-----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, TzbNIk6306dbxTx03WmYJiPvqlXZ5p3NuyXIsVuRlsG8EauDMvK2qhjXSdFAlkqu 5o+6GryR1wUYM8quTkVJRw== 0000773141-96-000006.txt : 19960517 0000773141-96-000006.hdr.sgml : 19960517 ACCESSION NUMBER: 0000773141-96-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960515 SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MDC HOLDINGS INC CENTRAL INDEX KEY: 0000773141 STANDARD INDUSTRIAL CLASSIFICATION: OPERATIVE BUILDERS [1531] IRS NUMBER: 840622967 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08951 FILM NUMBER: 96564802 BUSINESS ADDRESS: STREET 1: 3600 S YOSEMITE ST STE 900 CITY: DENVER STATE: CO ZIP: 80237 BUSINESS PHONE: 3037731100 MAIL ADDRESS: STREET 1: 3600 S YOSEMITE STREET STREET 2: SUITE 900 CITY: DENVER STATE: CO ZIP: 80237 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------- FORM 10-Q (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1996 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 1-8951 M.D.C. HOLDINGS, INC. (Exact name of Registrant as specified in its charter) Delaware 84-0622967 (State or other jurisdiction (I.R.S. employer of incorporation or organization) identification no.) 3600 South Yosemite Street, Suite 900 80237 Denver, Colorado (Zip code) (Address of principal executive offices) (303) 773-1100 (Registrant's telephone number, including area code) Not Applicable (Former name, former address and former fiscal year, if changed since last report) 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 As of April 18, 1996, 18,801,000 shares of M.D.C. Holdings, Inc. common stock were outstanding. M.D.C. HOLDINGS, INC. AND SUBSIDIARIES FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1996 INDEX Page No. ---- Part I. Financial Information: Item 1. Condensed Consolidated Financial Statements: Balance Sheets as of March 31, 1996 (Unaudited) and December 31, 1995......................... 1 Statements of Income (Unaudited) for the three months ended March 31, 1996 and 1995.......... 3 Statements of Cash Flows (Unaudited) for the three months ended March 31, 1996 and 1995.... 4 Notes to Financial Statements (Unaudited)....... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............. 17 Part II. Other Information: Item 1. Legal Proceedings............................... 29 Item 4. Submission of Matters to a Vote of Shareowners.. 30 Item 6. Exhibits and Reports on Form 8-K................ 30 (i) M.D.C. HOLDINGS, INC. Condensed Consolidated Balance Sheets (In thousands)
March 31, December 31, 1996 1995 ----------- ----------- ASSETS (Unaudited) Corporate Cash and cash equivalents................................................... $ 10,013 $ 10,290 Property and equipment, net................................................. 9,549 9,550 Deferred income taxes....................................................... 8,669 13,730 Deferred issue costs, net................................................... 9,746 9,931 Other assets, net........................................................... 3,737 3,830 ---------- ----------- 41,714 47,331 Homebuilding Cash and cash equivalents................................................... 10,074 5,096 Home sales and other accounts receivable.................................... 19,710 26,192 Investments and marketable securities, net.................................. 6,560 6,481 Inventories, net Housing completed or under construction................................... 279,507 265,205 Land and land under development........................................... 171,802 176,960 Prepaid expenses and other assets, net...................................... 41,503 42,111 ---------- ----------- 529,156 522,045 Financial Services Cash and cash equivalents................................................... 1,448 5,409 Accrued interest and other assets, net...................................... 4,304 3,129 Mortgage loans held in inventory, net....................................... 50,956 53,153 Mortgage Collateral, net of mortgage-backed bonds, and related assets and liabilities............................................................... 3,925 3,744 ---------- ----------- 60,633 65,435 Total Assets.......................................................... $ 631,503 $ 634,811 ========== ===========
See notes to condensed consolidated financial statements. -1- M.D.C. HOLDINGS, INC. Condensed Consolidated Balance Sheets (In thousands, except share amounts)
March 31, December 31, 1996 1995 ----------- ----------- LIABILITIES (Unaudited) Corporate Accounts payable and accrued expenses....................................... $ 20,791 $ 18,258 Income taxes payable........................................................ 8,564 11,930 Notes payable............................................................... 3,525 3,537 Senior Notes, net........................................................... 187,572 187,525 Subordinated notