility Letter of Credit is to be issued. At the time the Letter of Credit Request is made, the Borrower shall also provide the Administrative Agent and the Issuer with a copy of the form (if specified by the beneficiary) of the Facility Letter of Credit it is requesting be issued. Such Letter of Credit Request, to be effective, must be received by such Issuer and the Administrative Agent not later than 2:00 p.m. (Chicago time) on the last Business Day on which a Letter of Credit Request can be given under this Section 2.21(c)(i). (ii) Subject to the terms and conditions of Section 2.21(b) and provided that the applicable conditions set forth in Sections 5.01 and 5.02 hereof have been satisfied, such Issuer shall, on the Issuance Date, issue a Facility Letter of Credit on behalf of the Borrower in accordance with the Issuer's usual and customary business practices unless the Issuer has actually received (A) written notice from the Borrower specifically revoking the Letter of Credit Request with respect to such Facility Letter of Credit, (B) written notice from a Facility A Lender, which complies with the provisions of Section 2.21(e)(i) or (C) written or telephonic notice from the Administrative Agent stating that the issuance of such Facility Letter of Credit would violate Section 2.21(b). (iii) Each Issuer shall give the Administrative Agent and the Borrower written notice or telex notice, or telephonic notice confirmed promptly thereafter in writing, of the issuance of a Facility Letter of Credit (the "Issuance Notice"), together with (for the Borrower and the Administrative Agent) a copy of such Facility Letter of Credit. Notices and copies of Facility Letters of Credit required to be furnished to the Administrative Agent under this Section 2.21(c)(iii) shall also be delivered to Bank One, NA, Global Trade Financing Unit, 300 South Riverside, Mail Suite IL1-0236, Chicago, IL 60670 53 (Attention: Catherine Deal). Upon receipt of the Issuance Notice, the Administrative Agent shall notify each Facility A Lender of the issuance of such Facility Letter of Credit, which notice shall identify the Issuance Date, the Issuer, the amount and the expiration date of such Facility Letter of Credit. (iv) An Issuer shall not extend or amend any Facility Letter of Credit or allow a Facility Letter of Credit to be automatically extended unless the requirements of this Section 2.21(c) are met as though a new Facility Letter of Credit was being requested and issued. (d) Payment of Reimbursement Obligations; Duties of Issuers (i) Each Issuer shall promptly notify the Borrower and the Administrative Agent (which shall promptly notify the Facility A Lenders) of any draw under a Facility Letter of Credit and the Borrower shall reimburse such Issuer in accordance with Section 2.21(d)(iii). Any Reimbursement Obligation with respect to any Facility Letter of Credit shall bear interest from the date on which the Issuer honors a drawing under such Facility Letter of Credit until payment in full is received by such Issuer at (A) the Floating Rate until the second succeeding Business Day after such date and (B) the Default Rate thereafter. (ii) Any action taken or omitted to be taken by an Issuer under or in connection with any Facility Letter of Credit, if taken or omitted in the absence of bad faith, willful misconduct or gross negligence as determined in a final judgment by a court of competent jurisdiction, shall not (A) put that Issuer under any resulting liability to any Lender or (B) assuming that such Issuer has complied with the procedures specified in Section 2.21(c), all conditions to the issuance of a Facility Letter of Credit have been satisfied and any such Lender has not given a notice contemplated by Section 2.21(e)(i) that continues in full force and effect, relieve any such Lender of its obligations hereunder to that Issuer. In determining whether to pay under any Facility Letter of Credit, an Issuer shall have no obligation relative to the Lenders or to the Borrower other than to confirm that any documents required to be delivered under such Facility Letter of Credit have been delivered in compliance and that they comply on their face (including that any draw request has been purportedly executed by an authorized signatory, if and to the extent such a requirement is specified in the related Facility Letter of Credit), with the requirements of such Facility Letter of Credit. (iii) The Borrower agrees to pay to each Issuer the amount of all Reimbursement Obligations, interest and other amounts payable to such Issuer under or in connection with any Facility Letter of Credit immediately when due (and in any event shall reimburse an Issuer for drawings under a Facility Letter of Credit issued by it no later than two (2) Business Days after payment by that Issuer), irrespective of any claim, set-off, defense or other right which the Borrower or any Subsidiary may have at any time against any Issuer or any other Person, under all circumstances, including without limitation, any of the following circumstances: 54 (A) any lack of validity or enforceability of this Agreement or any of the other Loan Documents; (B) the existence of any claim, set-off, defense or other right which the Borrower or any Subsidiary may have at any time against a beneficiary named in a Facility Letter of Credit or, if such Facility Letter of Credit is transferable, any transferee of any Facility Letter of Credit (or any Person for whom any such transferee may be acting), the Administrative Agent, the Issuer, any Lender, 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 the Borrower or any Subsidiary and the beneficiary named in any Facility Letter of Credit); (C) any draft, certificate or any other document presented under the Facility Letter of Credit proving to be forged, fraudulent or invalid in any respect or any statement therein being untrue or inaccurate in any respect (except to the extent any such invalidity or insufficiency is found in a final judgment of a court of competent jurisdiction to have resulted from the gross negligence or willful misconduct of such Issuer). (D) the surrender or impairment of any guaranty or security for the performance or observance of any of the terms of any of the Loan Documents; or (E) the occurrence of any Event of Default or Unmatured Default. (iv) As among the Borrower, the Issuers, the Administrative Agent and the Lenders, the Borrower assumes all risks of the acts and omissions of, or misuse of the Facility Letters of Credit by, the respective beneficiaries of the Facility Letters of Credit (except such as are found in a final judgment by a court of competent jurisdiction to have resulted from the gross negligence or willful misconduct of an Issuer). In furtherance and not in limitation of the foregoing, the Issuers, the Administrative Agent and the Lenders shall not be responsible (absent gross negligence or willful misconduct in connection therewith, as determined by the final judgment of a court of competent jurisdiction) for (A) the forms, validity, sufficiency, accuracy, genuineness or legal effect of any document submitted by any party in connection with the application for and issuance of any Facility Letter of Credit, even if it should in fact prove to be in any or all respects invalid, insufficient, inaccurate, fraudulent or forged; (B) the validity or sufficiency of any instrument transferring or assigning or purporting thereof, in whole or in part, which may prove to be invalid or ineffective for any reason; (C) failure of the beneficiary of a Facility Letter of Credit to comply fully with underlying conditions required in order to draw upon such Facility Letter of Credit, so long a such beneficiary has presented the omissions, interruptions or delays in transmission or delivery of any messages, by mail, cable, telegraph, telex or otherwise; (E) errors in interpretation of technical terms; (F) 55 misapplication by the beneficiary of a Facility Letter of Credit of the proceeds of any drawing under such Facility Letter of Credit; or (G) any consequences arising from causes beyond the control of any Issuer, the Administrative Agent or any Facility A Lender. (e) Participation. (i) Upon the Closing Date, each of the Facility A Lenders shall be deemed to have irrevocably and unconditionally purchased and received from the Issuer, without recourse or warranty, an undivided interest and participation equal to its Facility A Pro Rata Share of the Existing Letters of Credit (including, without limitation, all rights and obligations of the Issuer with respect thereto) and any security therefor or guaranty pertaining thereto. Immediately upon issuance by an Issuer of any Facility Letter of Credit in accordance with the procedures set forth in Section 2.21(c) each Facility A Lender shall be deemed to have irrevocably and unconditionally purchased and received from the Issuer, without recourse or warranty, an undivided interest and participation equal to its Facility A Pro Rata Share of such Facility Letter of Credit (including, without limitation, all rights and obligations of the Issuer with respect thereto) and any security therefor or guaranty pertaining thereto, provided, that a Letter of Credit issued by any Issuer shall not be deemed to be a Facility Letter of Credit for purposes of this Agreement if the Administrative Agent and such Issuer shall have received written notice from any Facility A Lender on or before the Business Day prior to the date of its issuance of such Letter of Credit that one or more of the conditions contained in Sections 5.01 and 5.02 is not then satisfied, and in the event an Issuer receives such notice, it shall have no further obligation to issue any Facility Letter of Credit until such notice is withdrawn by that Facility A Lender or the Issuer receives a notice from the Administrative Agent that such condition has been effectively waived in accordance with the provisions of this Agreement. (ii) In the event that any Issuer makes any payment under any Facility Letter of Credit and the Borrower shall not have repaid such amount to such Issuer pursuant to Section 2.21(d), such Issuer shall promptly notify the Administrative Agent, which shall promptly notify each Facility A Lender, of such failure, and each Facility A Lender shall promptly and unconditionally pay to the Administrative Agent for the account of such Issuer the amount of such Facility A Lender's Facility A Pro Rata Share of the unreimbursed amount of any such payment. The failure of any Facility A Lender to make available to the Administrative Agent its Facility A Pro Rata Share of the unreimbursed amount of any such payment shall not relieve any other Facility A Lender of its obligation hereunder to make available to the Administrative Agent its Facility A Pro Rata Share of the unreimbursed amount of any payment on the date such payment is to be made, but no Facility A Lender shall be responsible for the failure of any other Facility A Lender to make available to the Administrative Agent its Facility A Pro Rata Share of the unreimbursed amount of any payment on the date such payment is to be made. (iii) Whenever an Issuer receives a payment on account of a Reimbursement Obligation, including any interest thereon, it shall promptly pay to the Administrative 56 Agent and the Administrative Agent shall promptly pay to each Facility A Lender which has funded its participating interest therein, in immediately available funds, an amount equal to its Facility A Pro Rata Share thereof. (iv) Upon the request of the Administrative Agent or any Facility A Lender, an Issuer shall furnish to such Administrative Agent or Facility A Lender copies of any Facility Letter of Credit to which that Issuer is party and such other documentation as may reasonably be requested by the Administrative Agent or Facility A Lender. (v) The obligations of a Facility A Lender to make payments to the Administrative Agent for the account of an Issuer with respect to a Facility Letter of Credit shall be absolute, unconditional and irrevocable, not subject to any counterclaim, set-off, qualification or exception whatsoever and shall be made in accordance with the terms and conditions of this Agreement under any circumstances. (vi) In the event any payment by the Borrower received by an Issuer with respect to a Facility Letter of Credit and distributed by the Administrative Agent to the Facility A Lenders on account of their participations is thereafter set aside, avoided or recovered from that Issuer in connection with any such distribution, such Facility A Lender shall, upon demand by that Issuer, contribute such Facility A Lender's Facility A Pro Rata Share of the amount set aside, avoided or recovered together with interest at the rate required to be paid by that Issuer upon the amount required to be repaid by it. (f) Compensation for Facility Letters of Credit. (i) The Company shall pay to the Administrative Agent, for the account of the Facility A Lenders, a fee (the "Facility Letter of Credit Fee") with respect to each Facility Letter of Credit for the period from the Issuance Date thereof (or, in the case of the Existing Letters of Credit, the Closing Date) to and including the final expiration date thereof, in a per annum amount equal to the product, calculated on a daily basis for each day during such period, of (A) the undrawn amount of such Facility Letter of Credit for such day multiplied by (B) the Facility Letter of Credit Fee Rate for such day, less 0.125% per annum. The Facility Letter of Credit Fees shall be due and payable in arrears on each Quarterly Payment Date and, to the extent any such fees are then due and unpaid, on the Facility A Termination Date. The Administrative Agent shall promptly remit such Facility Letter of Credit Fees, when paid to the Facility A Lenders (including the Issuer) in accordance with their Facility A Pro Rata Shares thereof. The Facility Letter of Credit Fees, once paid, shall not be refundable for any reason. (ii) The Company shall also pay to each Issuer, solely for its own account, as an issuing fee, with respect to each Facility Letter of Credit issued by such Issuer for the period from the Issuance Date thereof (or, in the case of the Existing Letters of Credit, the Closing Date) to and including the final expiration date thereof, in an amount equal to (A) the product, calculated on a daily basis for each day during such period, of (x) the undrawn amount of such Facility Letter of Credit for such day multiplied by (y) 0.125% per annum, plus (B) in the case of any Facility Letter of Credit in a stated amount of less than $10,000.00, an additional fee in an amount to be agreed upon by the Company and 57 the Issuer. The foregoing fees payable to the Issuer shall also be due and payable in arrears on each Quarterly Payment Date and, to the extent any such fees are then due and unpaid, on the Facility A Termination Date. Each Issuer shall be entitled to receive its reasonable out-of-pocket costs of issuing and servicing Facility Letters of Credit. (g) Issuer Reporting Requirements. Each Issuer shall, no later than the tenth day following the last day of each month, provide to the Administrative Agent a schedule of the Facility Letters of Credit issued by it, in form and substance reasonably satisfactory to the Administrative Agent, showing the Issuance Date, account party, original face 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 the Borrower to such Issuer during the month pursuant to Section 3.02. Copies of such reports shall be provided promptly to each Facility A Lender and the Company by the Administrative Agent. (h) Letter of Credit Collateral Account. From and after the occurrence and during the continuance of an Event of Default, the Borrower hereby agrees that it will, until the Facility A Termination Date, maintain a special collateral account (the "Letter of Credit Collateral Account") at the Administrative Agent's office at the address specified pursuant to Article XIII, in the name of the Borrower but under the sole dominion and control of the Administrative Agent, for the benefit of the Facility A Lenders, as security for repayment of the Facility A Obligations, a security interest in and to the Letter of Credit Collateral Account and any funds that may hereafter be on deposit in such account pursuant to Section 9.03. (i) Co-Borrower. Unless and until the Co-Borrower Termination Conditions are satisfied, the Co-Borrower shall, subject to the terms and conditions of this Section 2.21 and Section 2.26, have the right to request the issuance of Facility Letters of Credit and, with respect to the Existing Letters of Credit that are identified in Schedule II as for the account of the Co-Borrower and such other Facility Letters of Credit issued on or after the Closing Date at its request, shall have all of the obligations of the Borrower hereunder. The Existing Letters of Credit that are identified in Schedule II as for the account of the Co-Borrower shall apply against the Co-Borrower L/C Sublimit. Upon the satisfaction of the Co-Borrower Termination Conditions, all Facility Letters of Credit shall thereafter be issued for the account of the Company but obligations with respect to Facility Letters of Credit theretofore issued for the account of the Co-Borrower shall continue to be Facility Letter of Credit Obligations of the Co-Borrower and shall continue to be guaranteed by the Company pursuant to the Lennar Guaranty. SECTION 2.22. Non-Receipt of Funds by the Administrative Agent. Unless the Borrower or a Lender, as the case may be, notifies the Administrative Agent prior to the date on which it is scheduled to make payment to the Administrative Agent of (a) in the case of a Lender, the proceeds of a Loan or (b) in the case of the Borrower, a payment of principal, interest or fees to the Administrative Agent for the account of any one or more of the Lenders, that it does not intend to make such payment, the Administrative Agent may assume that such payment has been made. The Administrative 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 such Lender or the Borrower, as the case may be, has not in fact made such payment to the Administrative Agent, the recipient of such payment shall, on demand by the Administrative Agent, repay to the Administrative Agent the amount so made available together with interest 58 thereon in respect of each day during the period commencing on the date such amount was so made available by the Administrative Agent until the date the Administrative Agent recovers such amount at a rate per annum equal to (i) in the case of payment by a Lender, the Federal Funds Effective Rate for such day or (ii) in the case of payment by the Borrower, the interest rate applicable to the relevant Loan. SECTION 2.23. Withholding Tax Exemption. At least five Business Days prior to the first date on which interest or fees are payable hereunder for the account of any Lender, each Lender 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 the Borrower and the Administrative Agent two duly completed copies of United States Internal Revenue Service Form 1001 or 4224, certifying in either case that such Lender is entitled to receive payments under this Agreement and the applicable Notes, without deduction or withholding of any United States federal income taxes. Each Lender which so delivers a Form 1001 or 4224 further undertakes to deliver to each of the Borrower and the Administrative Agent two additional copies of such form (or a successor form) on or before the date that such form expires (currently, three successive calendar years for Form 1001 and one 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 the Borrower or the Administrative Agent, in each case certifying that such Lender is entitled to receive payments under this Agreement and the applicable Notes, without deduction or withholding of any United States federal income 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 Lender from duly completing and delivering any such form with respect to it and such Lender advises the Borrower and the Administrative Agent that it is not capable of receiving payments without any deduction or withholding of United States federal income tax. SECTION 2.24. Unconditional Obligation to Make Payment. To the fullest extent permitted by law, the Borrower shall make all payments hereunder, under the Notes and under all of the other Loan Documents regardless of any defense or counterclaim, including any defense or counterclaim based on any law, rule or policy which is now or hereafter promulgated by any governmental authority or regulatory body and which may adversely affect the Borrower's obligations to make, or the right of the holder of any Note to receive, those payments. SECTION 2.25. Compensating Balances. Bank One shall have the right (but no obligation) to enter into a separate agreement with the Borrower which provides for the reduction of the interest rate payable to Bank One hereunder in the event that the Borrower maintains collected balances in non-interest bearing accounts at Bank One, but in no event shall such agreement affect the amounts payable under this Agreement to any other Lender. Similarly, each other Lender shall have the right (but no obligation) to enter into a separate agreement with the Borrower which provides for the rebate to Borrower of a portion of the interest paid to such Lender under this Agreement in the event that the Borrower maintains collected balances in non-interest bearing accounts at such Lender, but in no event shall any such agreement affect the amounts payable under this Agreement to such Lender. 59 SECTION 2.26. Co-Borrower. (a) Rights and Obligations of Co-Borrower. If the Co-Borrower Termination Conditions are not satisfied as of the Closing Date, then, unless and until the Co-Borrower Termination Conditions are satisfied, the Co-Borrower (i) shall be, and shall have the rights and obligations of, a Borrower hereunder with respect to Facility A (excluding the Swing Line Loans but including the Facility Letters of Credit), and (ii) shall be the sole Borrower, and shall have the rights and obligations of the Borrower hereunder, with respect to Facility C; provided that, in addition to the limitations set forth in Section 2.01(a), (A) in no event may the aggregate principal amount of all outstanding Facility A Advances to the Co-Borrower exceed the Co-Borrower Facility A Sublimit; (B) in no event may the sum of the aggregate principal amount of all outstanding Facility A Advances to the Co-Borrower and the Facility Letter of Credit Obligations of the Co-Borrower exceed the Co-Borrower Facility A Sublimit; and (C) the Facility Letter of Credit Obligations of the Co-Borrower shall be subject to the applicable limitations set forth in Section 2.21(b). In no event shall the Co-Borrower have any of the rights or obligations of the Borrower under Facility B. Unless and until the Co-Borrower shall deliver a Guaranty hereunder, the Co-Borrower shall have no obligations with respect to any Advances to the Company or any Facility Letters of Credit issued for the account of the Company. The Obligations of the Co-Borrower hereunder shall be fully guaranteed by the Company pursuant to the Lennar Guaranty, which Lennar Guaranty shall be secured (along with all other Secured Obligations) by the Pledge Agreements. The Merger Loan (but not any other Obligations of the Co-Borrower) shall be fully guaranteed by the Co-Borrower Guarantors pursuant to the Co-Borrower Guaranties and secured by the Co-Borrower Pledge Agreements. (b) Satisfaction of Co-Borrower Termination Conditions. Unless the Co-Borrower Termination Conditions are satisfied as of the Closing Date, then within ten (10) days following the satisfaction of the applicable conditions set forth in clause (a) of the definition of "Co-Borrower Termination Conditions," the Company and the Co-Borrower shall cause to be executed and delivered to the Administrative Agent the following: (i) A Facility C Note executed by the Company payable to the order of the Administrative Agent and, if requested by any Facility C Lender in accordance with this Agreement, a Facility C Note executed by the Company payable to the order of such Facility C Lender. (ii) A written assumption agreement, in form and substance acceptable to the Administrative Agent, executed by the Company under which the Company shall assume all of the Obligations of the Co-Borrower under this Agreement. (iii) A Guaranty from the Co-Borrower and each Co-Borrower Subsidiary. (iv) A Supplemental Guaranty, in the form provided for in the Guaranty, executed by the Co-Borrower and each of the Co-Borrower Subsidiaries pursuant to which they guaranty the Secured Obligations. (v) Pledge Agreements (or amendments to previously executed Pledge Agreements in form satisfactory to the Administrative Agent) pledging as Collateral for 60 all of the Secured Obligations the Capital Stock or other equity interests in the Co-Borrower Subsidiaries, together with such stock certificates and other documents provided to be delivered pursuant to the Pledge Agreements. (vi) Opinions of counsel with respect to the Company, the Co-Borrower and the Co-Borrower Subsidiaries and the execution and delivery by them of the Loan Documents provided for herein, which opinions shall conform to the provisions of Section 5.01(d) and shall be satisfactory to the Administrative Agent. (vii) The supporting documents with respect to the Company, the Co-Borrower and each Co-Borrower Subsidiary provided for in Section 5.01(e) (including without limitation the resolutions provided for in clause (vi) thereof). (viii) Such other documents as the Administrative Agent or Syndication Agent or their counsel may reasonably request. Upon the Administrative Agent's receipt and approval of the foregoing, the Company shall promptly request a Facility A Advance in the amount of all outstanding Facility A Advances to the Co-Borrower. Upon the making of such Advances, and without any further action on the part of the Lenders, the Co-Borrower Termination Conditions shall be satisfied, the Co-Borrower shall have no further rights or obligations as Borrower hereunder (except as provided in Section 2.21(i)) and all Obligations of the Co-Borrower hereunder shall be the Obligations of the Company. SECTION 2.27. Replacement of Certain Lenders. In the event a Lender (the "Affected Lender") is a Non-Consenting Facility B Lender under Section 2.19(a) or a non-consenting Lender under Section 13.06(b), the Company may, upon written notice to such Affected Lender and to the Administrative Agent, require such Affected Lender to assign, and such Affected Lender shall assign, within five Business Days after the date of such notice, to one or more assignees selected by the Company and that are Eligible Assignees and otherwise comply with the provisions of Section 12.03 (each, a "Replacement Lender"), all of such Affected Lender's rights and obligations under this Agreement and the other Loan Documents (including without limitation its Commitments and all Loans owing to it) in accordance with Section 12.03; provided, however, that, in the case of a Non-Consenting Facility B Lender, such assignment shall, at the election of the Company, be limited to an assignment of its Facility B Commitment and Facility B Revolver Loans. With respect to any such assignment, the Affected Lender shall concurrently with such assignment receive payment in full of all amounts due and owing to it hereunder or under any of the other Loan Documents with respect to the Loans and Commitments so assigned, including without limitation the aggregate outstanding principal amount of such Loans owed to such Affected Lender, together with accrued interest thereon through the date of such assignment, amounts payable to such Affected Lender under Article III with respect to such Loans and all fees payable to such Affected Lender hereunder with respect to such Loans and Commitments so assigned. Any assignment to a Replacement Lender pursuant to the provisions of this Section 2.27 shall be in accordance with the provisions of Section 12.03 hereof. In no event shall any Lender have any obligation to issue a new or increased Commitment to replace all or any part of any Commitment of any Non-Consenting Facility B Lender or any non-consenting Lender under Section 13.06(b). 61 ARTICLE III CHANGE IN CIRCUMSTANCES SECTION 3.01. Yield-Protection. If the adoption, on or after the Agreement Date, of any law or any governmental or quasi-governmental rule, regulation, policy, guideline or directive (whether or not having the force of law), or any change, on or after the Agreement Date, in interpretation thereof, or the compliance of any Lender (which term, for purposes of this Article III, shall be deemed to include each Issuer in such capacity) therewith, (i) subjects any Lender or any applicable Lending Installation to any tax, duty, charge or withholding on or from payments due from the Borrower (excluding federal taxation of the overall net income of any Lender or applicable Lending Installation), or changes the basis of taxation of payments to any Lender in respect of its Loans or other amounts due it hereunder, or (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 Lender or any applicable Lending Installation (other than reserves and assessments taken into account in determining the interest rate applicable to Eurodollar Rate Advances), or (iii) imposes any other condition the result of which is to increase the cost to any Lender or any applicable Lending Installation of making, funding or maintaining loans (or letters of credit or participations therein) or reduces any amount receivable by any Lender or any applicable Lending Installation in connection with loans (or letters of credit or participations therein), or requires any Lender or any applicable Lending Installation to make any payment calculated by reference to the amount of loans (or letters of credit or participations therein) held or interest received by it, by an amount deemed material by such Lender, then, within 15 days of demand by such Lender, the Borrower shall pay such Lender that portion of such increased expense incurred or reduction in an amount received which such Lender determines is attributable to making, funding and maintaining its Loans, its applicable Commitment, the Facility Letters of Credit or any participations therein. SECTION 3.02. Changes in Capital Adequacy Regulation. If a Lender reasonably determines the amount of capital required or expected to be maintained by such Lender, any Lending Installation of such Lender or any corporation controlling such Lender is increased as a result of a Change, and such increase will have the effect of reducing the rate of return on such Lender's capital as a consequence of such Lender's obligations hereunder to a level below that which such Lender or such corporation, as the case may be, could have achieved but for such Change (taking into account such Lender's or such corporation's policies, as the case may be, with respect to capital adequacy and any payments made to such Lender pursuant to Section 3.01 which relate to capital adequacy and assuming that such Lender's capital was fully utilized prior to such Change), then within 15 days of demand by such Lender, the Borrower shall pay to the 62 Administrative Agent, for the account of such Lender, such additional amount or amounts as will compensate such Lender for such reduction. If any Lender becomes entitled to claim any additional amounts pursuant to this Section 3.02 it shall promptly notify the Borrower through the Administrative Agent of the event by reason of which it has become so entitled, but in any event within 90 days, after such Lender obtains actual knowledge thereof; provided that if such Lender fails to give such notice within the 90-day period after it obtains actual knowledge of such an event, such Lender shall, with respect to such compensation in respect of any costs resulting from such event, only be entitled to payment for costs incurred from and after the date 90 days prior to the date that such Lender does give such notice. A certificate setting forth in reasonable detail the computation of any additional amount payable pursuant to this Section 3.02, submitted by such Lender to the Borrower through the Administrative Agent, shall be delivered to the Borrower promptly after the initial incurrence of such additional amounts. "Change" means (i) any change after the Agreement Date 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 Lender or any Lending Installation or any corporation controlling any Lender or any Lending Institution. "Risk-Based Capital Guidelines" means (i) the risk-based capital guidelines in effect in the United States on the date of this Agreement, including transition rules, and (ii) 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. SECTION 3.03. Availability of Types of Advances. If any Lender determines that maintenance of its Eurodollar Rate Loans at a suitable Lending Installation would violate any applicable law, rule, regulation, or directive, whether or not having the force of law, or if the Administrative Agent determines that (i) deposits of a type and maturity appropriate to match fund Eurodollar Rate Advances are not available or (ii) the interest rate applicable to a Type of Advance does not accurately reflect the cost of making or maintaining such Advance, then the Administrative Agent shall suspend the availability of the affected Type of Advance and require any Eurodollar Rate Advances of the affected Type of Advance to be repaid or to be converted (in accordance with the terms of this Agreement) to any Type of Advance which is not affected and is then available under this Agreement. SECTION 3.04. Funding Indemnification. If any payment of a Eurodollar Rate 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 Eurodollar Rate Advance is not made on the date specified by the Borrower for any reason other than default by the Lenders, the Borrower will indemnify each Lender for any loss or cost incurred by it resulting therefrom, including, without limitation, any loss or cost in liquidating or employing deposits acquired to fund or maintain the Eurodollar Rate Advance. SECTION 3.05. Lender Statements Survival of Indemnity. To the extent reasonably possible, each Lender shall designate an alternate Lending Installation with respect to its Eurodollar Rate Loans to reduce any liability of the Borrower to such Lender under Sections 63 3.01 and 3.02 or to avoid the unavailability of a Type of Advance under Section 3.03, so long as such designation is not disadvantageous to such Lender. Each Lender shall deliver a written statement of such Lender as to the amount due, if any, under Sections 3.01, 3.02 or 3.04. Such written statement shall set forth in reasonable detail the calculations upon which such Lender determined such amount and shall be final, conclusive and binding on the Borrower in the absence of manifest error. Determination of amounts payable under such Sections in connection with a Eurodollar Rate Loan shall be calculated as though each Lender funded its Eurodollar Rate Loan through the purchase of a deposit of the type and maturity corresponding to the deposit used as a reference in determining the Eurodollar Rate 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 on demand after receipt by the Borrower of the written statement. The obligations of the Borrower under Sections 3.01, 3.02 and 3.04 shall survive payment of the Obligations and termination of this Agreement. ARTICLE IV REPRESENTATIONS AND WARRANTIES The Company represents and warrants and, with respect to itself and its Subsidiaries, the Co-Borrower represents and warrants, to each of the Lenders that: SECTION 4.01. Organization, Powers, etc. Each of the Loan Parties (a) is a corporation, limited partnership or limited liability company (as applicable) duly organized or formed, validly existing and in good standing under laws of its state of incorporation or formation, (b) has the power and authority to own or hold under lease the properties it purports to own or hold under lease and to carry on its business as now conducted, (c) is duly qualified or licensed to transact business in every jurisdiction in which such qualification or licensing is necessary to enable it to enforce all of its material contracts and other material rights and to avoid any material penalty or forfeiture. SECTION 4.02. Authorization and Validity of this Agreement, etc. Each of the Loan Parties has the power and authority to execute and deliver this Agreement, the Notes, the Guaranties and the other Loan Documents to which it is a party and to perform all its obligations hereunder and thereunder. The execution and delivery by the Company and (if applicable) the Co-Borrower of this Agreement and the Notes and by each of the Loan Parties of the Guaranties, the Lennar Guaranty (if applicable) and the other Loan Documents to which it is a party and its performance of its obligations hereunder and thereunder and any and all actions taken by the Loan Parties (a) have been duly authorized by all requisite corporate action or other applicable limited partnership or limited liability company action, (b) will not violate or be in conflict with (i) any provisions of law (including, without limitation, any applicable usury or similar law), (ii) any order, rule, regulation, writ, judgment, injunction, decree or award of any court or other agency of government, or (iii) any provision of its certificate of incorporation or by-laws, certificate of limited partnership or limited partnership agreement, or articles or certificate of formation or operating agreement (as applicable), (c) will not violate, be in conflict with, result in a breach of or constitute (with or without the giving of notice or the passage of time or both) a default under any material indenture, agreement or other instrument to which such Loan Party is a party or by which it or any of its properties or assets is or may be bound (including without 64 limitation any indentures pursuant to which any debt Securities of the Company or the Existing U.S. Home Debt Issues were issued), and (d) except as otherwise contemplated by this Agreement, will not result in the creation or imposition of any lien, charge or encumbrance upon, or any security interest in, any of its properties or assets. Each of this Agreement, the Notes, the Guaranties and the other applicable Loan Documents has been duly executed and delivered by the applicable Loan Parties. The Loan Documents constitute legal, valid and binding obligations of the applicable Loan Parties enforceable against the applicable Loan Parties in accordance with their terms, except as enforceability may be limited by bankruptcy, insolvency or similar laws affecting the enforcement of creditors' rights generally. SECTION 4.03. Financial Statements. (a) Borrower Financial Statements. The Company heretofore has provided to the Lenders (i) the consolidated balance sheet of the Company and its Subsidiaries (excluding U.S. Home and its Subsidiaries) as of November 30, 1999, and the related consolidated statements of earnings, stockholders' equity and cash flows for the 12-month period ended on that date, audited and reported upon by Deloitte & Touche, independent certified public accountants (the "Company Audited Financial Statements"), and (ii) the consolidated balance sheet of the Company as of February 29, 2000, and the consolidated statements of earnings and cash flows of the Company and its Subsidiaries (excluding U.S. Home and its Subsidiaries) for the three-month period ended on that date, unaudited but certified to be true and accurate (subject to normal year-end audit adjustments) by the President and an Authorized Financial Officer of the Company (the "Company Unaudited Financial Statements"). Those financial statements and reports (subject, in the case of the Company Unaudited Financial Statements, to normal year-end audit adjustments), and the related notes and schedules (if any), (a) were prepared in accordance with GAAP consistently applied throughout the period covered thereby, (b) present fairly the consolidated financial condition of the Company and its Subsidiaries (excluding U.S. Home and its Subsidiaries) as of the date thereof, (c) show all material liabilities, direct or contingent, of the Company and its Subsidiaries (excluding U.S. Home and its Subsidiaries) as of that date (including, without limitation, liabilities for taxes and material commitments), and (d) present fairly the consolidated shareholders' equity, results of operations and cash flows of the Company and its Subsidiaries (excluding U.S. Home and its Subsidiaries) at the date and for the period covered thereby. (b) U.S. Home Financial Statements. The Company heretofore has provided to the Lenders (i) the consolidated balance sheet of U.S. Home and its Subsidiaries as of December 31, 1999, and the related consolidated statements of earnings, stockholders' equity and cash flows for the year then ended, audited and reported upon by Arthur Andersen & Company, independent certified public accountants (the "U.S. Home Audited Financial Statements"), and (ii) the consolidated balance sheet of U.S. Home and its Subsidiaries as of March 31, 2000, and the consolidated statement of earnings and cash flows of U.S. Home and its Subsidiaries for the three-month period ended on that date, unaudited but certified to be true and accurate (subject to normal year-end audit adjustments) by the President and the Chief Financial Officer of U.S. Home (the "U.S. Home Unaudited Financial Statements"). Those financial statements and reports (subject, in the case of the U.S. Home Unaudited Financial Statements, to normal year-end audit adjustments), and the related notes and schedules (if any), (a) were prepared in accordance with GAAP consistently applied throughout the period covered thereby, (b) present 65 fairly the consolidated financial condition of U.S. Home and its Subsidiaries as of the date thereof, (c) show all material liabilities, direct or contingent, of U.S. Home and its Subsidiaries as of that date (including, without limitation, liabilities for taxes and material commitments), and (d) present fairly the consolidated stockholders' equity, results of operations and cash flows of U.S. Home and its Subsidiaries at the date and for the period covered thereby. (c) Pro Forma Financial Statements. The Company heretofore has provided to the Lenders the following pro forma financial statements (collectively, the "Pro Forma Financial Statements"), which are included in the Registration Statement on Form S-4 of the Company containing the Prospectus/Proxy Statement sent to the shareholders of the Company and U.S. Home in connection with the Merger: (i) the pro forma consolidated balance sheets of the Company and its Subsidiaries and U.S. Home and its Subsidiaries as of November 30 and December 31, 1999, and the related pro forma consolidated statements of earnings for the fiscal years then ended, and (ii) the pro forma consolidated balance sheets of the Company and its Subsidiaries and U.S. Home and its Subsidiaries as of February 29, 2000 and March 31, 2000, respectively, and the pro forma consolidated statements of earnings of the Company and its Subsidiaries and U.S. Home and its Subsidiaries for the three-month period ended on those dates. The Pro Forma Financial Statements have been prepared, in all material respects in accordance with the applicable requirements of the rules and regulations promulgated under the Securities Exchange Act of 1934, as amended, and the pro forma adjustments have been properly applied on the bases described therein and the assumptions used in the preparation of the Pro Forma Financial Information are reasonable and appropriate to give effect to the transactions or circumstances referred to therein. SECTION 4.04. No Material Adverse Effect. Since the dates of the Company Audited Financial Statements and U.S. Home Audited Financial Statements, no Event has occurred which has had or could reasonably be expected to have a Material Adverse Effect. There are no material unrealized or expected losses in connection with loans, advances and other commitments of the Loan Parties. SECTION 4.05. Title to Properties. Schedule III hereto contains a complete and accurate list of all Real Estate owned by the Loan Parties (identifying the Loan Party that is the owner thereof), except those properties (i) acquired or disposed of after November 30, 1999 (or December 31, 1999 in the case of Real Estate owned by U.S. Home or any of its Subsidiaries) or (ii) the loss or forfeiture of which individually or in the aggregate would not have a Material Adverse Effect. Each of the Loan Parties has good and marketable fee title, or title insurable by a reputable and nationally recognized title insurance company, to the Real Estate owned by it listed in Schedule III hereto, and to all the other assets owned by it and either reflected on the balance sheet and related notes and schedules most recently delivered by the Company to the Lenders (the "Recent Balance Sheet") or acquired by it after the date of that balance sheet and prior to the date hereof, except (x) for those properties and assets which have been disposed of since the date of the Recent Balance Sheet or which no longer are used or useful in the conduct of its business and (y) that good and marketable fee title, or title insurable by a reputable and nationally recognized title insurance company, to certain of the properties located in Arizona listed in Schedule III is held by the Persons and in the manner described in Schedule III hereto. All such Real Estate and other assets owned by the Loan Parties including the properties referred to in clause (y) above, are free and clear of all Mortgages, Liens, charges and other 66 encumbrances (other than Permitted Liens), except (i) in the case of Real Estate, as reflected on title insurance policies insuring the interest of the applicable Loan Party in the Real Estate or in title insurance binders issued with respect to the Real Estate (some of which title insurance binders have expired but were valid at the time of acquisition of the relevant Real Estate), and (ii) as reflected in the Recent Balance Sheet, and none of those Mortgages, Liens, charges or other encumbrances, individually or in the aggregate, prevents or has a Material Adverse Effect upon the use by the Loan Parties of any of their respective properties or assets as currently conducted or as planned for the future. SECTION 4.06. Litigation. There is no action, suit, proceeding, arbitration, inquiry or investigation (whether or not purportedly on behalf of the Company or any of its Subsidiaries) pending or, to the best knowledge of the Company or the Co-Borrower, threatened against or affecting the Company or any of the Subsidiaries which could reasonably be expected to have a Material Adverse Effect. Neither the Company nor any of its Subsidiaries is in default with respect to any final judgment, writ, injunction, decree, rule or regulation of any court or federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, which default would or could have a Material Adverse Effect. Neither the Company nor any of the other Loan Parties has any material contingent obligations not provided for or disclosed in the pro forma consolidated balance sheet as of November 30 and December 31, 1999 that are included in the Pro Forma Financial Statements or in any financial statements delivered hereafter in accordance with this Agreement. SECTION 4.07. Payment of Taxes. There have been filed all federal, state and local tax returns with respect to the operations of the Loan Parties which are required to be filed, except where extensions of time to make those filings have been granted by the appropriate taxing authorities and the extensions have not expired. The Loan Parties have paid or caused to be paid to the appropriate taxing authorities all taxes as shown on those returns and on any assessment received by any of them, to the extent that those taxes have become due, except for taxes the failure to pay which do not violate the provisions of Section 6.03 hereof. The Internal Revenue Service has completed an examination of the Company's federal income tax returns for the years ended 1980 through 1995, and the Company has paid all additional taxes, assessments, interest and penalties with respect to such years. The Internal Revenue Service has completed an examination of U.S. Home's federal income tax returns for the year ended 1995, and U.S. Home has paid all additional taxes, assessments, interest and penalties with respect to such years. SECTION 4.08. Agreements. Neither the Company nor any Subsidiary is a party to any agreement or instrument or is subject to any charter or other restriction that could reasonably be expected to have a Material Adverse Effect on it. Neither the Company nor any Subsidiary is in material default in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any material agreement or instrument to which it is a party, including, without limitation, the Merger Documents, and consummation of the transactions contemplated hereby and in the other Loan Documents will not cause any Loan Party to be in material default thereof. SECTION 4.09. Foreign Direct Investment Regulations. Neither the making of the Advances nor the repayment thereof nor any other transaction contemplated hereby will involve or constitute a violation by any Loan Party of any provision of the Foreign Direct Investment 67 Regulations of the United States Department of Commerce or of any license, ruling, order, or direction of the Secretary of Commerce thereunder. SECTION 4.10. Federal Reserve Regulations. (a) Regulations U and X. Neither the Company nor any other Loan Party is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying any margin stock (within the meaning of Regulation U or Regulation X of the Board of Governors of the Federal Reserve System of the United States). Margin stock (as defined in Regulation U) constitutes less than 25% of those assets of the Company and its Subsidiaries which are subject to any limitation on sale, pledge, or other restriction hereunder. (b) Use of Proceeds. No part of the proceeds of any of the Advances will be used to purchase or carry any such margin stock or to extend credit to others for the purpose of purchasing or carrying any such margin stock. If requested by the Lenders, the Company shall furnish to the Lenders a statement in conformity with the requirements of Federal Reserve Form U-1 referred to in Regulation U of said Board of Governors. No part of the proceeds of the Advances will be used for any purpose that violates, or which is inconsistent with, the provisions of Regulation X of said Board of Governors. SECTION 4.11. Consents, etc. Except as set forth on Schedule V hereto, no order, license, consent, approval, authorization of, or registration, declaration, recording or filing (except for the filing of a Current Report on Form 8-K, and a Quarterly Report on Form 10-Q, in each case with the Securities and Exchange Commission) with, or validation of, or exemption by, any governmental or public authority (whether federal, state or local, domestic or foreign) or any subdivision thereof is required in connection with, or as a condition precedent to, the due and valid execution, delivery and performance by any Loan Party of this Agreement, the Notes, the Guaranties or the other Loan Documents, or the legality, validity, binding effect or enforceability of any of the respective terms, provisions or conditions thereof. To the extent that any franchises, licenses, certificates, authorizations, approvals or consents from any federal, state or local (domestic or foreign) government, commission, bureau or agency are required for the acquisition, ownership, operation or maintenance by any Loan Party of properties now owned, operated or maintained by any of them, those franchises, licenses, certificates, authorizations, approvals and consents have been validly granted, are in full force and effect and constitute valid and sufficient authorization therefor. SECTION 4.12. Compliance with Applicable Laws. The Company and its Subsidiaries are in compliance with and conform to all statutes, laws, ordinances, rules, regulations, orders, restrictions and all other legal requirements of all domestic or foreign governments or any instrumentality thereof having jurisdiction over the conduct of their respective businesses or the ownership of their respective properties, the violation of which would have a Material Adverse Effect on it, including, without limitation, regulations of the Board of Governors of the Federal Reserve System, the Federal Interstate Land Sales Full Disclosure Act, the Florida Land Sales Act or any comparable statute in any other applicable jurisdiction. Neither the Company nor any Subsidiary has received any notice to the effect that its operations are not in material compliance with any of the requirements of applicable 68 Environmental Laws or any applicable federal, state and local health and safety statutes and regulations or the subject of any federal or state investigation evaluating whether any remedial action is needed to respond to a release of any Hazardous Substances into the environment, which non-compliance or remedial action could reasonably be expected to have a Material Adverse Effect. SECTION 4.13. Relationship of the Loan Parties. The Loan Parties are engaged as an integrated group in the business of owning, developing and selling Real Estate and of providing the required services, credit and other facilities for those integrated operations. The Loan Parties require financing on such a basis that funds can be made available from time to time to such entities, to the extent required for the continued successful operation of their integrated operations. The Advances to be made to the Company and, if applicable, the Co-Borrower under this Agreement are for the purpose of financing the Merger and the integrated operations of the Loan Parties, and the Loan Parties expect to derive benefit, directly or indirectly, from the Advances, both individually and as a member of the integrated group, since the financial success of the operations of the Loan Parties is dependent upon the continued successful performance of the integrated group as a whole. SECTION 4.14. Subsidiaries; Joint Ventures. Schedule VI hereto contains a complete and accurate list of (a) all Subsidiaries of the Company, including, with respect to each Subsidiary, (i) its state of incorporation, (ii) all jurisdictions (if any) in which it is qualified as a foreign corporation, (iii) the number of shares of its Capital Stock outstanding, and (iv) the number and percentage of those shares owned by the Company and/or by any other Subsidiary, and (b) each Joint Venture, including, with respect to each such Joint Venture, (i) its jurisdiction of organization, (ii) all other jurisdictions in which it is qualified as a foreign entity and (c) all Persons other than the Company that are parties thereto. All the outstanding shares of Capital Stock of each Subsidiary of the Company are validly issued, fully paid and nonassessable, except as otherwise provided by state wage claim laws of general applicability. All of the outstanding shares of Capital Stock of each Subsidiary owned by the Company or another Subsidiary as specified in Schedule VI are owned free and clear of all Liens, security interests, equity or other beneficial interests, charges and encumbrances of any kind whatsoever, except for Permitted Liens. Neither the Company nor any other Loan Party owns of record or beneficially any shares of the Capital Stock or other equity interests of any Person that is not a Guarantor, except (w) the Mortgage Banking Subsidiaries, (x) until the Co-Borrower Termination Conditions are satisfied, the Co-Borrower and Co-Borrower Subsidiaries, (y) Joint Ventures in which such Loan Party is permitted to invest pursuant to this Agreement and (z) the Subsidiaries listed in Schedule VII hereto. Pursuant to the Pledge Agreements, the Company and its Subsidiaries have pledged to the collateral trustee referred to in Section 8.03(a), and such collateral trustee has a perfected first priority security interest in, all of the Capital Stock or other equity interests in each Significant Subsidiary (except, unless and until the Co-Borrower Termination Conditions are satisfied, any Co-Borrower Subsidiary that is a Significant Subsidiary). SECTION 4.15. ERISA. Neither the Company nor any other Loan Party is executing or delivering any of the Loan Documents or entering into any of the transactions contemplated hereby, directly or indirectly, in connection with any arrangement or understanding in any respect involving any "employee benefit plan" with respect to which the Company or any other Loan Party is a "party in interest" within the meaning of the Employee Retirement Income 69 Security Act of 1974, or a "disqualified person", within the meaning of the Internal Revenue Code 1986, as amended. No Unfunded Liabilities exist with respect to any Single Employer Plans. 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 the Company nor any other Loan Party nor any other members of the Controlled Group has withdrawn from any Plan or initiated steps to do so, and no steps have been taken to reorganize or terminate any Plan. SECTION 4.16. Investment Company Act. Neither the Company nor any Subsidiary of the Company is an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. SECTION 4.17. Public Utility Holding Company Act. Neither the Company nor any Subsidiary of the Company 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. SECTION 4.18. Subordinated Debt. The Obligations constitute senior indebtedness which is entitled to the benefits of the subordination provisions of all outstanding Subordinated Debt, which outstanding Subordinated Debt as of the Closing Date is identified in Schedule VIII. SECTION 4.19. Post-Retirement Benefits. The present value of the expected cost of post-retirement medical and insurance benefits payable by the Company and its Subsidiaries to its employees and former employees, as estimated by the Company in accordance with procedures and assumptions deemed reasonable by the Administrative Agent, does not exceed $5,000,000. SECTION 4.20. Insurance. The certificate signed by an Authorized Financial Officer of the Company, that attests to the existence and adequacy of, and summarizes, the property, casualty, and liability insurance programs carried by the Loan Parties and that has been furnished by the Company to the Administrative Agent and the Lenders, is complete and accurate. This summary includes the insurer's or insurers' name(s), policy number(s), expiration date(s), amount(s) of coverage, type(s) of coverage, exclusion(s), and deductibles. This summary also includes similar information, and describes any reserves, relating to any self-insurance program that is in effect. SECTION 4.21. Environmental Representations. To the best of the Company's and the Co-Borrower's knowledge and belief, no Hazardous Substances in material violation of any Environmental Laws are present upon any of the Real Estate owned by the Company or any Subsidiary or any Real Estate which is encumbered by any Mortgage held by the Company or any Subsidiary, and neither the Company nor any Subsidiary has received any notice to the effect that any of the Real Estate owned by the Company or any Subsidiary or any of their respective operations are not in compliance with any of the requirements of applicable Environmental Laws or are the subject of any federal or state investigation evaluating whether any remedial action is needed to respond to a release of any Hazardous Substance into the environment which non-compliance or remedial action could be reasonably expected to have a Material Adverse Effect. 70 SECTION 4.22. Merger. The Company has furnished to the Administrative Agent true and complete copies of all executed Merger Documents, as amended to the Agreement Date. The Merger has been consummated and has become effective on the Closing Date hereunder in accordance with the terms of the Merger Documents. The execution and delivery of the Merger Documents by the Persons party thereto, the consummation of the Merger, and all actions taken by such Persons in connection therewith (a) have been duly authorized by all requisite corporate action, (b) do not violate or conflict with (i) any provisions of law, (ii) any order, rule, regulation, writ, judgment, injunction, decree or aware of any court or other agency of government, or (iii) any provision of any such Person's certificate of incorporation or by-laws, (c) do not violate, conflict with, result in a breach of or constitute (with or without the giving of notice or the passage of time or both) a default under any material indenture, agreement or other instrument to which such Person is a party or by which it or any of its properties or assets is or may be bound (including without limitation any indentures pursuant to which any debt Securities of the Company or the Existing U.S. Home Debt Issues were issued) and (d) will not result in the creation or imposition of any Lien, charge or encumbrance upon, or any security interest in, any of its properties or assets. SECTION 4.23. Minimum Adjusted Tangible Net Worth. On the Agreement Date, after giving effect to the Merger, Adjusted Tangible Net Worth is in excess of $928,000.000. SECTION 4.24. Co-Borrower Termination Conditions. Pursuant to the Existing U.S. Home Debt Tender Offer, Len Acquisition has accepted for purchase over 50% of each of the Existing U.S. Home Debt Issues, supplemental indentures that remove from each of the Existing U.S. Home Debt Issues any restrictive covenants described in clause (a)(ii) of the definition of "Co-Borrower Termination Conditions" have been fully executed and delivered on or before the Agreement Date and are and remain in full force and effect, and the Co-Borrower Termination Conditions have been satisfied. SECTION 4.25. No Misrepresentation. No representation or warranty by any Loan Party contained herein or made hereunder or in the Merger Documents and no certificate, schedule, exhibit, report or other document provided or to be provided by any Loan Party in connection with the transactions contemplated hereby or thereby (including, without limitation, the negotiation of and compliance with the Loan Documents) or in connection with the Merger contains or will contain a misstatement of a material fact or omit to state a material fact required to be stated therein in order to make the statements contained therein, in the light of the circumstances under which made, not misleading. ARTICLE V CONDITIONS PRECEDENT; TERMINATION SECTION 5.01. Conditions of Effectiveness. This Agreement shall become effective when the Administrative Agent shall have received counterparts of this Agreement executed by the Company and (unless the Co-Borrower Termination Conditions have been satisfied as of the Closing Date) the Co-Borrower and by each of the Lenders; provided, however, that the Lenders shall not be required to make any Advance hereunder nor shall the Issuer be required to issue any Facility Letter of Credit hereunder, unless and until (i) the 71 Administrative Agent shall have received the fees provided to be paid pursuant to the Fee Letters and (ii) the Administrative Agent shall have received each of the following items (with all documents required below, except as otherwise specified, to be dated the Closing Date, which date shall be the same for all such documents, and each of such documents to be in form and substance satisfactory to the Administrative Agent, be fully and properly executed by all parties thereto, and (except for the Notes) to be in sufficient copies for each Lender), and the conditions specified below shall have been satisfied: (a) A Facility A Note payable to the order of the Administrative Agent and a Facility A Note payable to the order of each Facility A Lender that shall have requested a Facility A Note in accordance with this Agreement; the Swing Line Note payable to the order of the Swing Line Bank; a Facility B Revolver Note and a Facility B Term Note payable to the order of the Administrative Agent and a Facility B Revolver Note and Facility B Term Note payable to the order of each of the Facility B Lenders that shall have requested such Notes in accordance with this Agreement; and (except as otherwise provided in subsection (s) below), a Facility C Note payable to the order of the Administrative Agent and a Facility C Note payable to the order of each of the Facility C Lenders that shall have requested a Facility C Note in accordance with this Agreement. (b) A Guaranty from each Subsidiary of the Company, except (i) for the Mortgage Banking Subsidiaries and the Subsidiaries listed in Schedule VII hereto and (ii) as otherwise provided in subsection (s) below. (c) The Pledge Agreements executed by the Company and each of the Guarantors that owns Capital Stock or other equity interests in any Significant Subsidiary and such other Subsidiaries as may be required pursuant to Section 8.01(a)(ii), pledging the Capital Stock of such Subsidiaries (including, but only if the Co-Borrower Termination Conditions are satisfied as of the Closing Date, the Co-Borrower Subsidiaries that are Significant Subsidiaries) together with such stock certificates and other documents provided to be delivered pursuant to the Pledge Agreements and the Collateral Trust Agreement provided for in Section 8.03(a). (d) The favorable written opinions addressed to the Lenders, and in form and substance satisfactory to the Administrative Agent, from (i) Bilzin Sumberg Dunn, Price & Axelrod, LLP, counsel to the Company, (A) confirming the accuracy of the representations and warranties set forth in Sections 4.01 (excluding clause (b) thereof, and limited, in the case of clause (a) thereof, to the jurisdictions listed under the heading "Where Qualified" in Schedule VI hereto), 4.02, 4.06, 4.11, 4.12, 4.24, the second sentence of Section 4.08 hereof, the last sentence of Section 4.14, and the second and third sentences of Section 4.22 hereof (which opinion, as to the representations set forth in clauses (b)(ii), (c) and (d) of Sections 4.02, 4.06, 4.11, 4.12, the second sentence of Section 4.08, and clauses (b)(ii), (c) and (d) of Section 4.22 hereof, may be to the best knowledge of such counsel), and may in its entirety be limited to Florida, Arizona, Delaware, Texas, California, Nevada, New York, Colorado and United States federal law); (B) to the effect that this Agreement, the Notes, the Guaranties and the other Loan Documents have been duly authorized, executed and delivered by the applicable Loan Parties; (C) that no authorization, consent, approval, license or exemption of, or filing nor registration with or other action by any New York, United States federal or Delaware governmental department, commission, board, bureau, regulatory body, agency or instrumentality or to the best knowledge 72 of such counsel, any court is or will be necessary for the execution, delivery and performance by any applicable Loan Party of this Agreement, the Notes, the Guaranties and the other Loan Documents (as applicable); and (D) this Agreement, the Notes, the Guaranties and the other Loan Documents constitute the legal, valid and binding obligations of the applicable Loan Parties, enforceable in accordance with their respective terms, except as the rights and remedies of the Lenders thereunder may be limited by (1) applicable bankruptcy, reorganization, insolvency and other laws effecting creditors' rights generally from time to time in effect, (2) the exercise of the discretionary powers of the court before which any proceeding seeking equitable remedies (including, without limitation, specific performance and injunctive relief) may be brought, and (3) such other qualifications expressed in the opinion, provided that such qualifications are acceptable to Administrative Agent, and (ii) from Clifford Chance Rogers & Wells, counsel for the Company, that neither the execution and delivery of the Merger Agreement by the Persons party thereto, nor their consummation of the Merger, nor the execution and delivery by the Company and (if applicable) the Co-Borrower of this Agreement and the Notes, and by each of the Loan Parties of the Guaranties, the Lennar Guaranty (if applicable) and the other Loan Documents to which such Loan Party is a party nor the performance by the Loan Parties of their obligations hereunder or thereunder violate, conflict with or result in a breach of or constitute (with or without the giving of notice or the passage of time or both) a default under any indenture pursuant to which any debt Securities of the Company or the Existing U.S. Home Debt Issues were issued. The opinion provided for in clause (i) above may rely on, or, if to the extent approved by the Administrative Agent, there shall be furnished to the Administrative Agent in lieu of (but solely with respect to the matters described below) the opinion described in clause (i) above, the following opinions, each of which shall also be addressed to the Lenders and in form and substance satisfactory to the Administrative Agent: the opinion of Fennemore, Craig as to matters of law of the State of Arizona, the opinion of Bellinger & DeWolf, P.C. as to matters of law of the State of Texas, the opinion of Palmieri, Tyler, Wiener, Wilhelm & Waldron LLP as to matters of law of the State of California, the opinion of Brownstein, Hyatt & Farber, P.C., as to matters of law of the State of Colorado, and the opinion (as approved by the Administrative Agent) of Kaye Scholer Fierman Hays & Handler LLP, counsel to U.S. Home, or Steven Lane, Executive Director-Legal of U.S. Home (or both), with respect to matters relating to U.S. Home and its Subsidiaries (except that Subsidiaries of U.S. Home incorporated or doing business in the State of Colorado shall be addressed in the opinion of Colorado counsel). The Company hereby instructs such counsel to prepare their opinions and deliver such opinions to the Lenders for the benefit of the Lenders, and such opinions shall contain a statement to such effect. (e) The following supporting documents with respect to each Loan Party: (i) a copy of its certificate or articles of incorporation or formation or certificate of limited partnership (as applicable) certified as of a date reasonably close to the Closing Date (except that, with respect to the Company and Len Acquisition, such certificate shall be as of the Closing Date) to be a true and accurate copy by the Secretary of State of its state of incorporation or formation; (ii) a certificate of that Secretary of State, dated as of a date reasonably close to the Closing Date (except that, with respect to the Company and Len Acquisition, such certificate shall be as of the Closing Date), as to its existence and (if available) good standing; (iii) a certificate of the Secretary of State of each jurisdiction, other than its state of incorporation or formation, in which it does business, as to its qualification as a foreign corporation, limited partnership or limited liability company; (iv) a copy of its by-laws, partnership agreement or operating agreement (as 73 applicable), certified by its secretary or assistant secretary, general partner, manager or other appropriate Person (as applicable) to be a true and accurate copy of its by-laws, partnership agreement or operating agreement (as applicable) in effect on the Closing Date; (v) a certificate of its secretary or assistant secretary, general partner, manager or other appropriate Person (as applicable), as to the incumbency and signatures of its officers or other Persons who have executed any documents on behalf of such Loan Party in connection with the transactions contemplated by this Agreement; (vi) a copy of resolutions of its Board of Directors, certified by its secretary or assistant secretary to be a true and accurate copy of resolutions duly adopted by such Board of Directors, or other appropriate resolutions or consents of, its partners or members certified by its general partner or manager (as applicable) to be true and correct copies thereof duly adopted, approved or otherwise delivered by its partners or members (to the extent necessary and applicable), each of which is certified to be in full force and effect on the Closing Date, authorizing the execution and delivery by it of this Agreement, the Notes, the Guaranties and the other Loan Documents to which it is a party and the performance by it of all its obligations thereunder; and (vii) such additional supporting documents and other information with respect to its operations and affairs as the Administrative Agent may reasonably request. (f) Certificates signed by a duly authorized officer of the Company and a duly authorized officer of the Co-Borrower (as applicable) stating that: (i) the representations and warranties of the Company and the Co-Borrower (as applicable) contained in Article IV hereof are correct and accurate on and as of the Closing Date as though made on and as of the Closing Date and (ii) no event has occurred and is continuing which constitutes an Event of Default or Unmatured Default hereunder. (g) The Borrowing Base report effective as of April 30, 2000, as required pursuant to Section 6.04(l), prepared on a pro forma basis as if the Merger had occurred on such date. (h) The Intercreditor Agreement duly executed by all parties thereto, provided, however, that, if the lenders to UAMC have not executed the Intercreditor Agreement as of the Closing Date, the Intercreditor Agreement shall be delivered not later than 30 days after the Closing Date. (i) Evidence satisfactory to the Administrative Agent and the Syndication Agent that there shall not have occurred any changes in the consolidated financial condition or results of operations or cash flows of the Loan Parties from that reflected in the Pro Forma Financial Statements which has or reasonably could be expected to have, in the judgment of the Administrative Agent and Syndication Agent, a Material Adverse Effect. (j) Evidence satisfactory to the Administrative Agent and the Syndication Agent that, simultaneously with the initial Advance hereunder, the Merger and all other transactions contemplated by the Merger Documents to take place on the consummation of the Merger shall have occurred and been lawfully consummated to the satisfaction of the Administrative Agent and the Syndication Agent. (k) Evidence satisfactory to the Administrative Agent and the Syndication Agent that the Borrower shall not have entered into or agreed to any amendment or modification of the Merger Agreement, or waived or released any material rights or benefits of the Company or Len 74 Acquisition thereunder, in each case without the prior written consent of the Administrative Agent or the Required Lenders. (l) A certificate signed by an Authorized Financial Officer of the Company showing in reasonable detail the calculations used to determine the Leverage Ratio for the Pricing Grid. (m) Pro forma consolidated balance sheet of the Company and its Subsidiaries effective as of April 30, 2000, and assuming all of the following transactions had occurred as of such dates: the effectiveness of the Merger, the effectiveness of this Agreement, and the funding of the initial Advances hereunder. (n) A report, in reasonable detail and in form and substance satisfactory to the Administrative Agent, with calculations indicating that the Loan Parties, on a pro forma basis effective as of April 30, 2000 (including the accounts of U.S. Home effective as of April 30, 2000) would have been in compliance with the provisions of Article VII (if this Agreement had been in effect as of such dates), which calculations shall be based upon the Pro Forma Financial Statements after making the assumptions referred to in Section 5.01(m) above. (o) Evidence satisfactory to the Administrative Agent and the Syndication Agent that, simultaneously with the initial Advance hereunder, the Borrower shall have received proceeds of unsecured debt Securities or of the Bridge Loan in an amount equal to at least $300,000,000, all on terms and conditions satisfactory to the Administrative Agent and the Syndication Agent. (p) Evidence satisfactory to the Administrative Agent and the Syndication Agent that the $80,000,000 secured revolving credit facility of USHMC that matures September 30, 2001 shall remain available for borrowing by USHMC in that amount and any default or termination right that results or would result from the Merger shall have been waived by the holders of the Indebtedness thereunder or otherwise eliminated to the satisfaction of the Administrative Agent and Syndication Agent or alternatively the Administrative Agent and the Syndication Agent shall have received evidence satisfactory to them that such facility has been replaced with a non-recourse revolving credit facility of at least such amount and on terms and with lenders satisfactory to the Administrative Agent and Syndication Agent. (q) Evidence satisfactory to the Administrative Agent and the Syndication Agent that the $315,000,000 secured revolving credit facility of UAMC that matured April 28, 2000, has been extended or replaced in the amount of $225,000,000, on terms and with lenders satisfactory to the Administrative Agent and the Syndication Agent. (r) Evidence satisfactory to the Administrative Agent that, simultaneously with the initial Advance hereunder, all obligations of the Company and U.S. Home under the loan facilities described in Schedule IX hereto have been paid in full. (s) If the Co-Borrower Termination Conditions are not satisfied on or before the Closing Date, then there shall not be delivered as a condition under this Section 5.01 the Facility C Notes of the Company, Guaranties by the Co-Borrower Subsidiaries or Pledge Agreements with respect to any Capital Stock or other equity interests in the Co-Borrower Subsidiaries but there shall be delivered as a condition under this Section 5.01 all of the following: (i) a Co-Borrower Facility A Note payable to the order of the Administrative Agent and a Co-Borrower 75 Facility A Note payable to the order of each of the Facility A Lenders that shall have requested a Co-Borrower Facility A Note in accordance with this Agreement; (ii) a Co-Borrower Facility C Note payable to the order of the Administrative Agent and a Co-Borrower Facility C Note payable to the order of each of the Facility C Lenders that shall have requested a Co-Borrower Facility C Note in accordance with this Agreement; (iii) the Lennar Guaranty, (iv) pledge agreements (the "Co-Borrower Pledge Agreements") executed by the Co-Borrower and by each of the Co-Borrower Subsidiaries that holds Capital Stock or other equity interests in any other Co-Borrower Subsidiary pledging the Capital Stock and other equity interests in the Co-Borrower Subsidiaries as security for the Merger Loan, substantially in the form of Exhibit Q hereto, together with such stock certificates and other documents provided to be delivered pursuant to the Co-Borrower Pledge Agreements, and the Collateral Trust Agreement provided for in Section 8.03(b); (v) guaranties (the "Co-Borrower Guaranties") executed by the Co-Borrower Subsidiaries guarantying the Merger Loan, substantially in the form of Exhibit R hereto; (vi) without limitation of the conditions set forth in subsection (d) above, evidence satisfactory to the Administrative Agent and the Syndication Agent that the Co-Borrower's and Co-Borrower Subsidiaries' execution and delivery of the applicable Loan Documents and the performance of their obligations hereunder and thereunder do not and will not violate, conflict with, result in breach of or constitute a default under any indenture pursuant to which any debt Securities of the Company or the Existing U.S. Home Debt Issues were issued; and (vii) a report, satisfactory to the Administrative Agent and Syndication Agent in form and substance, setting forth the status of the satisfaction of the conditions set forth in clause (a) of the definition of "Co-Borrower Termination Conditions," including the outstanding amount of each of the Existing U.S. Home Debt Issues. (t) Such other documents as the Administrative Agent, the Syndication Agent or their counsel may reasonably request. SECTION 5.02. Conditions Precedent to All Advances and Facility Letters of Credit. (a) No Lender shall be required to make any Advance (including any Advance under Section 2.26(b) but excluding any other Advance that, after giving effect thereto and to the application of the proceeds thereof, does not increase the aggregate amount of outstanding Advances under the applicable Facility) and no Issuer shall be required to issue any Facility Letter of Credit, unless on the applicable Borrowing Date or Issuance Date: (i) the Administrative Agent shall have received notice of Borrower's request for the Advance as provided in Section 2.09(a) or Letter of Credit Request as provided in Section 2.21(a) and such other approvals, opinions or documents as the Administrative Agent may reasonably request; (ii) the representations and warranties of the Company and the Co-Borrower contained in Article IV hereof are true and correct as of such Borrowing Date or Issuance Date; provided, however, that for the purposes hereof, (A) from and after the date of delivery by the Company pursuant to Section 6.04(a) of the consolidated financial statements for the year ended November 30, 2000, the references in Section 4.03 to "Company Audited Financial Statements" shall be deemed to be references to the annual 76 audited financial statements most recently delivered by the Company pursuant to Section 6.04(a) as of the date of the request for a Advance or Letter of Credit Request and (B) from and after that date of delivery by the Company pursuant to Section 6.04(b) of its consolidated financial statements for the quarter ending May 31, 2000, the references in Section 4.03 to "Company Unaudited Financial Statements" shall be deemed to be references to the quarterly unaudited financial statements most recently delivered by the Company pursuant to Section 6.04(b) as of the date of that request for an Advance or Letter of Credit Request; (iii) All legal matters incident to the making of such Advance shall be satisfactory to the Lenders and their counsel; (iv) There exists no Event of Default or Unmatured Default; and (v) The making of the Advance or issuance of the Facility Letter of Credit will not result in any Event of Default or Unmatured Default. (b) Each Borrowing Notice with respect to each such Advance and each Letter of Credit Request shall constitute a representation and warranty by the Borrower that all of the conditions contained in this Section 5.02 have been satisfied. ARTICLE VI AFFIRMATIVE COVENANTS The Company and, with respect to itself and its Subsidiaries, the Co-Borrower, covenants and agrees that from the date hereof until payment in full of all the Obligations, termination of all Facility Letters of Credit and termination of all Commitments, unless the Required Lenders otherwise shall consent in writing as provided in Section 13.06 hereof, the Company and the Co-Borrower, will, and will cause each of their Subsidiaries to: SECTION 6.01. Existence, Properties, etc. Do or cause to be done all things or proceed with due diligence with any actions or courses of action which may be necessary to preserve and keep in full force and effect its existence under the laws of their respective states of incorporation or formation and all qualifications or licenses in jurisdictions in which such qualification or licensing is required for the conduct of its business or in which the Lenders shall request such qualification; provided, however, that nothing herein shall be deemed to prohibit a Loan Party from (a) merging into or consolidating with any other Loan Party; provided (i) the Company is the surviving entity in the case of a merger involving the Company and (ii) unless and until the Co-Borrower Termination Conditions are satisfied, no merger involving the Co-Borrower shall be permitted unless, at the time of such merger, the Co-Borrower shall furnish to the Administrative Agent evidence satisfactory to it (which shall include an opinion of the Co-Borrower's counsel satisfactory to the Administrative Agent in form and substance) that the consummation of such merger will not violate, be in conflict with, result in a breach of or constitute (with or without the giving of notice or the passage of time or both) a default under any material indenture, agreement or other instrument to which the Co-Borrower is a party or by which it or any of its properties or assets is or may be bound (including without limitation any 77 indentures pursuant to which the Existing U.S. Home Debt Issues were issued), or (b) declaring and paying dividends in complete liquidation. The Company and, with respect to itself and its Subsidiaries, the Co-Borrower, will, and will cause each Subsidiary to, carry on and conduct its business in substantially the same manner and in substantially the same fields of enterprise as it is presently conducted and maintain all requisite authority to conduct its business in each jurisdiction in which its business is conducted. The primary business of the Company and its Subsidiaries shall at all times be the acquisition, development and sale of real estate assets. SECTION 6.02. Notice. Give prompt written notice to the Administrative Agent of (a) any proceeding instituted by or against the Company or any of its Subsidiaries in any federal or state court or before any commission or other regulatory body, federal, state or local, or any such proceedings threatened against the Company or any Subsidiary in writing by any federal, state or other governmental agency, which, if adversely determined, could reasonably be expected to have a Material Adverse Effect on the any Loan Party, and (b) any other Event which could reasonably be expected to lead to or result in a Material Adverse Effect on any Loan Party, or which, with or without the giving of notice or the passage of time or both, would constitute an Event of Default or a default under any material agreement other than this Agreement to which any Loan Party is a party or by which any of its properties or assets is or may be bound. SECTION 6.03. Payments of Debts, Taxes, etc. Pay all its debts and perform all its obligations promptly and in accordance with the respective terms thereof, and pay and discharge or cause to be paid and discharged promptly all taxes, assessments and governmental charges or levies imposed upon any Loan Party or upon any of their respective incomes or receipts or upon any of their respective properties before the same shall become in default or past due, as well as all lawful claims for labor, materials and supplies or otherwise which, if unpaid, might result in the imposition of a Lien or charge upon such properties or any part thereof; provided, however, that it shall not constitute a violation of the provisions of this Section 6.03 if any Loan Party shall fail to perform any such obligation or to pay any such debt (except for obligations for money borrowed), tax, assessment, governmental charge or levy or claim for labor, materials or supplies which is being contested in good faith, by proper proceedings diligently pursued, and as to which adequate reserves have been provided. SECTION 6.04. Accounts and Reports. Maintain a standard system of accounting established and administered in accordance with GAAP, and provide to the Lenders the following: (a) as soon as available and in any event within 120 days after the end of each fiscal year of the Company (commencing with the fiscal year ending November 30, 2000), a consolidated balance sheet of the Company and its Subsidiaries as of the end of that fiscal year and the related consolidated statements of earnings, stockholders' equity and cash flows for that fiscal year, all with accompanying notes and schedules, prepared in accordance with GAAP consistently applied and audited and reported upon by Deloitte & Touche or another firm of independent certified public accountants of similar recognized standing selected by the Company and acceptable to the Administrative Agent (such audit report shall be unqualified except for qualifications relating to changes in GAAP and required or approved by the Company's independent certified public accountants); 78 (b) as soon as available and in any event within 60 days after the end of each of the first three quarters, and within 120 days after the end of the fourth quarter, of each fiscal year of the Company (commencing with the quarter ending May 31, 2000), a consolidated balance sheet of the Company and its Subsidiaries as of the end of that quarter, and the related consolidated statement of earnings and cash flows of the Company and its Subsidiaries for the period from the beginning of the fiscal year to the end of that quarter, all prepared in accordance with GAAP consistently applied, unaudited but certified to be true and accurate, subject to normal year-end audit adjustments, by an Authorized Financial Officer of the Company; (c) within 60 days after the end of each of the first three quarters, and within 120 days after the end of the fourth quarter, of each fiscal year of the Company (commencing with the quarter ending May 31, 2000), (i) a consolidating balance sheet of the Loan Parties (in a form acceptable to the Administrative Agent) as of the end of that quarter and the related consolidating statement of earnings of the Loan Parties (in a form acceptable to the Administrative Agent) for the period from the beginning of the fiscal year to the end of that quarter, and (ii) a consolidating balance sheet of the Mortgage Banking Subsidiaries (in a form acceptable to the Administrative Agent) as of the end of that quarter and the related consolidating statement of earnings of the Mortgage Banking Subsidiaries (in a form acceptable to the Administrative Agent) for the period from the beginning of the fiscal year to the end of that quarter, all prepared in accordance with GAAP consistently applied, unaudited but certified to be true and accurate, subject to normal year-end audit adjustments, by an Authorized Financial Officer of the Company; (d) unless and until the Co-Borrower Termination Conditions are satisfied, as soon as available and in any event within 120 days after the end of each fiscal year of the Co-Borrower (commencing with the fiscal year ending December 31, 2000), a consolidated balance sheet of the Co-Borrower and its Subsidiaries as of the end of that fiscal year and the related consolidated statements of earnings, stockholders' equity and cash flows for that fiscal year, all with accompanying notes and schedules, prepared in accordance with GAAP consistently applied and audited and reported upon by Deloitte & Touche or another firm of independent certified public accountants of similar recognized standing selected by the Co-Borrower and acceptable to the Administrative Agent (such audit shall be unqualified except for qualifications relating to changes in GAAP and required or approved by the Co-Borrower's independent certified public accountants); (e) unless and until the Co-Borrower Termination Conditions are satisfied, as soon as available and in any event within 60 days after the end of each of the first three quarters, and within 120 days after the end of the fourth quarter, of each fiscal year of the Co-Borrower (commencing with the quarter ending June 30, 2000), a consolidated balance sheet of the Co-Borrower and its Subsidiaries as of the end of that quarter, and the related consolidated statement of earnings and cash flows of the Co-Borrower and its Subsidiaries for the period from the beginning of the fiscal year to the end of that quarter, all prepared in accordance with GAAP consistently applied, unaudited but certified to be true and accurate, subject to normal year-end audit adjustments, by an Authorized Financial Officer of the Company; (f) concurrently with the delivery of the financial statements described in subsections (a) and (d) above, a letter signed by that firm of independent certified public accountants to the 79 effect that, during the course of their examination, nothing came to their attention which caused them to believe that any Event of Default or Unmatured Default has occurred, or if such Event of Default or Unmatured Default has occurred, specifying the facts with respect thereto; and concurrently with the delivery of the financial statements described in subsections (b), (c) and (e) above, a certificate signed by the President or Executive Vice President and an Authorized Financial Officer of the Company to the effect that having read this Agreement, and based upon an examination which they deemed sufficient to enable them to make an informed statement, there does not exist any Event of Default or Unmatured Default, or if such Event of Default or Unmatured Default has occurred, specifying the facts with respect thereto; (g) within 30 days after the end of each calendar month (commencing with the month ending May 31, 2000), a report, in reasonable detail and in form and substance satisfactory to the Administrative Agent, setting forth, as of the end of the month, with respect to each Project owned by the Loan Parties, (i) the number of Housing Unit Closings, (ii) the number of Housing Units either completed or under construction, specifying the number thereof that are Completed Housing Units, (iii) the number of Housing Units Under Contract; (h) within 120 days after the end of each fiscal year of the Company (commencing with the fiscal year ending November 30, 2000), a schedule of all Real Estate owned by the Loan Parties in the form of Schedule III annexed hereto or as otherwise required by Administrative Agent, which schedule, in addition to providing all the categories of information specified in Schedule III, shall specify those properties the interest and carrying charges attributable to which are being deducted, for financial reporting purposes, for the fiscal year in which they are paid and shall contain all such other information as Administrative Agent shall require; (i) within 90 days after the beginning of each fiscal year of the Company, a projection, in reasonable detail and in form and substance satisfactory to the Administrative Agent, on a quarterly basis, of the cash flow and of the earnings of the Company and its Subsidiaries for that fiscal year and for the immediately succeeding fiscal year; (j) promptly upon becoming available, copies of all financial statements, reports, notices and proxy statements sent by the Company to its stockholders, and of all regular and periodic reports and other material (including copies of all registration statements and reports under the Securities Act of 1933, as amended (the "Securities Act"), and the Securities Exchange Act of 1934, as amended) filed by the Borrower with any securities exchange or any governmental authority or commission, except material filed with governmental authorities or commissions relating to the development of Real Estate in the ordinary course of the business of the Loan Parties and which does not relate to or disclose any Material Adverse Effect; (k) as soon as available and in any event within 90 days after the end of each of the first three quarters, and within 120 days after the end of the fourth quarter, of each fiscal year of each Joint Venture, a balance sheet of that Joint Venture as of the end of that quarter and a statement of earnings of that Joint Venture for the period from the beginning of the fiscal year to the end of that quarter, prepared in accordance with GAAP consistently applied, unaudited but certified to be true and accurate, subject (in the case of the financial statements delivered for the first three quarter of each fiscal year) to normal year-end adjustments, by an Authorized Financial Officer of the Company; 80 (l) within 60 days after the Closing Date and the end of each of the first three quarters, and within 90 days after the end of each fiscal year of the Company (commencing with the quarter ending May 31, 2000 and fiscal year ending November 30, 2000), a report, in reasonable detail and in form and substance satisfactory to the Administrative Agent, with calculations indicating that the Company and, if applicable, the Co-Borrower are in compliance, as of the Closing Date and as of the last day of such quarterly or annual period, as the case may be, with the provisions of Articles VII and VIII of this Agreement. Without limiting the generality of the foregoing, the Company shall provide to the Lenders (i) a report calculating the Borrowing Base in form and substance satisfactory to Administrative Agent, in which report the Company shall include a report of all accounts receivable from the sales of Housing Units included in the Borrowing Base, showing all such receivables which remain uncollected on the tenth (10th) day after the Closing Date or end of the quarter or fiscal year, as the case may be, provided, however, that the Company may, and upon request from the Administrative Agent shall, also deliver such report as of the end of any calendar month, and, (ii) a report containing the calculations necessary to indicate that the Company and, if applicable, the Co-Borrower are in compliance with the provisions of Sections 6.09 and 7.14, including a certification of the outstanding principal amount of all loans and advances made by any Loan Party to each of the applicable Mortgage Banking Subsidiaries, as the case may be, and that all such loans and advances are duly evidenced by the Mortgage Banking Subsidiaries Note in the possession of Administrative Agent. The reports furnished pursuant to this subsection (l) shall be certified to be true and correct by an Authorized Financial Officer of the Company and shall also contain a representation and warranty by the Company and, if applicable, the Co-Borrower that it is in full compliance with the provisions of Article VII of this Agreement; (m) within 60 days after the Closing Date and the end of each of the first three quarters, and within 90 days after the end of each fiscal year of the Company (commencing with the quarter ending May 31, 2000 and fiscal year ending November 30, 2000), a report, in reasonable detail and in form and substance satisfactory to the Administrative Agent, with calculations indicating whether the Company, as of the Closing Date and as of the last day of such quarterly or annual period, as the case may be, is in compliance with the Minimum Interest Coverage Ratio; (n) if requested by Administrative agent, 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, but the foregoing statement shall be required only if any Single Employer Plan shall exist; (o) as soon as possible and in any event within 10 days after the Company knows that any Reportable Event has occurred with respect to any Plan, a statement, signed by an Authorized Financial Officer of the Company, describing said Reportable Event and the action which the Company proposes to take with respect thereto; (p) as soon as possible and in any event within 10 days after receipt thereof by the Company or any of its Subsidiaries, a copy of (i) any notice or claim to the effect that the Company or any of its Subsidiaries is or may be liable to any Person as a result of the release by the Company, any of its Subsidiaries, or any other Person of any Hazardous Substance into the environment, and (ii) any notice alleging any violation of any Environmental law or any federal, 81 state or local health or safety law or regulation by the Company or any of its Subsidiaries, which, in either case, could reasonably be expected to have a Material Adverse Effect; (q) promptly upon the request of the Administrative Agent or any Lender, an accurate legal description with respect to any Real Estate included in the calculation of the Borrowing Base; (r) not more than 90 days after the making of any investment in any Significant Joint Venture or within thirty (30) days following the Administrative Agent's request in the case of any other Joint Venture, copies of each proposed shareholders' agreement, certificate or articles of incorporation, partnership agreement, joint venture agreement or similar organizational instrument or agreement, relating to the formation of each Joint Venture, and each material restatement, modification, amendment or supplement thereto; (s) concurrently with the quarterly financial statements described in subsection (b) above following the end of any quarter in which each new Subsidiary that is to become a Guarantor under Section 6.07 hereof was formed, the Company shall deliver to the Administrative Agent (i) a revised copy of Schedule VI to this Agreement, adding thereto the information with respect to such new Subsidiary required by Section 4.14 hereof; (ii) a Supplemental Guaranty, substantially in the form provided for in the Guaranty, executed by a duly authorized officer of such new Subsidiary; (iii) if such Subsidiary is a Significant Subsidiary, a Pledge Agreement (or amendment to a previously delivered Pledge Agreement in form satisfactory to the Administrative Agent) executed by a duly authorized officer of the Company or of such Guarantor that owns the Capital Stock or other equity interests in such Significant Subsidiary, together with such stock certificates and other documents provided to be delivered under the Pledge Agreement; (iv) a copy of the certificate of incorporation or other organizational document of such new Subsidiary, certified by the secretary of state or other official of the state or other jurisdiction of its incorporation; (v) a copy of the bylaws of such new Subsidiary, certified by the secretary or other appropriate officer or partner of such Subsidiary; and (vi) if requested by the Administrative Agent, an opinion of the Company's counsel in the form provided for in Section 5.01(d), modified to apply to the foregoing documents delivered hereunder; (t) concurrently with the quarterly financial statements described in subsection (b) above following the end of any quarter as of which any Subsidiary, the Capital Stock or other equity interests in which have not been pledged pursuant to a Pledge Agreement, becomes a Significant Subsidiary, the Company shall deliver to the Administrative Agent (i) a Pledge Agreement (or amendment to a previously delivered Pledge Agreement in form satisfactory to the Administrative Agent) executed by a duly authorized officer of the Company or of such Guarantor that owns the Capital Stock or other equity interests in such Significant Subsidiary, together with such stock certificates and other documents provided to be delivered under the Pledge Agreement; and (ii) if requested by the Administrative Agent, an opinion of the Company's counsel in the form provided for in Section 5.01(d), modified to apply to the foregoing documents delivered hereunder; (u) within 60 days of the Closing Date, a Closing Date consolidated balance sheet of the Company and its Subsidiaries (including Len Acquisition and its Subsidiaries), as of such 82 date and after giving effect to the Merger, the effectiveness of this Agreement, and the funding of the initial Advances hereunder, prepared in accordance with GAAP consistently applied, unaudited but certified to be true and accurate by an Authorized Financial Officer of the Company; (v) unless and until the Co-Borrower Termination Conditions have been satisfied, from time to time promptly upon request by the Administrative Agent and on the 91st day following the Closing Date, and concurrently with the quarterly financial statements described in subsection (e) above, a current report setting forth the information provided for in the report referred to in Section 5.01(s)(vii) certified by an Authorized Financial Officer of the Company; and (w) such supplements to the aforementioned documents and additional information (including, but not limited to, leasing, occupancy and non-financial information) and reports as the Administrative Agent or any Lender may from time to time reasonably require. SECTION 6.05. Access to Premises and Records. At all reasonable times and as often as any Lender may reasonably request, permit authorized representatives and agents (including accountants) designated by that Lender to (a) have access to the premises of the Company and each Subsidiary and to their respective corporate books and financial records, and all other records relating to their respective operations and procedures, (b) make copies of or excerpts from those books and records and (c) upon reasonable notice to the Company, discuss the respective affairs, finances and operations of the Company and its Subsidiaries with, and to be advised as to the same by, their respective officers and directors. SECTION 6.06. Maintenance of Properties and Insurance. Maintain all its properties and assets in good working order and condition and make all necessary repairs, renewals and replacements thereof so that its business carried on in connection therewith may be properly conducted at all times; and maintain or require to be maintained (a) adequate insurance, by financially sound and reputable insurers, on all properties of the Loan Parties which are of character usually insured by Persons engaged in the same or a similar business (including, without limitation, all Real Estate encumbered by Mortgages securing mortgage loans made by any Loan Party, to the extent normally required by prudent mortgagees, and all Real Estate which is subject of an Equity Investment by any Loan Party, to the extent normally carried by prudent builder-developers) against loss or damage resulting from fire, defects in title or other risks insured against by extended coverage and of the kind customarily insured against by those Persons, (b) adequate public liability insurance against tort claims which may be incurred by any Loan Party, and (c) such other insurance as may be required by law. Upon the request of the Administrative Agent, the Company will furnish to the Lenders full information as to the insurance carried. Notwithstanding the foregoing provisions of this Section 6.06, the Company shall be permitted to self-insure against all property and casualty risks associated with its construction of single-family dwelling units up to a maximum aggregate construction exposure for any Project not to exceed at any time 10% of Adjusted Tangible Net Worth. SECTION 6.07. Financing: New Investing. Give the Administrative Agent (a) advance written notice of the establishment of any new Significant Joint Venture or the formation of any new Significant Subsidiary, which such new Significant Subsidiary shall 83 become a Guarantor, by and effective upon compliance with the provisions of Section 6.04(s), unless (i) such Subsidiary is a Joint Venture Subsidiary, (ii) the terms of the agreement creating such Joint Venture prohibit the joint venturers thereof from being or becoming liable for any Indebtedness other than Indebtedness of the Joint Venture and (iii) all of the issued and outstanding equity Securities of such Subsidiary are pledged to the Lenders pursuant to Section 7.05 hereof, and (b) written notice of the formation of any new Subsidiary which is not a Significant Subsidiary given not later than ninety (90) days after such formation, which new Subsidiary shall become a Guarantor by and effective upon compliance with the provisions of Section 6.04(s), unless (x) such Subsidiary is a Joint Venture Subsidiary, (y) the terms of the agreement creating such Joint Venture prohibit the joint venturers thereof from being or becoming liable for any Indebtedness other than Indebtedness of the Joint Venture and (z) all of the issued and outstanding equity Securities of such Subsidiary are pledged to the Lenders pursuant to Section 7.05 hereof; provided, however, that (A) nothing in this Section 6.07 shall be deemed to authorize the Company or any of its Subsidiaries to enter into any such transaction if the same would violate any of the limitations set forth in Article VII hereof, (B) unless and until the Co-Borrower Termination Conditions are satisfied, no Subsidiary of the Co-Borrower shall be required to be a Guarantor nor shall the Capital Stock or other equity interest in such Subsidiary be required to be pledged hereunder, (C) such Subsidiary shall not be required to deliver a Guaranty if applicable laws or regulations (such as, by way of example, laws regulating insurance companies or providers of cable services) prohibit such Subsidiary from delivering a Guaranty and (D) a Subsidiary that is not a Wholly-Owned Subsidiary shall not be required to deliver a Guaranty. SECTION 6.08. Compliance with Applicable Laws. Promptly and fully comply with, conform to and obey all present and future laws, ordinances, rules, regulations, orders, writs, judgments, injunctions, decrees, awards and all other legal requirements applicable to the Company, its Subsidiaries and their respective properties, including, without limitation, Regulation Z of the Board of Governors of the Federal Reserve System, the Federal Interstate Land Sales Full Disclosure Act, ERISA, the Florida Land Sales Act or any similar statute in any applicable jurisdiction, the violation of which would have a Material Adverse Effect on any Loan Party. SECTION 6.09. Advances to the Mortgage Banking Subsidiaries. Cause the Mortgage Banking Subsidiaries to execute and deliver the Mortgage Banking Subsidiaries Note in order to evidence all loans and advances that now exist or are hereafter made by any Loan Party to any of the Mortgage Banking Subsidiaries, respectively; deposit the original Mortgage Banking Subsidiaries Note with Administrative Agent; and obtain, prior to or contemporaneously with the execution of this Agreement, written acknowledgments from each Mortgage Banking Subsidiary that the aggregate of all loans and advances hereafter made by any applicable Loan Party to such Mortgage Banking Subsidiary shall be evidenced and governed by the Mortgage Banking Subsidiaries Note held by Administrative Agent. At all times the principal amount of the Mortgage Banking Subsidiaries Note held by Administrative Agent must equal or exceed the aggregate principal amount of all loans and advances made by any Loan Party to Mortgage Banking Subsidiaries, and upon the request of Administrative Agent (but no more frequently than monthly), the Company shall obtain and deliver to the Administrative Agent specific written acknowledgments from each of the Mortgage Banking Subsidiaries to the effect that loans and advances theretofore made by any applicable Loan Party to the Mortgage 84 Banking Subsidiaries are evidenced by the Mortgage Banking Subsidiaries Note. In the event that after the Agreement Date any Loan Party organizes or acquires any Mortgage Banking Subsidiary, such Mortgage Banking Subsidiary shall, upon such organization or acquisition, join in and become a maker of a replacement Mortgage Banking Subsidiaries Note, such new Mortgage Banking Subsidiaries Note shall be deposited with the Administrative Agent pursuant to this Section 6.09, and all references in this Agreement to Mortgage Banking Subsidiaries shall thereafter be deemed references to all such Mortgage Banking Subsidiaries. SECTION 6.10. Use of Proceeds. Use the proceeds of the Advances for working capital and general corporate purposes and to finance the Merger and other Acquisitions consummated with the prior approval of the Board of Directors of the Person to be acquired. If the Co-Borrower Termination Conditions are not satisfied as of the Closing Date, the proceeds of Facility C shall be used by the Co-Borrower, first, in an amount approved by the Administrative Agent for the acquisition of U.S. Home pursuant to the Merger, and the balance for other purposes permitted hereunder. ARTICLE VII NEGATIVE COVENANTS The Company and, with respect to itself and its Subsidiaries, the Co-Borrower covenants and agrees that from the date hereof until payment in full of all the Obligations, termination of all Facility Letters of Credit and termination of the Commitments, unless the Required Lenders otherwise shall consent in writing as provided in Section 13.06 hereof, the Company and, with respect to itself and its Subsidiaries, the Co-Borrower will not, either directly or indirectly: SECTION 7.01. Minimum Tangible Net Worth. Permit Adjusted Tangible Net Worth at any time to be less than the sum of (a) $789,140,000, plus (b) an amount equal to the amount (if any) by which (i) 50% of the cumulative amount of positive Consolidated Net Income of the Loan Parties for each fiscal quarter of the Company ending after the Closing Date for which the Loan Parties, taken as a whole, had Consolidated Net Income exceeds (ii) the aggregate amount paid by the Company after the Closing Date to purchase or redeem its equity Securities, plus (c) an amount equal to 50% of the aggregate amount of the increase in Adjusted Tangible Net Worth resulting from the issuance of equity Securities of the Company after the Closing Date. For purposes of this Section 7.01, the term "Consolidated Net Income" when used in respect of any period, shall not include any loss for such period. SECTION 7.02. Limitation on Indebtedness. (a) Borrowing Base Limitation. At any time, permit the aggregate outstanding amount of the sum of all Borrowing Base Debt to exceed the Borrowing Base at such time (the "Borrowing Base Limitation"), provided, however, that, after the Bridge Loan is paid in full from the proceeds of unsecured debt or equity Securities or the Exchange Notes issued by the Company, the Borrower shall not be required to comply with the Borrowing Base Limitation if, but only so long as, the Facilities have a rating of BBB- or higher from S&P or Baa3 or higher from Moody's. 85 (b) Maximum Leverage Ratio. At any time, permit the Leverage Ratio to exceed 2.25. (c) Minimum Interest Coverage Ratio. At any time, permit the Interest Coverage Ratio to be less than the Minimum Interest Coverage Ratio. SECTION 7.03. Guaranties. Make or suffer to exist any Contingent Obligation (including, without limitation, any Contingent Obligation with respect to the obligations of a Subsidiary or Joint Venture) or otherwise assume, guarantee or in any way become contingently liable or responsible for obligations of any other Person, whether by agreement to purchase those obligations of any other Person, or by agreement for the furnishing of funds through the purchase of goods, supplies or services (whether by way of stock purchase, capital contribution, advance or loan) for the purpose of paying or discharging the obligations of any other Person, except for: (a) guaranties of obligations of the Loan Parties issued in the ordinary course of business; (b) the endorsement of negotiable instruments in the ordinary course of business; (c) guaranties of performance and completion and performance and completion bonds issued in connection with the construction of Real Estate developments owned by a Loan Party; (d) the Guaranties and (if applicable) the Lennar Guaranty and the Co-Borrower Guaranties; or (e) guaranties of liabilities incurred by Joint Ventures to which the Company or a Joint Venture Subsidiary is a party, provided that all such guaranties outstanding at any one time, do not exceed 25% of the Adjusted Tangible Net Worth. None of the foregoing clauses, however, shall be deemed to permit (i) any Loan Party to guaranty any obligations of any one or more of the Mortgage Banking Subsidiaries or any Subsidiary identified in Schedule VII if any such guaranty would cause a violation of Section 7.02 or any obligations of LNR or (ii) the Company to guaranty any obligations under any of the Existing U.S. Home Debt Issues. SECTION 7.04. Sale of Assets; Acquisitions; Merger. (a) Except for the transactions described in Schedule X (the "Permitted Dispositions"), do either of the following: (i) sell any single asset with a book value of $50,000,000 or more for a sales price which is less than 60% of the book value of that asset, or (ii) sell any single asset with a book value of $20,000,000 or more unless such sale is in the ordinary course of business; provided, however, that in no event shall the aggregate sales price of all assets sold or disposed of by the Loan Parties, other than those sold in the ordinary course of business, exceed $50,000,000 in any single calendar year. (b) Do any of the following: (i) sell, assign, lease or otherwise dispose of (whether in one transaction or in a series of transactions) all or substantially all of the assets (whether now owned or hereafter acquired) of the Company and the Subsidiaries (on a consolidated basis) except for the sale of inventory in the ordinary course of business; (ii) except as contemplated by the Merger Documents, merge into or consolidate with any other Person or permit any other Person to merge into or consolidate with it; 86 (iii) dissolve, liquidate or wind up its business by operation of law or otherwise; or (iv) distribute to the stockholders of the Company any Securities of any Subsidiary; provided, however, that any Subsidiary or any other Person may merge into or consolidate with or may dissolve and liquidate into a Loan Party, if (and only if), (1) in the case of a merger or consolidation, the Loan Party is the surviving Person, (2) in the case of a merger or consolidation involving the Company, the Company is the surviving Person, (3) the character of the business of the Company and the Subsidiaries on a consolidated basis will not be materially changed by such occurrence, (4) such occurrence shall not constitute or give rise to an Event of Default or Unmatured Default or a default in respect of any of the covenants contained in any agreement to which the Company or such Subsidiary is a party or by which its property may be bound and (5) unless and until the Co-Borrower Termination Conditions are satisfied, no merger or consolidation involving the Co-Borrower shall be permitted except in accordance with the provisions of Section 6.01(a)(ii). (c) Acquire another Person unless (i) the primary business of such Person is the Real Estate Business and (ii) the board of directors or other governing body of such Person approves such Acquisition. Nothing contained in this Section 7.04, however, shall restrict any sale of assets among the Company and the Guarantors which is in compliance with all other provisions of this Agreement. SECTION 7.05. Investments. Purchase or otherwise acquire, hold or invest in the Securities (whether Capital Stock or instruments evidencing debt) of, make loans or advances to, enter into any arrangements for the purpose of providing funds or credit to, or make any Equity Investment in, any Person which is not a Loan Party on the Closing Date or a Subsidiary which becomes a Guarantor upon the making of the investment, except for: (i) (A) Investments in or loans or advances to Joint Ventures to which the Company or a Subsidiary is a party; and (B) Investments in or loans or advances to the Mortgage Banking Subsidiaries and the Subsidiaries listed in Schedule VII, provided that (1) the aggregate of all such Investments, loans and advances outstanding at any time in this clause (i) does not exceed 25% of Adjusted Tangible Net Worth and (2) with respect to Investments in, or loans and advances to each Joint Venture Subsidiary which is not a Loan Party, all of the issued and outstanding equity Securities of such Joint Venture Subsidiary shall have been pledged to the Administrative Agent pursuant to the terms and provisions of a Pledge Agreement and such pledge shall not be prohibited by, or result in a breach or violation of, any agreement, indenture or other instrument to which the Company or any Subsidiary is a party or is bound, and (ii) (A) purchases of direct obligations of the government of the United States of America or any agency thereof, or obligations unconditionally guaranteed by the United States of America; (B) certificates of deposit of any bank, organized or licensed to conduct a banking business under the laws of the United States or any state thereof having capital, surplus and undivided profits of not less than $100,000,000; (C) Investments in commercial paper which, at the time of acquisition by the Company or a Subsidiary, is accorded an "A" or equivalent rating by any of the Rating Agencies or any other 87 nationally recognized credit rating agency of similar standing; (D) investments in publicly traded, readily marketable securities traded on a recognized national exchange or over-the-counter; and (E) loans or advances by the Company or a Guarantor to, or Securities or Indebtedness of, a real estate or homebuilding company to be acquired by the Company for the purpose of obtaining control of specific homebuilding assets of that homebuilding company, provided, however, that such loans, advances or Indebtedness are secured by Mortgages on land, homes under construction and/or homes inventory of such real estate or homebuilding company. SECTION 7.06. Disposition; Encumbrance or Issuance of Certain Stock. Sell, transfer or otherwise dispose of, or pledge, grant a security interest, equity interest or other beneficial interest in or otherwise encumber any of the outstanding shares of Capital Stock of any Mortgage Banking Subsidiary, or permit any Mortgage Banking Subsidiary to sell, issue or otherwise transfer any shares of its Capital Stock to any Person other than a Loan Party. SECTION 7.07. Other Indebtedness. (a) Subordinated Debt. Directly or indirectly make any payment of principal or interest with respect to any Subordinated Debt prior to the date the same is due, or amend or modify the terms of any Subordinated Debt except for extensions of the due date thereof, or directly or indirectly redeem, retire, defease, purchase, retire or otherwise acquire any Subordinated Debt. (b) Bridge Loan. Directly or indirectly make any payment of principal of the Bridge Loan except from the proceeds of unsecured debt Securities issued by the Company having a maturity date not less than twelve months after the latest of the Facility A Termination Date, Facility B Termination Date or Facility C Maturity Date or from the proceeds of equity Securities or the Exchange Notes issued by the Company or amend or modify the terms of the Bridge Loan Agreement or directly or indirectly redeem, retire, defease, purchase, retire or otherwise acquire the Bridge Loan. SECTION 7.08. Housing Units. Permit the total number of Housing Units owned by the Loan Parties, including Housing Units under construction, but excluding model Housing Units and Housing Units Under Contract, at any time to exceed 35% of the total number of Housing Unit Closings during the immediately preceding 12-month period; provided, however, that the total number of Housing Unit Closings during the twelve-month period immediately preceding the Closing Date shall include Housing Unit Closings of U.S. Home and its Subsidiaries during such period. SECTION 7.09. Construction in Progress. Cause, suffer or permit to exist any Mortgage, security interest or other encumbrance to secure Indebtedness on any Housing Unit or other building or structure (including, without limitation, any asset reported as "Construction in Progress" in the financial statements of the Company) that is under construction on any land owned or leased by any Loan Party; provided, however, that the Company may cause, suffer or permit to exist purchase money Mortgages having an aggregate outstanding principal balance not exceeding $25,000,000 at any time on assets so reported as "Construction in Progress." 88 SECTION 7.10. No Margin Stock. Use any of the proceeds of the Advances to purchase or carry any "margin stock" (as defined in Regulation U). SECTION 7.11. Mortgage Banking Subsidiaries' Capital Ratio. Permit the ratio of the combined total Indebtedness of the Mortgage Banking Subsidiaries to the Mortgage Banking Subsidiaries Adjusted Net Worth to exceed, at any time, eight (8) to one (1). SECTION 7.12. Transactions with Affiliates. 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, except in the ordinary course of business and pursuant to the reasonable requirements of the Company's or a Subsidiary's business and upon fair and reasonable terms no less favorable to the Company or such Subsidiary than the Company or such Subsidiary would obtain in a comparable arms'-length transaction. SECTION 7.13. Restrictions on Advances to Mortgage Banking Subsidiaries. Subject to Section 7.05, (a) permit any loan or advance to be made by a Loan Party to a Mortgage Banking Subsidiary except for loans and advances from a Loan Party to the Mortgage Banking Subsidiaries which are made under, and evidenced by, the Mortgage Banking Subsidiaries Note that is in the possession of Administrative Agent and for which the Company shall have obtained a written acknowledgment from each Mortgage Banking Subsidiary that the same are evidenced and governed by the Mortgage Banking Subsidiaries Note; (b) permit the aggregate amount of all loans and advances made by the Loan Parties to any Mortgage Banking Subsidiary outstanding at any time to exceed the sum of (i) the net carrying value of all mortgage loans held by such Mortgage Banking Subsidiary, less the aggregate principal amount of all promissory notes payable by such Mortgage Banking Subsidiary to banks or other lenders, and less the aggregate principal amount of all mortgage loans held for sale by such Mortgage Banking Subsidiaries which are pledged, assigned or otherwise encumbered, to the extent that said aggregate amount exceeds the aggregate principal amount of notes payable by such Mortgage Banking Subsidiary to banks or other lenders, and (ii) 1.5% of the principal amount of all mortgages serviced by such Mortgage Banking Subsidiary, less any loans or other financing to such Mortgage Banking Subsidiary associated with the servicing portfolio (exclusive of those amounts deducted in the calculation required under clause (i) above) if, and to the extent that, the servicing rights with respect to such mortgages are not subject to any Lien; (c) assign, transfer, pledge, hypothecate or encumber in any way the Mortgage Banking Subsidiaries Note, any interest therein or any sums due or to become due thereunder; (d) modify, amend, extend or in any way change the terms of the Mortgage Banking Subsidiaries Note; (e) make any principal advances to any Mortgage Banking Subsidiary, under the Mortgage Banking Subsidiaries Note or otherwise, at any time after the Administrative Agent has been granted a security interest in the Mortgage Banking Subsidiaries Note pursuant to Section 8.02 except to the extent of any principal prepayments under the Mortgage Banking Subsidiaries Note in excess of the mandatory principal payments required thereunder; or (f) permit a Mortgage Banking Subsidiary to enter into any agreement or agreements which (i) in any way restrict the payment of dividends by such Mortgage Banking Subsidiary or (ii) individually, or in the aggregate, impose any restriction on the repayment of any indebtedness of a Mortgage Banking Subsidiary to any Person (including, without limitation, the indebtedness payable under the Mortgage Banking Subsidiaries Note) other than a restriction on the payment of the last $5,000,000 of principal indebtedness of UAMC (i.e., such permitted restriction shall be applicable only after the aggregate principal 89 amount of indebtedness owed by UAMC to any Person shall be less than or equal to $5,000,000). SECTION 7.14. Mortgage Banking Subsidiaries Adjusted Net Worth. Permit the Mortgage Banking Subsidiaries Adjusted Net Worth at any time to be less than $30,000,000. SECTION 7.15. Investments in Land. At any time, permit the (a) sum of (i) the Loan Parties' investments in unimproved land plus (ii) the amount by which the Loan Parties' investments in improved land exceeds Qualified Finished Lots, plus (iii) the Loan Parties' investments in and advances to LLP to exceed (b) the sum of (i) Adjusted Tangible Net Worth plus (ii) the lesser of (A) $300,000,000 and (B) 50% of Subordinated Debt. SECTION 7.16. Liens and Encumbrances. (a) Negative Pledge. Grant any Liens on any of its rights, properties or assets other than Permitted Liens. (b) No Agreement for Negative Pledge. Agree with any third party not to create, assume or suffer to exist any Lien securing the Obligations on or of any of its property, real or personal, whether now owned or hereafter acquired. SECTION 7.17. Merger Documents. Enter into or agree to any material amendment or modification of the Merger Agreement, or waive or release any material rights or benefits of the Company or Len Acquisition thereunder. ARTICLE VIII COLLATERAL SECTION 8.01. Pledge Agreement. (a) Pledges Securing Secured Obligations. (i) Subject to the provisions of Section 8.03(a), the Secured Obligations shall at all times be secured by a first priority pledge of and security interest in all Capital Stock of or other equity interests in Len Acquisition and each of the Significant Subsidiaries in favor of the Administrative Agent for the ratable benefit of the Lenders. If and to the extent that any Subsidiary of the Company that is not a Significant Subsidiary thereafter becomes a Significant Subsidiary, the Company shall cause the Capital Stock or other equity interests in such Subsidiary to be pledged pursuant to a Pledge Agreement. (ii) In the event that at any time, whether on or after the Closing Date, the assets of all Subsidiaries with respect to which Pledge Agreements pledging the Capital Stock or other equity interests therein have been delivered as Collateral hereunder which have not theretofore been released, constitute, in the aggregate, an amount that is less than 90% of all assets of the Company and its Subsidiaries on a consolidated basis determined as of the last day of the most recent fiscal quarter of the Company (the "90% 90 Test"), the Company shall cause to be pledged, pursuant to Pledge Agreements (or amendments to previously executed Pledge Agreements satisfactory to the Administrative Agent), the Capital Stock or other equity interests in such additional Subsidiaries as may be required to satisfy the 90% Test. The specific Subsidiaries with respect to which such pledges shall be required shall be as mutually agreed upon by the Company and the Administrative Agent, provided, however, that in the absence of such agreement, the Subsidiary or Subsidiaries having the greatest amount of assets (and with respect to which the pledge of such Capital Stock or equity interests would not be prohibited by applicable laws or regulations) shall be pledged to the extent necessary to satisfy the 90% Test. For purposes of this Section 8.01(a)(ii), the assets of a Subsidiary shall exclude its interests (if any) in any other Subsidiary. Notwithstanding anything to the contrary contained herein, all of the Capital Stock of Strategic Technologies, Inc. shall be pledged pursuant to a Pledge Agreement. (b) Co-Borrower Pledges. Subject to the provisions of Section 8.03(b), unless and until the Co-Borrower Termination Conditions are satisfied, that portion of the Facility C Obligations of the Co-Borrower that constitutes the Merger Loan shall at all times be secured by a first priority pledge of and security interest in all Capital Stock of or other equity interests in each of the Co-Borrower Subsidiaries that is a Significant Subsidiary in favor of the Administrative Agent for the ratable benefit of the Facility C Lenders. If and to the extent that any Co-Borrower Subsidiary that is not a Significant Subsidiary thereafter becomes a Significant Subsidiary, the Company and the Co-Borrower shall cause the Capital Stock or other equity interests, in such Significant Subsidiary to be pledged pursuant to a Co-Borrower Pledge Agreement. For purposes of this Agreement and the Co-Borrower Guaranties and Co-Borrower Pledge Agreements, any payment received in respect of the Co-Borrower's Facility C Obligations (other than from collection or realization on the Co-Borrower Collateral or Co-Borrower Guaranties) shall first be applied to Facility C Obligations other than the Merger Loan. (c) Release of Certain Pledges. In the event that any Subsidiary with respect to which a Pledge Agreement or Co-Borrower Pledge Agreement pledging the Capital Stock or other equity interests therein has been delivered ceases to be a Significant Subsidiary (as determined as of the last day of two consecutive fiscal quarters of the Company), the Administrative Agent shall, upon written request from the Company, cause the pledge with respect to such Subsidiary to be released, provided, however, that no such release shall be required if, as a result thereof, the 90% Test provided for in Section 8.01(a)(ii) would not be satisfied. SECTION 8.02. Mortgage Banking Subsidiaries Note. (a) Pledge. Subject to the provisions of Section 8.03, upon the request of the Administrative Agent (which may not be made without the prior written consent from the Required Lenders and which shall be made upon the written request of the Required Lenders), the Company shall grant, and shall cause any Guarantor that is a payee under the Mortgage Banking Subsidiaries Note to grant, the Administrative Agent on behalf of the Lenders as security for the payment in full of all the Secured Obligations, a first lien and security interest in the Mortgage Banking Subsidiaries Note. Notwithstanding anything to the contrary provided in this Agreement, the Company agrees that the Mortgage Banking Subsidiaries Note Pledge 91 Agreement shall require all principal payments payable under the Mortgage Banking Subsidiaries Note to be made directly to the Administrative Agent and applied to the principal outstanding under the Notes as required under Section 2.06(d). (b) Collateral Documentation. If and when the Company is required to grant the Administrative Agent a security interest in the Mortgage Banking Subsidiaries Note pursuant to Section 8.02(a), the Company shall deliver to the Administrative Agent: (i) a pledge and security agreement (the "Mortgage Banking Subsidiaries Note Pledge Agreement"), in form and substance satisfactory to the Administrative Agent, duly executed by the Company and each Guarantor that is a payee under the Mortgage Banking Subsidiaries Note, granting the Administrative Agent on behalf of the Lenders, a first lien on, and security interest in, the Mortgage Banking Subsidiaries Note; (ii) an endorsement or allonge to the Mortgage Banking Subsidiaries Note, in form and substance satisfactory to the Administrative Agent, duly executed by the Borrower and each Guarantor that is a payee under the Mortgage Banking Subsidiaries Note, transferring the Mortgage Banking Subsidiaries Note to the Administrative Agent on behalf of the Lenders; and (iii) a written acknowledgment duly executed by the Borrower and each Guarantor that is a payee under the Mortgage Banking Subsidiaries Note, that the Administrative Agent holds the Mortgage Banking Subsidiaries Note as Collateral for the Secured Obligations. All the foregoing documents shall be delivered to the Administrative Agent on or before the date that the Company is required to grant the Administrative Agent the security interest in the Mortgage Banking Subsidiaries Note. All of the documentation and other items required under this Section 8.02 must be fully satisfactory, both in form and substance, to the Administrative Agent. In addition to the foregoing, at the request of the Administrative Agent, the Company shall, and shall cause each Guarantor that is a payee under the Mortgage Banking Subsidiaries Note to, execute and deliver to the Administrative Agent such assignments, pledges, financing statements and other documents, and cause to be done such further acts, all as the Administrative Agent from time to time may deem necessary or appropriate to evidence, confirm, perfect or protect any security interest required to be granted to the Administrative Agent hereunder. SECTION 8.03. Collateral Trusts. (a) Notwithstanding the foregoing provisions of this Article VIII, in the event that, and for as long as, the terms of the Existing Company Public Debt require that the holder of such Existing Company Public Debt shall have an equal and ratable Lien in any of the Collateral, the Liens upon such Collateral provided to be granted to the Administrative Agent hereunder shall instead be granted to a collateral trustee reasonably satisfactory to the Administrative Agent under the terms of an agreement ("Collateral Trust Agreement") substantially in the form of Exhibit T hereto, and providing for such Collateral to be for the equal and ratable benefit of the trustee of the Existing Company Public Debt (for the benefit of the holders of the Existing 92 Company Public Debt) and the Administrative Agent (for the benefit of the Holders of Secured Obligations). The fees and expenses of such collateral trustee shall be borne by the Company. (b) Notwithstanding the foregoing provisions of this Article VIII, in the event that, and for as long as, the terms of the Existing U.S. Home Senior Debt Issues require that the holder thereof shall have an equal and ratable Lien in any of the Co-Borrower Collateral, the Liens upon such Co-Borrower Collateral provided to be granted to the Administrative Agent hereunder shall instead be granted to a collateral trustee reasonably satisfactory to the Administrative Agent under the terms of a Collateral Trust Agreement substantially in the form of Exhibit U hereto, and providing for such Co-Borrower Collateral to be for the equal and ratable benefit of the trustee of the Existing U.S. Home Senior Debt Issues (for the benefit of the holders of such Existing U.S. Home Senior Debt Issues) and the Administrative Agent (for the benefit of the Facility C Lenders hereunder). The fees and expenses of such collateral trustee shall be borne by the Co-Borrower. ARTICLE IX EVENTS OF DEFAULT SECTION 9.01. Events of Default. The occurrence of any one or more of the following Events shall constitute an "Event of Default": (a) any representation or warranty made or deemed made by or on behalf of any Loan Party to the Lenders, the Issuer, the Swing Line Bank or the Administrative Agent under or in connection with this Agreement or any Loan Document shall be false or misleading in any material respect when made; (b) any report, certificate, financial statement or other document or instrument furnished in connection with this Agreement or the Loans hereunder shall be false or misleading in any material respect when furnished; (c) default shall be made in the payment of (i) the principal of any of the Notes when and as due and payable, or (ii) the interest on any of the Notes, any fees or any other sums due pursuant to Article II, which default continues for five days after the same becomes due and payable; (d) default shall be made with respect to any Indebtedness or Contingent Obligations of any Loan Party (other than the Indebtedness evidenced by the Notes and Non-Recourse Indebtedness), beyond any applicable period of grace, or default shall be made with respect to the performance of any other obligation or incurred in connection with any such Indebtedness or liabilities beyond any applicable period of grace, or default shall be made with respect to any other liability of $5,000,000 or more, if the effect of any such default is to accelerate the maturity of such Indebtedness or liability or to cause any other liability to become due prior to its stated maturity, or any such Indebtedness or liability shall not be paid when due and such default shall not have been remedied or cured by such Loan Party or waived by the obligor; (e) default shall be made in the due observance or performance of any of the provisions of Article VII or Article VIII or any other covenant, agreement or condition on the 93 part of any Loan Party to be performed under or in connection with this Agreement or any Loan Document, and such default shall have continued for a period of thirty (30) days after the occurrence thereof; (f) any Loan Party shall (i) petition or apply for, seek, consent to, or acquiesce in, the appointment of a receiver, trustee, examiner, custodian, liquidator or similar official of such Loan Party or any of its properties or assets, (ii) be unable, or admit in writing its inability, to pay its debts as they mature, (iii) make a general assignment for the benefit of or a composition with its creditors, (iv) have an order for relief entered with respect to it under the Federal bankruptcy laws as now or hereafter in effect, (v) institute any proceeding seeking an order for relief under the Federal bankruptcy laws as now or hereafter in effect, or file a petition or an answer seeking dissolution, winding up, liquidation or reorganization or an arrangement with creditors or a composition of its debts or to take advantage of any bankruptcy, reorganization, insolvency, readjustment of debts, dissolution or liquidation law or statute or other statute or law for the relief of debtors, or file any answer admitting the material allegations of a petition filed against it in any proceeding under such law, or fail to file an answer or other pleading denying the material allegations of any such proceeding filed against it, or if corporate or other action shall be taken by such Loan Party for the purpose of effecting any of the foregoing, or (vi) fail to contest in good faith any appointment or proceeding described in Section 9.01(g); (g) an order, judgment, or decree shall be entered without the application, approval, or consent of any Loan Party by any court of competent jurisdiction appointing a receiver, trustee or liquidator of any Loan Party or a proceeding described in Section 9.01(f) shall be instituted against the any Loan Party, and such appointment shall continue undischarged or such proceeding continues undismissed or unstayed for any period of 45 days; (h) final judgment for the payment of money in excess of an aggregate of $1,000,000 shall be rendered against the any Loan Party and the same shall remain undischarged for a period of 30 days during which execution shall not be effectively stayed; (i) there shall occur any Event or Events which, individually or in the aggregate, shall be deemed by the Required Lenders to have had a Material Adverse Effect; (j) any Loan Party shall be the subject of any proceeding or investigation pertaining to the release by any Loan Party, any of its Subsidiaries or any other Person of any Hazardous Substance into the environment, or any violation of any Environmental Law or any federal, state or local health or safety law or regulation, which, in either case, could reasonably be expected to have a Material Adverse Effect; or (k) there shall occur any Change in Control of the Company. SECTION 9.02. Remedies. (a) Acceleration. If any Event of Default described in Section 9.01(f) or (g) occurs with respect to the Company or, unless and until the Co-Borrower Termination Conditions are satisfied, the Co-Borrower, the obligations of the Lenders to make Loans, the Swing Line Bank to make Swing Line Loans and the Issuer to issue Facility Letters of Credit hereunder shall automatically terminate and the Obligations shall immediately become due and payable without 94 any election or action on the part of the Administrative Agent or any Lender. If any other Event of Default occurs and is continuing, the Administrative Agent may, and upon written direction of the Required Lenders shall, terminate or suspend the obligations of the Lenders to make Loans, the Swing Line Bank to make Swing Line Loans and the Issuer 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 the Borrower hereby expressly waives (b) Recission of Acceleration. If, within 30 days after acceleration of the maturity of the Obligations or termination of the obligations of the Lenders to make Loans hereunder as a result of any Event of Default (other than any Event of Default as described in Section 9.01 (f) or (g) with respect to the Company or, unless and until the Co-Borrower Termination Conditions are satisfied, the Co-Borrower) and before any judgment or decree for the payment of the Obligations due shall have been obtained or entered, the Required Lenders (in their sole discretion) shall so direct, the Administrative Agent shall, by notice to the Borrower, rescind and annul such acceleration and/or termination. SECTION 9.03. Application of Payments. (a) Subject to the provisions of Section 11.02 and any provisions of this Agreement specifically providing for payments to be applied to a particular Facility, the Administrative Agent shall, unless otherwise specified at the direction of the Required Lenders which direction shall be consistent with the last sentence of this Section 9.03, apply all payments and prepayments in respect of any Obligations and all proceeds of the Collateral (except as hereinafter provided) in the following order: (i) first, to pay interest on and then principal of any portion of the Loans which the Administrative Agent may have advanced on behalf of any Lender for which the Administrative Agent has not then been reimbursed by such Lender or the Borrower; (ii) second, to pay Obligations in respect of any fees, expenses, reimbursements or indemnities then due to the Administrative Agent; (iii) third, to pay Obligations in respect of any fees, expenses, reimbursements or indemnities then due to the Lenders and the Issuer(s); (iv) fourth, to pay interest due in respect of Swing Line Loans; (v) fifth, to pay interest due in respect of Loans (other than Swing Line Loans) and Facility Letter of Credit Obligations; (vi) sixth, to the ratable payment or prepayment of principal outstanding on Swing Line Loans; (vii) seventh, to the ratable payment or prepayment of principal outstanding on Loans (other than Swing Line Loans), Reimbursement Obligations, and Hedging Obligations under Permitted Hedging Agreements; 95 (viii) eighth, to the Letter of Credit Collateral Account in an amount equal to the outstanding Facility Letter of Credit Obligations to the extent required under Section 2.21(h); and (ix) ninth, to the ratable payment of all other Obligations. Unless otherwise designated (which designation shall only be applicable prior to the occurrence of an Event of Default) by the Borrower, all principal payments in respect of Loans (other than Swing Line Loans) under a Facility shall be applied first, to repay outstanding Floating Rate Loans under such Facility and then to repay outstanding Eurodollar Rate Loans under such Facility, with those that have earlier expiring Interest Period being repaid prior to those that have later expiring Interest Periods. The order of priority set forth in this Section 9.03(a) and the related provisions of this Agreement are set forth solely to determine the rights and priorities of the Administrative Agent, the Lenders, the Swing Line Bank and the Issuer(s) as among themselves. The order of priority set forth in clauses (i) through (ix) of this Section 9.03(a) may at any time and from time to time be changed by the Required Lenders without necessity of notice to or consent of or approval by the Company, the Co-Borrower or any other Person; provided, that the order of priority set forth in clauses (i) and (ii) may be changed only with the prior written consent of the Administrative Agent and the order of priority of payments in respect of Swing Line Loans may be changed only with the prior written consent of the Swing Line Bank. (b) Notwithstanding the foregoing, unless and until the Co-Borrower Termination Conditions are satisfied, payments received in respect of the Co-Borrower's Obligations shall only be applied to such Obligations (but otherwise in the order of priority set forth above) and proceeds of the Co-Borrower Collateral shall only be applied (subject to the limitations set forth in Section 8.01(b)) to the Co-Borrower's Facility C Obligations (but otherwise in the order of priority set forth above). ARTICLE X THE ADMINISTRATIVE AGENT SECTION 10.01. Appointment. Bank One, NA is hereby appointed Administrative Agent hereunder and under each other Loan Document and, subject to the provisions of Section 10.14 below, each of the Lenders irrevocably authorizes the Administrative Agent to act as the Administrative Agent of such Lender. The Administrative Agent agrees to act as such upon the express conditions contained in this Article X. The Administrative Agent shall not have a fiduciary relationship in respect of any Lender by reason of this Agreement. Bankers Trust Company is hereby appointed to act as Syndication Agent hereunder. Bank of America, N.A. and Credit Lyonnais Atlanta Agency are hereby appointed as Co-Documentation Agents hereunder. Guaranty Federal Bank, F.S.B. and Wachovia Bank, N.A. are hereby appointed as Senior Managing Agents hereunder. Comerica Bank and SunTrust Bank are hereby appointed as Managing Agents hereunder. U.S. Bank National Association is hereby appointed as Co-Agent hereunder. Except for rights of consent or approval given to the Syndication Agent under this Agreement, neither the Syndication Agent, nor the Co-Documentation Agents nor the Senior 96 Managing Agents nor the Managing Agents nor the Co-Agent shall have any right, power, obligation, liability, responsibility or duty under this Agreement in such capacity. SECTION 10.02. Powers. The Administrative Agent shall have and may exercise such powers under the Loan Documents as are specifically delegated to the Administrative Agent by the terms of each thereof, together with such powers as are reasonably incidental thereto. The Administrative Agent shall have no implied duties to the Lenders, or any obligation to the Lenders to take any action thereunder except any action specifically provided by the Loan Documents to be taken by the Administrative Agent. SECTION 10.03. General Immunity. Neither the Administrative Agent nor any of its directors, officers, agents or employees shall be liable to the Borrower, the Lenders or any Lender for any 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. SECTION 10.04. No Responsibility for Loans, Recitals, Etc. Neither the Administrative Agent nor any of its directors, officers, agents or employees shall be responsible for or have any duty to ascertain, inquire into, or verify (a) any statement, warranty or representation made in connection with any Loan Document or any borrowing hereunder; (b) the performance or observance of any of the covenants or agreements of any obligor under any Loan Document; (c) the satisfaction of any condition specified in Article V, except receipt of items required to be delivered to the Administrative Agent; or (d) the validity, effectiveness or genuineness (except its own due execution thereof) of any Loan Document or any other instrument or writing furnished in connection therewith. Further, the Administrative Agent assumes no obligation to any other Lender as to the collectibility of any Loans made by any Lender to the Borrower. Each Lender expressly acknowledges that the Administrative Agent has not made any representations or warranties to it on or prior to the date hereof and that no act by the Administrative Agent hereafter taken shall be deemed to constitute any representation or warranty by the Administrative Agent to any other Lender. Each Lender acknowledges that it has taken and will take such action and make such investigation as it deems necessary to inform itself as to the affairs and creditworthiness of the Borrower. SECTION 10.05. Employment of Agents and Counsel. The Administrative Agent may execute any of its duties as Administrative Agent hereunder and under any other Loan Document by or through employees, agents, and attorneys-in-fact and shall not be answerable to the Lenders, except as to money or securities 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. The Administrative 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. SECTION 10.06. Reliance on Documents; Counsel. The Administrative Agent shall not be under a duty to examine into or pass upon the validity, effectiveness, genuineness or value of this Agreement, the Notes, the Guaranties and other Loan Documents or any other document furnished pursuant hereto or thereto or in connection herewith, and the Administrative Agent shall be entitled to assume that the same are valid, effective and genuine and what they purport to be. The Administrative Agent shall be entitled to rely upon any Note, notice, consent, certificate, 97 affidavit, letter, telegram, statement, paper or document reasonably 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 the Administrative Agent, which counsel may be employees of the Administrative Agent. The Administrative Agent shall not be liable for any action taken or suffered in good faith by it based on or in accordance with any of the foregoing. SECTION 10.07. No Waiver of Rights. With respect to its Commitments, the Loans (including the Swing Loans) made by it and the Notes issued to it, the Administrative Agent shall have the same rights and powers hereunder and under any other Loan Document as any Lender or Issuer and may exercise the same as though it was not the Administrative Agent, and the term "Lender" or "Lenders" shall, unless the context otherwise indicates, include the Administrative Agent in its individual capacity. The Administrative Agent may accept deposits from, lend money to and issue letters of credit for the account of, and generally engage in any kind of business with the Company or its Affiliates (including, without limitation, trust, debt, equity and other transactions) in addition to the transactions contemplated by this Agreement or any other Loan Document; it being expressly understood and agreed that neither the Administrative Agent nor any other Lender shall be deemed by the execution hereof to have waived any rights under any loan or other agreement with the Company or any of its Affiliates relating to any other business or loans to the Company or any of its Affiliates which are not a part of the Commitments under this Agreement. SECTION 10.08. Knowledge of Event of Default. It is expressly understood and agreed that the Administrative Agent shall be entitled to assume that no Event of Default or Unmatured Default has occurred and is continuing, unless the officers of the Administrative Agent active on the Company's account have actual knowledge of such occurrence or have been notified by a Lender that such Lender considers that an Event of Default or Unmatured Default has occurred and is continuing and specifying the nature thereof. SECTION 10.09. Administrative Agent's Reimbursement and Indemnification. The Lenders agree to reimburse and indemnify the Administrative Agent ratably in accordance with their respective Pro Rata Shares (a) for any amounts not reimbursed by the Borrower for which the Administrative Agent is entitled to reimbursement by the Borrower under the Loan Documents, (b) for any other expenses incurred by the Administrative Agent on behalf of the Lenders, in connection with the preparation, execution, delivery, administration and enforcement of the Loan Documents and (c) 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 the Administrative 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 Lender shall be liable for any of the foregoing to the extent they arise from the gross negligence or willful misconduct of the Administrative Agent. SECTION 10.10. Notices to the Company. In each instance that a notice is required, pursuant to the terms hereof, to be given by one or more of the Lenders to the Company or any Subsidiary, the Lenders desiring that such notice be given shall so advise the Administrative 98 Agent (which advice, if given by telephone, shall be promptly confirmed by telex or letter to the Administrative Agent at its address listed in the signature pages hereto), which shall transmit such notice to the Company or such Subsidiary promptly after its having been so advised by the appropriate number of Lenders; provided, however, that subject to the provisions of Section 10.15 hereof, if the Administrative Agent shall fail to transmit such notice within a reasonable period of time after its having been so advised by the appropriate number of Lenders, the Lenders desiring that such notice be given may transmit such notice directly to the Company or such Subsidiary. In any event notices to the Company or any Subsidiary shall be sent to the address of the Company provided for in this Agreement. SECTION 10.11. Action on Instructions of Lenders. The Administrative 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 Lenders, or all of the Lenders, as the case may be, and such instructions and any action taken or failure to act pursuant thereto shall be binding on all of the Lenders and on all holders of Notes and on all Holders of Secured Obligations. Except where an action or inaction is expressly required under this Agreement, the Administrative Agent shall be fully justified in failing or refusing to take any action hereunder and under any other Loan Documents unless it shall first be indemnified to its satisfaction by the Lenders in accordance with their respective Pro Rata Shares, against any and all liability, cost and expense that it may incur by reason of taking or continuing to take any such action. SECTION 10.12. Lender Credit Decision. Each Lender acknowledges that it has, independently and without reliance upon the Administrative Agent or any other Lender and based on the financial statements prepared by the Company 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 Lender also acknowledges that it will, independently and without reliance upon the Administrative Agent or any other Lender 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. SECTION 10.13. Collateral. (a) Each Lender authorizes the Administrative Agent to enter into each of the Loan Documents to which it is a party and to take all action contemplated by such Loan Documents and to enter into the Intercreditor Agreement and to take all action contemplated by the Intercreditor Agreement. Each Lender agrees that no Holder of Secured Obligations, other than the Administrative Agent acting on behalf of all Holders of Secured Obligations, or, in the case of the Co-Borrower Collateral, on behalf of the Facility C Lenders, shall have the right individually to seek to realize upon the security granted by any Loan Document, it being understood and agreed that such rights and remedies may be exercised solely by the Administrative Agent for the benefit of the Holders of Secured Obligations (or, in the case of the Co-Borrower Collateral, for the benefit of the Facility C Lenders), upon the terms of the Loan Documents. 99 (b) In the event that any Collateral is pledged by any Person as collateral security for the Obligations, the Administrative Agent is hereby authorized to execute and deliver on behalf of the Holders of Secured Obligations any Loan Documents necessary or appropriate to grant and perfect a Lien on such Collateral in favor of the Administrative Agent on behalf of the Holders of Secured Obligations (or, in the case of the Co-Borrower Collateral, on behalf of the Facility C Lenders). (c) The Lenders hereby authorize the Administrative Agent, at its option and in its discretion, to release any Lien granted to or held by the Administrative Agent upon any Collateral (i) upon termination of the Commitments and payment and satisfaction of all of the Obligations or the transactions contemplated hereby; (ii) as permitted by, but only in accordance with, the terms of the applicable Loan Document; or (iii) if approved, authorized or ratified in writing by the Required Lenders, unless such release is required to be approved by all of the Lenders hereunder. Upon request by the Administrative Agent at any time, the Lenders will confirm in writing the Administrative Agent's authority to release particular types or items of Collateral pursuant to this Section 10.13(c). (d) Upon any sale or transfer of assets constituting Collateral which is expressly permitted pursuant to the terms of any Loan Documents, or consented to in writing by the Required Lenders, and upon at least ten (10) Business Days' prior written request by the Company, the Administrative Agent shall (and is hereby irrevocably authorized by the Lenders to) execute such documents as may be necessary to evidence the release of the Liens granted to the Administrative Agent for the benefit of the Holders of Secured Obligations (or, in the case of the Co-Borrower Collateral, for the benefit of the Facility C Lenders), upon the Collateral that was sold or transferred; provided, however, that (i) the Administrative Agent shall not be required to execute any such document on terms which, in the Administrative Agent's opinion, would expose the Administrative Agent to liability or create any obligation or entail any consequence other than the release of such Liens without recourse or warranty, and (ii) such release shall not in any manner discharge, affect or impair the Secured Obligations or any Liens upon (or obligations of the Company or any other Loan Party) in respect of) all interests retained by the Company or any other Loan Party, including (without limitation) the proceeds of the sale, all of which shall continue to constitute part of the Collateral. Notwithstanding the foregoing, each of the Lenders hereby acknowledges and agrees that upon the consummation of any Permitted Disposition, the Administrative Agent, for itself and on behalf of the Lenders, shall release from its Guaranty or Co-Borrower Guaranty any Loan Party whose stock is sold in such Permitted Disposition, and shall release such stock from the applicable Pledge Agreement or Co-Borrower Pledge Agreement. No release of Collateral shall affect the obligations of the Borrower under Section 2.06(b). SECTION 10.14. Resignation or Removal of the Administrative Agent. If, at any time, Lenders holding Notes having aggregate outstanding principal balances equal to at least 75% of the then outstanding amount of the Aggregate Commitment (excluding from such computation the Administrative Agent and its Notes) shall deem it advisable, those Lenders may submit to the Administrative Agent notification by certified mail, return receipt requested of its removal as Administrative Agent under this Agreement, which removal shall be effective as of the date of receipt of such notice by the Administrative Agent. If, at any time, the Administrative Agent shall deem it advisable, in its sole discretion, it may submit to each of the 100 Lenders written notification, by certified mail, return receipt requested, of its resignation as Administrative Agent under this Agreement, which resignation shall be effective as of 60 days after the date of such notice. In the event of any such removal or resignation, the Required Lenders may appoint a successor to the Administrative Agent. In the event the Administrative Agent shall have resigned and/or have been removed and so long as no successor shall have been appointed, the Borrower shall make all payments due each Lender hereunder directly to that Lender and all powers specifically delegated to the Administrative Agent by the terms hereof may be exercised by the Required Lenders. Upon the removal or resignation of the Administrative Agent, the retiring Administrative Agent shall be discharged from its duties and obligations hereunder and under the other Loan Documents. After the removal or resignation of the Administrative Agent, the provisions of this Article X shall continue in effect for its benefit in respect of any actions taken or omitted to be taken while it was acting as the Administrative Agent hereunder and under the other Loan Documents. SECTION 10.15. Benefits of Article X. None of the provisions of this Article X shall inure to the benefit of the Borrower or of any Person other than Administrative Agent and each of the Lenders and their respective successors and permitted assigns. Accordingly, neither the Borrower nor any Person other than Administrative Agent and the Lenders (and their respective successors and permitted assigns) shall be entitled to rely upon, or to raise as a defense, the failure of the Administrative Agent or any Lenders to comply with the provisions of this Article X. ARTICLE XI SETOFF; RATABLE PAYMENTS SECTION 11.01. Set-off. In addition to, and without limitation of, any rights of the Lenders under applicable law, if any Loan Party becomes insolvent, however evidenced, or any Event of Default or Unmatured Default occurs, any indebtedness from any Lender to any Loan Party (including all account balances, whether provisional or final and whether or not collected or available) may be offset and applied toward the payment of the Obligations owing to such Lender, whether or not the Obligations, or any part hereof, shall then be due; provided, however, that unless and until the Co-Borrower Conditions are satisfied, any set-off of amounts owed by any Lender to the Co-Borrower Subsidiaries shall only be applied to the Obligations of the Co-Borrower and the Co-Borrower Subsidiaries under the Loan Documents. Each Lender agrees promptly to notify the Borrower after any such set-off and application made by such Lender; provided, however, that the failure to give such notice shall not affect the validity of any such set-off and application. The rights of each Lender under this Section 11.01 are in addition to any other rights and remedies which that Lender may have under this Agreement or otherwise. SECTION 11.02. Ratable Payments. If any Lender, whether by setoff or otherwise, has payment made to it upon any of its Loans (other than payments received pursuant to Sections 3.01, 3.02 or 3.04) in a greater proportion than that received by any other Lender with respect to the Loans (other than payments with respect to a Facility that are received ratably by the Lenders of such Facility in accordance with the provisions of this Agreement), such Lender agrees, promptly upon demand, to purchase a portion of such Loans held by the other Lenders so that after such purchase each Lender will hold its Applicable Pro Rata Share of all Loans. If any 101 Lender, 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 Lender agrees, promptly upon demand, to take such action necessary such that all Lenders share in the benefits of such collateral ratably in accordance with their respective Pro Rata Shares. In case any such payment is disturbed by legal process, or otherwise, appropriate further adjustments shall be made. ARTICLE XII BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS SECTION 12.01. Successors and Permitted Assigns. The terms and provisions of the Loan Documents shall be binding upon and inure to the benefit of the Company, the Co-Borrower and the Lenders and their respective successors and permitted assigns, except that (a) neither the Company nor the Co-Borrower shall have the right to assign its rights or obligations under the Loan Documents and (b) except as otherwise provided in the next succeeding sentence, any assignment by any Lender must be made in compliance with Section 12.03. Nothing in this Agreement shall prevent or prohibit any Lender from pledging its Loans and Notes hereunder to a Federal Reserve Bank in support of borrowings made by such Lender from such Federal Reserve Bank and, with the consent of the Administrative Agent, any Lender which is a fund may pledge all or any portion of its Loans and Notes to its trustee in support of its obligations to its trustee. SECTION 12.02. Participations. (a) Permitted Participants; Effect. Any Lender 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 entities ("Participants") participating interests in any Loan owing to such Lender, any Note held by such Lender, any Commitment of such Lender or any other interest of such Lender under the Loan Documents. In the event of any such sale by a Lender of participating interests to a Participant, such Lender's obligations under the Loan Documents shall remain unchanged, such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, such Lender shall remain the holder of any such Note for all purposes under the Loan Documents, all amounts payable by the Borrower under this Agreement shall be determined as if such Lender had not sold such participating interests, and the Borrower and the Administrative Agent shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under the Loan Documents. (b) Voting Rights. Each Lender shall retain the sole right to approve, without the consent of any Participant, any amendment, modification or waiver of any provision of the Loan Documents other than any amendment, modification or waiver with respect to any Loan, Facility Letter of Credit Obligations or Commitment in which such Participant has an interest which forgives principal, interest or fees or reduces the interest rate or fees payable with respect to any such Loan, Facility Letter of Credit Obligations or Commitment, postpones any date fixed for any regularly-scheduled payment of principal of, or interest or fees on, any such Loan or Commitment, releases any Guarantor of any such Loan, Facility Letter of Credit Obligations or 102 releases any substantial portion of Collateral, if any, securing any such Loan or Facility Letter of Credit Obligations. (c) Benefit of Setoff. The Borrower agrees that each Participant shall be deemed to have the right of setoff provided in Section 11.01 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 Lender under the Loan Documents, provided that each Lender shall retain the right of setoff provided in Section 11.01 with respect to the amount of participating interests sold to each Participant. The Lenders agree to share with each Participant, and each Participant, by exercising the right of setoff provided in Section 11.01, agrees to share with each Lender, any amount received pursuant to the exercise of its right of setoff, such amounts to be shared in accordance with Section 11.02 as if each Participant were a Lender. SECTION 12.03. Assignments. (a) Permitted Assignments. Any Lender (or any Lender together with one or more other Lenders) may (x) assign all or (subject to Section 12.03(d)) a portion of its Commitments (and related outstanding Obligations) (i) to one or more other Lenders or to such assigning Lender's parent company and/or any Affiliate of such Lender which is at least 50% owned by such Lender or its parent company or (ii) in the case of any Lender that is a fund that invests in bank loans, any other fund that invests in bank loans and is managed by the same investment advisor or such Lender or by an Affiliate of such investment advisor of (y) assign all or, if less than all (but subject to Section 12.03(d)), a portion equal to at least $5,000,000 in the aggregate for the assigning Lender or Lenders of such Commitments (and related outstanding Obligations) to one or more Eligible Assignees (treating, solely for purposes of the foregoing $5,000,000 minimum limitation but not for any other purpose, including the fee payable to the Administrative Agent as hereinafter provided, (A) any fund that invests in bank loans and (B) any other fund that invests in bank loans and is managed by the same investment advisor as such fund or by an Affiliate of such investment advisor, as a single Eligible Assignee), each of which assignees shall become a party to this Agreement as a Lender by execution of an assignment and assumption agreement ("Assignment and Assumption Agreement") substantially in form of Exhibit V (appropriately completed), provided that (i) at such time Schedule I shall be deemed modified to reflect the Commitments and/or outstanding Loans, as the case may be) of such new Lender or the existing Lenders, (ii) upon surrender of the relevant Notes, new Notes will be issued by the Company to such new Lender and to the assigning Lender upon the request of such new Lender or assigning Lender (but the Company shall not be obligated to pay the Administrative Agent's or any Lender's costs and expenses with respect to the issuance of such Note or Notes unless the assignment is made pursuant to Section 2.27), (iii) the consent of the Administrative Agent shall be required in connection with any assignment (which consent shall not be unreasonably withheld), (iv) from and after May 21, 2000 and unless an Event of Default has occurred and is continuing, the consent of the Company shall be required in connection with any assignment of Commitments to an assignee pursuant to clause (y) above (which consent shall not be unreasonably withheld), and (v) the Administrative Agent shall receive at the time of each such assignment the payment of a non-refundable assignment fee of $3,500 payable by the assignor or assignee (as agreed to by them) and, provided further, that such transfer or assignment will not be effective until recorded by the Administrative Agent on the Register pursuant to Section 13.07. To the extent of any assignment pursuant to this Section 12.03, the 103 assigning Lender shall be relieved of its obligations hereunder with respect to its assigned Commitments. (b) Tax Requirements. At the time of each assignment pursuant to this Section 12.03 to a Person which is not already a Lender hereunder and which is not a United States person (as such term is defined in Section 7701(a)(3) of the Code) for U.S. federal income tax purposes, the respective assignee shall provide to the Company and the Administrative Agent, the appropriate Internal Revenue Service Forms described in Section 2.23. (c) Dissemination of Information. The Company and the Co-Borrower authorize each Lender to disclose to any Participant or any other Person acquiring an interest in the Loan Documents by operation of law (each a "Transferee") and any prospective Transferee any and all information in such Lender's possession concerning the creditworthiness of the Company and its Subsidiaries. (d) Co-Borrower. Unless and until the Co-Borrower Termination Conditions are satisfied, no Lender may assign or transfer any interest in Facility A or in Facility B unless it simultaneously transfers to the same Purchaser identical percentage interests in the Facility A Commitment, the Co-Borrower Facility A Sublimit, the Facility A Loans, the Facility Letter of Credit Obligations, the Facility B Commitment and the Facility B Revolver Loans. ARTICLE XIII MISCELLANEOUS SECTION 13.01. Notice. (a) Except as otherwise permitted by Section 2.14(b) 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 or by telex or by facsimile and 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, if mailed and properly addressed with postage prepaid, shall be deemed given when received (or when delivery is refused); any notice, if transmitted by telex or facsimile, shall be deemed given when transmitted (answerback confirmed in the case of telexes and facsimile confirmation in the case of a facsimile). (b) The Company, the Administrative Agent and any Lender may each change the address for service of notice upon it by a notice in writing to the other parties hereto. (c) Any notice to the Company shall be deemed notice to the Co-Borrower. SECTION 13.02. Survival of Representations. All covenants, agreements, representations and warranties made herein and in the certificates delivered pursuant hereto shall survive the making by the Lenders of any Loans herein contemplated and the execution and delivery to the Lenders of the Notes evidencing the Commitments, and shall continue in full force and effect until all of the Obligations have been paid in full, all Facility Letters of Credit have been terminated and all of the Commitments have been terminated. 104 SECTION 13.03. Expenses. The Borrower shall pay (a) all expenses, including attorneys' fees and disbursements (which attorneys may be employees of the Administrative Agent or any Lender), incurred by the Administrative Agent and any Lender in connection with the administration of this Agreement and the other Loan Documents, any amendments, modifications or waivers with respect to any of the provisions thereof and the enforcement and protection of the rights of the Lenders and the Administrative Agent under this Agreement or any of the other Loan Documents, including all recording and filing fees, documentary stamp, intangibles and similar taxes, title insurance premiums, appraisal fees and other costs and disbursements incurred in connection with the taking of collateral and the perfection and preservation of the Lenders' security therein, and (b) the reasonable fees and the disbursements of Administrative Agent's attorneys (which attorneys may be employees of the Administrative Agent) in connection with the preparation, negotiation, execution, delivery and review of this Agreement, the Notes and the other Loan Documents (whether or not the transactions contemplated by this Agreement shall be consummated) and the closing of the transactions contemplated hereby. SECTION 13.04. Indemnification of the Lenders and the Administrative Agent. The Borrower shall indemnify and hold harmless the Administrative Agent and each Lender, and their respective 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 the Administrative Agent or any Lender is a party thereto) which any of them may pay or incur arising out of or relating to, directly or indirectly, 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; provided, however, that in no event shall the Administrative Agent or a Lender have the right to be indemnified hereunder for its own gross negligence or willful misconduct nor shall the Administrative Agent be indemnified against any liabilities which arise as a result of any claims made or actions, suits or proceedings commenced or maintained against any Lender (including the Administrative Agent, in its capacity as such) (i) by that Lender's shareholders or any governmental regulatory body or authority asserting that such Lender or any of its directors, officers, employees or agents violated any banking or securities law or regulation or any duty to its own shareholders, customers (excluding the Borrower) or creditors in any manner whatsoever in entering into or performing any of its obligations contemplated by this Agreement or (ii) by any other Lender. The obligations of the Borrower under this Section shall survive the termination of this Agreement. SECTION 13.05. Maximum Interest Rate. It is the intention of the Lenders and the Borrower that the interest (as defined under applicable law) on the Indebtedness evidenced by the Notes which may be charged to, or collected or received from the Borrower shall not exceed the maximum rate permissible under applicable law. Accordingly, anything herein or in any of the Notes to the contrary notwithstanding, should any interest (as so defined) be charged to, or collected or received from the Borrower by the Lenders pursuant hereto or thereto in excess of the maximum legal rate, then the excess payment shall be applied to the Obligations with respect to which such excess payment applies or, if such excess payment applies to all Obligations, then pro rata among the Facility A Obligations, the Facility B Obligations and (except with respect to payments by the Co-Borrower prior to the satisfaction of the Co-Borrower Termination 105 Conditions) Facility C Obligations, and any portion of the excess payment remaining after payment in full thereof shall be returned by the Lenders to the Borrower. SECTION 13.06. Modification of Agreement. (a) Neither this Agreement nor any Note or Guaranty or (if applicable) the Lennar Guaranty or the Co-Borrower Guaranties nor any terms hereof or thereof may be changed, waived, discharged or terminated unless such change, waiver, discharge or termination is in writing signed by the Company (or other applicable Loan Party to such Loan Document) and the Required Lenders, provided that no such change, waiver, discharge or termination shall, without the consent of each Lender (with Obligations being directly affected in the case of the following clause (i)): (i) extend the final scheduled maturity of any Loan or Note or any portion thereof or extend the stated maturity of any Facility Letter of Credit beyond the Facility A Maturity Date, or reduce the rate or extend the time of payment of interest or fees thereon, or reduce the principal amount thereof (except to the extent repaid in cash), (ii) amend, modify or waive any provision of Article XI or this Section 13.06, (iii) reduce the percentage specified in the definition of the Required Lenders or change the definitions of Applicable Pro Rata Share, Facility A Pro Rata Share, Facility B Revolver Pro Rata Share, Facility B Term Pro Rata Share or Facility C Pro Rata Share, (iv) consent to the assignment or transfer by the Company of any of its rights and obligations under this Agreement, (v) other than pursuant to a transaction permitted by the terms of this Agreement, release all or substantially all of the Collateral, or (vi) other than pursuant to a transaction permitted by the terms of this Agreement, release any Guarantor from its obligations under its Guaranty or (unless and until the Co-Borrower Termination Conditions are satisfied) release the Company from its obligations under the Lennar Guaranty; provided, further, that no such change, waiver, discharge or termination shall (A) increase any Commitment of any Lender over the amount thereof then in effect (it being understood that waivers or modifications of conditions precedent, covenants, any Unmatured Default or Event of Default or of a mandatory reduction to the Aggregate Facility A Commitment or Aggregate Facility B Commitment or of a mandatory prepayment shall not constitute an increase of the Commitment of any Lender, and that an increase in the available portion of any Commitment of any Lender shall not constitute an increase in the Commitment of such Lender), without the consent of such Lender, (B) without the consent of each Issuer affected thereby, amend, modify or waive any provision of Section 2.21 or alter its rights or obligations with respect to Facility Letters of Credit, (C) without the consent of the Swing Line Bank, amend, modify or waive any provision relating to the rights or obligations of the Swing Line Bank or with respect to the Swing Line Loans (including, without limitation, the obligations of the Lenders to make Advances in repayment of Swing Line Loans) or (D) without the consent of the Administrative Agent, amend, modify or waive any provision of Article X or any other provision relating to the rights or obligations of the Administrative Agent; provided, however, that in any case the Required Banks may waive, in whole or in part, any such prepayment, repayment or Commitment reduction, so long as the application of any such prepayment, repayment or Commitment reduction which is still required to be made is not altered. (b) If, in connection with any proposed change, waiver, discharge or termination of or to any of the provisions of this Agreement or other Loan Documents as contemplated in clauses (i) through (vi), inclusive, of the first proviso to Section 13.06(a), the consent of the Required 106 Lenders is obtained but the consent of one or more of such other Lenders whose consent is required is not obtained, then the Company shall have the right, so long as all non-consenting Lenders whose individual consent is required are treated as described in either clauses (i) or (ii) below, either (i) to replace each such non-consenting Lender with one or more Replacement Lenders pursuant to Section 2.27 so long as at the time of such replacement, each such Replacement Lender consents to the proposed change, waiver, discharge or termination or (ii) to terminate each such non-consenting Lender's Commitments and repay in full its outstanding Loans, provided that, unless the Commitments that are terminated, and Loans that are repaid, pursuant to the preceding clause (ii) are immediately replaced in full at such time through the addition of new Lenders or the increase of the Commitments and/or outstanding Loans of existing Lenders (who in each case must specifically consent thereto in writing), then in the case of any action pursuant to preceding clause (ii) the Required Lenders (determined before giving effect to the proposed action) shall specifically consent thereto and, provided further, that in any event the Company shall not have the right to replace a Lender, terminate its Commitments or repay its Loans solely as a result of the exercise of such Lender's rights (and the withholding of any required consent by such Lender) pursuant to the second proviso to Section 13.06(a). (c) Anything in this Agreement to the contrary notwithstanding, if at a time when the conditions precedent set forth in Article V hereof to any Loan are, in the opinion of the Required Lenders, satisfied, any Lender (a "Defaulting Lender") shall fail to fulfill its obligations to make such Loan and such failure continues for at least two Business Days then, for so long as such failure shall continue, such Defaulting Lender shall (unless the Required Lenders, determined as if such Defaulting Lender were not a "Lender" hereunder, shall otherwise consent in writing) be deemed for all purposes relating to changes, waivers, discharges and termination under this Agreement (including, without limitation, under Section 13.06(a)) to have no Loans or Commitments, shall not be treated as a "Lender" hereunder when performing the computation of Required Lenders, and shall have no rights under the first proviso of Section 13.06(a); provided that any action taken by the other Lenders with respect to the matters referred to in clauses (i) through (iv), inclusive, of the first proviso of Section 13.06(a) shall not be effective as against such Defaulting Lender. SECTION 13.07. Register. The Agent shall maintain a register (the "Register") on which it will record the Commitments from time to time of each of the Lenders, the Loans made by each of the Lenders and each repayment in respect of the principal amount of the Loans of each Lender. Failure to make any such recordation, or any error in such recordation, shall not affect the Borrower's obligations in respect of such Loans. With respect to any Lender, the transfer of the Commitments of such Lender and the rights to the principal of, and interest on, any Loan made pursuant to such Commitment shall not be effective until such transfer is recorded on the Register maintained by the Administrative Agent with respect to ownership of such Commitments and Loans, and prior to such recordation all amounts owing to the transferor with respect to such Commitments and Loans shall remain owing to the transferor. The registration of assignment or transfer of all or part of any Commitments and Loans shall be recorded by the Administrative Agent on the Register only upon the acceptance by the Administrative Agent of a properly executed and delivered Assignment and Assumption Agreement pursuant to Section 12.03. Coincident with the delivery of such an Assignment and Assumption Agreement to the Administrative Agent for acceptance and registration of assignment or transfer of all or part of a Loan, or as soon thereafter as practicable, the assigning 107 or transferor Lender shall surrender the applicable Note evidencing such Loan, and thereupon the Borrower shall, promptly upon request by the Administrative Agent, issue one or more new Notes in the same aggregate principal amount to the assigning or transferor Lender and/or the new Lender. SECTION 13.08. Preservation of Rights. No notice to or demand of the Borrower in any case shall entitle the Borrower to any other or further notice or demand in the same or similar circumstances. No delay or omission of the Lenders or the Administrative 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 notwithstanding the existence of an Event of Default or Unmatured Default, or the inability of the Borrower to satisfy the conditions precedent to such Loan 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 the Lenders required pursuant to Section 13.06, 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 the Administrative Agent and the Lenders until the Obligations have been paid in full and all Facility Letters of Credit have terminated and all Commitments have terminated. SECTION 13.09. Several Obligations of Lenders. The respective obligations of the Lenders hereunder are several and not joint, and no Lender shall be the partner or agent of any other (except to the extent to which the Administrative Agent is authorized to act as such). The failure of any Lender to perform any of its obligations hereunder shall not relieve any other Lender from any of its obligations hereunder. 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. SECTION 13.10. Severability. If any one or more of the provisions contained in this Agreement or the Notes is held invalid, illegal or unenforceable in any respect, the validity, legality or enforceability of the remaining provisions contained herein and therein shall not in any way be affected or impaired thereby. SECTION 13.11. Counterparts. This Agreement may be executed in two or more counterparts, each of which may be executed by one or more of the parties hereto, but all of which, when taken together, shall constitute a single agreement binding on all the parties hereto. SECTION 13.12. The Company as Agent for the Co-Borrower. The Co-Borrower hereby appoints the Company as its agent and attorney-in-fact to execute and deliver any and all documents for and on behalf of the Co-Borrower in connection with the transactions contemplated by this Agreement or any of the other Loan Documents, or in connection with the amendment, modification or termination of any thereof, and hereby agrees that upon execution of any such documents or instruments they shall be binding upon the Co-Borrower. The Co-Borrower further agrees that the Lenders may rely upon written representations from the Company that it is acting on behalf of the Co-Borrower in accordance with the provisions of this Section 13.12 until such time as the Administrative Agent receives notice in writing from the Co- 108 Borrower of the termination of the designation of the Company as agent and attorney-in-fact for the Co-Borrower. SECTION 13.13. Loss, etc., Notes. Upon receipt by the Borrower of reasonably satisfactory evidence of the loss, theft, destruction or mutilation of any of the Notes, upon reimbursement to the Borrower of all reasonable expenses incidental thereto and upon surrender and cancellation of the relevant Note, if mutilated, the Borrower shall make and deliver in lieu of that Note (the "Prior Note") a new Note of like tenor, except that no reference need be made in the new Note to any installment or installments of principal, if any, previously due and paid upon the Prior Note. Any Note made and delivered in accordance with the provisions of this Section shall be dated as of the date to which interest has been paid on the unpaid principal amount of the Prior Note. SECTION 13.14. Governmental Regulation. Anything contained in this Agreement to the contrary notwithstanding, no Lender shall be obligated to extend credit to the Borrower in violation of any limitation or prohibition provided by any applicable statute or regulation. SECTION 13.15. Taxes. Any taxes (excluding federal, state or local income taxes on the overall net income of any Lender) or other similar assessments or charges payable or ruled payable by any governmental authority in respect of the Loan Documents shall be paid by the Borrower, together with interest and penalties, if any. SECTION 13.16. 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. SECTION 13.17. Entire Agreement. This Agreement sets forth the entire agreement of the parties hereto with respect to the subject matter hereof, provided, however, that the fees payable by Company are set forth in the Fee Letters. SECTION 13.18. CHOICE OF LAW. THE LOAN DOCUMENTS (OTHER THAN THOSE CONTAINING A CONTRARY EXPRESS CHOICE OF LAW PROVISION) SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS (AND NOT THE LAW OF CONFLICTS) OF THE STATE OF NEW YORK BUT GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL BANKS. SECTION 13.19. CONSENT TO JURISDICTION. THE BORROWER HEREBY IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL OR NEW YORK STATE COURT SITTING IN NEW YORK CITY IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO ANY LOAN DOCUMENTS AND THE BORROWER HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT AND IRREVOCABLY WAIVES 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 HEREIN SHALL LIMIT THE RIGHT OF THE ADMINISTRATIVE AGENT OR ANY LENDER TO BRING PROCEEDINGS AGAINST 109 THE BORROWER IN THE COURTS OF ANY OTHER JURISDICTION. ANY JUDICIAL PROCEEDING BY THE BORROWER AGAINST THE ADMINISTRATIVE AGENT OR ANY LENDER OR ANY AFFILIATE OF THE ADMINISTRATIVE AGENT OR ANY LENDER INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH ANY LOAN DOCUMENT SHALL BE BROUGHT ONLY IN A COURT IN NEW YORK, NEW YORK. SECTION 13.20. WAIVER OF JURY TRIAL. THE BORROWER, THE ADMINISTRATIVE AGENT AND EACH LENDER 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. [Signatures appear on following pages] 110 IN WITNESS WHEREOF, the Company, the Co-Borrower and the Lenders have caused this Agreement to be duly executed as of the date first above written. Company: LENNAR CORPORATION By: /s/ DAVID MCCAIN ----------------------------------------- David McCain, Vice President Address: Lennar Corporation 700 Northwest 107th Avenue Miami, Florida 33172 Attention: Bruce Gross, Chief Financial Officer Fax No.: (305) 227-7115 with copies to: Lennar Corporation 700 Northwest 107th Avenue Miami, Florida 33172 Attention: David McCain, General Counsel Fax No.: (305) 229-6650 and Bilzin Sumberg Dunn Price & Axelrod LLP 2500 First Union Financial Center 200 South Biscayne Boulevard Miami, FL 33131-2336 Attention: Brian Bilzin Fax No.: (305) 374-7593 111 Lenders: BANK ONE, NA, As Lender, Administrative Agent, Issuer and Swing Line Bank By: ----------------------------------------- Name: ------------------------------------ Its: ------------------------------------- Address: Bank One, NA 1 Bank One Plaza 14th Floor, Mail Suite IL1-0315 Chicago, Illinois 60670-0151 Attention: Patt Schiewitz Fax No.: (312) 732-1117 with a copy to: Bank One, NA 1 Bank One Plaza, Mail Suite 0801 Chicago, Illinois 60670-0801 Attention: Law Department Fax No.: (312) 732-5144 112 BANKERS TRUST COMPANY, As Lender and Syndication Agent By: ----------------------------------------- Name: ------------------------------------ Its: ------------------------------------- Address: 113 SCHEDULE IV PERMITTED LIENS None SCHEDULE V REQUIRED CONSENTS None SCHEDULE VIII SUBORDINATED DEBT None SCHEDULE IX Loan Facilities Required to be Repaid Debt Off Fourth Amended and Restated Credit Agreement dated as of February 14, 2000 among U.S. Home Corporation, Bank One NA as Administrative Agent and the lenders party hereto. SCHEDULE X PERMITTED DISPOSITIONS None EX-10.(P) 5 0005.txt Exhibit 10.(p) LENNAR CORPORATION 2000 STOCK OPTION AND RESTRICTED STOCK PLAN 1. Purpose of the Plan The Purpose of the Plan is to encourage and enable those officers, employees and directors of the Company upon whose judgement, initiative and efforts the Company largely depends for the successful conduct of its business to acquire a proprietary interest in Lennar, and by doing so to stimulate the efforts of those officers, employees and directors on behalf of the Company and strengthen their desire to remain officers, employees or directors of the Company. The Plan is an amendment and complete restatement of the 1997 Stock Option Plan and provides, in addition to the granting of stock options, for the granting of Restricted Stock. 2. Definitions As used in this Plan the following definitions apply: (a) "Assumed Options" means options granted in connection with the spinoff of LNR from Lennar Corporation in substitution for unexercised options granted under the Lennar Corporation 1991 Stock Option Plan or otherwise. (b) "Board of Directors" means the Board of Directors of Lennar. (c) "Code" means the Internal Revenue Code of 1986, as amended. (d) "Committee" means the Compensation Committee of the Board of Directors, or such other committee of the Board of Directors as is specified by the Board of Directors to perform the functions and duties of the Committee under the Plan. If there is no Compensation Committee and the Board of Directors does not appoint another Committee, the Board of Directors will be the Committee. (e) "Common Stock" means common stock, par value $.10 per share, of Lennar. (f) "Company" means Lennar and all of its more than 50% owned subsidiaries. (g) "Director" means any person serving as a member of the board of directors of any corporation included in the Company. (h) "Discretion" means the ability of a committee or other body to act in its sole discretion, with no requirement that it follow past practices or treat one employee in a manner consistent with the treatment afforded to any other employee. (i) "Grantee" means a person who holds a stock option, Stock Appreciation Right or Restricted Stock granted under the Plan. (j) "Incentive Option" means an option to purchase Common Stock which meets the requirements set forth in the Plan and is intended to be, and qualifies as, an Incentive Stock Option as that term is used in Section 422 of the Code. (k) "Key Employee" means an officer or employee of the Company, who the Committee determines can contribute significantly to the growth and successful operations of the Company. 1 (l) "Lennar Equivalent Fraction" means a fraction of which (i) the numerator is the average of the closing prices of Lennar Corporation common stock, as reported on the New York Stock Exchange on October 27, 28, 29, 30 and 31, 1997 and (ii) the denominator is the average of the closing prices of Lennar Common Stock, as reported on the New York Stock Exchange on November 3, 4, 5, 6 and 7, 1997. (m) "Lennar Options" means options granted under the Lennar 1991 Stock Option Plan, as it may have been amended and restated from time to time, which were outstanding (whether or not they were immediately exercisable) on October 31, 1997. (n) "Lennar" means Lennar Corporation, a Delaware corporation, or its successor by merger or any similar transaction. (o) "Nonqualified Option" means an option to purchase Common Stock which meets the requirements set forth in the Plan but is not intended to be, or does not qualify as, an Incentive Stock Option as that term is used in Section 422 of the Code. (p) "Officers and Directors Stock Option Committee" means a committee designated by the Board of Directors, consisting of two or more persons all of whom are outside directors, as that term is used in Section 162(m) of the Code. (q) "Plan" means this Lennar Corporation 2000 Stock Option and Restricted Stock Plan. (r) "Restricted Stock" means Common Stock granted under the terms of the Plan, which are subject to the restrictions hereunder. (s) "Securities Act" means the Securities Act of 1933, as amended. (t) "Stock Appreciation Right" means a right to receive the appreciation in value, or a portion of the appreciation value, of a specified number of shares of Common Stock, as provided in Section 4(b). (u) "10% Stockholder" means a person who owns (after applying the attribution rules contained in Section 424 of the Code) more than 10% of the total combined voting stock of all classes of Lennar or of any parent or subsidiary. 3. Authority to Grant Stock Options (a) The Committee or the Officers and Directors Stock Option Committee may at any time authorize the grant of stock options under the Plan to any one or more Key Employees or Directors. Subject to adjustment pursuant to Section 13, in no event may any Grantee receive stock options for more than 750,000 shares of Common Stock in any fiscal year. The Committee or the Officers and Directors Stock Option Committee may at their discretion, grant Assumed Options to Grantees that are intended to replace those unexercised stock options granted by Lennar under its 1991 Stock Option Plan; it is intended that such replacement would comply with Section 424 of the Code. An Assumed Option issued in substitution for a Lennar Option will entitle the holder to purchase a number of shares of Common Stock equal to (i) the number of shares which were subject to the Lennar Option on October 31, 1997, times (ii) the Lennar Equivalent Fraction. Stock options granted under the Plan may be Incentive Options or Nonqualified Options, except that (i) no officer or Director who is not an employee may be granted an Incentive Option, and (ii) no employee may be granted an Incentive Option which would result in the aggregate fair market value, determined as of the date the stock option is granted, of the Common Stock with respect to which that Incentive Option and all other Incentive Options held by that employee under any plan maintained by Lennar (or any parent or subsidiary of Lennar) are exercisable for the first time by that employee during any calendar year exceeding $100,000. Each stock option will be designated at the time of grant as a Nonqualified Option or as an Incentive Option. (b) Without limiting the generality of what is stated in Section 3(a), stock options may be granted to a Key Employee regardless of the fact that stock options or Stock Appreciation Rights previously granted to that Key Employee remain unexercised, and a Grantee may exercise a stock option or Stock Appreciation Right when it is 2 exercisable by its own terms, notwithstanding that there are stock options and Stock Appreciation Rights which were previously granted to that Grantee which remain unexercised. 4. Authority to Grant Stock Appreciation Rights (a) The Committee or the Officers and Directors Stock Option Committee may at any time authorize the grant of Stock Appreciation Rights to any Key Employees or Directors who hold or are receiving stock options granted under the Plan. Each Stock Appreciation Right will relate to a specific stock option granted under the Plan. A Stock Appreciation Right may be granted concurrently with the stock option to which it relates or at any time after the stock option has been granted and before it has been exercised, terminates or expires. The number of shares subject to a Stock Appreciation Right may not exceed the number of shares, which may be issued on exercise of the option to which the Stock Appreciation Right relates. (b) The term "Stock Appreciation Right" means the right to receive from the Company, without payment by the Grantee, an amount equal to the excess of the fair market value on the date the Stock Appreciation Right is exercised of the number of shares of Common Stock for which the Stock Appreciation Right is exercised over the exercise price the Grantee would have had to pay to exercise the related stock option in order to purchase that number of shares of Common Stock. Upon exercise of a Stock Appreciation Right the Participant will automatically be deemed to surrender the related stock option with regard to the number of shares of Common Stock as to which the Stock Appreciation Right is exercised. Stock Appreciation Rights may specify that the sum to be paid upon their exercise may be paid by the Company in cash, in Common Stock valued at its fair market value on the date the Stock Appreciation Right is exercised, or in any combination of cash and Common Stock valued in that manner. (c) A Stock Appreciation Right granted under the Plan will be exercisable only when, and with regard to the number of shares of Common Stock as to which, the related stock option is exercisable and will lapse when the related stock option terminates or expires. A Stock Appreciation Right granted under the Plan may only be transferred when, and to the person, to whom the right to exercise the related stock option is transferred as provided in Section 15. 5. Authority to Grant Restricted Stock The Committee or the Officers and Directors Stock Option Committee may in its discretion, as reflected by the terms of the applicable award agreement, at any time (i) authorize the grant of Restricted Stock under the Plan to any one or more Key Employees or Directors; (ii) provide a specified purchase price for the Restricted Stock (whether or not the payment of a purchase price is required by any state law applicable to the Company); (iii) determine the restrictions applicable to Restricted Stock and (iv) determine or impose other conditions to the grant of Restricted Stock under the Plan as it may deem appropriate. However, the aggregate number of shares of Restricted Stock granted to a Key Employee or Director in any fiscal year shall not exceed 750,000. 6. Terms and Conditions of Stock Options (a) Expiration Date: Each stock option granted under the Plan, other than an Assumed Option, will expire on a date determined by the Committee or the Officers and Directors Stock Option Committee, in its Discretion, when the option is granted, which will be not more than 10 years after the date of grant, except that an Incentive Option granted to a Key Employee who, at the time of the grant, is a 10% Stockholder will expire not more than five years after the date of grant. (b) Exercise Date: (i) Each stock option granted under the Plan, other than an Assumed Option, will be exercisable at such time or times, and in such installments, as are determined by the Committee or the Officers and Directors Stock Option Committee, in its Discretion, when the stock option is granted. In the case of new Assumed Options granted to a Grantee in replacement in accordance with Section 424 of the Code for options held by the Grantee, the new options may be made exercisable, if so determined by the Committee or the Officers and Directors Stock Option Committee, in its discretion, at the earliest date the replaced options were available. 3 (ii) Each Assumed Option issued in substitution for a Lennar Option will be exercisable with regard to (x) the number of shares as to which the Lennar Option would have been exercisable, multiplied by (y) the Lennar Equivalent Fraction. (c) Price: (i) The exercise price of each stock option granted under the Plan, other than an Assumed Option, will be determined by the Committee or the Officers and Directors Stock Option Committee, in its Discretion, at the time the stock option is granted, except that the exercise price of a stock option may not be less than (i) if the stock option is an Incentive Option granted to a person who is not a 10% Stockholder, 100% of the fair market value of the Common Stock on the date the stock option is granted or (ii) if the stock option is an Incentive Option granted to a 10% Stockholder, 110% of the fair market value of the Common Stock on the date the stock option is granted. If the stock option is a Nonqualified Option, the option may be granted at any price determined by the appropriate committee, except that a stock option intended to qualify for an exception under Section 162(m) of the Code, shall have an exercise price of not less than 100% of the fair market value of the Common Stock on the date the stock option is granted. For the purposes of the Plan, the fair market value of a share of the Common Stock on any day will be the mean between the highest and lowest quoted selling prices of the Common Stock on the New York Stock Exchange (or, if the Common Stock is not traded on the New York Stock Exchange, on the principal securities exchange or market on which the Common Stock is traded) on that date, or if there are no sales on that date, on the next following day on which there are sales. In the event the Common Stock is not publicly traded as of the date the option is granted, the exercise price of each such Incentive Option granted under the Plan will be determined by the Committee or the Officers and Directors Stock Option Committee, in its Discretion, at the time the Incentive Option is granted, except that the exercise price of the Incentive Option may not be less than the fair market value of such shares as of the grant date, with such fair market value determination to be made in 'good faith' as prescribed in Section 14a.422A-1 Q&A 2(c)(4) of the Temporary Treasury Regulations. (ii) The per share exercise price of an Assumed Option issued in substitution for a Lennar Option will be (x) the per share exercise price of the Lennar Option on October 31, 1997, divided by (y) the Lennar Equivalent Fraction. (d) Assignment: No stock option granted under the Plan may be assigned or transferred, other than as provided in Section 15 upon the death of the Grantee to whom the stock option was granted; provided, however, that the Committee or the Officers and Directors Stock Option Committee, may (but need not) permit other transfers, where the Committee or the Officers and Directors Stock Option Committee concludes that such transferability (i) does not result in accelerated taxation, (ii) does not cause any option intended to be an Incentive Option to fail to meet the requirements set forth in Section 422(b) of the Code (or any applicable successor to that Section) and (iii) is otherwise appropriate and desirable. (e) Payment of Option Exercise Price: The exercise price of any stock option will be payable in cash or by check payable to the order of Lennar, except that the Committee or the Officers and Directors Stock Option Committee may determine, in its discretion, that the exercise price of the stock option may be paid by delivering shares of Common Stock with a fair market value at the date the stock option is exercised equal to all or any part of the exercise price, with any remaining balance to be paid in cash or by check payable to the order of Lennar. 7. Terms and Conditions of Restricted Stock (a) Performance Goals: The Committee or the Officers and Directors Stock Option Committee, in its Discretion, shall in the case of grants of Restricted Stock intended to qualify for an exception from the limitation imposed by Section 162(m) of the Code (i) establish one or more performance goals ("Performance Goals") as a precondition to the grant of Restricted Stock awards, and (ii) provide, in connection with the establishment of the Performance Goals, for predetermined grants of specified numbers of shares of Restricted Stock to those Grantees (who continue to meet all applicable eligibility requirements) with respect to whom the applicable Performance Goals are satisfied; provided, however, that the Committee or the Officers and Directors Stock Option Committee shall retain the 4 discretion to reduce the number of shares subject to the Restricted Stock grant prior to the award. The Performance Goals shall be based upon the achievement of (i) a specified level, of (x) the Company's consolidated pre-tax or after-tax earnings or EBITDA or (y) the pre-tax or after-tax earnings, or the EBITDA, of any particular subsidiary, division or other business unit of Lennar or the Company, (ii) the achievement of a specified level of revenues, earnings, costs, return on assets, return on equity, return on capital, return on investment, return on assets under management, net operating income or net operating income as a percentage of book value with regard to the Company, particular subsidiaries, divisions or business units of Lennar or the Company, particular assets or groups of assets or particular employees or groups of employees, or (iii) any combination of the foregoing. Performance Goals may be absolute amounts or percentages of amounts or may be relative to the performance of other companies or of indexes. The Performance Goals shall be established in a timely fashion such that they are considered preestablished for purposes of the rules governing performance-based compensation under Section 162(m) of the Code. Prior to the award of Restricted Stock hereunder, the Officers and Directors Stock Option Committee shall have certified that any applicable Performance Goals, and other material terms of the grant, have been satisfied. Notwithstanding the foregoing, Performance Goals which do not satisfy the foregoing provisions of this Section 7(a) may be established by the Committee or the Officers and Directors Stock Option Committee with respect to grants of Restricted Stock not intended to qualify for an exception from the limitations imposed by Section 162(m) of the Code. (b) Vesting Periods: In connection with the grant of a Restricted Stock award, whether or not Performance Goals apply thereto, the Committee or the Officers and Directors Stock Option Committee shall establish one or more vesting periods ("Vesting Periods") with respect to the shares of Restricted Stock granted hereunder, the length of which shall be determined in the Discretion of the Committee or the Officers and Directors Stock Option Committee. Subject to the provisions of this Section 7, the Restricted Stock agreement and the other provisions of the Plan, restrictions on Restricted Stock shall lapse if the Grantee satisfies all applicable employment or other service requirements through the end of the applicable Vesting Period. (c) Assignment: No Restricted Stock award granted under the Plan may be assigned or transferred, other than as provided in Section 15 upon the death of the Grantee to whom the Restricted Stock was granted; provided, however, that the Committee or the Officers and Directors Stock Option Committee may (but need not) permit other transfers, where the Committee or the Officers and Directors Stock Option Committee concludes that such transferability is appropriate and desirable. (d) Certificates: A stock certificate shall be issued with respect to shares of Restricted Stock awarded under the Plan. Such certificates shall be registered in the name of the Grantee. The certificates for shares of Restricted Stock issued hereunder may include any legend which the Committee or the Officers and Directors Stock Option Committee deems appropriate to reflect any restrictions on transfer hereunder or under the written agreement, or as the Committee or the Officers and Directors Stock Option Committee may otherwise deem appropriate, and, without limiting the generality of the foregoing, shall bear a legend referring to the terms, conditions, and restrictions applicable to such award, substantially in the following form: The transferability of this certificate and the shares of stock represented hereby are subject to the terms and conditions (including forfeiture) of the Lennar Corporation 2000 Stock Option and Restricted Stock Plan and a written agreement entered into between the registered owner and Lennar Corporation. Copies of such Plan and agreement are on file in the offices of the Lennar Corporation at 700 NW 107th Avenue, Miami, Florida, 33172. (e) The Committee or the Officers and Directors Stock Option Committee shall require that the stock certificates evidencing such shares be held in custody by Lennar until the restrictions thereon shall have lapsed, and that, as a condition of any Restricted Stock award, the Grantee shall have delivered a stock power, endorsed in blank, relating to the stock covered by such award. If and when such restrictions so lapse, the stock certificates and stock power shall be delivered by Lennar to the recipient or his or her designee. 8. Withholding Payment If as a result of (i) the exercise of a stock option or a Stock Appreciation Right, or (ii) the lapse of restrictions on Restricted Stock (or other income recognition event, such as an election under Section 83 (b) of the Code), the 5 Company is required to pay any amount as withheld income tax (or such other applicable tax), the Company may, at its Discretion, either (i) reduce the number of shares of Common Stock issuable upon exercise of the stock option, or the cash or Common Stock to be paid or delivered upon exercise of the Stock Appreciation Right, by the amount of the required withholding (with the Common Stock valued at its fair market value on the date the stock option or Stock Appreciation Right is exercised), or (ii) require that, as a condition to exercise of the stock option or Stock Appreciation Right or as a condition precedent to issuance of the Restricted Stock, the Grantee remit to the Company the amount of withholding tax required to be paid as a result of the exercise. If a person makes a disqualifying disposition (as that term is used in Section 422 of the Code) of shares acquired upon exercise of an Incentive Option, that person will promptly notify the Company of the disqualifying disposition and pay to the Company an amount equal to any withholding tax the Company is required to pay as a result of the disqualifying disposition. If a person fails to reimburse the Company for any sum he or she is required to pay as a result of a disqualifying disposition of shares acquired upon exercise of an Incentive Option, the Company may withhold that amount from any payments of salary or other payments the Company is required to make to the person or may take any other lawful steps to collect that amount from the person. 9. Written Agreement Promptly after a stock option, Stock Appreciation Right or Restricted Stock award is granted under the Plan, Lennar will provide the Grantee of such stock option, Stock Appreciation Right or Restricted Stock with a written agreement containing the provisions of such award. The terms of the agreement will be in accordance with the Plan, but may contain additional provisions and restrictions authorized by the Committee or the Officers and Directors Stock Option Committee, in its Discretion, which are not inconsistent with the Plan. Each agreement relating to a stock option will state whether the stock option is or is not intended to be an Incentive Option. Each Grantee of an award granted under the Plan will be bound by the terms of the Plan and of the agreement relating to the stock option, Stock Appreciation Right or Restricted Stock. 10. Administration of the Plan (a) The Plan will be administered by the Committee or the Officers and Directors Stock Option Committee. The Officers and Directors Stock Option Committee shall be authorized to take action under the Plan as it relates to and in order to comply with Section 162(m) of the Code. (b) The Committee or the Officers and Directors Stock Option Committee will have full power to construe, interpret and administer the Plan and to establish and change the rules and regulations for its administration. (c) Subject to the limitations contained in the Plan, the Committee or the Officers and Directors Stock Option Committee will have full power, in its Discretion, (i) to grant Incentive Options, Nonqualified Options, Stock Appreciation Rights or Restricted Stock to any one or more Key Employees or Directors, as applicable, (ii) to determine as to any stock option, or Stock Appreciation Right granted to any Key Employee or Director the number of shares of Common Stock to which the stock option or Stock Appreciation Right will relate, the exercise price of the stock option or Stock Appreciation Right, the term of the stock option or Stock Appreciation Right, and all other terms of the stock option or Stock Appreciation Right and (iii) to determine the number of shares of Restricted Stock granted to any Key Employee or Director and all other terms of the Restricted Stock. (d) In exercising its powers under the Plan, the Committee or the Officers and Directors Stock Option Committee may act in its sole discretion, with no requirement that it follow past practice or treat one employee, officer or Director in a manner consistent with the treatment afforded to any other employee, officer or Director. (e) All actions taken and decisions made by the Committee or the Officers and Directors Stock Option Committee will be binding and conclusive on all Grantees of stock options, Stock Appreciation Rights or Restricted Stock granted under the Plan and all other officers, employees and Directors of the Company, and on their respective legal representatives and beneficiaries. No member of the Committee or the Officers and Directors Stock Option Committee will be liable for any determination made or action taken in good faith with respect to the Plan or any stock options, Stock Appreciation Rights or Restricted Stock granted under the Plan, or for any decision not to grant stock options, Stock Appreciation Rights or Restricted Stock under the Plan to any officer, employee or Director of the Company. 6 11. Shares Available for Options The aggregate number of shares of Common Stock which may be issued as Restricted Stock or upon exercise of stock options (including Assumed Options) or Stock Appreciation Rights granted under this Plan is four million (4,000,000) shares, subject to adjustment as provided in Section 13. Any shares of Restricted Stock or shares which are subject to stock options or Stock Appreciation Rights which terminate or are surrendered (including shares subject to stock options which are deemed surrendered because of exercise of Stock Appreciation Rights, to the extent the shares are not issued on exercise of the Stock Appreciation Rights) may again be made the subject of awards under the Plan, will be available to be issued as Restricted Stock or subsequently granted stock options or Stock Appreciation Rights. Any shares as to which stock options or Stock Appreciation Rights are exercised but which are retained by Lennar to pay the exercise price of stock options, to reimburse the Company for paying withholding taxes or otherwise, will be deemed to have been issued upon exercise of stock options or Stock Appreciation Rights, and will not be available to be issued as Restricted Stock or on exercise of other stock options or Stock Appreciation Rights. 12. Laws and Regulations (a) The obligation of the Company to sell shares with respect to an award granted under the Plan shall be subject to all applicable laws, rules and regulations, including all applicable federal and state securities laws, and the obtaining of all such approvals by governmental agencies as may be deemed necessary or appropriate by the Committee or the Officers and Directors Stock Option Committee. (b) The Committee or the Officers and Directors Stock Option Committee may make such changes to the Plan as may be necessary or appropriate to comply with the rules and regulations of any government authority or to obtain tax benefits applicable to an award. (c) Each grant of stock options, Stock Appreciation Rights or Restricted Stock is subject to the requirement that, if at any time the Committee or the Officers and Directors Stock Option Committee determines, in its discretion, that the listing, registration or qualification of shares issuable pursuant to the Plan is required by any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body is necessary or desirable as a condition of, or in connection with, the issuance of stock options, Stock Appreciation Rights or shares of Restricted Stock, no payment shall be made, or shares issued or grants of Restricted Stock made, in whole or in part, unless listing, registration, qualification, consent or approval has been effected or obtained free of any conditions in a manner acceptable to the Committee or the Officers and Directors Stock Option Committee. (d) In the event that the disposition of stock acquired pursuant to the Plan is not covered by a then current registration statement under the Securities Act, and is not otherwise exempt from such registration, such shares shall be restricted against transfer to the extent required under the Securities Act, and the Committee or the Officers and Directors Stock Option Committee may require any individual receiving shares pursuant to the Plan, as a condition precedent to receipt of such shares, to represent to the Company in writing that such shares are acquired for investment only and not with a view to distribution and that such shares will be disposed of only if registered for sale under the Securities Act or if there is an available exemption for such disposition. 13. Modification of Numbers of Shares and Other Securities If (a) the Company at any time is involved in a merger, consolidation, dissolution, liquidation, reorganization, exchange of shares, sale of all or substantially all of the assets or stock of the Company or similar transaction, (b) there is a stock dividend, stock split, reverse stock split, stock combination, reclassification, recapitalization or other similar change in the capital structure of Lennar, or a distribution to holders of Common Stock other than a cash dividend or (c) any other event occurs which in the judgment of the Committee necessitates an adjustment to the 7 terms of the outstanding stock options, Stock Appreciation Rights or Restricted Stock awards which were issued under the Plan, the Committee or the Officers and Directors Stock Option Committee may make such modifications in the terms of outstanding stock options, Stock Appreciation Rights or Restricted Stock awards as in its judgment are appropriate so the Grantees' rights will be substantially proportionate to the rights existing prior to the event, and to maintain the continuing availability of shares under Section 11 (if shares are otherwise then available) including, without limitation, adjustments in (i) the number and kind of shares subject to stock options or Restricted Stock awards, (ii) the exercise price of outstanding stock options and (iii) the number and kind of shares available under Section 11. To the extent that such action includes an increase or decrease in the number of shares subject to outstanding options, Stock Appreciation Rights or Restricted Stock awards, the number of shares available under Section 11 above will be increased or decreased, as the case may be, proportionately. In addition, the limits on the number of options or Restricted Stock that may be granted to an individual under Sections 3 and 5 may be adjusted proportionately. The judgment of the Committee or the Officers and Directors Stock Option Committee with respect to any matter referred to in this Section 13 will be conclusive and binding upon each Grantee without the need for any amendment to the Plan or any stock options, Stock Appreciation Rights or Restricted Stock which had been granted under the Plan. 14. Effects of Termination of Employment (a) Unless otherwise provided in an individual written agreement pursuant to Section 9 hereof, each stock option and related Stock Appreciation Right granted under the Plan will terminate when the Grantee ceases to be an officer, employee or Director of the Company, except that (i) If a Grantee of a stock option dies while an officer, employee or Director of the Company, each stock option and related Stock Appreciation Right granted under the Plan (or any predecessor) and held by the Grantee at the date of the Grantee's death shall become fully vested and may be exercised, by the Grantee's legal representative until 12 months after the date of death. (ii) If a Grantee of a stock option ceases to be an officer, employee or Director of the Company, (A) after the Grantee becomes 65 years old, (B) because of the disability of the Grantee (as determined by the Committee in its Discretion), or (C) under other circumstances which the Committee or the Officers and Directors Stock Option Committee, in its Discretion, determines to justify continued exercise of stock options and related Stock Appreciation Rights, each stock option and related Stock Appreciation Right held by the Grantee on the date the Grantee ceased to be an officer, employee or Director of the Company may be exercised, to the extent it was exercisable on the date the Grantee ceased to be an officer, employee or Director of the Company (or, with the consent of the Committee or the Officers and Directors Stock Option Committee in full) until the earlier of (x) three months after the date the Grantee ceases to be an officer, employee or Director of the Company, or (y) the date the stock option expires by its own terms. (b) Notwithstanding the above, if an Incentive Option is granted to a Director or officer, who is also an employee, in the event such Grantee ceases to be an employee, that option may be converted to a Nonqualified Option, under circumstances which the Committee or the Officers and Directors Stock Option Committee, in its Discretion deems appropriate, if that option is not exercised by the Grantee within three months of the time the Grantee ceases to be an employee, and shall thereafter be subject to the provisions of clause (A), (B) or (C) of subparagraph (a) (ii) above so long as the Grantee remains a Director or officer. (c) Unless otherwise provided in an individual written agreement pursuant to Section 9 hereof, each nonvested Restricted Stock granted under the Plan will be forfeited when the Grantee ceases to be an officer, employee or Director of the Company, except that 8 (i) If a Grantee of a nonvested Restricted Stock award dies while an officer, employee or Director of the Company, all restrictions will immediately lapse on all Restricted Stock granted to the applicable Grantee, however any Performance Goals under Section 7 must still be achieved prior to the award of such shares of Restricted Stock. (ii) If a Grantee of a nonvested Restricted Stock ceases to be an officer, employee or Director of the Company, (A) because of disability of the Grantee (as determined by the Committee or the Officers and Directors Stock Option Committee in its discretion), or (B) under other circumstances as determined by the Committee or the Officers and Directors Stock Option Committee, in its discretion, such Restricted Stock shall (with the consent of the Committee or the Officers and Directors Stock Option Committee) not be forfeited; however, any Performance Goals under Section 7 must still be achieved prior to the award of such shares of Restricted Stock. (d) Notwithstanding the above, (i) each stock option granted under the Plan (or any predecessor Plan) shall be fully vested and the restrictions will immediately lapse on all Restricted Stock granted under the Plan and any Performance Goals shall be deemed to be met upon a Change in Control. For purposes of this Plan, a "Change in Control" means the occurrence of one or more of the following events: (i) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of the Company to any person or group of related persons for purposes of Section 13(d) of the Securities Exchange Act of 1934, as amended (a "Group"), together with any affiliates thereof, other than a transaction with any wholly owned subsidiary of Company, (ii) the approval by the holders of capital stock of the Company of any plan or proposal for the liquidation or dissolution of the Company; (iii) any Person or Group (other than Leonard Miller and any Permitted Transferees of Leonard Miller) shall become the owner, directly or indirectly, beneficially or of record, of shares representing more than 50% of the aggregate ordinary voting power represented by the issued and outstanding capital stock of Company; (iv) a majority of the members of the Board of Directors of the Company are persons who were not Directors on the date of this Plan and whose election was not approved by a vote of at least a majority of the members of the Board of Directors of the Company in office at the time of the election who either were members of the Board of Directors on the date of this Plan or whose election as members of such Board of Directors was previously approved by such a majority. "Permitted Transferee" means, with respect to any person, (i) that person's spouse, (ii) a parent or lineal descendant (including an adopted child) of a parent of that person, or the spouse of a lineal descendant of a parent of that person, (iii) a trustee, guardian or custodian for, or an executor, administrator or other legal representative of the estate of, that person, or a trustee, guardian or custodian for a Permitted Transferee of that person, (iv) the trustee of a trust (including a voting trust) for the benefit of that person and (v) a corporation, partnership, trust or other entity of which that person and Permitted Transferees of that Person are the beneficial owners of a majority in voting power of the equity. 15. No Rights to Continued Employment Nothing in the Plan or in any stock option, Stock Appreciation Right or Restricted Stock award granted under the Plan will give any officer, employee or Director of the Company a right to continue to be an officer, employee or Director of the Company or in any other way affect the right of the Company to terminate the officer position or employment of any officer, employee or Director at any time for any reason whatsoever, with or without cause. 16. Rights as a Shareholder Other than as provided under Section 7, Grantee shall have no rights as a stockholder with respect to any shares covered by any stock option or Stock Appreciation Right or any shares of Restricted Stock until the issuance of a stock certificate to the Grantee for such shares. 9 17. Effective Date This restatement of the Plan will be effective on the date it is adopted by the Board of Directors, provided that the stockholders of Lennar approve this restatement within 12 months after it is adopted by the Board of Directors. Stock options, Stock Appreciation Rights and Restricted Stock may be granted prior to approval of the Plan by the stockholders of Lennar, but each stock option, Stock Appreciation Right and Restricted Stock granted prior to stockholder approval of this restatement will be subject to approval of this restatement by the stockholders of Lennar within 12 months after its adoption. No stock option or Stock Appreciation Right may be exercised or Restricted Stock become vested until the Plan is approved by the stockholders of Lennar, and all stock options, Stock Appreciation Rights and Restricted Stock granted before the Plan is approved by the stockholders of Lennar will automatically terminate at the end of 12 months after the Plan is adopted by the Board of Directors if the Plan is not approved by the stockholders of Lennar by that date. 18. Amendments of the Plan The Board of Directors may amend the Plan at any time, except that no amendment to the Plan will be effective until it is approved by the stockholders of Lennar if the amendment (a) increases the maximum number of shares which may be issued as Restricted Stock or upon exercise of stock options or Stock Appreciation Rights granted under the Plan, (b) changes the categories of persons eligible to receive stock options, Stock Appreciation Rights or Restricted Stock under the Plan or (c) materially increases the benefits officers or employees of the Company may receive under the Plan. No amendment to the Plan will change the exercise price, or otherwise alter any provision, of any stock option, Stock Appreciation Right or Restricted Stock which has been granted prior to the amendment, unless the Grantee of the stock option, Stock Appreciation Right or Restricted Stock consents to the change. 19. Termination of the Plan The Plan may be terminated at any time by the Board of Directors. The Plan will terminate on the 10th anniversary of the date it is adopted by the Board of Directors unless it is terminated before that. No stock options, Stock Appreciation Rights or Restricted Stock may be granted after the Plan is terminated. However, termination of the Plan will not affect any stock option, Stock Appreciation Right or Restricted Stock which is outstanding when the Plan is terminated. 20. Governing Law With respect to stock or options granted pursuant to the Plan and the agreements thereunder, the Plan, such agreements and any options or stock granted pursuant thereto shall be governed by the applicable Code provisions to the maximum extent possible. Otherwise, the operation of, and the rights of Grantees under, the Plan, the agreements and any options or stock granted thereunder shall be governed by applicable federal law and, to the extent not governed by federal law, by the laws of the State of Florida. As approved by the Board of Directors of Lennar Corporation on June 22, 2000. 10 EX-13 6 0006.txt Exhibit 13 FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA Lennar Corporation and Subsidiaries At or for the Years Ended November 30,
(Dollars in thousands, except per share amounts) 2000 1999 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------------- Results of Operations: Revenues: Homebuilding $4,390,034 2,849,207 2,204,428 1,208,570 952,648 Financial services $ 316,934 269,307 212,437 94,512 89,013 Total revenues $4,706,968 3,118,514 2,416,865 1,303,082 1,041,661 Operating earnings: Homebuilding $ 480,796 340,803 283,369 120,240 91,066 Financial services $ 43,595 31,096 33,335 35,545 28,650 Corporate general and administrative expenses $ 50,155 37,563 28,962 15,850 12,396 Earnings from continuing operations before income taxes $ 375,635 285,477 240,114 85,727 84,429 Earnings from continuing operations $ 229,137 172,714 144,068 50,605 51,502 Earnings from discontinued operations $ -- -- -- 33,826 36,484 Net earnings $ 229,137 172,714 144,068 84,431 87,986 Per share amounts (diluted): Earnings from continuing operations $ 3.64 2.74 2.49 1.34 1.42 Earnings from discontinued operations $ -- -- -- 0.89 1.01 Net earnings per share $ 3.64 2.74 2.49 2.23 2.43 Cash dividends per share - common stock $ .05 .05 .05 .088 .10 Cash dividends per share - Class B common stock $ .045 .045 .045 .079 .09 Financial Position: Total assets $3,777,914 2,057,647 1,917,834 1,343,284 1,589,593 Total debt $1,703,510 802,295 798,838 661,695 689,159 Stockholders' equity $1,228,580 881,499 715,665 438,999 695,456 Shares outstanding (000's) 62,731 57,917 58,151 53,160 35,928 Stockholders' equity per share $ 19.58 15.22 12.31 8.26 19.36 Delivery and Backlog Information: Number of homes delivered 18,578 12,606 10,777 6,702 5,968 Backlog of home sales contracts 8,363 2,903 4,100 3,318 1,929 Dollar value of backlog $2,072,000 662,000 840,000 665,000 312,000
As a result of the Company's spin-off of its commercial real estate investment and management business, including the Investment Division business segment, the selected financial data for 1997 and 1996 reflects the Company's Investment Division as a discontinued operation. 1 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain statements contained in the following Management's Discussion and Analysis of Financial Condition and Results of Operations may be "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. By their nature, forward-looking statements involve risks, uncertainties and other factors that may cause actual results to differ materially from those which are anticipated. With regard to the Company, these factors include, but are not limited to, changes in general economic conditions, the market for homes generally and in areas where the Company has developments, the availability and cost of land suitable for residential development, materials prices, labor costs, interest rates, consumer confidence, competition, environmental factors and government regulations affecting the Company's operations. RESULTS OF OPERATIONS Overview Lennar Corporation achieved record revenues, profits and earnings per share in 2000. The Company's net earnings in 2000 were $229.1 million, or $3.64 per share diluted, compared to $172.7 million, or $2.74 per share diluted, in 1999. The increase in net earnings in 2000 primarily resulted from the Company's $1.2 billion acquisition of U.S. Home Corporation ("U.S. Home") in May 2000. U.S. Home is primarily a homebuilder, with operations in 13 states. The acquisition strengthened the Company's position in several of its established markets and brought the Company positions of strength in a number of attractive new markets. As a result of the successful integration of U.S. Home, the Company achieved record earnings in 2000 and further strengthened its balance sheet by reducing its ratio of net homebuilding debt (homebuilding debt less cash) to total capital from 61% immediately after it acquired U.S. Home to 44% at year-end. Homebuilding The Company's Homebuilding Division sells and constructs homes primarily for entry level, move-up, active adult and retiree homebuyers in 13 states. The Company markets under its "Everything's Included SM" and "Design Studio SM" programs. The Company's land operations include the purchase, development and sale of land for its homebuilding activities, as well as the sale of land to third parties. In certain circumstances, the Company minimizes its risk by forming joint ventures with other entities. The following tables set forth selected financial and operational information for the periods indicated. The results of U.S. Home are included in the information since its acquisition in May 2000.
Selected Homebuilding Division Financial Data (Dollars in thousands, Years Ended November 30, except average sales price) 2000 1999 1998 - --------------------------------------------------------------------------------- Revenues: Sales of homes $4,118,549 2,671,744 2,089,762 Sales of land and other revenues 258,145 157,981 83,758 Equity in earnings from partnerships 13,340 19,482 30,908 - --------------------------------------------------------------------------------- Total revenues 4,390,034 2,849,207 2,204,428 Costs and expenses: Cost of homes sold 3,277,183 2,105,422 1,641,741 Cost of land and other expenses 220,948 130,432 69,279 Selling, general and administrative 411,107 272,550 210,039 - --------------------------------------------------------------------------------- Total costs and expenses 3,909,238 2,508,404 1,921,059 - --------------------------------------------------------------------------------- Operating earnings $ 480,796 340,803 283,369 ================================================================================= Gross margin on home sales* 21.3% 21.2% 21.4% SG&A expenses as a % of revenues from home sales 10.0% 10.2% 10.1% Average sales price $ 226,000 212,000 194,000 =================================================================================
* Fiscal 2000 excludes the effect of purchase accounting related to the U.S. Home acquisition.
Summary of Home and Backlog Data By Region (Dollars in thousands) Years Ended November 30, - -------------------------------------------------------------- Deliveries 2000 1999 1998 - -------------------------------------------------------------- East 6,155 4,241 3,761 Central 5,203 3,107 2,484 West 6,878 5,241 4,532 - -------------------------------------------------------------- Subtotal 18,236 12,589 10,777 Joint ventures 342 17 -- - -------------------------------------------------------------- Total 18,578 12,606 10,777 ============================================================== New Orders - -------------------------------------------------------------- East 5,676 3,788 4,010 Central 5,089 3,056 2,519 West 6,770 4,536 4,487 - -------------------------------------------------------------- Subtotal 17,535 11,380 11,016 Joint ventures 312 29 -- - -------------------------------------------------------------- Total 17,847 11,409 11,016 ============================================================== Backlog - Homes - -------------------------------------------------------------- East 2,768 1,091 1,544 Central 1,632 652 703 West 3,451 1,148 1,853 - -------------------------------------------------------------- Subtotal 7,851 2,891 4,100 Joint ventures 512 12 -- - -------------------------------------------------------------- Total 8,363 2,903 4,100 ============================================================== Backlog Dollar Value (including JVs) $2,072,000 662,000 840,000 ==============================================================
2 The Company's market regions consist of the following states: East: Primarily Florida and also includes Maryland/Virginia and New Jersey. Central: Primarily Texas and also includes Minnesota and Ohio. West: Primarily California and also includes Colorado, Arizona and Nevada. In addition, the Company has various partnerships in North Carolina and Michigan. Revenues from sales of homes increased 54% in 2000 and 28% in 1999 compared to the previous years primarily as a result of increases in the number of new home deliveries and the average sales price. New home deliveries were higher in 2000 compared to 1999 due to the inclusion of U.S. Home's homebuilding activity since its acquisition in May 2000. The increase in deliveries in 1999 compared to 1998 reflected growth in California, where the Company made several acquisitions in 1998, and generally favorable market conditions throughout the Company's homebuilding markets in the first half of 1999. The higher average sales price in 2000 compared to 1999 was due primarily to an increase in the average sales price in most of the Company's existing markets, combined with changes in product mix as a result of the entry into new markets. The higher average sales price in 1999 compared to 1998 reflected both price increases and a shift in product mix in certain markets. Gross profits on home sales increased to $841.4 million in 2000, compared to $566.3 million in 1999 and $448.0 million in 1998. Gross profits in 2000 were impacted by purchase accounting associated with the acquisition of U.S. Home. Gross margin as a percentage of sales of homes in 2000 was 21.3% (excluding the effect of purchase accounting), and 20.4% (including the effect of purchase accounting), compared to 21.2% in 1999 and 21.4% in 1998. Gross margins increased slightly in 2000 excluding the effect of purchase accounting compared to 1999. The increase was primarily due to improvements in Florida and success in new markets entered into since the acquisition of U.S. Home. The slight decrease in gross margin percentage in 1999 compared to 1998 was due primarily to the Company's expansion into inland areas of California where gross margin percentages are lower than those in the other areas of California in which the Company operates. Revenues from land sales totaled $243.5 million in 2000, compared to $150.3 million in 1999 and $77.2 million in 1998. Gross profits from land sales totaled $27.6 million, or 11.3%, in 2000, compared to $22.2 million, or 14.8%, in 1999 and $12.6 million, or 16.3%, in 1998. Equity in earnings from partnerships decreased to $13.3 million in 2000, compared to $19.5 million in 1999 and $30.9 million in 1998. Margins achieved on sales of land and equity in earnings from partnerships may vary significantly from period to period depending on the timing of land sales by the Company and its partnerships. Selling, general and administrative expenses as a percentage of revenues from home sales improved 20 basis points in 2000 compared to 1999 and remained nearly unchanged in 1999 compared to 1998. The improvement in 2000 compared to 1999 resulted primarily from the increased volume and efficiencies realized from the acquisition of U.S. Home in May 2000. New home orders increased 56% in 2000 and 4% in 1999 compared to the previous years. The significant increase in 2000 was a result of the Company's acquisition of U.S. Home. The increase in 1999 reflected higher new orders in the first half of 1999 due primarily to expansion in California and strong demand in Texas. While new home orders rose in fiscal 1999, they were lower in the second half of the fiscal year compared to the same period in 1998 due primarily to lower new orders in Florida and Arizona/Nevada, where there were decreases in the average number of communities and some softening in demand in certain markets. Backlog dollar value increased 213% to $2.1 billion at November 30, 2000, compared to $0.7 billion at November 30, 1999, due primarily to the Company's acquisition of U.S. Home. Financial Services The Financial Services Division provides mortgage financing, title insurance and closing services for Lennar homebuyers and others. The Division packages and resells residential mortgage loans and performs mortgage loan servicing activities. The Division also provides high speed Internet access, cable television and home monitoring services for both Lennar homebuyers and other customers. The following table sets forth selected financial and operational information relating to the Financial Services Division. The results of U.S. Home Mortgage Corporation are included in the information since its acquisition in May 2000.
Years Ended November 30, (Dollars in thousands) 2000 1999 1998 - ------------------------------------------------------------------ Revenues $ 316,934 269,307 212,437 Costs and expenses 273,339 238,211 179,102 - ------------------------------------------------------------------ Operating earnings $ 43,595 31,096 33,335 ================================================================== Dollar value of mortgages originated $3,240,252 2,162,479 1,031,338 ================================================================== Number of mortgages originated 20,800 14,900 7,900 ================================================================== Principal balance of servicing portfolio $2,313,336 3,128,234 3,213,235 ================================================================== Number of loans serviced 29,000 38,000 41,000 ================================================================== Number of title transactions 120,000 139,000 123,000 ==================================================================
3 The 18% increase in revenues from the Financial Services Division in 2000 compared to 1999 reflected higher mortgage services revenues as a result of the contribution from U.S. Home Mortgage Corporation since its acquisition in May 2000 combined with higher revenues and an increased capture rate from the Division's existing mortgage operations. The 27% increase in revenues from the Financial Services Division in 1999 compared to 1998 reflected higher mortgage services revenues as a result of the growth in Lennar home deliveries, a higher capture rate of Lennar homebuyers and acquisitions made in the Division in 1999, combined with higher title services revenues which resulted from a higher number of title transactions in the first half of 1999 and acquisitions made in 1998 and 1999. Operating earnings from the Financial Services Division were higher in 2000 compared to 1999 primarily due to the earnings contribution from U.S. Home Mortgage Corporation. Operating earnings from the Financial Services Division were lower in 1999 compared to 1998 primarily due to reduced earnings from title services as a result of a lower level of refinance activity, and a highly competitive pricing environment in the mortgage business. Corporate General and Administrative Corporate general and administrative expenses as a percentage of total revenues improved to 1.1% in 2000 from 1.2% in both 1999 and 1998. The improvement in 2000 was primarily the result of a strong corporate infrastructure capable of supporting additional growth. Interest Interest expense was $98.6 million, or 2.1% of total revenues, in 2000, $48.9 million, or 1.6% of total revenues, in 1999 and $47.6 million, or 2.0% of total revenues, in 1998. The increase in interest as a percentage of total revenues in 2000 was primarily due to higher average debt outstanding and higher average cost of debt following the U.S. Home acquisition, compared to the same period last year. The decrease in interest as a percentage of total revenues in 1999 compared to 1998 was mainly due to a lower average borrowing rate in the first nine months of 1999, primarily as a result of the Company's issuance of $229 million of zero-coupon senior convertible debt securities late in the third quarter of 1998. These notes have an effective interest rate of 3 7/8%. FINANCIAL CONDITION AND CAPITAL RESOURCES In 2000, $479.4 million in cash was provided by the Company's operations, compared to $121.3 million in 1999. Cash flows from operations in 2000 consisted primarily of $229.1 million of net earnings, $223.3 million of cash received from the sale of inventories and an increase in accounts payable and other liabilities of $101.0 million. This generation of cash was primarily offset by $75.9 million of cash used to increase loans held for sale or disposition by the Company's Financial Services Division. Cash flows from operations in 1999 consisted primarily of $172.7 million of net earnings. This generation of cash was primarily offset by $77.4 million of cash used to increase inventories through land purchases, land development and construction and $41.2 million of cash used to reduce accounts payable and other liabilities. Earnings before interest, income taxes, depreciation and amortization ("EBITDA") were $518.5 million in 2000, $373.3 million in 1999 and $313.0 million in 1998. Cash used in investing activities totaled $186.7 million in 2000, compared to cash used in investing activities of $28.5 million in 1999. In 2000, $158.4 million of cash was used in the acquisitions of properties and businesses, which includes $152.4 million used for the acquisition of U.S. Home. In 1999, $19.7 million of cash was used in the acquisitions of properties and businesses. The Company finances its land acquisition and development activities, construction activities, financial services activities and general operating needs primarily from cash generated from operations as well as from revolving lines of credit, public debt and equity, financial institution borrowings and purchase money notes. The Company also buys land under option agreements. Option agreements permit the Company to acquire portions of properties when it is ready to build homes on them. The financial risk of adverse market conditions associated with longer-term land holdings is managed by prudent underwriting of land purchases in areas that the Company views as desirable growth markets, diversification of risk through partnerships with other entities and careful management of the land development process. In May 2000, the Company entered into new financing arrangements related to the acquisition of U.S. Home, for working capital and for future growth. The financings include senior secured credit facilities with a group of financial institutions which will provide the Company with up to $1.4 billion of financing. The credit facilities consist of a $700 million five-year revolving credit facility, a $300 million 364-day revolving credit facility and a $400 million term loan B. The Company may elect to convert borrowings under the 364-day revolving credit facility to a term loan which would mature in May 2005. At November 30, 2000, there was $399 million outstanding under the term loan B and there were no amounts outstanding under the revolving credit facilities. As a result of the U.S. Home acquisition, holders of U.S. Home's publicly-held notes totaling $525 million were entitled to require U.S. Home to repurchase the notes for 101% of their principal amount within 90 days after the transaction was completed. Independent of that requirement, in April 2000, the Company made a tender offer for all of the notes and a solicitation of consents to modify provisions of the indentures relating to the notes. As a result of the tender offer and required repurchases after the acquisition, the Company paid approximately $520 million, which includes tender and consent fees, for $508 million of U.S. Home's notes. 4 In May 2000, the Company issued $325 million of 9.95% senior notes due 2010 at a price of 92.313% for the purpose of purchasing U.S. Home's publicly-held notes that were tendered in response to the Company's offer and consent solicitation in April 2000, and to pay associated costs and expenses. Proceeds from the offering, after underwriting discount and expenses, were approximately $295 million. At November 30, 2000, the book value was $300.0 million. In February 1999, the Company issued $282 million of 7 5/8% senior notes. The senior notes are due in 2009 and were issued for the purpose of reducing amounts outstanding under revolving credit facilities and redeeming outstanding 10 3/4% notes. Proceeds from the offering, after underwriting and market discounts, expenses and settlement of a related interest rate hedge agreement, were approximately $266 million. In March 1999, the Company redeemed all of the outstanding 10 3/4% senior notes due 2004 of one of its subsidiaries, Greystone Homes, Inc., at a price of 105.375% of the principal amount outstanding plus accrued interest. Cash paid to redeem the notes was $132 million, which approximated their carrying value. At November 30, 2000, the book value related to the 7 5/8% senior notes was $270.5 million. In July 1998, the Company issued, for $229 million, zero-coupon senior convertible debentures due 2018 (the "Debentures") with a face amount at maturity of $493 million. The Debentures have an effective interest rate of 3 7/8%. The Debentures are convertible at any time into the Company's common stock at the rate of 12.3768 shares per $1,000 face amount at maturity. If the Debentures are converted during the first five years, the Company may elect to pay cash equal to the fair value of the common stock at the time of the conversion. Holders have the option to require the Company to repurchase the Debentures on any of the fifth, tenth or fifteenth anniversary dates from the issue date for the initial issue price plus accrued original issue discount. The Company has the option to satisfy the repurchases with any combination of cash and/or shares of the Company's common stock. The Company will have the option to redeem the Debentures, in cash, at any time after the fifth anniversary date for the initial issue price plus accrued original issue discount. At November 30, 2000, the amount outstanding, net of unamortized original issue discount, was $247.2 million. The Company's ratio of net homebuilding debt to total capital was 44.0% at November 30, 2000, compared to 33.3% at November 30, 1999. The increase resulted in part from repurchases of the Company's outstanding common stock and in part from the new financings related to the acquisition of U.S. Home. In addition to the use of capital in the Company's ordinary homebuilding and financial services activities, the Company will continue to actively evaluate various other uses of capital which fit into its homebuilding and financial services strategies and meet its profitability and return on capital requirements. This may include acquisitions of or investments in other entities. These activities may be funded through any combination of the Company's credit facilities, cash generated from operations, sales of assets or the issuance of public debt, common stock or preferred stock under existing and future shelf registrations. The Financial Services Division finances its mortgage loan and servicing activities by pledging them as collateral for borrowings under lines of credit totaling $360 million. Total borrowings under the financial services lines of credit were $339.4 million and $236.6 million at November 30, 2000 and 1999, respectively. The Company utilizes interest rate swap agreements to manage interest costs and hedge against risks associated with changing interest rates. At November 30, 2000, the Company had six interest rate swap agreements outstanding with a total notional amount of $400 million, which mature at various dates through 2007. These agreements fixed the LIBOR index (to which certain of the Company's debt interest rates are tied) at an average interest rate of 6.6% at November 30, 2000. The Financial Services Division, in the normal course of business, also uses derivative financial instruments to reduce its exposure to fluctuations in interest rates. Counterparties to each of the above agreements are major financial institutions. Credit loss from counterparty non-performance is not anticipated. The Company's 2000 Stock Option and Restricted Stock Plan (the "Plan"), which is subject to stockholder approval at the 2001 annual meeting of the Company's stockholders, provides for the granting of stock options and awards of restricted stock to certain officers, employees and directors. In the third quarter of 2000, 860,000 shares of restricted stock were awarded under the Plan. The stock was valued based on its market price on the date of grant. Unearned compensation arising from the restricted stock grants is amortized to expense over the period of the restrictions. The grants vest over 5 years. In September 1999, the Company's Board of Directors approved the repurchase of up to 10 million shares of the Company's outstanding common stock from time-to-time, subject to market conditions. In February 2000, the Company's Board of Directors approved the repurchase of an additional 5 million shares of the Company's outstanding common stock. As of November 30, 2000, under these approvals, the Company had repurchased approximately 9.8 million shares of its outstanding common stock for an aggregate purchase price of approximately $158.9 million, or $16 per share. In July 2000 and March 1999, the Company filed shelf registration statements with the Securities and Exchange Commission ("SEC") under which it may offer, from time-to-time, its common stock, preferred stock, depositary shares, debt securities or warrants at an aggregate initial offering price not to exceed $1 billion in total. Proceeds can be used for repayment of debt, acquisitions and general corporate purposes. As of November 30, 2000, no securities had been issued under these two registration statements. 5 The Company has maintained excellent relationships with the financial institutions participating in its financing arrangements and has no reason to believe that such relationships will not continue in the future. Based on the Company's current financial condition and credit relationships, Lennar believes that its operations and borrowing resources will provide for its current and long-term capital requirements at the Company's anticipated levels of growth. BACKLOG Backlog represents the number of homes subject to pending sales contracts. Homes are sold using sales contracts which are usually accompanied by sales deposits. Before entering into sales contracts, the Company generally prequalifies its customers. In some instances, purchasers are permitted to cancel sales contracts if they are unable to close on the sale of their existing home or fail to qualify for financing and under certain other circumstances. The Company experienced a cancellation rate of 21% in 2000 and 20% in both 1999 and 1998. Although cancellations can delay the sales of the Company's homes, they have not had a material impact on sales, operations or liquidity, because the Company closely monitors the progress of prospective buyers in obtaining financing and monitors and adjusts construction start plans to match the level of demand for homes. The Company does not recognize revenue on homes covered by pending sales contracts until the sales are closed and title passes to the new homeowners. SEASONALITY The Company has historically experienced variability in results of operations from quarter to quarter due to the seasonal nature of the homebuilding business. The Company typically experiences the highest rate of orders for new homes in the first half of the calendar year although the rate of orders for new homes is highly dependent on the number of active communities and the timing of new community openings. Because new home deliveries trail orders for new homes by several months, the Company typically has a greater percentage of new home deliveries in the second half of its fiscal year compared to the first half. As a result, the Company's earnings from sales of homes are generally higher in the second half of the fiscal year. INTEREST RATES AND CHANGING PRICES Inflation can have a long-term impact on the Company because increasing costs of land, materials and labor result in a need to increase the sales prices of homes. In addition, inflation is often accompanied by higher interest rates, which can have a negative impact on housing demand and the costs of financing land development activities and housing construction. Increased construction costs, rising interest rates, as well as increased materials and labor costs, may reduce gross margins. In recent years the increases in these costs have followed the general rate of inflation and hence have not had a significant adverse impact on the Company. In addition, deflation can impact the value of real estate. There can be no assurance that changing prices will not have a material adverse impact on the Company's future results of operations. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 137 and SFAS No. 138, which is required to be adopted for fiscal years beginning after June 15, 2000. SFAS No. 133 will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, a change in the fair value of the derivative will either be offset against the change in the fair value of the hedged asset, liability, or firm commitment through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The implementation of SFAS No. 133 will not have a material impact on the Company's results of operations or financial position. In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition in Financial Statements, which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. SAB No. 101 is applicable for the Company beginning in the fourth quarter of the year ending November 30, 2001. Management does not currently believe that the implementation of SAB No. 101 will have a material impact on the Company's results of operations or financial position. In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No. 140 replaces SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No. 140 revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of SFAS No. 125's provisions without reconsideration. SFAS No. 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. Management does not currently believe that the implementation of SFAS No. 140 will have a material impact on the Company's results of operations or financial position. 6 REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Stockholders of Lennar Corporation: We have audited the accompanying consolidated balance sheets of Lennar Corporation and subsidiaries (the "Company") as of November 30, 2000 and 1999, and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the three years in the period ended November 30, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of November 30, 2000 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended November 30, 2000, in conformity with accounting principles generally accepted in the United States of America. /s/ Deloitte & Touche LLP Miami, Florida January 9, 2001 7 REPORT OF MANAGEMENT The accompanying consolidated financial statements are the responsibility of management. The statements have been prepared in accordance with accounting principles generally accepted in the United States of America and include amounts that are based on management's best judgments and estimates. Management relies on internal accounting controls, among other things, to produce records suitable for the preparation of financial statements. The Company employs internal auditors whose work includes evaluating and testing internal accounting controls. The responsibility of our independent auditors for the financial statements is limited to their expressed opinion on the fairness of the consolidated financial statements taken as a whole. Their examination is performed in accordance with auditing standards generally accepted in the United States of America which include tests of our accounting records and internal accounting controls and evaluation of estimates and judgments used to prepare the financial statements. An Audit Committee of outside members of the Board of Directors periodically meets with management, the external auditors and internal auditors to evaluate the scope of auditing activities and review results. Both the external and internal auditors have full and free access to the Committee, without management present, to discuss any appropriate matters. /s/ BRUCE E. GROSS /s/ DIANE J. BESSETTE Bruce E. Gross Diane J. Bessette Vice President and Chief Financial Officer Vice President and Controller 8 CONSOLIDATED BALANCE SHEETS Lennar Corporation and Subsidiaries November 30, 2000 and 1999
(In thousands, except per share amounts) 2000 1999 - -------------------------------------------------------------------------------------------------------- ASSETS Homebuilding: Cash $ 287,627 83,256 Receivables, net 42,270 11,162 Inventories: Construction in progress and model homes 2,284,548 1,234,213 Land held for development 17,036 40,338 --------------------------- Total inventories 2,301,584 1,274,551 Investments in partnerships 257,639 173,310 Other assets 277,794 97,826 --------------------------- 3,166,914 1,640,105 Financial services 611,000 417,542 --------------------------- $ 3,777,914 2,057,647 =========================== LIABILITIES AND STOCKHOLDERS' EQUITY Homebuilding: Accounts payable and other liabilities $ 778,238 333,532 Mortgage notes and other debts payable, net 1,254,650 523,661 --------------------------- 2,032,888 857,193 Financial services 516,446 318,955 --------------------------- Total liabilities 2,549,334 1,176,148 Stockholders' equity: Preferred stock -- -- Common stock of $0.10 par value per share Authorized 100,000 shares; Issued: 2000 - 62,731; 1999 - 48,511 6,273 4,851 Class B common stock of $0.10 par value per share Authorized 30,000 shares; Issued: 2000 - 9,848; 1999 - 9,848 985 985 Additional paid-in capital 812,501 525,623 Retained earnings 582,299 356,058 Unearned restricted stock (14,535) -- Treasury stock, at cost; 2000 - 9,848 common shares; 1999 - 442 common shares (158,943) (6,018) --------------------------- Total stockholders' equity 1,228,580 881,499 --------------------------- $ 3,777,914 2,057,647 ===========================
See accompanying notes to consolidated financial statements. 9 CONSOLIDATED STATEMENTS OF EARNINGS Lennar Corporation and Subsidiaries Years Ended November 30, 2000, 1999 and 1998
(In thousands, except per share amounts) 2000 1999 1998 - ------------------------------------------------------------------------------------ Revenues: Homebuilding $4,390,034 2,849,207 2,204,428 Financial services 316,934 269,307 212,437 -------------------------------------- Total revenues 4,706,968 3,118,514 2,416,865 -------------------------------------- Costs and expenses: Homebuilding 3,909,238 2,508,404 1,921,059 Financial services 273,339 238,211 179,102 Corporate general and administrative 50,155 37,563 28,962 Interest expense 98,601 48,859 47,628 -------------------------------------- Total costs and expenses 4,331,333 2,833,037 2,176,751 -------------------------------------- Earnings before provision for income taxes 375,635 285,477 240,114 Provision for income taxes 146,498 112,763 96,046 -------------------------------------- Net earnings $ 229,137 172,714 144,068 ====================================== Earnings per share: Basic $ 4.00 2.97 2.59 ====================================== Diluted $ 3.64 2.74 2.49 ======================================
See accompanying notes to consolidated financial statements. 10 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Lennar Corporation and Subsidiaries Years Ended November 30, 2000, 1999 and 1998
(In thousands) 2000 1999 1998 - ----------------------------------------------------------------------------------------------------------------- Common stock: Beginning balance $ 4,851 4,824 4,322 Shares issued - U.S. Home acquisition 1,298 -- -- Shares issued - acquisitions -- -- 350 Shares issued - equity draw-down agreement -- -- 114 Shares issued - employee stock plans and restricted stock grants 124 21 35 Conversion of Class B common stock -- 6 3 ------------------------------------------- Balance at November 30 6,273 4,851 4,824 ------------------------------------------- Class B common stock: Beginning balance 985 991 994 Conversion to common stock -- (6) (3) ------------------------------------------- Balance at November 30 985 985 991 ------------------------------------------- Additional paid-in capital: Beginning balance 525,623 523,645 388,797 Shares issued - U.S. Home acquisition 265,569 -- -- Shares issued - acquisitions -- -- 93,746 Payment made under acquisition agreement -- (1,252) -- Shares issued - equity draw-down agreement -- -- 35,957 Shares issued - employee stock plans and restricted stock grants 21,309 3,230 5,145 ------------------------------------------- Balance at November 30 812,501 525,623 523,645 ------------------------------------------- Retained earnings: Beginning balance 356,058 186,205 44,886 Net earnings 229,137 172,714 144,068 Cash dividends - common stock (2,453) (2,418) (2,302) Cash dividends - Class B common stock (443) (443) (447) ------------------------------------------- Balance at November 30 582,299 356,058 186,205 ------------------------------------------- Unearned restricted stock: Beginning balance -- -- -- Restricted stock grants (15,856) -- -- Amortization of unearned restricted stock 1,321 -- -- ------------------------------------------- Balance at November 30 (14,535) -- -- ------------------------------------------- Treasury stock, at cost: Beginning balance (6,018) -- -- Repurchases of common stock (152,925) (6,018) -- ------------------------------------------- Balance at November 30 (158,943) (6,018) -- ------------------------------------------- Total stockholders' equity $ 1,228,580 881,499 715,665 ===========================================
See accompanying notes to consolidated financial statements. 11 CONSOLIDATED STATEMENTS OF CASH FLOWS Lennar Corporation and Subsidiaries Years Ended November 30, 2000, 1999 and 1998
(In thousands) 2000 1999 1998 - ----------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net earnings $ 229,137 172,714 144,068 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 44,267 38,956 25,264 Amortization of discount/premium on debt, net 14,264 8,774 (885) Equity in earnings from partnerships (13,340) (19,482) (30,908) Increase (decrease) in deferred income taxes (17,223) 28,125 12,469 Changes in assets and liabilities, net of effects from acquisitions: (Increase) decrease in receivables (11,912) 8,173 8,636 (Increase) decrease in inventories 223,255 (77,428) (112,347) Increase in other assets (14,179) (3,639) (1,970) (Increase) decrease in financial services loans held for sale or disposition (75,871) 6,293 (111,582) Increase (decrease) in accounts payable and other liabilities 101,001 (41,196) 130,451 ------------------------------------- Net cash provided by operating activities 479,399 121,290 63,196 ------------------------------------- Cash flows from investing activities: Operating properties and equipment: Additions (16,022) (15,328) (13,233) Sales 5,520 -- 51 (Increase) decrease in investments in partnerships, net (2,857) 6,524 (6,724) (Increase) decrease in financial services mortgage loans (11,834) 1,548 286 Purchases of investment securities (18,112) (13,119) (3,361) Receipts from investment securities 14,946 11,600 3,733 Acquisition of U.S. Home Corporation, net of cash acquired (152,386) -- -- Acquisitions of properties and businesses, net of cash acquired (5,971) (19,747) (190,524) ------------------------------------- Net cash used in investing activities (186,716) (28,522) (209,772) ------------------------------------- Cash flows from financing activities: Net repayments under revolving credit facilities -- (136,650) (239,850) Net borrowings (repayments) under financial services short-term debt 153,155 (856) 136,205 Payments for tender of U.S. Home Corporation's senior notes (519,759) -- -- Net proceeds from issuance of 9.95% senior notes 294,988 -- -- Net proceeds from issuance of 7 5/8% senior notes -- 266,153 -- Net proceeds from issuance of zero-coupon senior convertible debentures -- -- 222,960 Proceeds from other borrowings 424,783 1,856 114,581 Principal payments on other borrowings (279,941) (160,570) (127,571) Limited-purpose finance subsidiaries, net 45 769 727 Common stock: Issuance 5,577 3,251 41,251 Payment made under acquisition agreement -- (1,252) -- Repurchases (152,925) (6,018) -- Dividends (2,896) (2,861) (2,749) ------------------------------------- Net cash provided by (used in) financing activities (76,973) (36,178) 145,554 -------------------------------------
12 CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands) 2000 1999 1998 - ---------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash 215,710 56,590 (1,022) Cash at beginning of year 118,167 61,577 62,599 ------------------------------------------ Cash at end of year $ 333,877 118,167 61,577 ========================================== Summary of cash: Homebuilding $ 287,627 83,256 34,677 Financial services 46,250 34,911 26,900 ------------------------------------------ $ 333,877 118,167 61,577 ------------------------------------------ Supplemental disclosures of cash flow information: Cash paid for interest, net of amounts capitalized $ 1,157 9,647 15,254 Cash paid for income taxes $ 91,742 108,845 60,157 Supplemental disclosures of non-cash investing and financing activities: Assumption of mortgages related to acquisitions of properties $ 5,529 29,342 28,913 Common stock issued in 1998 acquisitions $ -- -- 94,096 Acquisition of U.S. Home Corporation: Fair value of assets acquired, inclusive of cash of $90,997 $ 1,654,444 -- -- Goodwill recorded 47,809 -- -- Liabilities assumed (1,192,004) -- -- ------------------------------------------ $ 510,249 -- -- ------------------------------------------ Common stock issued $ 266,867 -- -- Cash paid 243,382 -- -- ------------------------------------------ Total consideration $ 510,249 -- -- ------------------------------------------
See accompanying notes to consolidated financial statements. 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Lennar Corporation and Subsidiaries 1. Summary of Significant Accounting Policies Basis of Consolidation The accompanying consolidated financial statements include the accounts of Lennar Corporation and all subsidiaries and partnerships in which a controlling interest is held (the "Company"). The Company's investments in partnerships (and similar entities) in which a significant, but less than controlling, interest is held are accounted for by the equity method. All significant intercompany transactions and balances have been eliminated. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Revenue Recognition Revenues from sales of homes are recognized when the sales are closed and title passes to the new homeowners. Revenues from sales of other real estate (including the sales of land and operating properties) are recognized when a significant down payment is received, the earnings process is complete and the collection of any remaining receivables is reasonably assured. Cash The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. Due to the short maturity period of the cash equivalents, the carrying amount of these instruments approximates their fair values. Cash as of November 30, 2000 and 1999 included $65.9 million and $33.5 million, respectively, of cash held in escrow for periods of up to three days. Inventories Inventories are stated at cost unless the inventory within a community is determined to be impaired, in which case the impaired inventory is written down to fair value. The Company evaluates long-lived assets for impairment based on the undiscounted future cash flows of the assets. Write-downs of inventories deemed to be impaired are recorded as adjustments to the cost basis of the respective inventories. No impairment existed at November 30, 2000 or 1999. Start-up costs, construction overhead and selling expenses are expensed as incurred. Homes held for sale are classified as construction in progress until delivered. Land, land development, amenities and other costs are accumulated by specific area and allocated proportionately to homes within the respective area. Interest and Real Estate Taxes Interest and real estate taxes attributable to land, homes and operating properties are capitalized and added to the cost of those properties as long as the properties are being actively developed. Interest related to homebuilding, including interest costs relieved from inventories, is included in interest expense. Interest expense relating to the financial services operations is included in its respective costs and expenses. During 2000, 1999 and 1998, interest costs of $128.8 million, $62.9 million and $55.7 million, respectively (excluding the limited-purpose finance subsidiaries), were incurred and $117.7 million, $54.8 million and $45.9 million, respectively, were capitalized by the Company's homebuilding operations. Capitalized interest charged to expense in 2000, 1999 and 1998 was $98.6 million, $49.0 million and $43.1 million, respectively. 14 Operating Properties and Equipment Operating properties and equipment are recorded at cost and are included in other assets in the consolidated balance sheets. Depreciation is calculated to amortize the cost of depreciable assets over their estimated useful lives using the straight-line method. The estimated useful life for operating properties is 30 years and for equipment is 2 to 10 years. Investment Securities Investment securities that have determinable fair values are classified as available-for-sale unless they are classified as held-to-maturity. Securities classified as held-to-maturity are carried at amortized cost because they are purchased with the intent and ability to hold to maturity. Available-for-sale securities are recorded at fair value. Any unrealized holding gains or losses on available-for-sale securities are reported in a separate component of stockholders' equity, net of tax effects, until realized. At November 30, 2000 and 1999, investment securities classified as held-to-maturity totaled $12.5 million and $8.9 million, respectively, and were included in other assets of the Financial Services Division. There were no other investment securities at November 30, 2000 or 1999. Derivative Financial Instruments The Company utilizes interest rate swaps and other agreements to manage interest costs and hedge against risks associated with changing interest rates. The Company designates interest rate swaps and other agreements as hedges of specific debt instruments or anticipated transactions. Interest differentials on interest rate swaps are recognized as adjustments to interest incurred on the related debt instruments. The related amounts payable to or receivable from counterparties are included in other liabilities or other assets in the consolidated balance sheets. The fair values of the interest rate swap agreements are not recognized in the consolidated financial statements. Gains or losses on interest rate hedges on anticipated debt issuances are recorded at the time the debt is issued as part of the carrying value of the debt and recognized over the life of the debt as an adjustment to interest incurred. The Financial Services Division, in the normal course of business, uses derivative financial instruments to reduce its exposure to fluctuations in interest rates. The Division enters into forward commitments and option contracts to protect the value of loans held for sale or disposition from increases in market interest rates. Adjustments are made to the carrying values of these loans based on changes in the market value of these hedging contracts (see Note 12). Goodwill Goodwill represents the excess of the purchase price over the fair value of net assets acquired and is amortized by the Company on a straight-line basis over periods ranging from 15 to 20 years. At November 30, 2000 and 1999, goodwill was $110.4 million and $61.2 million, respectively (net of accumulated amortization of $11.6 million and $6.4 million, respectively). In the event that facts and circumstances indicate that the carrying value of goodwill may be impaired, an evaluation of recoverability is performed. If an evaluation is required, the estimated future undiscounted cash flows associated with the goodwill would be compared to the carrying amount to determine if a write-down to fair value based on discounted cash flows was required. No impairment existed at November 30, 2000 or 1999. Goodwill is included in other assets of the Homebuilding Division and the assets of the Financial Services Division in the consolidated balance sheets. Income Taxes Income taxes are accounted for in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes. Under SFAS No. 109, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and are measured by using enacted tax rates expected to apply to taxable income in the years in which those differences are expected to reverse. 15 Stock-Based Compensation The Company grants stock options to certain employees for a fixed number of shares with an exercise price not less than the fair value of the shares at the date of the grant. The Company accounts for the stock option grants in accordance with Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees. No compensation expense is recognized because all stock options granted have exercise prices not less than the market value of the Company's stock on the date of the grant. The impact of the pro forma disclosures required by SFAS No. 123, Accounting for Stock-Based Compensation, is included in Note 11. Restricted stock grants are valued based on the market price of the common stock on the date of grant. Unearned compensation arising from the restricted stock grants is amortized to expense over the period of the restrictions. The grants vest over 5 years. Unearned restricted stock is shown as a reduction of stockholders' equity in the consolidated balance sheets. Earnings per Share In 1998, the Company adopted SFAS No. 128, Earnings per Share, which requires a dual presentation of basic and diluted earnings per share on the face of the statement of earnings. Basic earnings per share is computed by dividing earnings attributable to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. Financial Services Mortgage loans held for sale or disposition by the Financial Services Division are recorded at the lower of cost or market, as determined on an aggregate basis. Premiums and discounts recorded on these loans are presented as an adjustment to the carrying amount of the loans and are not amortized. When the Division sells loans into the secondary market, a gain or loss is recognized to the extent that the sales proceeds exceed, or are less than, the book value of the loans. Loan origination fees, net of direct origination costs, are deferred and recognized as a component of the gain or loss when loans are sold. The Division either retains the servicing on the loans it sells and recognizes servicing fee income as those services are performed or sells the servicing rights on the loans it originates. Upon the sale of a mortgage loan, the book value of the mortgage loan is allocated to the mortgage servicing right and to the loan (without the mortgage servicing right) based on its estimated relative fair value. Mortgage servicing rights are periodically evaluated for impairment based on the fair value of these rights. The fair value of mortgage servicing rights is determined by discounting the estimated future cash flows using a discount rate commensurate with the risks involved. This method of valuation incorporates assumptions that market participants would use in their estimates of future servicing income and expense, including assumptions about prepayment, default and interest rates. For purposes of measuring impairment, the loans underlying the mortgage servicing rights are stratified on the basis of interest rate and type. The amount of impairment is the amount by which the mortgage servicing rights, net of accumulated amortization, exceed their fair value by strata. Impairment, if any, is recognized through a valuation allowance and a charge to current operations. Mortgage servicing rights are amortized in proportion to, and over the period of, the estimated net servicing income of the underlying mortgages. The book value and fair value of mortgage servicing rights was $11.7 million and $13.4 million, respectively, at November 30, 2000 and $15.6 million and $23.1 million, respectively, at November 30, 1999. A valuation allowance related to mortgage servicing rights was not required at or for the years ended November 30, 2000 and 1999. New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 137 and SFAS No. 138, which is required to be adopted for fiscal years beginning after June 15, 2000. SFAS No. 133 will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, a change in the fair value of the derivative will either be offset against the change in the fair value of the hedged asset, liability, or firm commitment through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The implementation of SFAS No. 133 will not have a material impact on the Company's results of operations or financial position. 16 In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition in Financial Statements, which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. SAB No. 101 is applicable for the Company beginning in the fourth quarter of the year ending November 30, 2001. Management does not currently believe that the implementation of SAB No. 101 will have a material impact on the Company's results of operations or financial position. In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No. 140 replaces SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No. 140 revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of SFAS No. 125's provisions without reconsideration. SFAS No. 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. Management does not currently believe that the implementation of SFAS No. 140 will have a material impact on the Company's results of operations or financial position. Reclassification Certain prior year amounts in the consolidated financial statements have been reclassified to conform with the 2000 presentation. 2. Acquisitions On May 3, 2000, the Company acquired U.S. Home Corporation ("U.S. Home") in a transaction in which U.S. Home stockholders received a total of approximately $243 million in cash and 13 million shares of the Company's common stock amounting to approximately $267 million. The cash portion of the acquisition was funded primarily from the Company's revolving credit facilities (see Note 7). U.S. Home is primarily a homebuilder, with operations in 13 states. U.S. Home had total revenues of $1.8 billion and net income of $72.4 million in 1999, and it delivered 9,246 homes (including joint ventures) during that year. The acquisition was accounted for using the purchase method of accounting. In connection with the transaction, the Company acquired assets with a fair value of $1.7 billion, assumed liabilities with a fair value of $1.2 billion and recorded goodwill of $48 million. Goodwill is being amortized on a straight-line basis over 20 years. The results of U.S. Home are included in the Company's consolidated statements of earnings since the acquisition date. Revenues and net earnings on an unaudited pro forma basis would have been $5.5 billion and $260.4 million, respectively, for the year ended November 30, 2000 and $4.9 billion and $233.2 million, respectively, for the year ended November 30, 1999, had the acquisition occurred on December 1, 1998. Pro forma earnings per share would have been $3.81 per share diluted ($4.15 per share basic) for the year ended November 30, 2000 and $3.07 per share diluted ($3.28 per share basic) for the year ended November 30, 1999. The pro forma information gives effect to actual operating results prior to the acquisition, adjusted for the pro forma effect of interest expense, amortization of goodwill, and certain other adjustments, together with their related income tax effect. The pro forma information does not purport to be indicative of the results of operations which would have actually been reported had the acquisition occurred on December 1, 1998. During the third quarter of 1998, the Company acquired the properties of two California homebuilders, ColRich Communities and Polygon Communities. During the first quarter of 1998, the Company acquired a Northern California homebuilder, Winncrest Homes, and the North American Asset Development Group of companies ("NAADC"), which provide title and escrow services in California, Arizona and Colorado. In September 1998, NAADC acquired a small escrow company in California. In connection with these transactions, the Company paid $202 million in cash (inclusive of cash acquired of $12 million) and issued $94 million in common stock (3.5 million shares). The cash portion of these transactions was funded primarily from the Company's revolving credit facilities and issuance of zero-coupon senior convertible debentures. The Company received assets with a fair value of $335 million and assumed liabilities totaling $47 million in connection with these transactions. In addition, the Company recorded goodwill of $8 million relating to the acquisitions of NAADC, Winncrest and the escrow company. Goodwill is being amortized on a straight-line basis over 20 years. The acquisitions were accounted for using the purchase method of accounting. In 1999, the Company paid $1.3 million to the sellers of one of the properties acquired, under an agreement which set a floor on the value of a portion of the shares of common stock given to the sellers as part of the consideration for the acquisition. The agreement allowed the Company to settle the floor in cash or stock. As a result, the payment was recorded as a reduction in stockholders' equity in 1999. The results of each acquired entity are included in the Company's consolidated statements of earnings since the respective acquisition dates. The pro forma effect of the acquisitions on the results of operations is not presented as it is not considered material. 17 3. Operating and Reporting Segments In 1999, the Company adopted SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information, which establishes new standards for the way that public enterprises report information about operating and reporting segments. It also establishes standards for related disclosures about products and services, geographic areas and major customers. The implementation of SFAS No. 131 did not have a significant impact on the Company's definition of operating and reporting segments and related disclosures. The Company has two operating and reporting segments: Homebuilding and Financial Services. The Company's reportable segments are strategic business units that offer different products and services. The accounting policies of the segments are the same as those described in the summary of significant accounting policies in Note 1. Homebuilding Homebuilding operations include the sale and construction of single-family attached and detached homes. These activities also include the purchase, development and sale of residential land by the Company and through partnerships in which it has investments. The following table sets forth financial information relating to the homebuilding operations:
Years Ended November 30, (In thousands) 2000 1999 1998 - ----------------------------------------------------------------------------------------- Revenues: Sales of homes $4,118,549 2,671,744 2,089,762 Sales of land and other revenues 258,145 157,981 83,758 Equity in earnings from partnerships 13,340 19,482 30,908 -------------------------------------- Total revenues 4,390,034 2,849,207 2,204,428 Costs and expenses: Cost of homes sold 3,277,183 2,105,422 1,641,741 Cost of land and other expenses 220,948 130,432 69,279 Selling, general and administrative 411,107 272,550 210,039 -------------------------------------- Total costs and expenses 3,909,238 2,508,404 1,921,059 -------------------------------------- Operating earnings $ 480,796 340,803 283,369 ====================================== Depreciation and amortization $ 33,858 29,505 20,762 -------------------------------------- Additions to operating properties and equipment $ 5,779 2,283 5,987 ======================================
Financial Services The Financial Services Division provides mortgage financing, title insurance and closing services for both the Company's homebuyers and others. The Division packages and resells residential mortgage loans and performs mortgage loan servicing activities. The Division also provides high speed Internet access, cable television, and home monitoring services for both the Company's homebuyers and other customers. The following table sets forth financial information relating to the financial services operations:
Years Ended November 30, (In thousands) 2000 1999 1998 - ----------------------------------------------------------------------------------- Revenues $316,934 269,307 212,437 Costs and expenses 273,339 238,211 179,102 -------------------------------- Operating earnings $ 43,595 31,096 33,335 ================================ Depreciation and amortization $ 10,409 9,451 4,502 -------------------------------- Interest income, net $ 15,707 12,301 10,878 -------------------------------- Additions to operating properties and equipment $ 10,243 13,045 7,246 ================================
18 4. Receivables
November 30, (In thousands) 2000 1999 - -------------------------------------------------------- Accounts receivable $ 32,327 10,826 Mortgages and notes receivable 14,846 2,444 --------------------- 47,173 13,270 Allowance for doubtful accounts (4,903) (2,108) --------------------- $ 42,270 11,162 =====================
5. Investments in Partnerships Summarized financial information on a combined 100% basis related to the Company's significant investments in partnerships and other similar entities (collectively the "Partnerships") accounted for by the equity method was as follows:
November 30, (In thousands) 2000 1999 - ------------------------------------------------------------------ Assets: Cash $ 35,504 143,257 Land under development 962,835 389,974 Other assets 145,866 117,939 ------------------------ $1,144,205 651,170 ======================== Liabilities and equity: Accounts payable and other liabilities $ 122,597 47,118 Notes and mortgages payable 471,742 227,271 Equity of: The Company 254,298 171,960 Others 295,568 204,821 ------------------------ $1,144,205 651,170 ======================== Years Ended November 30, (In thousands) 2000 1999 1998 - ------------------------------------------------------------------------------ Revenues $ 361,684 283,979 277,544 Costs and expenses 295,224 219,100 192,130 ------------------------------------ Net earnings of partnerships $ 66,460 64,879 85,414 ------------------------------------ Company share of net earnings $ 13,340 19,482 30,908 ====================================
At November 30, 2000, the Company's equity interest in each of these Partnerships ranged from 10% to 50%. At November 30, 2000, these Partnerships were primarily involved in the acquisition and development of residential land. The Company shares in the profits and losses of these Partnerships and, when appointed the manager of the Partnerships, receives fees for the management of the assets. Certain of the Partnerships have partnership interests in other partnerships. The Company provides limited guarantees on debt of twelve of the Company's Partnerships and one second-tier partnership, amounting to $142.6 million at November 30, 2000. 19 6. Operating Properties and Equipment
November 30, (In thousands) 2000 1999 - ---------------------------------------------------------------- Furniture, fixtures and equipment $ 47,043 16,351 Community recreational facilities 2,098 3,564 --------------------- 49,141 19,915 Accumulated depreciation (30,556) (14,010) --------------------- $ 18,585 5,905 =====================
Operating properties and equipment are included in other assets in the consolidated balance sheets. 7. Mortgage Notes and Other Debts Payable
November 30, (In thousands) 2000 1999 - --------------------------------------------------------------------------------- Zero-coupon senior convertible debentures due 2018 $ 247,205 237,897 7 5/8% senior notes due 2009 270,480 269,548 9.95% senior notes due 2010 300,017 -- Term Loan B due 2007 399,000 -- U.S. Home senior notes due through 2009 12,913 -- Mortgage notes on land with fixed interest rates from 5.4% to 12.0% due through 2009 25,035 16,216 ------------------------ $1,254,650 523,661 ========================
In May 2000, the Company entered into new financing arrangements related to the acquisition of U.S. Home, for working capital and for future growth. The financings include senior secured credit facilities with a group of financial institutions which provide the Company with up to $1.4 billion of financing. The credit facilities consist of a $700 million five-year revolving credit facility, a $300 million 364-day revolving credit facility and a $400 million term loan B (together the "Facilities"). The Company may elect to convert borrowings under the 364-day revolving credit facility to a term loan which would mature in May 2005. The Facilities are collateralized by the outstanding common stock of certain of the Company's subsidiaries. Certain Financial Services Division subsidiaries are co-borrowers under the Facilities. At November 30, 2000, no borrowings were allocated to this Division. At November 30, 2000, $399 million was outstanding under the term loan B and no amounts were outstanding under the revolving credit facilities. The weighted average interest rate of the Facilities at November 30, 2000 was 9.2%. The Company utilizes interest rate swap agreements to manage interest costs and hedge against risks associated with changing interest rates (see Notes 1 and 12). As a result of the U.S. Home acquisition, holders of U.S. Home's publicly-held notes totaling $525 million were entitled to require U.S. Home to repurchase the notes for 101% of their principal amount within 90 days after the transaction was completed. Independent of that requirement, in April 2000, the Company made a tender offer for all of the notes and a solicitation of consents to modify provisions of the indentures relating to the notes. As a result of the tender offer and required repurchases after the acquisition, the Company paid approximately $520 million, which includes tender and consent fees, for $508 million of U.S. Home's notes. In May 2000, the Company issued $325 million of 9.95% senior notes due 2010 at a price of 92.313% for the purpose of purchasing U.S. Home's publicly-held notes that were tendered in response to the Company's offer and consent solicitation in April 2000, and to pay associated costs and expenses. The senior notes are guaranteed on a joint and several basis by substantially all of the Company's subsidiaries, other than subsidiaries engaged in mortgage and reinsurance activities. Proceeds from the offering, after underwriting discount and expenses, were approximately $295 million. At November 30, 2000, the book value was $300.0 million. 20 In February 1999, the Company issued $282 million of 7 5/8% senior notes due 2009 for the purpose of reducing amounts outstanding under revolving credit facilities and redeeming outstanding 10 3/4% senior notes. Proceeds from the offering, after underwriting and market discounts, expenses and settlement of a related interest rate hedge agreement, were approximately $266 million. The senior notes are collateralized by the outstanding common stock of certain of the Company's subsidiaries. In March 1999, the Company redeemed all of the outstanding 10 3/4% senior notes due 2004 of one of its subsidiaries, Greystone Homes, Inc., at a price of 105.375% of the principal amount outstanding plus accrued interest. Cash paid to redeem the notes was $132 million, which approximated their carrying value. At November 30, 2000, the book value relating to the 7 5/8% senior notes was $270.5 million. In July 1998, the Company issued, for $229 million, zero-coupon senior convertible debentures due 2018 (the "Debentures") with a face amount at maturity of $493 million. The Debentures have an effective interest rate of 3 7/8%. The Debentures are convertible at any time into the Company's common stock at the rate of 12.3768 shares per $1,000 face amount at maturity. If the Debentures are converted during the first five years, the Company may elect to pay cash equal to the fair value of the common stock at the time of the conversion. Holders have the option to require the Company to repurchase the Debentures on any of the fifth, tenth, or fifteenth anniversary dates from the issue date for the initial issue price plus accrued original issue discount. The Company has the option to satisfy the repurchases with any combination of cash and/or shares of the Company's common stock. The Company will have the option to redeem the Debentures, in cash, at any time after the fifth anniversary date for the initial issue price plus accrued original issue discount. The Debentures are collateralized by the outstanding common stock of certain of the Company's subsidiaries. At November 30, 2000, the amount outstanding, net of unamortized original issue discount, was $247.2 million. The minimum aggregate principal maturities of mortgage notes and other debts payable during the five years subsequent to November 30, 2000 are as follows: 2001 - $14.8 million; 2002 - $19.4 million; 2003 - $5.4 million; 2004 - $5.3 million and 2005 - $6.5 million. The remaining principal obligations are due subsequent to November 30, 2005. All of the notes secured by land contain collateral release provisions for accelerated payment which may be made as necessary to maintain construction schedules. 8. Financial Services The assets and liabilities related to the Company's financial services operations (as described in Note 3) were as follows:
November 30, (In thousands) 2000 1999 - ------------------------------------------------------------------------ Assets: Cash and receivables, net $ 79,025 54,031 Mortgage loans held for sale or disposition, net 376,452 229,042 Mortgage loans, net 42,504 22,562 Mortgage servicing rights, net 11,653 15,564 Operating properties and equipment, net 18,869 21,378 Title plants 15,530 14,587 Goodwill, net 25,199 20,070 Other 21,874 14,684 Limited-purpose finance subsidiaries 19,894 25,624 -------------------- $611,000 417,542 ==================== Liabilities: Notes and other debts payable $428,966 253,010 Other 67,586 40,321 Limited-purpose finance subsidiaries 19,894 25,624 -------------------- $516,446 318,955 ====================
21 At November 30, 2000, the Division had two warehouse lines of credit totaling $360 million to fund the Division's mortgage loan and servicing activities. Borrowings under these facilities were $339.4 million and $236.6 million at November 30, 2000 and 1999, respectively, and were collateralized by mortgage loans with outstanding principal balances of $297.2 million and $221.7 million, respectively, and by servicing rights relating to approximately $1.8 billion and $2.5 billion of loans, respectively. There are several interest rate pricing options which fluctuate with market rates. The borrowing rate has been reduced to the extent that custodial escrow balances exceeded required compensating balance levels. The effective interest rate on these facilities at November 30, 2000 and 1999 was 6.4% and 4.5%, respectively. The warehouse lines of credit mature through November 2002 at which time the Company expects these facilities to be renewed. At November 30, 2000, the Division also had advances under a repurchase agreement amounting to $51.9 million. Borrowings under the agreement are collateralized by mortgage loans and had an effective interest rate of 7.5% at November 30, 2000. Certain of the Division's servicing agreements require it to pass through payments on loans even though it is unable to collect such payments and, in certain instances, be responsible for losses incurred through foreclosure. Exposure to this credit risk is minimized through geographical diversification and review of the mortgage loan servicing created or purchased. Management believes that it has provided adequate reserves for expected losses based on the fair value of the underlying collateral. Provisions for these losses have not been material to the Company. In prior years, limited-purpose finance subsidiaries of the Financial Services Division placed mortgages and other receivables as collateral for various long-term financings. These limited-purpose finance subsidiaries pay the principal of, and interest on, these financings primarily from the cash flows generated by the related pledged collateral, which includes a combination of mortgage notes, mortgage-backed securities and funds held by a trustee. At November 30, 2000 and 1999, the balances outstanding for the bonds and notes payable were $19.9 million and $25.6 million, respectively. The borrowings mature in years 2013 through 2018 and carry interest rates ranging from 4.9% to 13.2%. The annual principal repayments are dependent upon collections on the underlying mortgages, including prepayments, and cannot be reasonably determined. 9. Income Taxes The provision for income taxes consisted of the following:
Years Ended November 30, (In thousands) 2000 1999 1998 - ---------------------------------------------------------- Current: Federal $ 146,666 71,091 74,739 State 17,055 13,547 9,308 ------------------------------------ 163,721 84,638 84,047 ------------------------------------ Deferred: Federal (15,672) 24,422 6,493 State (1,551) 3,703 5,506 ------------------------------------ (17,223) 28,125 11,999 ------------------------------------ $ 146,498 112,763 96,046 ====================================
22 Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of the assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The tax effects of significant temporary differences that give rise to the net deferred tax asset are as follows:
November 30, (In thousands) 2000 1999 - ---------------------------------------------------------------- Deferred tax assets: Acquisition adjustments $ 75,997 13,900 Reserves and accruals 74,972 37,557 Net operating loss and capital loss carryforwards, tax affected 4,466 5,788 Investments in partnerships 3,386 4,099 Deferred gains 1,900 -- Other 7,412 2,923 ----------------------- Deferred tax assets 168,133 64,267 Less: valuation allowance (7,117) (8,508) ----------------------- Total deferred tax assets, net 161,016 55,759 ----------------------- Deferred tax liabilities: Capitalized expenses 14,922 14,538 Deferred gains -- 1,065 Installment sales 2,281 2,547 Other 32,361 4,634 ----------------------- Total deferred tax liabilities 49,564 22,784 ----------------------- Net deferred tax asset $ 111,452 32,975 =======================
The Homebuilding Division's net deferred tax asset amounting to $110.0 million and $33.3 million at November 30, 2000 and 1999, respectively, is included in other assets in the consolidated balance sheets. At November 30, 2000 and 1999, the Financial Services Division had a net deferred tax asset of $1.5 million and a net deferred tax liability of $0.3 million, respectively. SFAS No. 109 requires the reduction of the deferred tax assets by a valuation allowance if, based on the weight of available evidence, it is more likely than not that a portion or all of the deferred tax asset will not be realized. At November 30, 2000 and 1999, the Company had a valuation allowance of $7.1 million and $8.5 million, respectively, for net operating loss and capital loss carryforwards and certain acquisition adjustments which currently are not expected to be realized. Based on management's assessment, it is more likely than not that the net deferred tax asset will be realized through future taxable earnings. A reconciliation of the statutory rate and the effective tax rate follows:
% of Pre-tax Income - ------------------------------------------------------------------------------- 2000 1999 1998 - ------------------------------------------------------------------------------- Statutory rate 35.0 35.0 35.0 State income taxes, net of federal income tax benefit 3.4 3.9 4.0 Other 0.6 0.6 1.0 ------------------------ Effective rate 39.0 39.5 40.0 ========================
23 10. Earnings Per Share Basic and diluted earnings per share for the years ended November 30, 2000, 1999 and 1998 were calculated as follows:
(In thousands, except per share amounts) 2000 1999 1998 - ---------------------------------------------------------------------------------- Numerator: Numerator for basic earnings per share- net earnings $229,137 172,714 144,068 Interest on zero-coupon convertible debentures, net of tax 5,808 5,538 1,732 -------------------------------- Numerator for diluted earnings per share $234,945 178,252 145,800 ================================ Denominator: Denominator for basic earnings per share- weighted average shares 57,341 58,246 55,660 Effect of dilutive securities: Employee stock options and restricted stock 1,053 684 945 Zero-coupon convertible debentures 6,105 6,105 2,019 -------------------------------- Denominator for diluted earnings per share - adjusted weighted average shares and assumed conversions 64,499 65,035 58,624 ================================ Basic earnings per share $ 4.00 2.97 2.59 ================================ Diluted earnings per share $ 3.64 2.74 2.49 ================================
11. Capital Stock Preferred Stock The Company is authorized to issue 500,000 shares of preferred stock with a par value of $10 per share and 100 million shares of participating preferred stock with a par value of $0.10 per share. No shares of preferred stock have been issued as of November 30, 2000. Common Stock The Company has two classes of common stock. The common stockholders have one vote for each share owned in matters requiring stockholder approval and during both 2000 and 1999 received quarterly dividends of $0.0125 per share. The Class B common stockholders have ten votes for each share of stock owned and during both 2000 and 1999 received quarterly dividends of $0.01125 per share. As of November 30, 2000, Mr. Leonard Miller, Chairman of the Board of the Company, owned or controlled 9.8 million shares of common stock and Class B common stock, which represented approximately 65% voting control of the Company. In September 1999, the Company's Board of Directors approved the repurchase of up to 10 million shares of the Company's outstanding common stock. The Company may repurchase shares, from time-to-time, subject to market conditions. In February 2000, the Company's Board of Directors approved the repurchase of an additional 5 million shares of the Company's outstanding common stock. During 2000 and 1999, under these approvals, the Company repurchased approximately 9,406,000 and 442,000 shares of its outstanding common stock for an aggregate purchase price of approximately $152.9 million and $6.0 million, respectively. 24 In July 2000 and March 1999, the Company filed shelf registration statements and prospectuses with the SEC to offer, from time-to-time, its common stock, preferred stock, depositary shares, debt securities or warrants at an aggregate initial offering price not to exceed $1 billion in total. Proceeds can be used for repayment of debt, acquisitions and general corporate purposes. As of November 30, 2000, no securities had been issued under these two registration statements. In March 1998, the Company entered into an equity draw-down agreement with a major international banking firm (the "Firm") under which the Company has the option to sell common stock, up to proceeds of $120 million, to the Firm in increments of up to $15 million (or such higher amount as may be agreed to by the parties) per month. In the event the Company elects to sell common stock, the sales price is equal to 98% of the average of the daily high and low stock price from time-to-time. As of November 30, 2000, the Company had issued 1.1 million shares under the agreement resulting in proceeds to the Company of $36 million, all of which occurred in fiscal 1998. Restrictions on Payment of Dividends Other than as required to maintain the financial ratios and net worth requirements under the revolving credit facilities, there are no restrictions on the payment of dividends on common stock by the Company. The cash dividends paid with regard to a share of Class B common stock in a calendar year may not be more than 90% of the cash dividends paid with regard to a share of common stock in that calendar year. There are no agreements which restrict the payment of dividends by subsidiaries of the Company other than as required to maintain the financial ratios and net worth requirements under the Financial Services Division's warehouse lines of credit. Stock Option Plans The Lennar Corporation 2000 Stock Option and Restricted Stock Plan (the "2000 Plan"), which is subject to stockholder approval which will be sought at the 2001 annual meeting of the Company's stockholders, provides for the granting of stock options and awards of restricted stock of the Company's common stock to certain officers, employees and directors. No options granted under the 2000 Plan may be exercisable until at least six months after the date of the grant. Thereafter, exercises are permitted in varying installments, on a cumulative basis. Each stock option and stock appreciation right granted will expire on a date determined at the time of the grant, but not more than 10 years after the date of the grant. In the third quarter of 2000, 860,000 shares of restricted stock were awarded under the 2000 Plan. The stock was valued based on its market price on the date of the grant. The grants vest over 5 years. Unearned compensation arising from the restricted stock is shown as a reduction of stockholders' equity in the consolidated balance sheets. The Lennar Corporation 1997 Stock Option Plan (the "1997 Plan") provides for the granting of options or stock appreciation rights to certain key employees of the Company to purchase shares at prices not less than market value as of the date of the grant. No options granted under the 1997 Plan may be exercisable until at least six months after the date of the grant. Thereafter, exercises are permitted in varying installments, on a cumulative basis. Each stock option and stock appreciation right granted will expire on a date determined at the time of the grant, but not more than 10 years after the date of the grant. The Lennar Corporation 1991 Stock Option Plan (the "1991 Plan") provided for the granting of options to certain key employees of the Company to purchase shares at prices not less than market value as of the date of the grant. No options granted under the 1991 Plan may be exercisable until at least six months after the date of the grant. Thereafter, exercises are permitted in varying installments, on a cumulative basis. Each stock option granted will expire on a date determined at the time of the grant, but not more than 10 years after the date of the grant. 25 A summary of the Company's stock option activity for the years ended November 30, 2000, 1999 and 1998 was as follows:
2000 1999 1998 - ---------------------------------------------------------------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Stock Exercise Stock Exercise Stock Exercise Options Price Options Price Options Price - ---------------------------------------------------------------------------------------------------------------------------- Outstanding, beginning of year 3,445,230 $ 16.20 3,679,256 $ 15.52 2,815,880 $ 10.60 Grants 671,000 $ 17.68 211,000 $ 23.95 1,372,500 $ 24.12 Terminations (256,652) $ 19.43 (235,108) $ 19.83 (201,498) $ 16.60 Exercises (380,895) $ 11.74 (209,918) $ 10.05 (307,626) $ 8.41 ----------------------------------------------------------------------------------- Outstanding, end of year 3,478,683 $ 16.68 3,445,230 $ 16.20 3,679,256 $ 15.52 ----------------------------------------------------------------------------------- Exercisable, end of year 1,422,734 $ 14.14 1,299,743 $ 11.87 1,142,616 $ 10.69 ----------------------------------------------------------------------------------- Available for grant, end of year 3,890,822 1,310,072 1,334,622 ---------- --------- --------- Weighted average fair value per share of options granted during the year under SFAS No. 123 $ 7.84 $ 9.40 $ 9.03 - ----------------------------------------------------------------------------------------------------------------------------
The following table summarizes information about fixed stock options outstanding at November 30, 2000:
Options Outstanding Options Exercisable ----------------------------------------------------------- -------------------------------------- Number Outstanding Weighted Average Weighted Average Number Outstanding Weighted Average Range of Per Share at November 30, Remaining Per Share at November 30, Per Share Exercise Prices 2000 Contractual Life Exercise Price 2000 Exercise Price - ------------------ ------------------ ---------------- ---------------- ------------------ ---------------- $ 2.56 - $ 4.56 272,426 0.6 years $ 3.27 128,250 $ 2.79 $ 7.28 - $ 9.97 384,171 2.3 years $ 9.43 288,829 $ 9.77 $10.14 - $18.53 1,641,151 6.4 years $15.03 683,875 $13.04 $19.47 - $34.13 1,180,935 4.1 years $24.42 321,780 $24.94
The Company applies APB Opinion No. 25 and related Interpretations in accounting for its fixed stock option plans. No compensation expense is recognized because all stock options granted have exercise prices not less than the market value of the Company's stock on the date of the grant. Under SFAS No. 123, compensation cost for the Company's stock-based compensation plans would be determined based on the fair value at the grant dates for awards under those plans. Had the Company adopted SFAS No. 123 in accounting for fixed stock option plans, the pro forma effect would not be material to the Company's reported net earnings and earnings per share for the years ended November 30, 2000, 1999 and 1998. 26 The fair value of each option grant was estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions:
2000 1999 1998 - ------------------------------------------------------------------------------------------- Dividend yield 0.2% - 0.3% 0.2% - 0.3% 0.1% - 0.3% Volatility rate 39% - 44% 40% - 42% 32% - 39% Risk-free interest rate 7.1% - 7.5% 4.8% - 6.1% 4.7% - 6.0% Expected option life (years) 3.9 - 7.7 3.9 - 7.7 3.9 - 7.7
Employee Stock Ownership/401(k) Plan Prior to 1998, the Employee Stock Ownership/401(k) Plan (the "Plan") provided shares of stock to employees who had completed one year of continuous service with the Company. During 1998, the Plan was amended to exclude any new shares from being provided to employees. All prior year contributions to employees actively employed on or after October 1, 1998 vest at a rate of 20% per year over a five year period. All active participants in the plan whose employment terminated prior to October 1, 1998 vested based upon the plan that was active prior to their termination of employment. Under the 401(k) portion of the Plan, contributions made by employees can be invested in a variety of mutual funds, and the Company may also make contributions for the benefit of employees. The Company records as compensation expense an amount which approximates the vesting of the contributions to the Employee Stock Ownership portion of the Plan, as well as the Company's contribution to the 401(k) portion of the Plan. This amount was $4.7 million in 2000, $3.1 million in 1999 and $2.9 million in 1998. 12. Financial Instruments The following table presents the carrying amounts and estimated fair values of financial instruments held by the Company at November 30, 2000 and 1999, using available market information and appropriate valuation methodologies. Considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. The table excludes cash, receivables and accounts payable, which had fair values approximating their carrying values. 27
November 30, (In thousands) 2000 1999 - ------------------------------------------------------------------------------------------------------------- Carrying Fair Carrying Fair Amount Value Amount Value - ------------------------------------------------------------------------------------------------------------- ASSETS Financial services: Mortgage loans held for sale or disposition, net $ 376,452 379,499 229,042 231,116 Mortgage loans, net 42,504 42,014 22,562 22,112 Investments held-to-maturity 12,488 12,507 8,902 8,904 Limited-purpose finance subsidiaries - collateral for bonds and notes payable 19,894 20,320 25,624 26,499 LIABILITIES Homebuilding: Mortgage notes and other debts payable $1,254,650 1,287,902 523,661 466,311 Financial services: Notes and other debts payable $ 428,966 428,966 253,010 252,865 Limited-purpose finance subsidiaries - bonds and notes payable 19,894 20,169 25,624 26,638 OFF-BALANCE SHEET FINANCIAL INSTRUMENTS Homebuilding: Interest rate swap agreements $ -- (5,707) -- 1,724 Financial services: Commitments to originate loans $ -- 445 -- (197) Forward commitments to sell loans -- (119) -- 434 - -------------------------------------------------------------------------------------------------------------
The following methods and assumptions are used by the Company in estimating fair values: Mortgage notes and other debts payable: The fair value of fixed rate borrowings is based on quoted market prices. Variable rate borrowings are tied to market indices and thereby approximate fair value. Financial services assets, liabilities and off-balance sheet financial instruments: The fair values are based on quoted market prices, if available. The fair values for instruments which do not have quoted market prices are estimated by the Company on the basis of discounted cash flows or other financial information. Interest rate swap agreements: The fair value is based on dealer quotations and generally represents an estimate of the amount the Company would pay or receive to terminate the agreement at the reporting date. The Company utilizes interest rate swap agreements to manage interest costs and hedge against risks associated with changing interest rates. Counterparties to these agreements are major financial institutions. Credit loss from counterparty non-performance is not anticipated. A majority of the Company's available variable rate borrowings are based on the London Interbank Offered Rate ("LIBOR") index. At November 30, 2000, Lennar had six interest rate swap agreements outstanding with a total notional amount of $400 million, which will mature at various dates through 2007. These agreements fixed the LIBOR index at an average interest rate of 6.6% at November 30, 2000. The effect of the interest rate swap agreements on interest incurred and on the average cost of borrowing was a decrease for the year ended November 30, 2000 of $1.2 million and 0.08% and an increase of $1.8 million and 0.22% and $0.8 million and 0.11% for the years ended November 30, 1999 and 1998, respectively. During 1998, the Company entered into a contract to hedge the interest rate risk associated with the anticipated issuance of $200 million of 10-year senior notes. The contract fixed the yield on the 10-year U.S. Treasury Note (which was used as a basis for determining the interest rate on the Company's issuance of the senior notes) at 5.8%. In February 1999, the Company issued $282 million of 10-year senior notes (see Note 7). The payment made to the counterparty to this agreement at the time the senior notes were issued was $11.2 million. Such amount was recorded as a reduction of the carrying value of the senior notes and will be amortized as an adjustment to interest incurred over the life of the senior notes. 28 As of November 30, 2000, the Financial Services Division's pipeline of loans in process totaled approximately $1.2 billion. There is no exposure to credit risk in this type of commitment until the loans are funded. However, the Division uses the same credit policies in the approval of the commitments as are applied to all lending activities. Since a portion of these commitments is expected to expire without being exercised by the borrower, the total commitments do not necessarily represent future cash requirements. There is no exposure to market risk until a rate commitment is extended by the Company to a borrower. Loans in the pipeline of loans in process for which interest rates were committed to the borrower totaled approximately $106.0 million as of November 30, 2000. Substantially all of these commitments are for periods of 30 days or less. Mandatory mortgage-backed securities ("MBS") forward commitments are used by the Company to hedge its interest rate exposure during the period from when the Company extends an interest rate lock to a loan applicant until the time at which the loan is sold to an investor. These instruments involve, to varying degrees, elements of credit and interest rate risk. Credit risk is managed by the Company by entering into agreements with investment bankers with primary dealer status and with permanent investors meeting the credit standards of the Company. At any time, the risk to the Company, in the event of default by the purchaser, is the difference between the contract price and current market value. At November 30, 2000, the Company had open commitments amounting to $360.1 million to sell MBS with varying settlement dates through February 2001. 13. Commitments and Contingent Liabilities The Company and certain subsidiaries are parties to various claims, legal actions and complaints arising in the ordinary course of business. In the opinion of management, the disposition of these matters will not have a material adverse effect on the financial condition of the Company. The Company is subject to the usual obligations associated with entering into contracts for the purchase (including option contracts), development and sale of real estate in the routine conduct of its business. Option contracts for the purchase of land permit the Company to acquire portions of properties when it is ready to build homes on them. The use of option contracts allows the Company to manage the financial risk of adverse market conditions associated with longer-term land holdings. The Company has entered into agreements to lease certain office facilities and equipment under operating leases. Future minimum payments under the noncancelable leases are as follows: 2001 - $26.2 million; 2002 - $20.3 million; 2003 - $14.9 million; 2004 - $10.2 million; 2005 - $5.7 million and thereafter - $14.4 million. Rental expense for the years ended November 30, 2000, 1999 and 1998 was $36.6 million, $24.3 million and $14.4 million, respectively. The Company is committed, under various letters of credit, to perform certain development and construction activities and provide certain guarantees in the normal course of business. Outstanding letters of credit under these arrangements totaled $98.8 million at November 30, 2000. The Company also had outstanding performance and surety bonds with estimated costs to complete of $622.4 million related principally to its obligations for site improvements at various projects at November 30, 2000. The Company does not believe that any such bonds are likely to be drawn upon. 14. Supplemental Financial Information As discussed in Note 7, the Company issued $325 million of 9.95% senior notes due 2010. The Company's obligations to pay principal, premium, if any, and interest under the notes are guaranteed on a joint and several basis by substantially all of its subsidiaries, other than subsidiaries engaged in mortgage and title reinsurance activities. The Company has determined that separate, full financial statements of the guarantors would not be material to investors and, accordingly, supplemental financial information for the guarantors is presented. Consolidating statements of cash flows are not presented because cash flows for the non-guarantor subsidiaries were not significant for any of the periods presented. 29 Consolidating Balance Sheet November 30, 2000
Lennar Guarantor Non-Guarantor (In thousands) Corporation Subsidiaries Subsidiaries Eliminations Total - ------------------------------------------------------------------------------------------------------------------------- ASSETS Homebuilding: Cash and receivables, net $ 211,635 117,649 613 -- 329,897 Inventories -- 2,295,191 6,393 -- 2,301,584 Investments in partnerships -- 257,639 -- -- 257,639 Other assets 85,936 191,858 -- -- 277,794 Investments in subsidiaries 1,495,680 200,488 -- (1,696,168) -- --------------------------------------------------------------------------- 1,793,251 3,062,825 7,006 (1,696,168) 3,166,914 Financial services -- 16,604 594,396 -- 611,000 --------------------------------------------------------------------------- $ 1,793,251 3,079,429 601,402 (1,696,168) 3,777,914 =========================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Homebuilding: Accounts payable and other liabilities $ 225,362 550,659 2,217 -- 778,238 Mortgage notes and other debts payable, net 1,216,703 37,947 -- -- 1,254,650 Intercompany (877,394) 993,477 (116,083) -- -- --------------------------------------------------------------------------- 564,671 1,582,083 (113,866) -- 2,032,888 Financial services -- 1,666 514,780 -- 516,446 --------------------------------------------------------------------------- Total liabilities 564,671 1,583,749 400,914 -- 2,549,334 Stockholders' equity 1,228,580 1,495,680 200,488 (1,696,168) 1,228,580 --------------------------------------------------------------------------- $ 1,793,251 3,079,429 601,402 (1,696,168) 3,777,914 ===========================================================================
30 Consolidating Balance Sheet November 30, 1999
Lennar Guarantor Non-Guarantor (In thousands) Corporation Subsidiaries Subsidiaries Eliminations Total - ------------------------------------------------------------------------------------------------------------------------- ASSETS Homebuilding: Cash and receivables, net $ 48,343 45,534 541 -- 94,418 Inventories -- 1,267,050 7,501 -- 1,274,551 Investments in partnerships -- 173,310 -- -- 173,310 Other assets 63,143 34,683 -- -- 97,826 Investments in subsidiaries 573,291 107,900 -- (681,191) -- --------------------------------------------------------------------------- 684,777 1,628,477 8,042 (681,191) 1,640,105 Financial services -- 26,132 391,410 -- 417,542 --------------------------------------------------------------------------- $ 684,777 1,654,609 399,452 (681,191) 2,057,647 =========================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Homebuilding: Accounts payable and other liabilities $ 103,002 228,421 2,109 -- 333,532 Mortgage notes and other debts payable, net 507,445 16,216 -- -- 523,661 Intercompany (807,169) 827,316 (20,147) -- -- --------------------------------------------------------------------------- (196,722) 1,071,953 (18,038) -- 857,193 Financial services -- 9,365 309,590 -- 318,955 --------------------------------------------------------------------------- Total liabilities (196,722) 1,081,318 291,552 -- 1,176,148 Stockholders' equity 881,499 573,291 107,900 (681,191) 881,499 --------------------------------------------------------------------------- $ 684,777 1,654,609 399,452 (681,191) 2,057,647 ===========================================================================
31 Consolidating Statement of Earnings Year Ended November 30, 2000
Lennar Guarantor Non-Guarantor (In thousands) Corporation Subsidiaries Subsidiaries Eliminations Total - ----------------------------------------------------------------------------------------------------------- Revenues: Homebuilding $ -- 4,387,157 2,877 -- 4,390,034 Financial services -- 47,818 269,116 -- 316,934 --------------------------------------------------------------- Total revenues -- 4,434,975 271,993 -- 4,706,968 --------------------------------------------------------------- Costs and expenses: Homebuilding -- 3,906,772 2,466 -- 3,909,238 Financial services -- 52,533 220,806 -- 273,339 Corporate general and administrative 50,155 -- -- -- 50,155 Interest -- 98,601 -- -- 98,601 --------------------------------------------------------------- Total costs and expenses 50,155 4,057,906 223,272 -- 4,331,333 --------------------------------------------------------------- Earnings (loss) before income taxes (50,155) 377,069 48,721 -- 375,635 Provision (benefit) for income taxes (20,298) 147,057 19,739 -- 146,498 Equity in earnings from subsidiaries 258,994 28,982 -- (287,976) -- --------------------------------------------------------------- Net earnings $ 229,137 258,994 28,982 (287,976) 229,137 ===============================================================
Consolidating Statement of Earnings Year Ended November 30, 1999
Lennar Guarantor Non-Guarantor (In thousands) Corporation Subsidiaries Subsidiaries Eliminations Total - ----------------------------------------------------------------------------------------------------------- Revenues: Homebuilding $ -- 2,848,105 1,102 -- 2,849,207 Financial services -- 31,025 238,282 -- 269,307 --------------------------------------------------------------- Total revenues -- 2,879,130 239,384 -- 3,118,514 --------------------------------------------------------------- Costs and expenses: Homebuilding -- 2,506,332 2,072 -- 2,508,404 Financial services -- 34,115 204,096 -- 238,211 Corporate general and administrative 37,563 -- -- -- 37,563 Interest -- 48,859 -- -- 48,859 --------------------------------------------------------------- Total costs and expenses 37,563 2,589,306 206,168 -- 2,833,037 --------------------------------------------------------------- Earnings (loss) before income taxes (37,563) 289,824 33,216 -- 285,477 Provision (benefit) for income taxes (15,823) 114,480 14,106 -- 112,763 Equity in earnings from subsidiaries 194,454 19,110 -- (213,564) -- --------------------------------------------------------------- Net earnings $ 172,714 194,454 19,110 (213,564) 172,714 ===============================================================
32 Consolidating Statement of Earnings Year Ended November 30, 1998
Lennar Guarantor Non-Guarantor (In thousands) Corporation Subsidiaries Subsidiaries Eliminations Total - ----------------------------------------------------------------------------------------------------------- Revenues: Homebuilding $ -- 2,l67,869 36,559 -- 2,204,428 Financial services -- 19,889 192,548 -- 212,437 --------------------------------------------------------------- Total revenues -- 2,187,758 229,107 -- 2,416,865 --------------------------------------------------------------- Costs and expenses: Homebuilding -- 1,890,532 30,527 -- 1,921,059 Financial services -- 23,674 155,428 -- 179,102 Corporate general and administrative 28,962 -- -- -- 28,962 Interest -- 47,628 -- -- 47,628 --------------------------------------------------------------- Total costs and expenses 28,962 1,961,834 185,955 -- 2,176,751 --------------------------------------------------------------- Earnings (loss) before income taxes (28,962) 225,924 43,152 -- 240,114 Provision (benefit) for income taxes (11,472) 90,369 17,149 -- 96,046 Equity in earnings from subsidiaries 161,558 26,003 -- (187,561) -- --------------------------------------------------------------- Net earnings $ 144,068 161,558 26,003 (187,561) 144,068 ===============================================================
15. Quarterly Data (unaudited)
(In thousands, except per share amounts) First Second Third Fourth - ------------------------------------------------------------------------------------------------------ 2000 Revenues $ 640,367 968,180 1,376,215 1,722,206 Earnings before income taxes $ 36,412 59,739 100,011 179,473 Net earnings $ 22,211 36,441 61,007 109,478 Earnings per share: Basic $ 0.42 0.69 0.99 1.77 Diluted $ 0.40 0.64 0.90 1.59 ================================================ 1999 Revenues $ 590,599 738,357 819,497 970,061 Earnings before income taxes $ 46,053 65,440 75,162 98,822 Net earnings $ 27,862 39,591 45,473 59,788 Earnings per share: Basic $ 0.48 0.68 0.78 1.03 Diluted $ 0.45 0.63 0.72 0.95 ================================================
Quarterly and year-to-date computations of per share amounts are made independently. Therefore, the sum of per share amounts for the quarters may not agree with per share amounts for the year. 33 SHAREHOLDER INFORMATION Lennar Corporation and Subsidiaries ANNUAL MEETING INDEPENDENT AUDITORS The Annual Stockholders' Meeting Deloitte & Touche LLP will be held at 11:00 a.m. on 200 South Biscayne Boulevard, Suite 400 April 3, 2001 at the Doral Park Miami, Florida 33131 Golf and Country Club, 5001 N.W. 104th Avenue FORM 10-K AVAILABLE Miami, Florida 33178 A copy of the Company's Annual Report on Form 10-K as filed with the REGISTRAR AND TRANSFER AGENT Securities and Exchange Commission is BankBoston, N.A. available without charge to any EquiServe L.P. stockholder upon written request to: 150 Royall Street Investor Relations Canton, Massachusetts 02021 Lennar Corporation 700 N.W. 107th Avenue LISTING Miami, Florida 33172 New York Stock Exchange (LEN) Telephone: (305) 559-4000 CORPORATE COUNSEL Clifford Chance Rogers & Wells LLP 200 Park Avenue New York, New York 10166 COMPARATIVE COMMON STOCK DATA
- ------------------------------------------------------------------------------------------------------------------- Common Stock Prices Cash Dividends New York Stock Exchange Per Share - ------------------------------------------------------------------------------------------------------------------- Fiscal High/Low Price Common Stock Class B Quarter 2000 1999 2000 1999 2000 1999 - ------------------------------------------------------------------------------------------------------------------- First $18.63 - 15.25 27.88 - 21.63 1 1/4 cent 1 1/4 cent 1 1/8 cent 1 1/8 cent Second 21.75 - 16.25 27.81 - 20.50 1 1/4 cent 1 1/4 cent 1 1/8 cent 1 1/8 cent Third 29.44 - 17.88 24.94 - 17.50 1 1/4 cent 1 1/4 cent 1 1/8 cent 1 1/8 cent Fourth 34.88 - 25.63 19.44 - 13.06 1 1/4 cent 1 1/4 cent 1 1/8 cent 1 1/8 cent - -------------------------------------------------------------------------------------------------------------------
As of November 30, 2000, there were approximately 2,200 holders of record of the Company's common stock. 34 EX-21 7 0007.txt Exhibit 21 Lennar Corporation and Subsidiaries Listing of Subsidiaries State of Incorporation ------------- Lennar Corporation Delaware Subsidiaries - -------------------------------------------------------------------------------- Adjustable Mortgage Finance Corporation Florida Ameristar Financial Services, Inc. California Ameristar Insurance Services of Florida, Inc. Florida Aquaterra Utilities, Inc. Florida BCDC Corp. California Boca Greens, Inc. Florida Boca Isles Club, Inc. Florida Boca Isles South Club, Inc. Florida Bramalea California Properties, Inc. California Bramalea California Realty, Inc. California Bramalea California, Inc. California Brazoria County LP, Inc. Nevada Canterbury Corporation Florida Clodine-Bellaire LP, Inc. Nevada Club Pembroke Isles, Inc. Florida Club Tampa Palms, Inc. Florida Continental Escrow Company California Countryplace Golf Course, Inc. Texas DCA Acceptance Corporation Alabama DCA at Wiggins Bay, Inc. Florida DCA Builder Issuer, Inc. Florida DCA CML Acceptance, Inc. Florida DCA Financial Corporation Florida DCA General Contractors, Inc. Florida DCA Homes of Central Florida, Inc. Florida DCA NJ Realty, Inc. New Jersey DCA of Hialeah, Inc. Florida DCA of Lake Worth, Inc. Florida DCA of New Jersey, Inc. New Jersey Devco Land Corp. Florida E.M.J.V. Corp. Florida Eagle Home Mortgage, Inc. Washington Edgewater Reinsurance, Ltd. Turks & Caicos Islands Fidelity Guaranty and Acceptance Corporation Delaware Greystone Construction, Inc. Arizona Greystone Homes of Nevada, Inc. Delaware Greystone Homes, Inc. Delaware Harris County LP, Inc. Nevada Hillside, Inc. Florida Homecraft Corporation Texas Hometrust Insurance Company Vermont 1 Lennar Corporation and Subsidiaries Listing of Subsidiaries Subsidiaries - -------------------------------------------------------------------------------- Imperial Homes Corporation Florida Inactive Corporations, Inc. Florida Independence Land Title Company Texas Institutional Mortgages, Inc. Florida Kings Isle Recreation Corp. Florida Kings Ridge Golf Corporation Florida Kings Ridge Recreation Corporation Florida Kings Wood Development Corporation Florida La Canada Holding Company California Legends Golf Club, Inc. Florida Lennar Acquisition Corp. II California Lennar Communities Development, Inc. Delaware Lennar Communities, Inc. California Lennar Construction, Inc. Arizona Lennar Financial Services, Inc. Florida Lennar Homes, Inc. Florida Lennar Homes of Arizona, Inc. Arizona Lennar Homes of California, Inc. California Lennar Homes of Texas Land and Construction, Ltd. Texas Lennar Homes of Texas Sales and Marketing, Ltd. Texas Lennar Insurance Services, Inc. Florida Lennar La Paz, Inc. California Lennar La Paz Limited, Inc. California Lennar Land Partners Florida Lennar Land Partners II Florida Lennar Land Partners Sub, Inc. Delaware Lennar Land Partners Sub II, Inc. Nevada Lennar Management, Inc. California Lennar Nevada, Inc. Nevada Lennar Northland I, Inc. California Lennar Northland II, Inc. California Lennar Northland III, Inc. California Lennar Northland IV, Inc. California Lennar Northland V, Inc. California Lennar Northland VI, Inc. California Lennar Pacific, Inc. Delaware Lennar Pacific Properties, Inc. Delaware Lennar Realty, Inc. Florida Lennar Renaissance, Inc. California Lennar Sacramento, Inc. California Lennar Sales Corp. California Lennar San Jose Holdings, Inc. California Lennar Southland I, Inc. California Lennar Southland II, Inc. California Lennar Southland III, Inc. California Lennar Southwest Holding Corp. Nevada Lennar Texas Holding Company Texas Lennar Title Services, Inc. Florida 2 Lennar Corporation and Subsidiaries Listing of Subsidiaries Subsidiaries - -------------------------------------------------------------------------------- Lennar.Com, Inc. Florida LL Partners, Inc. Nevada Long Point Development Corporation Texas Lucerne Greens, Inc. Florida Lucerne Merged Condominiums, Inc. Florida Lundgren Bros. Construction, Inc. Minnesota M.A.P. Builders, Inc. Florida Marlborough Development Corporation California Marlborough Financial Corporation California Marlborough Mortgage Corporation California Meritus Title Company California Midland Housing Industries Corp. California Midland Investment Corporation California Mission Viejo Holdings, Inc. California Multi-Builder Acceptance Corp. Alabama NGMC Finance Corporation Florida NGMC Finance Corporation, IV Florida North American Asset Development Corporation California North American Real Estate Services, Inc. California North American Title Agency of Arizona, Inc. Arizona North American Title Company of Colorado Colorado North American Title Company, Inc. California North American Title Guaranty Company California North American Title Insurance Company California Oceanpointe Development Corporation Florida Orrin Thompson Construction Company Minnesota Orrin Thompson Homes Corp. Minnesota Paparone Construction Corp. New Jersey Prairie Lake Corporation Florida Regency Title Company Texas Rivenhome Corporation Florida Riviera Land Corp. Florida Rutenberg Homes of Texas, Inc. Texas Rutenberg Homes, Inc. (Florida) Florida San Felipe Indemnity Co., Ltd. Bermuda Satisfaction, Inc. Florida Savell Gulley Development Corporation Texas Silver Lakes-Gateway Clubhouse, Inc. Florida SLTC, Inc. Texas State Home Acceptance Corporation Florida Stoney Corporation Florida Stoneybrook Clubhouse West, Inc. Florida Stoneybrook Clubhouse, Inc. Florida Strategic Holdings, Inc. Nevada Strategic Technologies Communications of Calif., Inc. California Strategic Technologies, Inc. Florida Summerway Investment Corp. Florida Superior Realty & Marketing, Inc Florida 3 Lennar Corporation and Subsidiaries Listing of Subsidiaries Subsidiaries - -------------------------------------------------------------------------------- Texas Professional Title, Inc. Texas Texas-Wide General Agency, Inc. Texas Texas-Wide Insurance Agency, Inc. Texas The Bridges at Rancho Santa Fe Sales Company, Inc. California The Club at Stoneybrook, Inc. Florida TitleAmerica Insurance Corporation Florida U.S. Home & Development Corporation Delaware U.S. Home Acceptance Corporation Delaware U.S. Home Corporation Delaware U.S. Home Corporation of New York New York U.S. Home Insurance Agency, Inc. Colorado U.S. Home Mortgage Corporation Florida U.S. Home of Arizona Construction Co. Arizona U.S. Home of Colorado Real Estate, Inc. Colorado U.S. Home Realty Corporation Florida U.S. Home Realty, Inc. (Maryland) Maryland U.S. Home Realty, Inc. (Texas) Texas U.S. Insurors, Inc. Florida U.S.H. Corporation of New York New York U.S.H. Indemnity Co, Ltd. Bermuda U.S.H. Los Prados, Inc. Nevada UAMC Asset Corp. II Nevada Universal American Finance Corp., I. Florida Universal American Mortgage Company Florida Universal American Mortgage Co. of California California Universal Title Insurors, Inc. Florida USH (West Lake), Inc. New Jersey USH Acquisition Corp. Delaware USH Equity Corporation Nevada USH Funding Corp. Texas USH Holding, Inc. Delaware USH Millennium Ventures Corp. Florida USH Woodbridge, Inc. Texas USH/MJR, Inc. Texas USHHH, Inc. Florida W.B. Homes, Inc. Florida West Chocolate Bayou Development Corp. Texas Westchase, Inc. Nevada Weststone Corporation Florida 4 EX-23 8 0008.txt Exhibit 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements No. 33-45442 and No. 2-89104 on Form S-8 and Registration Statements No. 333-73311 and No. 333-42586 on Form S-3 of Lennar Corporation of our reports dated January 9, 2001, appearing in and incorporated by reference in this Annual Report on Form 10-K of Lennar Corporation for the year ended November 30, 2000. /s/ Deloitte & Touche LLP Deloitte & Touche LLP Certified Public Accountants Miami, Florida February 28, 2001 EX-99 9 0009.txt EXHIBIT 99 INDEPENDENT AUDITORS' REPORT To the Board of Directors of Lennar Homes, Inc.: We have audited the accompanying consolidated balance sheets of Lennar Homes, Inc. and subsidiaries (the "Company"), a wholly-owned subsidiary of Lennar Corporation, as of November 30, 2000 and 1999 and the related consolidated statements of earnings, stockholder's equity and cash flows for each of the three years in the period ended November 30, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of November 30, 2000 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended November 30, 2000, in conformity with accounting principles generally accepted in the United States of America. /s/ DELOITTE & TOUCHE LLP Miami, Florida January 9, 2001 -1- LENNAR HOMES, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Lennar Corporation) CONSOLIDATED BALANCE SHEETS NOVEMBER 30, 2000 AND 1999 (Dollars in thousands, except par value) - -------------------------------------------------------------------------------- 2000 1999 ASSETS Cash $ 57,175 $ 62,064 Inventories 827,814 899,566 Investments in partnerships 49,427 50,976 Other assets 58,751 21,396 ---------- ---------- $ 993,167 $1,034,002 ========== ========== LIABILITIES AND STOCKHOLDER'S EQUITY LIABILITIES: Accounts payable and other liabilities $ 183,910 $ 195,139 Mortgage notes payable 4,379 7,313 Due to affiliates 465,390 533,139 ---------- ---------- Total liabilities 653,679 735,591 ---------- ---------- STOCKHOLDER'S EQUITY: Common stock, $1 par value; 5,000 shares authorized, issued and outstanding 5 5 Additional paid-in capital 10,256 10,256 Retained earnings 329,227 288,150 ---------- ---------- Total stockholder's equity 339,488 298,411 ---------- ---------- $ 993,167 $1,034,002 ========== ========== See accompanying notes to consolidated financial statements. -2- LENNAR HOMES, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Lennar Corporation) CONSOLIDATED STATEMENTS OF EARNINGS YEARS ENDED NOVEMBER 30, 2000, 1999 AND 1998 (Dollars in thousands) - -------------------------------------------------------------------------------- 2000 1999 1998 REVENUES: Sales of homes $2,128,259 $1,848,428 $1,458,447 Sales of land and other revenues 114,705 48,617 46,503 ---------- ---------- ---------- Total revenues 2,242,964 1,897,045 1,504,950 ---------- ---------- ---------- COSTS AND EXPENSES: Cost of homes sold 1,707,859 1,499,497 1,170,926 Cost of land and other expenses 91,950 29,470 30,865 Selling, general and administrative 231,894 207,562 171,755 Licensing expense to affiliate 104,677 63,285 -- Interest 39,244 24,419 39,945 ---------- ---------- ---------- Total costs and expenses 2,175,624 1,824,233 1,413,491 ---------- ---------- ---------- EARNINGS BEFORE INCOME TAXES 67,340 72,812 91,459 INCOME TAXES 26,263 28,761 36,584 ---------- ---------- ---------- NET EARNINGS $ 41,077 $ 44,051 $ 54,875 ========== ========== ========== See accompanying notes to consolidated financial statements. -3- LENNAR HOMES, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Lennar Corporation) CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY YEARS ENDED NOVEMBER 30, 2000, 1999 AND 1998 (Dollars in thousands) - -------------------------------------------------------------------------------- Additional Common Paid-in Retained Stock Capital Earnings Total Balance, November 30, 1997 $ 5 $ 10,256 $189,224 $199,485 1998 net earnings -- -- 54,875 54,875 -------- -------- -------- -------- Balance, November 30, 1998 5 10,256 244,099 254,360 1999 net earnings -- -- 44,051 44,051 -------- -------- -------- -------- Balance, November 30, 1999 5 10,256 288,150 298,411 2000 net earnings -- -- 41,077 41,077 -------- -------- -------- -------- Balance, November 30, 2000 $ 5 $ 10,256 $329,227 $339,488 ======== ======== ======== ======== See accompanying notes to consolidated financial statements. -4- LENNAR HOMES, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Lennar Corporation) CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED NOVEMBER 30, 2000, 1999 AND 1998 (Dollars in thousands) - --------------------------------------------------------------------------------
2000 1999 1998 CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 41,077 $ 44,051 $ 54,875 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Depreciation and amortization 11,091 12,167 4,447 Equity in loss (earnings) from partnerships 1,056 (3,785) 1,065 Changes in assets and liabilities, net of effects from acquisitions: (Increase) decrease in inventories 66,963 (115,403) (18,429) (Increase) decrease in other assets (38,407) 14,362 25,504 Increase (decrease) in accounts payable and other liabilities (11,229) 26,871 63,032 --------- --------- --------- Net cash provided by (used in) operating activities 70,551 (21,737) 130,494 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: (Increase) decrease in investments in partnerships, net 493 (23,375) (24,881) --------- --------- --------- Net cash provided by (used in) investing activities 493 (23,375) (24,881) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from borrowings -- 167 3,123 Principal payments on borrowings (8,184) (23,012) (1,100) Increase (decrease) in amounts due to affiliates (67,749) 101,530 (82,959) --------- --------- --------- Net cash provided by (used in) financing activities (75,933) 78,685 (80,936) --------- --------- --------- NET INCREASE (DECREASE) IN CASH (4,889) 33,573 24,677 CASH AT BEGINNING OF YEAR 62,064 28,491 3,814 --------- --------- --------- CASH AT END OF YEAR $ 57,175 $ 62,064 $ 28,491 ========= ========= =========
See Note 1 for supplemental disclosures of cash flow information related to interest and income taxes paid. Supplemental disclosures of non-cash investing and financing activities: Purchases of inventory financed by sellers $ 5,250 $ 14,360 $ 14,223 Fair value of assets acquired in acquisitions $ -- $ -- $ 291,161 Liabilities assumed in acquisitions $ -- $ -- $ 13,388
See accompanying notes to consolidated financial statements. -5- LENNAR HOMES, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Lennar Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED NOVEMBER 30, 2000, 1999 AND 1998 - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Consolidation - The accompanying consolidated financial statements include the accounts of Lennar Homes, Inc., a wholly-owned subsidiary of Lennar Corporation, and all subsidiaries and partnerships in which a controlling interest is held (the "Company"). The Company's investments in partnerships (and similar entities) in which a significant, but less than a controlling, interest is held are accounted for by the equity method. All significant intercompany transactions have been eliminated. The Company operates in one operating and reporting segment - homebuilding. Homebuilding operations include the sale and construction of single-family attached and detached homes. These activities also include the purchase, development and sale of residential land by the Company and through partnerships in which it has investments. Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Revenue Recognition - Revenue from sales of homes are recognized when the sales are closed and title passes to the new homeowners. Revenues from sales of other real estate, including the sale of land, are recognized when a significant down payment is received, the earnings process is complete and the collection of any remaining receivables is reasonably assured. Cash - The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. Due to the short maturity period of the cash equivalents, the carrying amount of these instruments approximates their fair values. Cash as of November 30, 2000 and 1999 included $39.0 million and $32.7 million, respectively, of cash held in escrow for periods of up to three days. Inventories - Inventories are stated at cost unless the inventory within a community is determined to be impaired, in which case the impaired inventory is written down to fair value. The Company evaluates long-lived assets for impairment based on the undiscounted future cash flows of the assets. Write-downs to inventories deemed to be impaired are recorded as adjustments to the cost basis of the respective inventories. No impairment existed at November 30, 2000 or 1999. Start-up costs, construction overhead and selling expenses are expensed as incurred. Homes held for sale are classified as inventories until delivered. Land, land development, amenities and other costs are accumulated by specific area and allocated proportionately to homes within the respective area. Due to Affiliates - The Company has transactions in the normal course of business with Lennar Corporation and/or affiliated companies. -6- Interest and Real Estate Taxes - Interest and real estate taxes attributable to land, homes and operating properties are capitalized and added to the cost of those properties as long as the properties are being actively developed. Interest costs relieved from inventories are included in interest expense. Interest costs result from the interest related to the Company's outstanding debt as disclosed in the consolidated balance sheets as well as debt incurred by the Company's parent, Lennar Corporation. Lennar Corporation allocates a portion of its interest to the Company based on the Company's inventory levels during the year. Operating Properties and Equipment - Operating properties and equipment are recorded at cost. Depreciation is calculated to amortize the cost of depreciable assets over their estimated useful lives using the straight-line method. The estimated useful life for operating properties is 30 years and for equipment is 2 to 5 years. Operating properties and equipment are included in other assets in the consolidated balance sheets. Income Taxes - The Company files a consolidated federal income tax return with Lennar Corporation. Income taxes have been provided at the Company level as if the Company filed an income tax return on a stand-alone basis. Current taxes due are recorded as a payable to Lennar Corporation, and the deferred portion is recorded as deferred taxes. Income taxes are accounted for in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes. Under SFAS No. 109, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and are measured by using enacted tax rates expected to apply to taxable income in the years in which those differences are expected to reverse. Fair Value of Financial Instruments - The carrying amounts of cash, accounts payable and mortgage notes payable approximate fair value. New Accounting Pronouncements - In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 137 and SFAS No. 138, which is required to be adopted for fiscal years beginning after June 15, 2000. SFAS No. 133 will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, a change in the fair value of the derivative will either be offset against the change in the fair value of the hedged asset, liability, or firm commitment through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The implementation of SFAS No. 133 will not have a material impact on the Company's results of operations or financial position. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition in Financial Statements, which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. SAB No. 101 is applicable for the Company beginning in the fourth quarter of the year ending November 30, 2001. Management does not currently believe that the implementation of SAB No. 101 will have a material impact on the Company's results of operations or financial position. -7- 2. ACQUISITIONS In 1998, the Company acquired Winncrest Homes, a California homebuilder, and the properties of two other California homebuilders, ColRich Communities and Polygon Communities. Lennar Corporation paid $184.0 million in cash and issued $94.1 million in Lennar Corporation common stock. These amounts paid on the Company's behalf are included in due to affiliates in the consolidated balance sheets. The Company acquired assets (primarily inventories) with a fair value of $291.2 million and assumed liabilities of $13.4 million. The acquisition of Winncrest Homes was accounted for using the purchase method of accounting. The results of Winncrest Homes are included in the Company's consolidated statements of earnings since the acquisition date. The pro forma effect of the acquisition of Winncrest Homes on the results of operations for 1998 is not presented as it is not considered material. 3. MORTGAGE NOTES PAYABLE At November 30, 2000 and 1999, the Company had mortgage notes on land with fixed interest rates ranging from 5.4% to 12.0% due through 2008 with an outstanding balance of $4.4 million and $7.3 million, respectively. These borrowings are collateralized by land. 4. INCOME TAXES The provision for income taxes consisted of the following: Years Ended November 30, (Dollars in thousands) 2000 1999 1998 --------------------------------------------------------------------- Current: Federal $ 37,654 $ 19,527 $ 42,166 State 4,378 3,719 5,251 -------- -------- -------- 42,032 23,246 47,417 -------- -------- -------- Deferred: Federal (14,349) 4,789 (5,862) State (1,420) 726 (4,971) -------- -------- -------- (15,769) 5,515 (10,833) -------- -------- -------- $ 26,263 $ 28,761 $ 36,584 ======== ======== ======== The actual income tax expense differs from the "expected" tax expense for the year (computed by applying the U.S. federal corporate rate of 35% to earnings before income taxes) primarily due to the amount of state income taxes, net of the related federal tax benefit. -8- Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of the assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The tax effects of significant temporary differences that give rise to the net deferred tax asset are as follows: November 30, (Dollars in thousands) 2000 1999 ------------------------------------------------------------- Deferred tax assets: Acquisition adjustments $ 1,729 $ 3,001 Reserves and accruals 12,347 10,381 Capitalized expenses 14,356 -- Investments in partnerships 2,527 3,335 Other 4,211 2,163 ------- ------- Total deferred tax assets 35,170 18,880 ------- ------- Deferred tax liabilities: Capitalized expenses -- 8,378 Deferred gains -- 922 Installment sales 804 1,031 Other 10,048 -- ------- ------- Total deferred tax liabilities 10,852 10,331 ------- ------- Net deferred tax asset $24,318 $ 8,549 ======= ======= The net deferred tax asset is included in other assets in the consolidated balance sheets. 5. RELATED PARTY TRANSACTIONS On April 1, 1999, Lennar Corporation entered into an agreement with Greystone Homes of Nevada, Inc. ("Greystone"), a wholly-owned subsidiary of Lennar Corporation, whereby Greystone has granted to the Company the right to use certain property for a fee. Unpaid fees bear interest at 9% annually. The fee and its related interest comprise the classification "licensing expense to affiliate" in the consolidated statements of earnings. On a quarterly basis, these amounts are paid by Lennar Corporation to Greystone. The amounts paid by Lennar Corporation on behalf of the Company are included in due to affiliates in the Company's consolidated balance sheets, and bear interest at 9% annually. The term of the agreement ends on November 30, 2001, with automatic one year renewals unless terminated earlier by three-months written notice by either party. During 2000 and 1999, Lennar Corporation and its subsidiaries advanced funds to the Company which had no stated repayment terms. At November 30, 2000 and 1999, the Company had a payable to affiliates of $465.4 million and $533.1 million, respectively. -9- 6. COMMITMENTS AND CONTINGENT LIABILITIES The Company and certain subsidiaries are parties to various claims, legal actions and complaints arising in the ordinary course of business. In the opinion of management, the disposition of these matters will not have a material adverse effect on the financial condition of the Company. The Company is subject to the usual obligations associated with entering into contracts for the purchase (including option contracts), development and sale of real estate in the routine conduct of its business. Option contracts for the purchase of land permit the Company to acquire portions of properties when it is ready to build homes on them. The use of option contracts allows the Company to manage the financial risk of adverse market conditions associated with longer-term land holdings. The Company has entered into agreements to lease certain office facilities and equipment under operating leases. Future minimum payments under the noncancelable leases are as follows: 2001 - $4.6 million; 2002 - $4.0 million; 2003 - $3.4 million; 2004 - $2.5 million; 2005 - $1.0 million and thereafter - $2.6 million. Rental expense for the years ended November 30, 2000, 1999 and 1998 was $9.8 million, $8.0 million and $2.8 million, respectively. The Company is committed, under various letters of credit, to perform certain development and construction activities and provide certain guarantees in the normal course of business. Outstanding letters of credit under these arrangements totaled $52.2 million at November 30, 2000. The Company also had outstanding performance and surety bonds with estimated costs to complete of $343.4 million related principally to its obligations for site improvements at various projects at November 30, 2000. The Company does not believe that any such bonds are likely to be drawn upon. The Company has guaranteed obligations of Lennar Corporation with regard to certain issues of its outstanding debt, and the stock of the Company has been pledged as collateral for Lennar Corporation's obligations with regard to that debt. The Company knows of no event of default which would require it to satisfy these guarantees and, therefore, the fair value of these contingent liabilities is considered immaterial. -10- INDEPENDENT AUDITORS' REPORT To the Board of Directors of Lennar Southwest Holding Corp.: We have audited the accompanying consolidated balance sheets of Lennar Southwest Holding Corp. and subsidiaries (the "Company"), a wholly-owned subsidiary of Lennar Homes, Inc., as of November 30, 2000 and 1999 and the related consolidated statements of earnings, stockholder's equity and cash flows for each of the three years in the period ended November 30, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of November 30, 2000 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended November 30, 2000, in conformity with accounting principles generally accepted in the United States of America. /s/ DELOITTE & TOUCHE LLP Miami, Florida January 9, 2001 -11- LENNAR SOUTHWEST HOLDING CORP. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Lennar Homes, Inc.) CONSOLIDATED BALANCE SHEETS NOVEMBER 30, 2000 AND 1999 (Dollars in thousands, except par value) - -------------------------------------------------------------------------------- 2000 1999 ASSETS Cash $ 29,180 $ 25,965 Inventories 249,872 209,232 Other assets 17,723 8,299 -------- -------- $296,775 $243,496 ======== ======== LIABILITIES AND STOCKHOLDER'S EQUITY LIABILITIES: Accounts payable and other liabilities $ 22,440 $ 24,948 Due to affiliates 206,040 173,594 -------- -------- Total liabilities 228,480 198,542 -------- -------- STOCKHOLDER'S EQUITY: Common stock, $1 par value; 5,000 shares authorized, issued and outstanding 5 5 Additional paid-in capital 3,332 3,332 Retained earnings 64,958 41,617 -------- -------- Total stockholder's equity 68,295 44,954 -------- -------- $296,775 $243,496 ======== ======== See accompanying notes to consolidated financial statements. -12- LENNAR SOUTHWEST HOLDING CORP. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Lennar Homes, Inc.) CONSOLIDATED STATEMENTS OF EARNINGS YEARS ENDED NOVEMBER 30, 2000, 1999 AND 1998 (Dollars in thousands) - -------------------------------------------------------------------------------- 2000 1999 1998 REVENUES: Sales of homes $718,959 $563,315 $427,009 Sales of land and other revenues 24,522 15,986 5,862 -------- -------- -------- Total revenues 743,481 579,301 432,871 -------- -------- -------- COSTS AND EXPENSES: Cost of homes sold 582,555 457,306 338,361 Cost of land and other expenses 9,609 4,942 3,896 Selling, general and administrative 67,744 51,193 41,144 Licensing expense to affiliate 35,069 19,539 -- Interest 10,240 5,286 5,978 -------- -------- -------- Total costs and expenses 705,217 538,266 389,379 -------- -------- -------- EARNINGS BEFORE INCOME TAXES 38,264 41,035 43,492 INCOME TAXES 14,923 16,209 17,397 -------- -------- -------- NET EARNINGS $ 23,341 $ 24,826 $ 26,095 ======== ======== ======== See accompanying notes to consolidated financial statements. -13- LENNAR SOUTHWEST HOLDING CORP. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Lennar Homes, Inc.) CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY YEARS ENDED NOVEMBER 30, 2000, 1999 AND 1998 (Dollars in thousands) - -------------------------------------------------------------------------------- Additional Common Paid-in Retained Stock Capital Earnings Total -------- -------- -------- -------- Balance, November 30, 1997 $ 5 $ 3,332 $ (9,304) $ (5,967) 1998 net earnings -- -- 26,095 26,095 -------- -------- -------- -------- Balance, November 30, 1998 5 3,332 16,791 20,128 1999 net earnings -- -- 24,826 24,826 -------- -------- -------- -------- Balance, November 30, 1999 5 3,332 41,617 44,954 2000 net earnings -- -- 23,341 23,341 -------- -------- -------- -------- Balance, November 30, 2000 $ 5 $ 3,332 $ 64,958 $ 68,295 ======== ======== ======== ======== See accompanying notes to consolidated financial statements. -14- LENNAR SOUTHWEST HOLDING CORP. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Lennar Homes, Inc.) CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED NOVEMBER 30, 2000, 1999 AND 1998 (Dollars in thousands) - --------------------------------------------------------------------------------
2000 1999 1998 CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 23,341 $ 24,826 $ 26,095 Adjustments to reconcile net earnings to net cash used in operating activities: Depreciation and amortization 771 686 780 Changes in assets and liabilities: Increase in inventories (41,217) (53,473) (45,983) (Increase) decrease in other assets (9,618) (4,997) 6,942 Increase (decrease) in accounts payable and other liabilities (2,508) 6,483 (1,134) -------- -------- -------- Net cash used in operating activities (29,231) (26,475) (13,300) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase in amounts due to affiliates 32,446 37,667 27,482 -------- -------- -------- Net cash provided by financing activities 32,446 37,667 27,482 -------- -------- -------- NET INCREASE IN CASH 3,215 11,192 14,182 CASH AT BEGINNING OF YEAR 25,965 14,773 591 -------- -------- -------- CASH AT END OF YEAR $ 29,180 $ 25,965 $ 14,773 ======== ======== ========
See Note 1 for supplemental disclosures of cash flow information related to interest and income taxes paid. See accompanying notes to consolidated financial statements. -15- LENNAR SOUTHWEST HOLDING CORP. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Lennar Homes, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED NOVEMBER 30, 2000, 1999 AND 1998 - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Consolidation - The accompanying consolidated financial statements include the accounts of Lennar Southwest Holding Corp. and all subsidiaries and partnerships in which a controlling interest is held (the "Company"). The Company is a wholly-owned subsidiary of Lennar Homes, Inc. which is a wholly-owned subsidiary of Lennar Corporation. All significant intercompany transactions have been eliminated. The Company operates in one operating and reporting segment - homebuilding. Homebuilding operations include the sale and construction of single-family attached and detached homes. These activities also include the purchase, development and sale of residential land by the Company and through partnerships in which it has investments. Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Revenue Recognition - Revenue from sales of homes are recognized when the sales are closed and title passes to the new homeowners. Revenues from sales of other real estate including the sales of land are recognized when a significant down payment is received, the earnings process is complete and the collection of any remaining receivables is reasonably assured. Cash - The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. Due to the short maturity period of the cash equivalents, the carrying amount of these instruments approximates their fair values. Cash as of November 30, 2000 and 1999 included $13.2 million and $0.4 million, respectively, of cash held in escrow for periods of up to three days. Inventories - Inventories are stated at cost unless the inventory within a community is determined to be impaired, in which case the impaired inventory is written down to fair value. The Company evaluates long-lived assets for impairment based on the undiscounted future cash flows of the assets. Write-downs to inventories deemed to be impaired are recorded as adjustments to the cost basis of the respective inventories. No impairment existed at November 30, 2000 or 1999. Start-up costs, construction overhead and selling expenses are expensed as incurred. Homes held for sale are classified as inventories until delivered. Land, land development, amenities and other costs are accumulated by specific area and allocated proportionately to homes within the respective area. Due to Affiliates - The Company has transactions in the normal course of business with Lennar Corporation and/or affiliated companies. -16- Interest and Real Estate Taxes - Interest and real estate taxes attributable to land and homes are capitalized and added to the cost of those properties as long as the properties are being actively developed. Interest costs relieved from inventories are included in interest expense. Interest costs result from the interest related to debt incurred by Lennar Corporation. Lennar Corporation allocates a portion of its interest to the Company based on the Company's inventory levels during the year. Operating Equipment - Operating equipment is recorded at cost. Depreciation is calculated to amortize the cost of depreciable assets over their estimated useful lives using the straight-line method. The estimated useful life is 2 to 5 years. Operating equipment is included in other assets in the consolidated balance sheets. Income Taxes - The Company files a consolidated federal income tax return with Lennar Corporation. Income taxes have been provided at the Company level as if the Company filed an income tax return on a stand-alone basis. Current taxes due are recorded as a payable to Lennar Corporation, and the deferred portion is recorded as deferred taxes. Income taxes are accounted for in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes. Under SFAS No. 109, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and are measured by using enacted tax rates expected to apply to taxable income in the years in which those differences are expected to reverse. Fair Value of Financial Instruments - The carrying amounts of cash and accounts payable approximate fair value. New Accounting Pronouncements - In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 137 and SFAS No. 138, which is required to be adopted for fiscal years beginning after June 15, 2000. SFAS No. 133 will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, a change in the fair value of the derivative will either be offset against the change in the fair value of the hedged asset, liability, or firm commitment through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The implementation of SFAS No. 133 will not have a material impact on the Company's results of operations or financial position. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition in Financial Statements, which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. SAB No. 101 is applicable for the Company beginning in the fourth quarter of the year ending November 30, 2001. Management does not currently believe that the implementation of SAB No. 101 will have a material impact on the Company's results of operations or financial position. -17- 2. INCOME TAXES The provision for income taxes consisted of the following: Years Ended November 30, (Dollars in thousands) 2000 1999 1998 ---------------------------------------------------------------------- Current: Federal $17,463 $12,172 $16,067 State 2,031 2,318 2,001 ------- ------- ------- 19,494 14,490 18,068 ------- ------- ------- Deferred: Federal (4,159) 1,493 (363) State (412) 226 (308) ------- ------- ------- (4,571) 1,719 (671) ------- ------- ------- $14,923 $16,209 $17,397 ======= ======= ======= The actual income tax expense differs from the "expected" tax expense for the year (computed by applying the U.S. federal corporate rate of 35% to earnings before income taxes) primarily due to the amount of state income taxes, net of the related federal tax benefit. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of the assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The tax effects of significant temporary differences that give rise to the net deferred tax asset (liability) are as follows: November 30, (Dollars in thousands) 2000 1999 ------------------------------------------------------------------ Deferred tax assets: Capitalized expenses $2,820 $ -- ------ ------- Total deferred tax assets 2,820 -- ------ ------- Deferred tax liabilities: Capitalized expenses -- 3,156 Other 1,405 -- ------ ------- Total deferred tax liabilities 1,405 3,156 ------ ------- Net deferred tax asset (liability) $1,415 $(3,156) ====== ======= -18- The net deferred tax asset of $1.4 million at November 30, 2000 is included in other assets and the net deferred tax liability of $3.2 million at November 30, 1999 is included in accounts payable and other liabilities in the consolidated balance sheets. 3. RELATED PARTY TRANSACTIONS On April 1, 1999, Lennar Corporation entered into an agreement with Greystone Homes of Nevada, Inc. ("Greystone"), a wholly-owned subsidiary of Lennar Corporation, whereby Greystone has granted to the Company the right to use certain property for a fee. Unpaid fees bear interest at 9% annually. The fee and its related interest comprise the classification "licensing expense to affiliate" in the consolidated statements of earnings. On a quarterly basis, these amounts are paid by Lennar Corporation to Greystone. The amounts paid by Lennar Corporation on behalf of the Company are included in due to affiliates in the Company's consolidated balance sheets, and bear interest at 9% annually. The term of the agreement ends on November 30, 2001, with automatic one year renewals unless terminated earlier by three-months written notice by either party. During 2000 and 1999, Lennar Corporation and its subsidiaries advanced funds to the Company which had no stated repayment terms. At November 30, 2000 and 1999, the Company had a payable to affiliates of $206.0 million and $173.6 million, respectively. 4. COMMITMENTS AND CONTINGENT LIABILITIES The Company and certain subsidiaries are parties to various claims, legal actions and complaints arising in the ordinary course of business. In the opinion of management, the disposition of these matters will not have a material adverse effect on the financial condition of the Company. The Company is subject to the usual obligations associated with entering into contracts for the purchase (including option contracts), development and sale of real estate in the routine conduct of its business. Option contracts for the purchase of land permit the Company to acquire portions of properties when it is ready to build homes on them. The use of option contracts allows the Company to manage the financial risk of adverse market conditions associated with longer-term land holdings. The Company has entered into agreements to lease certain office facilities and equipment under operating leases. Future minimum payments under the noncancelable leases are as follows: 2001 - $0.9 million; 2002 - $0.9 million; 2003 - $0.8 million; 2004 - $0.7 million; 2005 - $0.6 million and thereafter - $2.2 million. Rental expense for the years ended November 30, 2000, 1999 and 1998 was $0.9 million, $0.7 million and $0.5 million, respectively. The Company is committed, under various letters of credit, to perform certain development and construction activities and provide certain guarantees in the normal course of business. Outstanding letters of credit under these arrangements totaled $26.7 million at November 30, 2000. The Company also had outstanding performance and surety bonds with estimated costs to complete of $1.7 million related principally to its obligations for site improvements at various projects at November 30, 2000. The Company does not believe that any such bonds are likely to be drawn upon. The Company has guaranteed obligations of Lennar Corporation with regard to certain issues of its outstanding debt, and the stock of the Company has been pledged as collateral for Lennar Corporation's obligations with regard to that debt. The Company knows of no event of default which would require it to satisfy these guarantees and, therefore, the fair value of these contingent liabilities is considered immaterial. -19- INDEPENDENT AUDITORS' REPORT To the Board of Directors of Lennar Homes of California, Inc.: We have audited the accompanying consolidated balance sheets of Lennar Homes of California, Inc. and subsidiaries (the "Company"), a wholly-owned subsidiary of Lennar Homes, Inc., as of November 30, 2000 and 1999 and the related consolidated statements of earnings, stockholder's equity and cash flows for each of the three years in the period ended November 30, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of November 30, 2000 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended November 30, 2000, in conformity with accounting principles generally accepted in the United States of America. /s/ DELOITTE & TOUCHE LLP Miami, Florida January 9, 2001 -20- LENNAR HOMES OF CALIFORNIA, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Lennar Homes, Inc.) CONSOLIDATED BALANCE SHEETS NOVEMBER 30, 2000 AND 1999 (Dollars in thousands, except par value) - -------------------------------------------------------------------------------- 2000 1999 ASSETS Inventories $145,067 $217,594 Investments in partnerships 25,064 25,654 Other assets 3,010 3,481 -------- -------- $173,141 $246,729 ======== ======== LIABILITIES AND STOCKHOLDER'S EQUITY LIABILITIES: Accounts payable and other liabilities $ 33,902 $ 26,968 Mortgage note payable 2,000 2,200 Due to affiliates 87,486 175,548 -------- -------- Total liabilities 123,388 204,716 -------- -------- STOCKHOLDER'S EQUITY: Common stock, $1 par value; 5,000 shares authorized, issued and outstanding 5 5 Retained earnings 49,748 42,008 -------- -------- Total stockholder's equity 49,753 42,013 -------- -------- $173,141 $246,729 ======== ======== See accompanying notes to consolidated financial statements. -21- LENNAR HOMES OF CALIFORNIA, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Lennar Homes, Inc.) CONSOLIDATED STATEMENTS OF EARNINGS YEARS ENDED NOVEMBER 30, 2000, 1999 AND 1998 (Dollars in thousands) - -------------------------------------------------------------------------------- 2000 1999 1998 REVENUES: Sales of homes $419,508 $348,084 $262,345 Sales of land and other revenues 16,606 520 12,415 -------- -------- -------- Total revenues 436,114 348,604 274,760 -------- -------- -------- COSTS AND EXPENSES: Cost of homes sold 327,229 265,730 187,927 Cost of land and other expenses 18,702 3,588 10,923 Selling, general and administrative 44,918 38,946 25,135 Licensing expense to affiliate 20,696 11,039 -- Interest 11,880 7,555 12,219 -------- -------- -------- Total costs and expenses 423,425 326,858 236,204 -------- -------- -------- EARNINGS BEFORE INCOME TAXES 12,689 21,746 38,556 INCOME TAXES 4,949 8,590 15,423 -------- -------- -------- NET EARNINGS $ 7,740 $ 13,156 $ 23,133 ======== ======== ======== See accompanying notes to consolidated financial statements. -22- LENNAR HOMES OF CALIFORNIA, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Lennar Homes, Inc.) CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY YEARS ENDED NOVEMBER 30, 2000, 1999 AND 1998 (Dollars in thousands) - -------------------------------------------------------------------------------- Common Retained Stock Earnings Total Balance, November 30, 1997 $ 5 $ 5,719 $ 5,724 1998 net earnings -- 23,133 23,133 ------- ------- ------- Balance, November 30, 1998 5 28,852 28,857 1999 net earnings -- 13,156 13,156 ------- ------- ------- Balance, November 30, 1999 5 42,008 42,013 2000 net earnings -- 7,740 7,740 ------- ------- ------- Balance, November 30, 2000 $ 5 $49,748 $49,753 ======= ======= ======= See accompanying notes to consolidated financial statements. -23- LENNAR HOMES OF CALIFORNIA, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Lennar Homes, Inc.) CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED NOVEMBER 30, 2000, 1999 AND 1998 (Dollars in thousands) - --------------------------------------------------------------------------------
2000 1999 1998 CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 7,740 $ 13,156 $ 23,133 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 3,166 5,215 660 Equity in loss from partnerships 3,783 247 422 Changes in assets and liabilities, net of effects from acquisitions: Decrease in inventories 69,468 1,635 85,265 Decrease in other assets 364 1,646 1,159 Increase in accounts payable and other liabilities 6,934 4,567 3,958 --------- --------- --------- Net cash provided by operating activities 91,455 26,466 114,597 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Increase in investments in partnerships, net (3,193) (13,741) (12,582) --------- --------- --------- Net cash used in investing activities (3,193) (13,741) (12,582) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from borrowings -- 167 3,123 Principal payments on borrowings (200) (12,682) (790) Decrease in amounts due to affiliates (88,062) (3,630) (101,310) --------- --------- --------- Net cash used in financing activities (88,262) (16,145) (98,977) --------- --------- --------- NET INCREASE (DECREASE) IN CASH -- (3,420) 3,038 CASH AT BEGINNING OF YEAR -- 3,420 382 --------- --------- --------- CASH AT END OF YEAR $ -- $ -- $ 3,420 ========= ========= =========
See Note 1 for supplemental disclosures of cash flow information related to interest and income taxes paid. Supplemental disclosures of non-cash investing and financing activities: Purchases of inventory financed by sellers $ -- $ 11,680 $ 7,996 Fair value of assets acquired in acquisitions $ -- $ -- $ 216,408 Liabilities assumed in acquisitions $ -- $ -- $ 5,456
See accompanying notes to consolidated financial statements. -24- LENNAR HOMES OF CALIFORNIA, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Lennar Homes, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED NOVEMBER 30, 2000, 1999 AND 1998 - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Consolidation - The accompanying consolidated financial statements include the accounts of Lennar Homes of California, Inc. and all subsidiaries and partnerships in which a controlling interest is held (the "Company"). The Company is a wholly-owned subsidiary of Lennar Homes, Inc. which is a wholly-owned subsidiary of Lennar Corporation. The Company's investments in partnerships (and similar entities) in which a significant, but less than a controlling, interest is held are accounted for by the equity method. All significant intercompany transactions have been eliminated. The Company operates in one operating and reporting segment - homebuilding. Homebuilding operations include the sale and construction of single-family attached and detached homes. These activities also include the purchase, development and sale of residential land by the Company and through partnerships in which it has investments. Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Revenue Recognition - Revenue from sales of homes are recognized when the sales are closed and title passes to the new homeowners. Revenues from sales of other real estate, including the sale of land, are recognized when a significant down payment is received, the earnings process is complete and the collection of any remaining receivables is reasonably assured. Cash - The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. Inventories - Inventories are stated at cost unless the inventory within a community is determined to be impaired, in which case the impaired inventory is written down to fair value. The Company evaluates long-lived assets for impairment based on the undiscounted future cash flows of the assets. Write-downs to inventories deemed to be impaired are recorded as adjustments to the cost basis of the respective inventories. No impairment existed at November 30, 2000 or 1999. Start-up costs, construction overhead and selling expenses are expensed as incurred. Homes held for sale are classified as inventories until delivered. Land, land development, amenities and other costs are accumulated by specific area and allocated proportionately to homes within the respective area. Due to Affiliates - The Company has transactions in the normal course of business with Lennar Corporation and/or affiliated companies. -25- Interest and Real Estate Taxes - Interest and real estate taxes attributable to land and homes are capitalized and added to the cost of those properties as long as the properties are being actively developed. Interest costs relieved from inventories are included in interest expense. Interest costs result from the interest related to the Company's outstanding debt as disclosed in the consolidated balance sheets as well as debt incurred by Lennar Corporation. Lennar Corporation allocates a portion of its interest to the Company based on the Company's inventory levels during the year. Operating Equipment - Operating equipment is recorded at cost. Depreciation is calculated to amortize the cost of depreciable assets over their estimated useful lives using the straight-line method. The estimated useful life is 2 to 5 years. Operating equipment is included in other assets in the consolidated balance sheets. Income Taxes - The Company files a consolidated federal income tax return with Lennar Corporation. Income taxes have been provided at the Company level as if the Company filed an income tax return on a stand-alone basis. Current taxes due are recorded as a payable to Lennar Corporation, and the deferred portion is recorded as deferred taxes. Income taxes are accounted for in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes. Under SFAS No. 109, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and are measured by using enacted tax rates expected to apply to taxable income in the years in which those differences are expected to reverse. Fair Value of Financial Instruments - The carrying amounts of accounts payable and the mortgage note payable approximate fair value. New Accounting Pronouncements - In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 137 and SFAS No. 138, which is required to be adopted for fiscal years beginning after June 15, 2000. SFAS No. 133 will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, a change in the fair value of the derivative will either be offset against the change in the fair value of the hedged asset, liability, or firm commitment through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The implementation of SFAS No. 133 will not have a material impact on the Company's results of operations or financial position. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition in Financial Statements, which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. SAB No. 101 is applicable for the Company beginning in the fourth quarter of the year ending November 30, 2001. Management does not currently believe that the implementation of SAB No. 101 will have a material impact on the Company's results of operations or financial position. -26- 2. ACQUISITIONS In 1998, the Company acquired the properties of two California homebuilders, ColRich Communities and Polygon Communities. Lennar Corporation paid $126.2 million in cash and issued $85.1 million in Lennar Corporation common stock. These amounts paid on the Company's behalf are included in due to affiliates in the consolidated balance sheets. The Company acquired assets (primarily inventories) with a fair value of $216.4 million and assumed liabilities of $5.5 million. 3. MORTGAGE NOTE PAYABLE At November 30, 2000 and 1999, the Company had a mortgage note on land bearing interest at 10.0% maturing in 2008 with an outstanding balance of $2.0 million and $2.2 million, respectively. This borrowing is collateralized by land. 4. INCOME TAXES The provision for income taxes consisted of the following: Years Ended November 30, (Dollars in thousands) 2000 1999 1998 ------------------------------------------------------------------- Current: Federal $ 7,972 $ 4,095 $ 14,310 State 927 780 1,782 ------- ------- -------- 8,899 4,875 16,092 ------- ------- -------- Deferred: Federal (3,594) 3,226 (362) State (356) 489 (307) ------- ------- -------- (3,950) 3,715 (669) ------- ------- -------- $ 4,949 $ 8,590 $ 15,423 ======= ======= ======== The actual income tax expense differs from the "expected" tax expense for the year (computed by applying the U.S. federal corporate rate of 35% to earnings before income taxes) primarily due to the amount of state income taxes, net of the related federal tax benefit. -27- Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of the assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The tax effects of significant temporary differences that give rise to the net deferred tax asset (liability) are as follows: November 30, (Dollars in thousands) 2000 1999 ------------------------------------------------------------ Deferred tax assets: Acquisition adjustments $ -- $ 527 Capitalized expenses 1,637 -- Other 1,789 -- ------- ------- Total deferred tax assets 3,426 527 ------- ------- Deferred tax liabilities: Capitalized expenses -- 3,282 Other 2,231 -- ------- ------- Total deferred tax liabilities 2,231 3,282 ------- ------- Net deferred tax asset (liability) $ 1,195 $(2,755) ======= ======= The net deferred tax asset of $1.2 million at November 30, 2000 is included in other assets and the net deferred tax liability of $2.8 million at November 30, 1999 is included in accounts payable and other liabilities in the consolidated balance sheets. 5. RELATED PARTY TRANSACTIONS On April 1, 1999, Lennar Corporation entered into an agreement with Greystone Homes of Nevada, Inc. ("Greystone"), a wholly-owned subsidiary of Lennar Corporation, whereby Greystone has granted to the Company the right to use certain property for a fee. Unpaid fees bear interest at 9% annually. The fee and its related interest comprise the classification "licensing expense to affiliate" in the consolidated statements of earnings. On a quarterly basis, these amounts are paid by Lennar Corporation to Greystone. The amounts paid by Lennar Corporation on behalf of the Company are included in due to affiliates in the Company's consolidated balance sheets, and bear interest at 9% annually. The term of the agreement ends on November 30, 2001, with automatic one year renewals unless terminated earlier by three-months written notice by either party. During 2000 and 1999, Lennar Corporation and its subsidiaries advanced funds to the Company which had no stated repayment terms. At November 30, 2000 and 1999, the Company had a payable to affiliates of $87.5 million and $175.5 million, respectively. -28- 6. COMMITMENTS AND CONTINGENT LIABILITIES The Company and certain subsidiaries are parties to various claims, legal actions and complaints arising in the ordinary course of business. In the opinion of management, the disposition of these matters will not have a material adverse effect on the financial condition of the Company. The Company is subject to the usual obligations associated with entering into contracts for the purchase (including option contracts), development and sale of real estate in the routine conduct of its business. Option contracts for the purchase of land permit the Company to acquire portions of properties when it is ready to build homes on them. The use of option contracts allows the Company to manage the financial risk of adverse market conditions associated with longer-term land holdings. The Company has entered into agreements to lease certain office facilities and equipment under operating leases. Future minimum payments under the noncancelable leases are as follows: 2001 - $ 0.8 million; 2002 - $0.8 million; 2003 - $0.8 million; 2004 - $0.5 million and 2005 - $0.1 million. Rental expense for the years ended November 30, 2000, 1999 and 1998 was $1.7 million, $0.7 million and $0.3 million, respectively. The Company is committed, under various letters of credit, to perform certain development and construction activities and provide certain guarantees in the normal course of business. Outstanding letters of credit under these arrangements totaled $4.6 million at November 30, 2000. The Company also had outstanding performance and surety bonds with estimated costs to complete of $190.8 million related principally to its obligations for site improvements at various projects at November 30, 2000. The Company does not believe that any such bonds are likely to be drawn upon. The Company has guaranteed obligations of Lennar Corporation with regard to certain issues of its outstanding debt, and the stock of the Company has been pledged as collateral for Lennar Corporation's obligations with regard to that debt. The Company knows of no event of default which would require it to satisfy these guarantees and, therefore, the fair value of these contingent liabilities is considered immaterial. -29- INDEPENDENT AUDITORS' REPORT To the Board of Directors of Greystone Homes, Inc.: We have audited the accompanying consolidated balance sheets of Greystone Homes, Inc. and subsidiaries (the "Company"), a wholly-owned subsidiary of Lennar Corporation, as of November 30, 2000 and 1999 and the related consolidated statements of earnings, stockholder's equity and cash flows for each of the three years in the period ended November 30, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of November 30, 2000 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended November 30, 2000, in conformity with accounting principles generally accepted in the United States of America. /s/ DELOITTE & TOUCHE LLP Miami, Florida January 9, 2001 -30- GREYSTONE HOMES, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Lennar Corporation) CONSOLIDATED BALANCE SHEETS NOVEMBER 30, 2000 AND 1999 (Dollars in thousands, except par value) - -------------------------------------------------------------------------------- 2000 1999 ASSETS Inventories $313,613 $369,380 Goodwill, net 38,742 41,032 Other assets 31,209 29,918 Due from affiliates 118,656 -- -------- -------- $502,220 $440,330 ======== ======== LIABILITIES AND STOCKHOLDER'S EQUITY LIABILITIES: Accounts payable and other liabilities $ 51,262 $ 39,017 Mortgage notes payable 672 8,040 Due to affiliates -- 38,274 -------- -------- Total liabilities 51,934 85,331 -------- -------- STOCKHOLDER'S EQUITY: Common stock, $0.01 par value; 1,000 shares authorized, issued and outstanding -- -- Additional paid-in capital 216,073 216,073 Retained earnings 234,213 138,926 -------- -------- Total stockholder's equity 450,286 354,999 -------- -------- $502,220 $440,330 ======== ======== See accompanying notes to consolidated financial statements. -31- GREYSTONE HOMES, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Lennar Corporation) CONSOLIDATED STATEMENTS OF EARNINGS YEARS ENDED NOVEMBER 30, 2000, 1999 AND 1998 (Dollars in thousands) - --------------------------------------------------------------------- 2000 1999 1998 REVENUES: Sales of homes $646,206 $823,317 $621,309 Sales of land and other revenues 110,822 100,223 21,293 Licensing revenues from affiliates 104,677 63,285 -- -------- -------- -------- Total revenues 861,705 986,825 642,602 -------- -------- -------- COSTS AND EXPENSES: Cost of homes sold 495,930 634,103 491,168 Cost of land and other expenses 99,606 91,876 13,198 Selling, general and administrative 89,017 86,023 69,903 Interest 20,944 23,159 9,684 -------- -------- -------- Total costs and expenses 705,497 835,161 583,953 -------- -------- -------- EARNINGS BEFORE INCOME TAXES 156,208 151,664 58,649 INCOME TAXES 60,921 59,907 23,459 -------- -------- -------- NET EARNINGS $ 95,287 $ 91,757 $ 35,190 ======== ======== ======== See accompanying notes to consolidated financial statements. -32- GREYSTONE HOMES, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Lennar Corporation) CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY YEARS ENDED NOVEMBER 30, 2000, 1999 AND 1998 (Dollars in thousands) - -------------------------------------------------------------------------------- Additional Common Paid-in Retained Stock Capital Earnings Total Balance, November 30, 1997 $ -- $216,073 $ 11,979 $228,052 1998 net earnings -- -- 35,190 35,190 ----- -------- -------- -------- Balance, November 30, 1998 -- 216,073 47,169 263,242 1999 net earnings -- -- 91,757 91,757 ----- -------- -------- -------- Balance, November 30, 1999 -- 216,073 138,926 354,999 2000 net earnings -- -- 95,287 95,287 ----- -------- -------- -------- Balance, November 30, 2000 $ -- $216,073 $234,213 $450,286 ===== ======== ======== ======== See accompanying notes to consolidated financial statements. -33- GREYSTONE HOMES, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Lennar Corporation) CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED NOVEMBER 30, 2000, 1999 AND 1998 (Dollars in thousands) - --------------------------------------------------------------------------------
2000 1999 1998 CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 95,287 $ 91,757 $ 35,190 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Depreciation and amortization, net 12,874 13,516 (564) Changes in assets and liabilities: (Increase) decrease in inventories 45,449 41,966 (93,765) (Increase) decrease in other assets (1,557) 17,504 (15,039) Increase (decrease) in accounts payable and other liabilities 12,245 (971) 16 --------- --------- --------- Net cash provided by (used in) operating activities 164,298 163,772 (74,162) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on borrowings (7,368) (143,255) (4,579) (Increase) decrease in amounts due from affiliates (118,656) -- 19,950 Increase (decrease) in amounts due to affiliates (38,274) (41,514) 79,788 --------- --------- --------- Net cash provided by (used in) financing activities (164,298) (184,769) 95,159 --------- --------- --------- NET INCREASE (DECREASE) IN CASH -- (20,997) 20,997 CASH AT BEGINNING OF YEAR -- 20,997 -- --------- --------- --------- CASH AT END OF YEAR $ -- $ -- $ 20,997 ========= ========= =========
See Note 1 for supplemental disclosures of cash flow information related to interest and income taxes paid. Supplemental disclosures of non-cash investing and financing activities: Purchases of inventory financed by sellers $ -- $ 6,505 $ 14,825
See accompanying notes to consolidated financial statements. -34- GREYSTONE HOMES, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Lennar Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED NOVEMBER 30, 2000, 1999 AND 1998 - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Consolidation - The accompanying consolidated financial statements include the accounts of Greystone Homes, Inc., a wholly-owned subsidiary of Lennar Corporation, and all subsidiaries and partnerships in which a controlling interest is held (the "Company"). All significant intercompany transactions have been eliminated. The Company operates in one operating and reporting segment - homebuilding. Homebuilding operations include the sale and construction of single-family attached and detached homes. These activities also include the purchase, development and sale of residential land by the Company and through partnerships in which it has investments. Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Revenue Recognition - Revenue from sales of homes are recognized when the sales are closed and title passes to the new homeowners. Revenues from sales of other real estate, including the sale of land, are recognized when a significant down payment is received, the earnings process is complete and the collection of any remaining receivables is reasonably assured. Cash - The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. Inventories - Inventories are stated at cost unless the inventory within a community is determined to be impaired, in which case the impaired inventory is written down to fair value. The Company evaluates long-lived assets for impairment based on the undiscounted future cash flows of the assets. Write-downs to inventories deemed to be impaired are recorded as adjustments to the cost basis of the respective inventories. No impairment existed at November 30, 2000 or 1999. Start-up costs, construction overhead and selling expenses are expensed as incurred. Homes held for sale are classified as inventories until delivered. Land, land development, amenities and other costs are accumulated by specific area and allocated proportionately to homes within the respective area. Due from/to Affiliates - The Company has transactions in the normal course of business with Lennar Corporation and/or affiliated companies. -35- Interest and Real Estate Taxes - Interest and real estate taxes attributable to land and homes are capitalized and added to the cost of those properties as long as the properties are being actively developed. Interest costs relieved from inventories are included in interest expense. Interest costs result from the interest related to the Company's outstanding debt as disclosed in the consolidated balance sheets as well as debt incurred by the Company's parent, Lennar Corporation. Lennar Corporation allocates a portion of its interest to the Company based on the Company's inventory levels during the year. Operating Equipment - Operating equipment is recorded at cost. Depreciation is calculated to amortize the cost of depreciable assets over their estimated useful lives using the straight-line method. The estimated useful life is 2 to 5 years. Operating equipment is included in other assets in the consolidated balance sheets. Goodwill - Goodwill represents the excess of the purchase price over the fair value of net assets acquired and is amortized by the Company on a straight-line basis over 20 years. At November 30, 2000 and 1999, goodwill was $38.7 million and $41.0 million, respectively (net of accumulated amortization of $7.1 million and $4.8 million, respectively). In the event that facts and circumstances indicate that the carrying value of goodwill may be impaired, an evaluation of recoverability is performed. If an evaluation is required, the estimated future undiscounted cash flows associated with the goodwill would be compared to the carrying amount to determine if a write-down to fair value based on discounted cash flows was required. No impairment existed at November 30, 2000 or 1999. Income Taxes - The Company files a consolidated federal income tax return with Lennar Corporation. Income taxes have been provided at the Company level as if the Company filed an income tax return on a stand-alone basis. Current taxes due are recorded as a payable to Lennar Corporation, and the deferred portion is recorded as deferred taxes. Income taxes are accounted for in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes. Under SFAS No. 109, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and are measured by using enacted tax rates expected to apply to taxable income in the years in which those differences are expected to reverse. Fair Value of Financial Instruments - The carrying amounts of accounts payable and mortgage notes payable approximate fair value. New Accounting Pronouncements - In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 137 and SFAS No. 138, which is required to be adopted for fiscal years beginning after June 15, 2000. SFAS No. 133 will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, a change in the fair value of the derivative will either be offset against the change in the fair value of the hedged asset, liability, or firm commitment through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The implementation of SFAS No. 133 will not have a material impact on the Company's results of operations or financial position. -36- In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition in Financial Statements, which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. SAB No. 101 is applicable for the Company beginning in the fourth quarter of the year ending November 30, 2001. Management does not currently believe that the implementation of SAB No. 101 will have a material impact on the Company's results of operations or financial position. 2. MORTGAGE NOTES PAYABLE At November 30, 2000 and 1999, the Company had mortgage notes on land with fixed interest rates ranging from 9.0% to 10.0% due through 2001 with an outstanding balance of $0.7 million and $8.0 million, respectively. These borrowings are collateralized by land. In 1999, Lennar Corporation redeemed all of the Company's outstanding 10 3/4% senior notes due 2004, at a price of 105.375% of the principal amount outstanding plus accrued interest. Cash paid to redeem the notes was $132 million, which approximated their carrying value. 3. INCOME TAXES The provision for income taxes consisted of the following: Years Ended November 30, (Dollars in thousands) 2000 1999 1998 -------------------------------------------------------------- Current: Federal $ 51,687 $ 45,105 $ 24,470 State 6,011 8,591 3,047 -------- -------- -------- 57,698 53,696 27,517 -------- -------- -------- Deferred: Federal 2,933 5,393 (2,196) State 290 818 (1,862) -------- -------- -------- 3,223 6,211 (4,058) -------- -------- -------- $ 60,921 $ 59,907 $ 23,459 ======== ======== ======== The actual income tax expense differs from the "expected" tax expense for the year (computed by applying the U.S. federal corporate rate of 35% to earnings before income taxes) primarily due to the amount of state income taxes, net of the related federal tax benefit. -37- Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of the assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The tax effects of significant temporary differences that give rise to the net deferred tax asset are as follows: November 30, (Dollars in thousands) 2000 1999 --------------------------------------------------------------------- Deferred tax assets: Acquisition adjustments $ 10,158 $ 12,992 Reserves and accruals 21,390 16,455 Net operating loss and capital loss carryforwards, tax affected 4,466 5,788 Capitalized expenses 5,305 -- Deferred gains 1,959 -- Investments in partnerships 745 764 -------- -------- Deferred tax assets 44,023 35,999 Less: valuation allowance (7,117) (8,508) -------- -------- Total deferred tax assets, net 36,906 27,491 -------- -------- Deferred tax liabilities: Capitalized expenses -- 3,591 Deferred gains -- 158 Other 16,387 -- -------- -------- Total deferred tax liabilities 16,387 3,749 -------- -------- Net deferred tax asset $ 20,519 $ 23,742 ======== ======== The net deferred tax asset is included in other assets in the consolidated balance sheets. SFAS No. 109 requires the reduction of the deferred tax assets by a valuation allowance if, based on the weight of available evidence, it is more likely than not that a portion or all of the deferred tax asset will not be realized. At November 30, 2000 and 1999, the Company had a valuation allowance of $7.1 million and $8.5 million, respectively, for net operating loss and capital loss carryforwards and certain acquisition adjustments which currently are not expected to be realized. Based on management's assessment, it is more likely than not that the net deferred tax asset will be realized through future taxable earnings. 4. RELATED PARTY TRANSACTIONS On April 1, 1999, Lennar Corporation entered into an agreement with Greystone Homes of Nevada, Inc. ("Greystone"), a wholly-owned subsidiary of Lennar Corporation, whereby Greystone has granted to affiliates of Lennar Corporation the right to use certain property for a fee. Unpaid fees bear interest at 9% annually. The classification "licensing revenues from affiliates" in the consolidated statements of earnings is comprised of the affiliates' fee and interest. On a quarterly basis, these amounts are paid to Greystone by Lennar Corporation. The term of the agreement ends on November 30, 2001, with automatic one year renewals unless terminated earlier by three-months written notice by either party. -38- On April 1, 1999, Lennar Corporation entered into a financing arrangement with Greystone which matures on December 31, 2001, whereby Lennar Corporation may borrow up to $400 million from Greystone at an interest rate of 9% payable quarterly. During 2000, Lennar Corporation borrowed $178.4 million under this financing arrangement. During 2000 and 1999, Lennar Corporation and its subsidiaries advanced and borrowed funds to and from the Company which had no stated repayment terms. At November 30, 2000, the Company had a $118.7 million receivable from affiliates. At November 30, 1999, the Company had a $38.3 million payable to affiliates. 5. COMMITMENTS AND CONTINGENT LIABILITIES The Company and certain subsidiaries are parties to various claims, legal actions and complaints arising in the ordinary course of business. In the opinion of management, the disposition of these matters will not have a material adverse effect on the financial condition of the Company. The Company is subject to the usual obligations associated with entering into contracts for the purchase (including option contracts), development and sale of real estate in the routine conduct of its business. Option contracts for the purchase of land permit the Company to acquire portions of properties when it is ready to build homes on them. The use of option contracts allows the Company to manage the financial risk of adverse market conditions associated with longer-term land holdings. The Company has entered into agreements to lease certain office facilities and equipment under operating leases. Future minimum payments under the noncancelable leases are as follows: 2001 - $1.4 million; 2002 - $1.1 million; 2003 - $0.7 million; 2004 - $0.6 million and 2005 - $0.2 million. Rental expense for the years ended November 30, 2000, 1999 and 1998 was $2.2 million, $1.6 million and $1.8 million, respectively. The Company is committed, under various letters of credit, to perform certain development and construction activities and provide certain guarantees in the normal course of business. Outstanding letters of credit under these arrangements totaled $12.2 million at November 30, 2000. The Company also had outstanding performance and surety bonds with estimated costs to complete of $124.1 million related principally to its obligations for site improvements at various projects at November 30, 2000. The Company does not believe that any such bonds are likely to be drawn upon. The Company has guaranteed obligations of Lennar Corporation with regard to certain issues of its outstanding debt, and the stock of the Company has been pledged as collateral for Lennar Corporation's obligations with regard to that debt. The Company knows of no event of default which would require it to satisfy these guarantees and, therefore, the fair value of these contingent liabilities is considered immaterial. -39- INDEPENDENT AUDITORS' REPORT To the Board of Directors of U.S. Home Corporation: We have audited the accompanying consolidated balance sheet of U.S. Home Corporation and subsidiaries (the "Company"), a wholly-owned subsidiary of Lennar Corporation, as of November 30, 2000 and the related consolidated statements of earnings, stockholder's equity and cash flows for the period from inception (February 15, 2000) to November 30, 2000. 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 audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits 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 audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of November 30, 2000, and the results of its operations and its cash flows for the period from inception (February 15, 2000) to November 30, 2000, in conformity with accounting principles generally accepted in the United States of America. /s/ DELOITTE & TOUCHE LLP Miami, Florida January 9, 2001 -40- U.S. HOME CORPORATION AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Lennar Corporation) CONSOLIDATED BALANCE SHEET NOVEMBER 30, 2000 (Dollars in thousands, except par value) - -------------------------------------------------------------------------------- ASSETS Homebuilding: Cash $ 56,084 Receivables, net 14,135 Inventories 1,180,130 Investments in partnerships 82,087 Goodwill, net 46,418 Other assets 105,493 ---------- 1,484,347 Financial services 148,870 ---------- $1,633,217 ========== LIABILITIES AND STOCKHOLDER'S EQUITY Homebuilding liabilities: Accounts payable and other liabilities $ 290,065 Mortgage notes and other debts payable 32,897 Due to affiliates 595,987 ---------- 918,949 Financial services liabilities 143,976 Stockholder's equity: Common stock, $0.10 par value; 5,000 shares authorized, issued and outstanding 1 Additional paid-in capital 510,249 Retained earnings 60,042 ---------- Total stockholder's equity 570,292 ---------- $1,633,217 ========== See accompanying notes to consolidated financial statements -41- U.S. HOME CORPORATION AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Lennar Corporation) CONSOLIDATED STATEMENT OF EARNINGS PERIOD FROM INCEPTION (FEBRUARY 15, 2000) TO NOVEMBER 30, 2000 (Dollars in thousands) - -------------------------------------------------------------------------------- REVENUES: Homebuilding $1,371,002 Financial services 26,418 ---------- Total revenues 1,397,420 ---------- COSTS AND EXPENSES: Homebuilding 1,245,747 Financial services 14,370 General and administrative 2,594 Interest 36,279 ---------- Total costs and expenses 1,298,990 ---------- EARNINGS BEFORE INCOME TAXES 98,430 INCOME TAXES 38,388 ---------- NET EARNINGS $ 60,042 ========== See accompanying notes to consolidated financial statements -42- U.S. HOME CORPORATION AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Lennar Corporation) CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY PERIOD FROM INCEPTION (FEBRUARY 15, 2000) TO NOVEMBER 30, 2000 (Dollars in thousands) - --------------------------------------------------------------------------------
Additional Common Paid-in Retained Stock Capital Earnings Total Initial capitalization $ 1 $ -- $ -- $ 1 Contribution of capital to acquire U.S. Home Corporation (see Note 2) -- 510,249 -- 510,249 Net earnings from February 15, 2000 to November 30, 2000 -- -- 60,042 60,042 -------- -------- -------- -------- Balance, November 30, 2000 $ 1 $510,249 $ 60,042 $570,292 ======== ======== ======== ========
See accompanying notes to consolidated financial statements. -43- U.S. HOME CORPORATION AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Lennar Corporation) CONSOLIDATED STATEMENT OF CASH FLOWS PERIOD FROM INCEPTION (FEBRUARY 15, 2000) TO NOVEMBER 30, 2000 (Dollars in thousands) - -------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 60,042 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 8,328 Equity in earnings from partnerships (211) Changes in assets and liabilities, net of effects from acquisition: Increase in receivables (317) Decrease in inventories 110,256 Increase in other assets (7,991) Increase in financial services loans held for sale or disposition (27,919) Decrease in accounts payable and other liabilities (65,351) --------- Net cash provided by operating activities 76,837 --------- CASH FLOWS FROM INVESTING ACTIVITIES: Decrease in operating properties and equipment, net 2,798 Increase in investments in partnerships, net (33,115) Increase in financial services mortgage loans (12,656) Acquisition of business - net of cash acquired (152,386) --------- Net cash used in investing activities (195,359) --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings under financial services short-term debt 113,260 Payments for tender of senior notes (519,759) Proceeds from borrowings 2,981 Principal payments on borrowings (253,286) Contributed capital 243,383 Increase in amounts due to affiliates 595,987 --------- Net cash provided by financing activities 182,566 --------- CASH AT END OF PERIOD $ 64,044 ========= Summary of cash: Homebuilding $ 56,084 Financial services 7,960 --------- $ 64,044 =========
See Note 1 for supplemental disclosures of cash flow information related to interest and income taxes paid. Supplemental disclosures of non-cash investing and financing activities: Purchases of inventory financed by sellers $ 279 Fair value of assets acquired in U.S. Home acquisition, inclusive of cash of $90,997 $1,654,444 Goodwill recorded $ 47,809 Liabilities assumed in U.S. Home acquisition $1,192,004
See accompanying notes to consolidated financial statements. -44- U.S. HOME CORPORATION AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Lennar Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PERIOD FROM INCEPTION (FEBRUARY 15, 2000) TO NOVEMBER 30, 2000 - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Consolidation - The accompanying consolidated financial statements include the accounts of U.S. Home Corporation, a wholly-owned subsidiary of Lennar Corporation, and all subsidiaries and partnerships in which a controlling interest is held (the "Company" or "U.S. Home"). The Company's investments in partnerships (and similar entities) in which a significant, but less than a controlling, interest is held are accounted for by the equity method. All significant intercompany transactions have been eliminated. U.S. Home was formerly known as LEN Acquisition Corporation. LEN Acquisition Corporation was incorporated on February 15, 2000. In May 2000, U.S. Home Corporation was acquired by LEN Acquisition Corporation. LEN Acquisition Corporation was subsequently renamed U.S. Home Corporation. See Note 2. Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Revenue Recognition - Revenue from sales of homes are recognized when the sales are closed and title passes to the new homeowners. Revenues from sales of other real estate (including the sales of land and operating properties) are recognized when a significant down payment is received, the earnings process is complete and the collection of any remaining receivables is reasonably assured. Cash - The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. Due to the short maturity period of the cash equivalents, the carrying amount of these instruments approximates their fair values. Cash as of November 30, 2000 included $26.8 million of cash held in escrow for periods of up to three days. Inventories - Inventories are stated at cost unless the inventory within a community is determined to be impaired, in which case the impaired inventory is written down to fair value. The Company evaluates long-lived assets for impairment based on the undiscounted future cash flows of the assets. Write-downs to inventories deemed to be impaired are recorded as adjustments to the cost basis of the respective inventories. No impairment existed at November 30, 2000. Start-up costs and selling expenses are expensed as incurred. Homes held for sale are classified as inventories until delivered. Land, land development, amenities and other costs are accumulated by specific area and allocated proportionately to homes within the respective area. Due to Affiliates - The Company has transactions in the normal course of business with Lennar Corporation and/or affiliated companies. -45- Interest and Real Estate Taxes - Interest and real estate taxes attributable to land and homes are capitalized and added to the cost of those properties as long as the properties are being actively developed. Interest related to homebuilding, including interest costs relieved from inventories, is included in interest expense. Interest costs result from the interest related to the Company's outstanding debt as disclosed in the consolidated balance sheet as well as debt incurred by the Company's parent, Lennar Corporation. Lennar Corporation allocates a portion of its interest to the Company based on the Company's inventory levels during the year. Interest expense relating to the financial services operations is included in its respective costs and expenses. Operating Equipment - Operating equipment is recorded at cost. Depreciation is calculated to amortize the cost of depreciable assets over their estimated useful lives using the straight-line method. The estimated useful life for operating equipment is 3 to 10 years. Operating equipment is included in other assets in the consolidated balance sheet. Derivative Financial Instruments - The Financial Services Division, in the normal course of business, uses derivative financial instruments to reduce its exposure to fluctuations in interest rates. The Division enters into forward commitments and option contracts to protect the value of loans held for sale or disposition from increases in market interest rates. Adjustments are made to the carrying values of these loans based on changes in the market value of these hedging contracts (see Note 8). Goodwill - Goodwill represents the excess of the purchase price over the fair value of net assets acquired and is amortized by the Company on a straight-line basis over 20 years. At November 30, 2000, goodwill was $46.4 million (net of accumulated amortization of $1.4 million). In the event that facts and circumstances indicate that the carrying value of goodwill may be impaired, an evaluation of recoverability is performed. If an evaluation was required, the estimated future undiscounted cash flows associated with the goodwill would be compared to the carrying amount to determine if a write-down to fair value based on discounted cash flows was required. No impairment existed at November 30, 2000. Income Taxes - The Company files a consolidated federal income tax return with Lennar Corporation. Income taxes have been provided at the Company level as if the Company filed an income tax return on a stand-alone basis. Current taxes due are recorded as a payable to Lennar Corporation, and the deferred portion is recorded as deferred taxes. Income taxes are accounted for in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes. Under SFAS No. 109, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and are measured by using enacted tax rates expected to apply to taxable income in the years in which those differences are expected to reverse. -46- Financial Services - Mortgage loans held for sale or disposition by the Financial Services Division are recorded at the lower of cost or market, as determined on an aggregate basis. Premiums and discounts recorded on these loans are presented as an adjustment to the carrying amount of the loans and are not amortized. When the Division sells loans into the secondary market, a gain or loss is recognized to the extent that the sales proceeds exceed, or are less than, the book value of the loans or the securities. Loan origination fees, net of direct origination costs, are deferred and recognized as a component of the gain or loss when loans are sold. The Division does not retain or service the mortgages that it originates but, rather, sells the mortgages and related servicing rights to investors. New Accounting Pronouncements - In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 137 and SFAS No. 138, which is required to be adopted for fiscal years beginning after June 15, 2000. SFAS No. 133 will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, a change in the fair value of the derivative will either be offset against the change in the fair value of the hedged asset, liability, or firm commitment through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The implementation of SFAS No. 133 will not have a material impact on the Company's results of operations or financial position. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition in Financial Statements, which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. SAB No. 101 is applicable for the Company beginning in the fourth quarter of the year ending November 30, 2001. Management does not currently believe that the implementation of SAB No. 101 will have a material impact on the Company's results of operations or financial position. In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No. 140 replaces SFAS No. 125, Accounting for Transfers and Servicing of Financial Liabilities Assets and Extinguishments of Liabilities. SFAS No. 140 revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of SFAS No. 125's provisions without reconsideration. SFAS No. 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. Management does not currently believe that the implementation of SFAS No. 140 will have a material impact on the Company's results of operations or financial position. 2. ACQUISITION On May 3, 2000, U.S. Home Corporation was acquired by LEN Acquisition Corporation in a transaction in which U.S. Home stockholders received a total of approximately $243 million in cash and 13 million shares of Lennar Corporation common stock amounting to approximately $267 million. LEN Acquisition Corporation was subsequently renamed U.S. Home Corporation. -47- The acquisition was accounted for using the purchase method of accounting. In connection with the transaction, the Company acquired assets with a fair value of $1.7 billion, assumed liabilities with a fair value of $1.2 billion and recorded goodwill of $48 million. Goodwill is being amortized on a straight-line basis over 20 years. The results of U.S. Home are included in the Company's consolidated statement of earnings since the acquisition date. Revenues and net earnings on an unaudited pro forma basis would have been $2.2 billion and $101.8 million, respectively, for the year ended November 30, 2000 had the acquisition occurred on December 1, 1999. The pro forma information gives effect to actual operating results prior to the acquisition, adjusted for the pro forma effect of interest expense, amortization of goodwill, and certain other adjustments, together with their related income tax effect. The pro forma information does not purport to be indicative of the results of operations which would have actually been reported had the acquisition occurred on December 1, 1999. 3. OPERATING AND REPORTING SEGMENTS The Company has two operating and reporting segments: Homebuilding and Financial Services. The Company's reportable segments are strategic business units that offer different products and services. The accounting policies of the segments are the same as those described in the summary of significant accounting policies in Note 1. Homebuilding Homebuilding operations include the sale and construction of single-family attached and detached homes. These activities also include the purchase, development and sale of residential land by the Company and through partnerships in which it has investments. The following table sets forth financial information relating to the homebuilding operations: Period from inception (February 15, 2000) to November 30, 2000 (Dollars in thousands) -------------------------------------------------------------------------- Revenues: Sales of homes $1,344,084 Sales of land and other revenues 26,707 Equity in earnings from partnerships 211 ---------- Total revenues 1,371,002 ---------- Costs and expenses: Cost of homes sold 1,101,223 Cost of land and other expenses 21,381 Selling, general and administrative 123,143 ---------- Total costs and expenses 1,245,747 ---------- Operating earnings $ 125,255 ========== Depreciation and amortization $ 8,147 ========== Additions to operating equipment $ 2,487 ========== -48- Financial Services The Company's Financial Services Division provides mortgage financing for U.S. Home homebuyers and others. The Division also packages and resells residential mortgage loans. The following table sets forth financial information relating to the financial services operations: Period from inception (February 15, 2000) to November 30, 2000 (Dollars in thousands) -------------------------------------------------------------------------- Revenues $26,418 Costs and expenses 14,370 ------- Operating earnings $12,048 ======= Depreciation and amortization $ 181 ======= Interest income, net $ 3,051 ======= Additions to operating equipment $ 235 ======= 4. RECEIVABLES (Dollars in thousands) November 30, 2000 -------------------------------------------------------------------------- Accounts receivable $ 8,239 Mortgages and notes receivable 5,977 ------- 14,216 Allowance for doubtful accounts (81) ------- $14,135 ======= 5. MORTGAGE NOTES AND OTHER DEBTS PAYABLE (Dollars in thousands) November 30, 2000 -------------------------------------------------------------------------- 7.95% senior notes due 2001 $ 3,467 8.25% senior notes due 2004 980 7.75% senior notes due 2005 2,279 8.88% senior subordinated notes due 2007 4,800 8.875% senior subordinated notes due 2009 1,387 Mortgage notes on land with fixed interest rates from 6.0% to 10.0% due through 2009 19,984 ------- $32,897 ======= -49- As a result of LEN Acquisition Corporation's acquisition of U.S. Home, holders of U.S. Home's publicly-held notes totaling $525 million were entitled to require U.S. Home to repurchase the notes for 101% of their principal amount within 90 days after the transaction was completed. Independent of that requirement, in April 2000, Lennar Corporation made a tender offer for all of the notes and a solicitation of consents to modify provisions of the indentures relating to the notes. As a result of the tender offer and required repurchases after the acquisition, Lennar Corporation paid approximately $520 million, which includes tender and consent fees, for $508 million of U.S. Home's notes. These amounts paid on the Company's behalf are included in due to affiliates in the consolidated balance sheet. The minimum aggregate principal maturities of mortgage notes and other debts payable during the five years subsequent to November 30, 2000 are as follows: 2001 - $7.1 million; 2002 - $15.4 million; 2004 - $1.3 million; 2005 - $2.5 million and $6.6 million thereafter. All of the notes secured by land contain collateral release provisions for accelerated payment which may be made as necessary to maintain construction schedules. 6. FINANCIAL SERVICES The assets and liabilities related to the Company's financial services operations (as described in Note 3) were as follows: (Dollars in thousands) November 30, 2000 -------------------------------------------------------------------------- Assets: Cash and receivables, net $ 26,814 Mortgage loans held for sale or disposition, net 100,459 Mortgage loans, net 19,421 Other 2,176 --------- $ 148,870 ========= Liabilities: Revolving credit facilities $ 123,724 Other 20,252 --------- $ 143,976 ========= At November 30, 2000, the Financial Services Division had two revolving credit facilities of $90 million and $10 million. At November 30, 2000, the commitment amount for the $90 million facility was temporarily increased to $120 million for a thirty-day period ending December 30, 2000. Borrowings under both of these facilities were $123.7 million at November 30, 2000, and were primarily collateralized by mortgage loans with outstanding principal balances of $114.8 million. There are several interest rate pricing options which fluctuate with market rates. The borrowing rates have been reduced to the extent that custodial escrow balances exceeded required compensating balance levels. The effective interest rates on the $90 million facility and the $10 million facility at November 30, 2000 were 7.7% and 8.6%, respectively. The $90 million facility and the $10 million facility mature in November 2002 and May 2001, respectively. -50- 7. INCOME TAXES The provision for income taxes consisted of the following: Period from inception (February 15, 2000) to November 30, 2000 (Dollars in thousands) -------------------------------------------------------------------------- Current: Federal $ 31,465 State 3,659 -------- 35,124 -------- Deferred: Federal 2,970 State 294 -------- 3,264 -------- $ 38,388 ======== The actual income tax expense differs from the "expected" tax expense for the year (computed by applying the U.S. federal corporate rate of 35% to earnings before income taxes) primarily due to the amount of state income taxes, net of the related federal tax benefit. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of the assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The tax effects of significant temporary differences that give rise to the net deferred tax asset are as follows: (Dollars in thousands) November 30, 2000 --------------------------------------------------------------- Deferred tax assets: Acquisition adjustments $ 61,891 Reserves and accruals 24,158 Investments in partnerships 114 Other 2,281 -------- Total deferred tax assets 88,444 -------- Deferred tax liabilities: Capitalized expenses 31,161 Deferred gains 75 Other 4,491 -------- Total deferred tax liabilities 35,727 -------- Net deferred tax asset $ 52,717 ======== The net deferred tax asset is included in other assets in the consolidated balance sheet. -51- 8. FINANCIAL INSTRUMENTS The Company estimates the fair value of its financial instruments using available market information and appropriate valuation methodologies. Considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimated fair values are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. At November 30, 2000, the Company believes that the fair value of cash, accounts receivable and accounts payable and other liabilities approximates their carrying value because of their typically liquid, short-term nature and market rate terms. At November 30, 2000, the Homebuilding Division's mortgage notes and other debts payable consisted of fixed rate debt. The carrying value of the fixed rate debt approximates fair value based on quoted market prices. At November 30, 2000, the fair value of the Financial Services Division's mortgage loans approximate their carrying value based on interest rates on the loans compared to the current market rates and the collectibility, term and type of loans. The fair value of the Financial Services Division's notes and other debts payable approximate their carrying value because these variable rate borrowings are tied to market indices. At November 30, 2000, the fair value of commitments to purchase loans was not material based upon the difference between the current value of similar loans and the price at which the Company has committed to originate the loans. The fair value of commitments to sell loan contracts was not material based on the estimated amount that the Company would receive or pay to terminate the commitments at the reporting date based on market prices for similar financial instruments. At November 30, 2000, the Financial Services Division's pipeline of loans in process totaled approximately $538.0 million. There is no exposure to credit risk in this type of commitment until the loans are funded. However, the Division uses the same credit policies in the approval of the commitments as are applied to all lending activities. Since a portion of these commitments is expected to expire without being exercised by the borrower, the total commitments do not necessarily represent future cash requirements. There is no exposure to market risk until a rate commitment is extended by the Company to a borrower. Loans in the pipeline of loans in process for which interest rates were committed to the borrower totaled approximately $40.5 million as of November 30, 2000. Substantially all of these commitments are for periods of 60 days or less. Mandatory mortgage-backed securities ("MBS") forward commitments are used by the Company to hedge its interest rate exposure during the period from when the Company extends an interest rate lock to a loan applicant until the time at which the loan is sold to an investor. These instruments involve, to varying degrees, elements of credit and interest rate risk. Credit risk is managed by the Company by entering into agreements with investment bankers with primary dealer status and with permanent investors meeting the credit standards of the Company. At any time, the risk to the Company, in the event of default by the purchaser, is the difference between the contract price and current market value. At November 30, 2000, the Company had open commitments amounting to $64.0 million to sell MBS with varying settlement dates through January 2001. -52- 9. RELATED PARTY TRANSACTIONS During 2000, Lennar Corporation and its subsidiaries advanced funds to the Company which had no stated repayment terms. At November 30, 2000, the Company had a payable to affiliates of $596.0 million. 10. COMMITMENTS AND CONTINGENT LIABILITIES The Company and certain subsidiaries are parties to various claims, legal actions and complaints arising in the ordinary course of business. In the opinion of management, the disposition of these matters will not have a material adverse effect on the financial condition of the Company. The Company is subject to the usual obligations associated with entering into contracts for the purchase (including option contracts), development and sale of real estate in the routine conduct of its business. Option contracts for the purchase of land permit the Company to acquire portions of properties when it is ready to build homes on them. The use of option contracts allows the Company to manage the financial risk of adverse market conditions associated with longer-term land holdings. The Company has entered into agreements to lease certain office facilities and equipment under operating leases. Future minimum payments under the noncancelable leases are as follows: 2001 - $6.4 million; 2002 - $3.7 million; 2003 - $2.6 million; 2004 - $1.3 million; 2005 - $1.0 million and thereafter - $5.8 million. Rental expense for the period from inception (February 15, 2000) to November 30, 2000 was $8.5 million. The Company is committed, under various letters of credit, to perform certain development and construction activities and provide certain guarantees in the normal course of business. Outstanding letters of credit under these arrangements totaled $23.4 million at November 30, 2000. The Company also had outstanding performance and surety bonds with estimated costs to complete of $125.4 million related principally to its obligations for site improvements at various projects at November 30, 2000. The Company does not believe that any such bonds are likely to be drawn upon. The Company has guaranteed obligations of Lennar Corporation with regard to certain issues of its outstanding debt, and the stock of the Company has been pledged as collateral for Lennar Corporation's obligations with regard to that debt. The Company knows of no event of default which would require it to satisfy these guarantees and, therefore, the fair value of these contingent liabilities is considered immaterial. -53- INDEPENDENT AUDITORS' REPORT To the Board of Directors of Lennar Land Partners Sub II, Inc.: We have audited the accompanying consolidated balance sheets of Lennar Land Partners Sub II, Inc. and subsidiaries (the "Company"), a wholly-owned subsidiary of Lennar Corporation, as of November 30, 2000 and 1999 and the related consolidated statements of earnings, stockholder's equity and cash flows for the year ended November 30, 2000 and the period from inception (June 21, 1999) to November 30, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of November 30, 2000 and 1999, and the results of its operations and its cash flows for the year ended November 30, 2000 and the period from inception (June 21, 1999) to November 30, 1999, in conformity with accounting principles generally accepted in the United States of America. /s/ DELOITTE & TOUCHE LLP Miami, Florida January 9, 2001 -54- LENNAR LAND PARTNERS SUB II, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Lennar Corporation) CONSOLIDATED BALANCE SHEETS NOVEMBER 30, 2000 AND 1999 (Dollars in thousands, except par value) - -------------------------------------------------------------------------------- 2000 1999 ASSETS Cash $ -- $ 78 Land held for development and sale 2,221 17,113 Investment in partnership 56,669 87,206 Other assets 100 75 Due from affiliates 82,793 3,450 -------- -------- $141,783 $107,922 ======== ======== LIABILITIES AND STOCKHOLDER'S EQUITY LIABILITIES: Accounts payable and other liabilities $ 4,763 $ 2,744 -------- -------- Total liabilities 4,763 2,744 -------- -------- STOCKHOLDER'S EQUITY: Common stock, $1 par value; 5,000 shares authorized, 100 shares issued and outstanding -- -- Additional paid-in capital 92,420 92,420 Retained earnings 44,600 12,758 -------- -------- Total stockholder's equity 137,020 105,178 -------- -------- $141,783 $107,922 ======== ======== See accompanying notes to consolidated financial statements. -55- LENNAR LAND PARTNERS SUB II, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Lennar Corporation) CONSOLIDATED STATEMENTS OF EARNINGS YEAR ENDED NOVEMBER 30, 2000 AND THE PERIOD FROM INCEPTION (JUNE 21, 1999) TO NOVEMBER 30, 1999 (Dollars in thousands) - -------------------------------------------------------------------------------- 2000 1999 REVENUES: Land sales $52,423 $15,839 Equity in earnings from partnership 21,845 9,213 Other 262 1,116 ------- ------- Total revenues 74,530 26,168 ------- ------- COSTS AND EXPENSES: Cost of land sales 21,951 4,878 General and administrative 379 202 ------- ------- Total costs and expenses 22,330 5,080 ------- ------- EARNINGS BEFORE INCOME TAXES 52,200 21,088 INCOME TAXES 20,358 8,330 ------- ------- NET EARNINGS $31,842 $12,758 ======= ======= See accompanying notes to consolidated financial statements -56- LENNAR LAND PARTNERS SUB II, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Lennar Corporation) CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY YEAR ENDED NOVEMBER 30, 2000 AND THE PERIOD FROM INCEPTION (JUNE 21, 1999) TO NOVEMBER 30, 1999 (Dollars in thousands) - --------------------------------------------------------------------------------
Additional Common Paid-in Retained Stock Capital Earnings Total Initial capitalization (June 21, 1999) $ -- $ 92,420 $ -- $ 92,420 Net earnings from June 21, 1999 to November 30, 1999 -- -- 12,758 12,758 ------- -------- -------- -------- Balance, November 30, 1999 -- 92,420 12,758 105,178 2000 net earnings -- -- 31,842 31,842 ------- -------- -------- -------- Balance, November 30, 2000 $ -- $ 92,420 $ 44,600 $137,020 ======= ======== ======== ========
See accompanying notes to consolidated financial statements. -57- LENNAR LAND PARTNERS SUB II, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Lennar Corporation) CONSOLIDATED STATEMENTS OF CASH FLOWS YEAR ENDED NOVEMBER 30, 2000 AND THE PERIOD FROM INCEPTION (JUNE 21, 1999) TO NOVEMBER 30, 1999 (Dollars in thousands) - --------------------------------------------------------------------------------
2000 1999 CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 31,842 $ 12,758 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Equity in earnings from partnership (21,845) (9,213) Changes in assets and liabilities: Decrease in land held for development and sale 14,892 563 (Increase) decrease in other assets (25) 12 Increase (decrease) in accounts payable and other liabilities 2,019 (7,596) -------- -------- Net cash provided by (used in) operating activities 26,883 (3,476) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Decrease in investment in partnership, net 52,382 3,105 -------- -------- Net cash provided by investing activities 52,382 3,105 -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: (Increase) decrease in amounts due from affiliates (79,343) 449 -------- -------- Net cash provided by (used in) financing activities (79,343) 449 -------- -------- NET INCREASE (DECREASE) IN CASH (78) 78 CASH AT BEGINNING OF PERIOD 78 -- -------- -------- CASH AT END OF PERIOD $ -- $ 78 ======== ========
See Note 1 for supplemental disclosures of cash flow information related to interest and income taxes paid See accompanying notes to consolidated financial statements -58- LENNAR LAND PARTNERS SUB II, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Lennar Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEAR ENDED NOVEMBER 30, 2000 AND THE PERIOD FROM INCEPTION (JUNE 21, 1999) TO NOVEMBER 30, 1999 - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Consolidation - The accompanying consolidated financial statements include the accounts of Lennar Land Partners Sub II, Inc., its subsidiaries and a partnership in which an interest is held (the "Company"). The Company is a wholly-owned subsidiary of Lennar Corporation and was formed on June 21, 1999 by the contribution of an investment in partnership. The investment in partnership was recorded at Lennar Corporation's historical carrying value. The Company's investment in partnership is accounted for by the equity method. All significant intercompany transactions have been eliminated. The Company operates in one operating and reporting segment - land. The activities in this segment include the purchase, development and sale of residential land by the Company and its partnership. Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Revenue Recognition - Revenues from land sales are recognized when a significant down payment is received, the earnings process is complete and the collection of any remaining receivables is reasonably assured. Cash - The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. Due to the short maturity period of the cash equivalents, the carrying amount of these instruments approximates their fair values. Land Held for Development and Sale - The cost of land held for development and sale includes direct and indirect costs, capitalized interest and property taxes. The cost of land, major infrastructure, amenities and other common costs are apportioned among the parcels within a real estate community using the area or relative sales value methods, as appropriate. Land is carried at cost, unless the land within a community is determined to be impaired, in which case the impaired land will be written down to fair value. The Company evaluates long-lived assets for impairment based on undiscounted future cash flows of the assets. Write-downs of land deemed to be impaired will be recorded as adjustments to the cost basis of the respective land. No impairment existed at November 30, 2000 or 1999. Due from Affiliates - The Company has transactions in the normal course of business with Lennar Corporation and/or affiliated companies. -59- Interest and Real Estate Taxes - Interest and real estate taxes attributable to land are capitalized and added to the cost of those properties as long as the properties are being actively developed. Interest costs relieved from inventories are included in "cost of land sales" in the consolidated statements of earnings. Interest costs result from the interest related to debt incurred by the Company's parent, Lennar Corporation. Lennar Corporation allocates a portion of its interest to the Company based on the Company's inventory levels during the year. Income Taxes - The Company files a consolidated federal income tax return with Lennar Corporation. Income taxes have been provided at the Company level as if the Company filed an income tax return on a stand-alone basis. Current taxes due are recorded as a payable to Lennar Corporation, and the deferred portion is recorded as deferred taxes. Income taxes are accounted for in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes. Under SFAS No. 109, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and are measured by using enacted tax rates expected to apply to taxable income in the years in which those differences are expected to reverse. Fair Value of Financial Instruments - The carrying amounts of cash and accounts payable approximate fair value. New Accounting Pronouncements - In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 137 and SFAS No. 138, which is required to be adopted for fiscal years beginning after June 15, 2000. SFAS No. 133 will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, a change in the fair value of the derivative will either be offset against the change in the fair value of the hedged asset, liability, or firm commitment through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The implementation of SFAS No. 133 will not have a material impact on the Company's results of operations or financial position. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition in Financial Statements, which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. SAB No. 101 is applicable for the Company beginning in the fourth quarter of the year ending November 30, 2001. Management does not currently believe that the implementation of SAB No. 101 will have a material impact on the Company's results of operations or financial position. -60- 2. INVESTMENT IN PARTNERSHIP At November 30, 2000, the Company had a 50% equity interest in a partnership. Financial information related to this partnership accounted for by the equity method was as follows: November 30, (Dollars in thousands) 2000 1999 ------------------------------------------------------------ Assets: Cash $ 17,912 $ 20,085 Land held for development and sale 150,150 201,787 Other assets 90,167 28,866 -------- -------- $258,229 $250,738 ======== ======== Liabilities and equity: Accounts payable and other liabilities $ 38,566 $ 14,880 Mortgage notes and other debts payable 106,325 61,446 Equity of: The Company 56,669 87,206 Other 56,669 87,206 -------- -------- $258,229 $250,738 ======== ======== Year ended November 30, 2000 and the period from inception (June 21, 1999) to November 30, 1999 (Dollars in thousands) 2000 1999 ------------------------------------------------------------ Revenues $172,432 $ 73,139 Costs and expenses 128,742 54,713 -------- -------- Net earnings from partnership $ 43,690 $ 18,426 ======== ======== Company share of net earnings $ 21,845 $ 9,213 ======== ======== -61- 3. INCOME TAXES The provision for income taxes consisted of the following: Year ended November 30, 2000 and the period from inception (June 21, 1999) to November 30, 1999 (Dollars in thousands) 2000 1999 ------------------------------------------------------------------------- Current: Federal $ 18,491 $ 6,780 State 2,150 1,292 -------- ------- 20,641 8,072 -------- ------- Deferred: Federal (258) 224 State (25) 34 -------- ------- (283) 258 -------- ------- $ 20,358 $ 8,330 ======== ======= The actual income tax expense differs from the "expected" tax expense for the year (computed by applying the U.S. federal corporate rate of 35% to earnings before income taxes) primarily due to the amount of state income taxes, net of the related federal tax benefit. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of the assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The tax effects of significant temporary differences that give rise to the deferred tax assets (liabilities) are as follows: November 30, (Dollars in thousands) 2000 1999 ------------------------------------------------------------------------- Deferred tax assets (liabilities): Capitalized expenses $ 25 $ (258) ===== ====== The deferred tax assets at November 30, 2000 are included in other assets and the deferred tax liabilities at November 30, 1999 are included in accounts payable and other liabilities in the consolidated balance sheets. -62- 4. RELATED PARTY TRANSACTIONS The Company and its partnership, in the ordinary course of business, sell land to Lennar Corporation. During 2000, these land sales amounted to $106.9 million and generated gains of $47.9 million. During the period from inception (June 21, 1999) to November 30, 1999, these land sales amounted to $16.7 million and generated gains of $6.3 million. The Company believes amounts received from Lennar Corporation approximate amounts that would have been received from independent third parties. During 2000 and 1999, Lennar Corporation and its subsidiaries advanced and borrowed funds to and from the Company which had no stated repayment terms. At November 30, 2000 and 1999, the Company had a receivable from affiliates of $82.8 million and $3.5 million, respectively. 5. COMMITMENTS AND CONTINGENT LIABILITIES The Company and certain subsidiaries are parties to various claims, legal actions and complaints arising in the ordinary course of business. In the opinion of management, the disposition of these matters will not have a material adverse effect on the financial condition of the Company. The Company is subject to the usual obligations associated with entering into contracts for the purchase (including option contracts), development and sale of real estate in the routine conduct of its business. The Company has guaranteed obligations of Lennar Corporation with regard to certain issues of its outstanding debt, and the stock of the Company has been pledged as collateral for Lennar Corporation's obligations with regard to that debt. The Company knows of no event of default which would require it to satisfy these guarantees and, therefore, the fair value of these contingent liabilities is considered immaterial. -63- INDEPENDENT AUDITORS' REPORT To the Board of Directors of Lennar Financial Services, Inc.: We have audited the accompanying consolidated balance sheets of Lennar Financial Services, Inc. and subsidiaries ("LFS"), a wholly-owned subsidiary of Lennar Corporation, as of November 30, 2000 and 1999 and the related consolidated statements of earnings, stockholder's equity and cash flows for each of the three years in the period ended November 30, 2000. These financial statements are the responsibility of LFS' management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of LFS as of November 30, 2000 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended November 30, 2000, in conformity with accounting principles generally accepted in the United States of America. /s/ Deloitte & Touche LLP Miami, Florida January 9, 2001 64 LENNAR FINANCIAL SERVICES, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Lennar Corporation) CONSOLIDATED BALANCE SHEETS NOVEMBER 30, 2000 AND 1999 (Dollars in Thousands, Except Par Value) - -------------------------------------------------------------------------------- ASSETS 2000 1999 Cash $ 38,288 $ 34,911 Assets held for sale or disposition: Mortgage loans 258,363 207,641 Foreclosure-related assets 17,630 21,401 Investments: Loans held for investment 23,083 22,562 Collateral for bonds and notes payable 20,740 24,067 Investments 12,488 8,902 Due from affiliates 19,591 -- Title plants 15,530 14,587 Mortgage servicing rights, net 11,653 15,564 Goodwill, net 25,199 20,070 Operating properties and equipment, net 17,710 21,378 Other assets 20,325 26,768 -------- -------- $480,600 $417,851 ======== ======== LIABILITIES AND STOCKHOLDER'S EQUITY LIABILITIES: Accounts payable and accrued expenses $ 17,372 $ 12,378 Borrowings under credit agreements 305,242 253,010 Bonds and notes payable 18,278 24,067 Other liabilities 33,408 29,032 Due to affiliates -- 11,939 -------- -------- Total liabilities 374,300 330,426 -------- -------- STOCKHOLDER'S EQUITY: Common stock, $1 par value; 5,000 shares authorized, issued and outstanding 5 5 Additional paid-in capital 16,969 16,969 Retained earnings 89,326 70,451 -------- -------- Total stockholder's equity 106,300 87,425 -------- -------- $480,600 $417,851 ======== ======== See accompanying notes to consolidated financial statements. 65 LENNAR FINANCIAL SERVICES, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Lennar Corporation) CONSOLIDATED STATEMENTS OF EARNINGS YEARS ENDED NOVEMBER 30, 2000, 1999 AND 1998 (Dollars in Thousands) - -------------------------------------------------------------------------------- 2000 1999 1998 REVENUES: Title and escrow activities $179,444 $181,941 $150,333 Interest income 23,917 22,682 19,463 Loan origination and sales activities 62,033 44,650 24,959 Mortgage servicing activities 9,830 12,006 12,070 Other 16,808 8,028 5,611 -------- -------- -------- Total revenues 292,032 269,307 212,436 -------- -------- -------- OPERATING EXPENSES: Payroll and benefits 142,243 139,688 98,578 Other administrative expenses 64,886 57,286 48,319 Occupancy 19,579 17,474 11,573 Data processing 1,845 2,050 1,738 Provision for losses 9,410 1,592 5,771 Depreciation and amortization 10,228 9,740 4,763 Interest 11,763 10,718 8,289 -------- -------- -------- Total operating expenses 259,954 238,548 179,031 -------- -------- -------- EARNINGS BEFORE INCOME TAXES 32,078 30,759 33,405 INCOME TAXES 13,203 13,130 13,355 -------- -------- -------- NET EARNINGS $ 18,875 $ 17,629 $ 20,050 ======== ======== ======== See accompanying notes to consolidated financial statements. 66 LENNAR FINANCIAL SERVICES, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Lennar Corporation) CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY YEARS ENDED NOVEMBER 30, 2000, 1999 AND 1998 (Dollars in Thousands) - -------------------------------------------------------------------------------- Additional Common Paid-in Retained Stock Capital Earnings Total BALANCE, NOVEMBER 30, 1997 $ 5 $ 16,969 $ 32,772 $ 49,746 Net earnings -- -- 20,050 20,050 -------- -------- -------- -------- BALANCE, NOVEMBER 30, 1998 5 16,969 52,822 69,796 Net earnings -- -- 17,629 17,629 -------- -------- -------- -------- BALANCE, NOVEMBER 30, 1999 5 16,969 70,451 87,425 Net earnings -- -- 18,875 18,875 -------- -------- -------- -------- BALANCE, NOVEMBER 30, 2000 $ 5 $ 16,969 $ 89,326 $106,300 ======== ======== ======== ======== See accompanying notes to consolidated financial statements. 67 LENNAR FINANCIAL SERVICES, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Lennar Corporation) CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED NOVEMBER 30, 2000, 1999 AND 1998 (Dollars in Thousands)
- ------------------------------------------------------------------------------------------------------------------------- 2000 1999 1998 CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 18,875 $ 17,629 $ 20,050 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Depreciation and amortization 10,228 9,740 4,763 Amortization of mortgage loan discounts (541) (431) (262) Origination and acquisition of mortgage loans (2,112,393) (2,043,571) (931,062) Proceeds on sales of mortgage loans 2,061,931 2,047,714 819,480 Net decrease in foreclosure-related assets 2,509 2,150 2,845 Net (increase) decrease in other assets 9,632 (4,824) 4,828 Net increase (decrease) in accounts payable and accrued expenses 9,647 (6,428) 7,634 ----------- ----------- ----------- Net cash provided by (used in) operating activities (112) 21,979 (71,724) ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to loans and mortgage-backed securities held for investment (2,189) (3,328) (7,172) Sales and principal reductions of loans and mortgage-backed securities held for investment 3,011 3,015 7,309 Purchases of investment securities (18,112) (13,119) -- Maturities of investment securities 14,946 11,600 -- Principal reductions of collateral for bonds and notes payable 5,864 10,226 11,934 Originations (sales) of mortgage servicing rights, net 1,315 (8,317) (10,426) Additions to property and equipment (10,008) (13,045) (7,429) Acquisition of North American Asset Development Corporation and subsidiaries, net of cash acquired (2,050) (1,915) (10,441) Acquisition of Southwest Land Title, net of cash acquired -- (6,631) -- Acquisition of Eagle Home Mortgage, Inc., net of cash acquired (2,255) (5,874) -- Acquisition of North American Title Insurance Company -- (4,049) -- Acquisition of North American Title Guaranty, net of cash acquired -- (508) -- Acquisition of Texas Professional Title (1,666) -- -- ----------- ----------- ----------- Net cash used in investing activities (11,144) (31,945) (16,225) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in borrowings under credit agreements 52,192 (3,168) 134,268 Repayment of bonds and notes payable (5,789) (9,457) (11,683) Increase (decrease) in amounts due to/from affiliates (31,770) 30,603 (17,410) ----------- ----------- ----------- Net cash provided by financing activities 14,633 17,978 105,175 ----------- ----------- ----------- NET INCREASE IN CASH 3,377 8,012 17,226 CASH AT BEGINNING OF YEAR 34,911 26,899 9,673 ----------- ----------- ----------- CASH AT END OF YEAR $ 38,288 $ 34,911 $ 26,899 =========== =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for interest $ 12,133 $ 10,982 $ 8,150 =========== =========== =========== (Continued)
68 LENNAR FINANCIAL SERVICES, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Lennar Corporation) CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED NOVEMBER 30, 2000, 1999 AND 1998 (Dollars in Thousands)
- ------------------------------------------------------------------------------------------------------------------------- 2000 1999 1998 ACQUISITION OF TEXAS PROFESSIONAL TITLE: Fair value of assets (inclusive of cash of $ - ) $ 1,002 Goodwill recorded 2,411 Liabilities assumed (1,747) ----------- Cash paid $ 1,666 =========== ACQUISITION OF SOUTHWEST LAND TITLE: Fair value of assets (inclusive of cash of $209) $ 2,544 Goodwill recorded 5,389 Liabilities assumed (1,093) ----------- Cash paid $ 6,840 =========== ACQUISITION OF EAGLE HOME MORTGAGE, INC.: Fair value of assets (inclusive of cash of $1,705) $ 28,465 Goodwill recorded 4,910 Liabilities assumed (25,796) ----------- Cash paid $ 7,579 =========== ACQUISITION OF NORTH AMERICAN TITLE INSURANCE COMPANY: Fair value of assets (inclusive of cash of $ - ) $ 8,058 Goodwill recorded 125 Liabilities assumed (4,134) ----------- Cash paid $ 4,049 =========== ACQUISITION OF NORTH AMERICAN TITLE GUARANTY: Fair value of assets (inclusive of cash of $742) $ 1,415 Goodwill recorded 1,005 Liabilities assumed (1,170) ----------- Cash paid $ 1,250 =========== ACQUISITION OF NORTH AMERICAN ASSET DEVELOPMENT CORPORATION AND SUBSIDIARIES: Fair value of assets (inclusive of cash of $8,938) $ 41,185 Goodwill recorded 7,845 Liabilities assumed (29,651) ----------- Cash paid $ 19,379 =========== See accompanying notes to consolidated financial statements. (Concluded)
69 LENNAR FINANCIAL SERVICES, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Lennar Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED NOVEMBER 30, 2000, 1999 AND 1998 - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation - Lennar Financial Services, Inc., a wholly-owned subsidiary of Lennar Corporation ("Lennar"), was formed to serve as a holding company for the entities which form the financial services division of Lennar. Financial services activities are primarily conducted through Lennar Financial Services, Inc. and nine of its subsidiaries (collectively "LFS"): Universal American Mortgage Company, Eagle Home Mortgage, Inc., Strategic Technologies, Inc., Universal Title Insurors, Inc., Regency Title Company, TitleAmerica Insurance Corporation, Southwest Land Title, Inc., Texas Professional Title, and North American Asset Development Corporation. These entities arrange mortgage financing, title insurance, and closing services for Lennar homebuyers and others, package and resell residential mortgage loans, perform mortgage loan servicing activities and provide high speed Internet access, cable television and home monitoring services to residents of Lennar communities and others. The financial statements of LFS include the accounts of LFS and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. Mortgage Loans Held for Sale - Loans held for sale are carried at the lower of cost or market determined on an aggregate basis. Discounts recorded on loans held for sale are presented as a reduction of the carrying amount of the loans and are not amortized. LFS enters into forward sales contracts for the purpose of protecting the value of its inventory of loans held for sale and pipeline of loan applications in process against increases in market interest rates. The cost of mortgage loans is adjusted by gains and losses generated from the corresponding hedging transactions. LFS allocates hedging gains and losses between mortgage loans held for sale at the end of the year and mortgage loans sold during the year. Hedging gains and losses realized during the commitment and warehousing period related to the pipeline and mortgage loans held for sale are deferred. Hedging losses are recognized currently if deferring such losses would result in mortgage loans held for sale and mortgage loans in the pipeline being valued in excess of their estimated fair value. Loans Held for Investment - Loans for which LFS has the positive intent and ability to hold to maturity consist of mortgage loans carried at cost net of unamortized discounts. Discounts are amortized over the estimated lives of the loans using the interest method. Collateral for Bonds and Notes Payable - Collateral for bonds and notes payable consists of mortgage loans, mortgage-backed securities, and funds held by the trustee. Mortgage loans and mortgage-backed securities are carried net of unamortized discounts. Discounts are amortized over the estimated lives of the assets using the interest method. An unaffiliated company holds an interest in the collateral for bonds and notes payable to the extent such assets exceed the related liabilities. 70 Allowance for Loan Losses - The allowance for loan losses is established by charges to income through the provision for loan losses. Loans or portions thereof which are considered by management to be uncollectible are charged to the allowance and recoveries of amounts previously charged off are credited to the allowance. The allowance represents the amount which, in management's judgment, is adequate to absorb the estimated losses on existing loans which will become uncollectible. The adequacy of the allowance is determined by management's continuing evaluation of the loan portfolio in light of past loan loss experience, regulatory examinations, present economic conditions, and other factors considered relevant by management. Anticipated changes in economic factors which may influence the level of the allowance are considered in the evaluation by management when the likelihood of the changes can be reasonably determined. While management uses the best information available to make such evaluations, future adjustments to the allowance may be necessary as a result of future economic and other conditions that may be beyond management's control. Impaired Loans - Individually identified impaired loans are measured based on the present value of payments expected to be received, using the historical effective loan rate as the discount rate. Alternatively, measurement may also be based on observable market prices or, for loans that are solely dependent on the collateral for repayment, measurement may be based on the fair value of the collateral. Loans that are to be foreclosed are measured based on the fair value of the collateral. If the recorded investment in the impaired loan exceeds the measure of fair value, a valuation is required as a component of the allowance for loan losses. Changes to the valuation allowance are recorded as a component of the provision for loan losses. Real Estate Owned - Real estate acquired through actual foreclosure or deed in lieu of foreclosure is carried at the lower of fair value minus estimated costs to sell or at cost. Any deficiency of the fair value of the asset minus the estimated costs to sell when compared to the carrying value of the asset is recognized as a valuation allowance. The estimates of fair value are susceptible to changes that could result in an adjustment to results of operations. Costs relating to the development and improvement of the property are capitalized, whereas those relating to holding the property are charged to expense in the period incurred. Mortgage Servicing Rights - Upon the sale of a mortgage loan, the book value of the mortgage loan is allocated to the mortgage servicing right and to the loan (without the mortgage servicing right) based on the estimated relative fair values. Mortgage servicing rights are periodically evaluated for impairment based on the fair value of these rights. The fair value of mortgage servicing rights is determined by discounting the estimated future cash flows using a discount rate commensurate with the risks involved. This method of valuation incorporates assumptions that market participants would use in their estimates of future servicing income and expense, including assumptions about prepayment, default and interest rates. For purposes of measuring impairment, the loans underlying the mortgage servicing rights are stratified on the basis of interest rate and type. The amount of impairment is the amount by which the mortgage servicing rights, net of accumulated amortization, exceed their fair value by strata. Impairment, if any, is recognized through a valuation allowance and a charge to current operations. Mortgage servicing rights are amortized in proportion to, and over the period of, the estimated net servicing income of the underlying mortgages. 71 Loan Origination and Sales - Loan origination fees received at the time loans are originated, net of direct loan origination costs, are deferred. These deferred amounts are recognized as a component of the gain or loss on loans sold and as a yield adjustment on loans held for investment. Gains and losses on loan sales are recognized at the time of sale and are determined by the difference between the net carrying value of the loans sold, including deferred origination fees and allocated hedging costs, and the sales price of the loans. Loan Servicing Revenue - Loan servicing revenue represents fees earned for servicing loans owned by others, generally calculated as a percentage of outstanding principal balance, as well as late charges and other ancillary revenues resulting from servicing activities. Sale of Servicing Rights - LFS recognizes gains and losses on the sales of servicing rights when all risks and rewards of ownership of the servicing rights have irrevocably passed to the purchaser and there are no significant unresolved contingencies. Income Taxes - LFS files a consolidated federal income tax return with Lennar. Income taxes have been provided at LFS' level as if LFS filed an income tax return on a stand-alone basis. Current taxes due are recorded as a payable to Lennar, and the deferred portion is recorded as deferred taxes. Income taxes are accounted for in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes. Under SFAS No. 109, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and are measured by using enacted tax rates expected to apply to taxable income in the years in which those differences are expected to reverse. Title Plants - Title plants, which are comprised of indexed and cataloged information concerning titles to real property, are recorded at cost. Such costs are not amortized because there is no indication of reduction of plant values. Costs of maintaining and operating title plants are charged to operations in the period in which they are incurred. LFS owns title plants in four states. In other locations, LFS purchases access to title plant information for a fee based on the revenues. Goodwill - Goodwill represents the excess of the purchase price over the fair value of net assets acquired and is amortized by charges to income on a straight-line basis over 15 - 20 years. LFS amortized $1,387,000, $959,000 and $358,000 of goodwill for the years ended November 30, 2000, 1999 and 1998, respectively, which is included in depreciation and amortization expenses in the consolidated statements of earnings. Property and Equipment - Property and equipment is stated at cost. Property and equipment is reviewed for impairment and a provision is recorded, if necessary, whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. Depreciation of property and equipment is computed using the straight-line method or an accelerated method based on the estimated useful lives of the assets. Amortization of leasehold improvements is computed on the straight-line method over the estimated useful lives of the improvements or the term of the lease, whichever is shorter. 72 Escrow Funds Held in Trust - At November 30, 2000 and 1999, LFS held approximately $365,749,000 and $340,762,000, respectively, in trust for others, pending completion of real estate transactions. These funds are not included in LFS' consolidated balance sheets. The primary depositories provide LFS with certain bank-related escrow accounting services at no charge and favorable interest charges on borrowings. Title and Escrow Revenue - Premiums from title insurance policies are recognized as revenue on the effective date of the policy. Escrow fees are recognized at the time the related real estate transactions are completed, usually upon the close of escrow. Title and Escrow Losses - LFS provides an allowance for estimated title and escrow losses based upon management's evaluation of claims presented and estimates for any incurred but not reported claims. The allowance is established at a level that management estimates to be sufficient to satisfy those claims where a loss is determined to be probable and the amount of such loss can be reasonably estimated. The allowance for title and escrow losses for both known and incurred but not reported claims is considered by management of LFS to be adequate for such purposes. Depending on the underwriting agreement, LFS is responsible for a $2,500, $5,000 or $7,500 deductible per covered title claim. New Accounting Pronouncements - In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. In June 1999, the FASB delayed the effective date of SFAS No. 133 to all years beginning after June 15, 2000. SFAS No. 133 will require LFS to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. Management does not anticipate that the adoption of SFAS No. 133 will have a material impact on LFS' earnings or financial position. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition in Financial Statements, which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. SAB No. 101 is applicable for LFS beginning in the fourth quarter of the year ending November 30, 2001. Management does not anticipate that the adoption of SAB No. 101 will have a material impact on LFS' earnings or financial position. In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. This Statement replaces SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No. 140 revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of SFAS No. 125's provisions without reconsideration. SFAS No. 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. Management does not anticipate that the adoption of SFAS No. 140 will have a material effect on LFS' earnings or financial position. Financial Statement Presentation - LFS prepares its financial statements using an unclassified balance sheet presentation as is customary in the financial services industry. A classified balance sheet 73 presentation would have aggregated current assets, current liabilities, and net working capital at November 30, 2000 and 1999 as follows:
2000 1999 Current assets $ 330,116,000 $ 262,694,000 Current liabilities 293,976,000 244,516,000 ------------- ------------- Net working capital $ 36,140,000 $ 18,178,000 ============= =============
Reclassifications - Certain prior year balances have been reclassified to conform with current period financial statement presentation. Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. FORECLOSURE-RELATED ASSETS Foreclosure-related assets at November 30, 2000 and 1999 consisted of the following:
2000 1999 Loans repurchased from mortgage-backed securities $ 18,529,000 $ 20,697,000 Loans purchased from third parties (net of acquisition discounts of $1,017,000 and $2,209,000 at November 30, 2000 and 1999, respectively) 1,685,000 3,020,000 Real estate owned 629,000 767,000 Claims receivable 444,000 695,000 Allowance for credit losses (3,657,000) (3,778,000) ------------- ------------- $ 17,630,000 $ 21,401,000 ============= =============
LFS periodically elects (but is not required) to repurchase delinquent loans from certain mortgage-backed securities in instances where the loan is fully insured or guaranteed and where the interest to be recovered upon receipt of related claim proceeds substantially exceeds its cost of funds. LFS purchased a large number of loans in 2000 and 1999 in order to earn the spread between interest rates receivable from the loans or related claims and its short-term borrowing rate. Loans repurchased are carried at LFS' cost to acquire the loan from the mortgage-backed security. LFS also acquires distressed loans from third parties at substantially discounted prices. LFS performs all of the activities necessary to resolve the delinquency or complete the foreclosure process, files claims and/or markets the related real estate assets. These loans are carried net of discount. The discounts are not amortized but are recognized as a component of the gain or loss at the time of final disposition of the loan or related property. Claims receivable represent final claim proceeds due from the mortgage loan insurer or guarantor and are generally received within forty-five to ninety days after filing. 74 LFS provides for estimated credit losses based upon the terms of its servicing contracts with its investors, the quality of the underlying collateral and its experience with loans of similar quality. Management believes that it has provided an adequate allowance for expected losses. All foreclosure-related assets are carried at the lower of cost or fair value less estimated costs to sell. 3. LOANS HELD FOR INVESTMENT LFS periodically acquires loans which it holds for investment. Loans held for investment are carried at cost and discounts attributable to such loans are amortized into income over the estimated lives of the loans. At November 30, 2000 and 1999, unamortized net discounts attributable to loans held for investment were $58,000 and $94,000, respectively. 4. COLLATERAL FOR BONDS AND NOTES PAYABLE Collateral for bonds and notes payable (the "Collateral") consists of fixed and adjustable rate mortgage loans and fixed-rate mortgage-backed securities guaranteed by U.S. government agencies. All collateral is pledged to secure repayment of the bonds and notes payable. All principal and interest on the Collateral is remitted directly to a trustee and, together with any reinvestment income earned thereon, is available for payment on the bonds and notes payable. The components of the Collateral at November 30, 2000 and 1999 are as follows:
2000 1999 Mortgage-backed securities held to maturity $11,328,000 $11,953,000 Mortgage loans 8,492,000 10,948,000 Funds held by trustee 920,000 1,166,000 ----------- ----------- $20,740,000 $24,067,000 =========== ===========
75 5. INVESTMENTS The amortized cost, unrealized gains, unrealized losses and fair values for held to maturity securities by type as of November 30, 2000 and 1999 are as follows:
2000 ------------------------------------------------------------ Amortized Unrealized Unrealized Fair Cost Gains Losses Value U.S. Treasury securities $ 1,829,000 $ 21,000 $ (1,000) $ 1,849,000 U.S. government agency obligations 5,861,000 -- (1,000) 5,860,000 Certificates of deposit 4,798,000 -- -- 4,798,000 ----------- ----------- ------------ ----------- Total $12,488,000 $ 21,000 $ (2,000) $12,507,000 =========== =========== ============ =========== 1999 ------------------------------------------------------------ Amortized Unrealized Unrealized Fair Cost Gains Losses Value U.S. Treasury securities $ 842,000 $ 11,000 $ -- $ 853,000 U.S. government agency obligations 8,060,000 5,000 (14,000) 8,051,000 ----------- ----------- ------------ ----------- Total $ 8,902,000 $ 16,000 $ (14,000) $ 8,904,000 =========== =========== ============ ===========
The amortized cost and estimated fair value of securities held to maturity at November 30, 2000 by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Amortized Fair Cost Value Due in one year or less $11,631,000 $11,630,000 Due after one year through five years 603,000 614,000 Due after five years through ten years 254,000 263,000 ----------- ----------- Total $12,488,000 $12,507,000 =========== =========== 76 6. MORTGAGE SERVICING RIGHTS Changes in originated mortgage servicing rights during 2000 and 1999 were as follows: Balance at November 30, 1998 $ 11,080,000 Originations 13,508,000 Sales (5,192,000) Amortization (3,832,000) ------------ Balance at November 30, 1999 15,564,000 Originations 170,000 Sales (1,485,000) Amortization (2,596,000) ------------ Balance at November 30, 2000 $ 11,653,000 ============ At November 30, 2000, the fair value of originated mortgage servicing rights was $13,379,000. A valuation allowance related to LFS' mortgage servicing rights was not required at or for the year ended November 30, 2000. 7. OTHER ASSETS Other assets consisted of the following at November 30, 2000 and 1999: 2000 1999 Servicing advances and other receivables $13,874,000 $20,142,000 Other 6,451,000 6,626,000 ----------- ----------- $20,325,000 $26,768,000 =========== =========== 77 8. INVESTMENT IN AFFILIATES LFS has investments in two affiliates that are accounted for using the equity method of accounting. LFS has a 50% ownership in both Northwest Mortgage Alliance LLC ("Northwest") and Equity Home Mortgage LLC ("Equity"), whose principal business activities are the origination of mortgage loans in the state of Washington and Oregon, respectively. The condensed financial statements of Northwest as of and for the year ended November 30, 2000 are presented below: BALANCE SHEET ASSETS: Cash $ 98,000 Due from affiliates 19,000 Operating properties and equipment 7,000 Accounts receivable 2,000 Prepaid expenses 1,000 ---------- Total $ 127,000 ========== LIABILITIES AND MEMBERS' EQUITY: Liabilities $ 18,000 Members' equity 109,000 ---------- Total $ 127,000 ========== STATEMENT OF EARNINGS Revenues $ 813,000 Expenses 607,000 ---------- Net earnings $ 206,000 ========== The condensed financial statements of Equity as of and for the year ended November 30, 2000 are presented below: BALANCE SHEET ASSETS: Cash $ 175,000 Due from affiliates 285,000 Operating properties and equipment 54,000 Accounts receivable 4,000 Prepaid expenses 3,000 ---------- Total $ 521,000 ========== LIABILITIES AND MEMBERS' EQUITY: Liabilities $ 114,000 Members' equity 407,000 ---------- Total $ 521,000 ========== STATEMENT OF EARNINGS Revenues $3,681,000 Expenses 2,744,000 ---------- Net earnings $ 937,000 ========== 78 At November 30, 2000, the investment in Northwest and Equity was $54,000 and $204,000, respectively, and is included in other assets. 9. BORROWINGS UNDER CREDIT AGREEMENTS
2000 1999 Warehouse line of credit with banks totaling $240 million, variable interest rate (approximately 5.79% at November 30, 2000); secured by loans held for sale, foreclosure-related assets and servicing rights, maturing April 27, 2001 $225,553,000 $236,601,000 Advances under Paine Webber Real Estate Securities Whole Loan Finance Program, variable interest rate (approximately 7.70% at November 30, 2000); secured by mortgage loans held for sale 6,952,000 7,893,000 Advances under Greenwich Capital repurchase agreement, variable interest rate (approximately 7.47% at November 30, 2000); secured by mortgage loans held for sale 51,885,000 -- Note payable to bank; interest payable quarterly, principal due at maturity on September 27, 2001; interest at the bank's prime rate (7.76% at November 30, 2000); secured by stock -- of two subsidiaries 20,000,000 Note payable to bank paid in 2000 -- 3,905,000 Line of credit from a bank -- 2,935,000 Other borrowings 852,000 1,676,000 ------------ ------------ Total $305,242,000 $253,010,000 ============ ============
The warehouse line of credit is subject to restrictive covenants relating to certain financial ratios as to net worth and debt. 10. BONDS AND NOTES PAYABLE At November 30, 2000 and 1999, bonds and notes payable had an outstanding balance of $18,278,000 and $24,067,000, respectively. The borrowings mature in years 2013 through 2018 and carry interest rates ranging from 4.9% to 13.2%. The annual principal repayments are dependent upon collections on the Collateral, including prepayments, and, as a result, the actual maturity is likely to occur earlier than its stated maturity. 79 11. INCOME TAXES Income tax expense (benefit) for the years ended November 30, 2000, 1999 and 1998 consists of: 2000 1999 1998 Current $ 17,142,000 $ 9,979,000 $ 10,074,000 Deferred (3,939,000) 3,151,000 3,281,000 ------------ ------------ ------------ $ 13,203,000 $ 13,130,000 $ 13,355,000 ============ ============ ============ The actual income tax differs from the "expected" tax expense for the year (computed by applying the U.S. federal corporate rate of 35% to earnings before income taxes) primarily due to the amount of state income taxes, net of the related federal tax benefit. At November 30, 2000 and 1999, the tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities are as follows:
2000 1999 Deferred tax assets: Loss reserves $ 4,731,000 $ 5,444,000 Property and equipment 823,000 868,000 Accruals not currently deductible 1,022,000 292,000 Deferred hedging transactions -- 401,000 Other 953,000 1,031,000 ----------- ----------- 7,529,000 8,036,000 Valuation allowance (579,000) (579,000) ----------- ----------- 6,950,000 7,457,000 Deferred tax liabilities: Intangible assets 1,418,000 1,418,000 Amortization of servicing acquisition costs 4,603,000 6,148,000 Other 1,084,000 620,000 ----------- ----------- 7,105,000 8,186,000 Net deferred tax liability $ (155,000) $ (729,000) =========== ===========
The net deferred tax liability is included in other liabilities. 12. LOAN SERVICING As of November 30, 2000 and 1999, LFS was servicing approximately 29,000 and 40,000 loans, respectively, with unpaid principal balances aggregating $2,313,000,000 and $3,128,000,000, respectively, for others. Loans serviced for others and related escrow funds of approximately $11,427,000 and $16,233,000 on deposit in custodial bank accounts at November 30, 2000 and 1999, respectively, are not included in the accompanying consolidated balance sheets. In connection with its loan servicing activities, LFS makes certain payments of property taxes and insurance premiums in advance of collecting them from specific mortgagors and makes certain 80 payments of attorneys' fees and other costs related to loans in foreclosure. In addition, LFS is a party to certain standard industry servicing agreements (principally agreements with Government National Mortgage Association, Federal National Mortgage Association, and the Federal Home Loan Mortgage Corporation) under which the servicer is required to pass through principal and interest payments on loans prior to their collection from specific mortgagors. These advance amounts are included in Other Assets in the accompanying consolidated balance sheets. Exposure to this credit risk is minimized through geographic diversification and careful review of the mortgage loan servicing created or purchased by LFS. LFS has errors and omissions and fidelity bond insurance policies, both in the amount of $5,000,000. 13. MORTGAGE LOAN PIPELINE, HEDGES, AND RELATED OFF-BALANCE SHEET RISK LFS enters into derivative financial instruments with off-balance sheet risk in the normal course of business through the origination and sale of mortgage loans and the management of the related loss exposure caused by fluctuations in interest rates. These financial instruments include commitments to extend credit (e.g., the mortgage loan pipeline), forward contracts for the delivery of mortgage-backed securities ("MBS"), and other hedging instruments. These instruments involve, to varying degrees, elements of credit and market risk. All of LFS' derivative financial instruments are held or issued for purposes other than trading. As of November 30, 2000 and 1999, LFS' pipeline of loans in process totaled approximately $689,249,000 and $371,848,000, respectively. There is no exposure to credit risk in this type of commitment until the loans are funded; however, LFS uses the same credit policies in the approval of the commitments as are applied to all lending activities. There is no exposure to market risk until a rate commitment is extended by LFS to a borrower. Loans in process for which interest rates were committed to the borrower totaled approximately $65,543,000 and $79,408,000 as of November 30, 2000 and 1999, respectively. Substantially all of these commitments are for periods of 30 days or less. Since a portion of these commitments are expected to expire without being exercised by the borrower, the total commitments do not necessarily represent future cash requirements. For loans in process for which interest rates are committed to borrowers, LFS determines daily what portion of those loans to hedge. This determination is based on numerous factors, including the composition of the pipeline, the portion of such pipeline likely to close, the timing of such closings, and anticipated changes in interest rates. LFS is exposed to market risk to the extent that the portion of the pipeline that actually closes at the committed price is greater than or less than the portion expected to close. Mandatory MBS forward commitments are used by LFS to hedge its interest rate exposure during the period from when LFS extends an interest rate lock to a loan applicant until the time in which the loan is sold to an investor. These instruments involve, to varying degrees, elements of credit and interest rate risk. Credit risk is managed by LFS by entering into agreements only with investment bankers with primary dealer status and with permanent investors meeting the credit standards of LFS. At any time, the risk to LFS, in the event of default by the purchaser, is the difference between the contract price and current market value, which is a percentage of the outstanding commitment. At November 30, 2000, LFS had open commitments amounting to $296,150,000 to sell MBSs with varying settlement dates through February 2001. 81 14. FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS No. 107, Disclosures About Fair Values of Financial Instruments, requires the disclosure of information about certain financial instruments. The estimated fair values have been determined by LFS using available market information and appropriate valuation methodologies. The fair values are significantly affected by the assumptions used. Accordingly, the use of different assumptions may have a material effect on the fair values. The estimated fair values presented herein are not necessarily indicative of the amounts that LFS could realize in a current market exchange nor of the aggregate underlying value of LFS itself. The following describes the methods and assumptions used by LFS in estimating fair values: Cash - The carrying amounts reported in the consolidated balance sheets approximate fair values as maturities are less than 90 days. Mortgage Loans - Fair value is based on quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. Loans Held for Investment - Fair value is based on discounting estimated cash flows through the estimated maturity, adjusted for approximate prepayments, using appropriate market discount rates, or quoted market prices. Collateral for Bonds and Notes Payable - Fair value is based on quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. Investments - Fair value is based on quoted market prices. Borrowings under Credit Agreements - Fair value approximates carrying value due to variable interest rate pricing terms and the short-term nature of the borrowings. Bonds and Notes Payable - Fair value is based on quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. Commitments to Originate and to Sell Loans - Fair value of commitments to purchase loans is based upon the difference between the current value of similar loans and the price at which LFS has committed to originate the loans. The fair value of commitments to sell loan contracts is the estimated amount that LFS would receive or pay to terminate the commitments at the reporting date based on market prices for similar financial instruments. 82 The estimated fair value of LFS' on-balance sheet and off-balance sheet financial instruments was as follows at November 30, 2000 and 1999, respectively (in thousands of dollars):
2000 1999 Carrying Fair Carrying Fair Value Value Value Value On-balance sheet: Financial assets: Cash $ 38,288 $ 38,288 $ 34,911 $ 34,911 Mortgage loans 258,363 261,410 207,641 209,715 Loans held for investment 23,083 22,593 22,562 22,112 Collateral for bonds and notes payable 20,740 21,166 24,067 27,200 Investment securities 12,488 12,507 8,902 8,904 Financial liabilities: Borrowings under credit agreements 305,242 305,242 253,010 252,865 Bonds and notes payable 18,278 18,553 24,067 25,081 Off-balance sheet: Commitments to originate loans -- 445 -- (197) Commitments to sell loans -- (119) -- 434
15. RELATED PARTIES During 2000 and 1999, Lennar has periodically advanced and borrowed funds to and from LFS which bear interest at a rate tied to Lennar's short-term borrowing rate. At November 30, 2000, Lennar had borrowed $19,591,000 from LFS; at November 30, 1999, LFS had borrowed $11,939,000 from Lennar. LFS recorded net interest income related to these advances of $762,000 in 2000 and net interest expense of $337,000 and $324,000 in 1999 and 1998, respectively. At November 30, 2000 and 1999, LFS had issued and outstanding $3,375,000 and $5,960,000, respectively, of letters of credit to the benefit of Lennar. 16. COMMITMENTS AND CONTINGENCIES Because of the nature of its activities, LFS is at times subject to threatened legal actions which arise out of the normal course of business. In the opinion of management, there is no pending or threatened litigation which will have a material effect on LFS' financial position or results of operations. LFS has guaranteed obligations of Lennar with regard to certain issues of its outstanding debt, and the stock of LFS has been pledged as collateral for Lennar's obligations with regard to that debt. LFS knows of no event of default which would require it to satisfy these guarantees and, therefore, the fair value of these contingent liabilities is considered immaterial. 83 -----END PRIVACY-ENHANCED MESSAGE-----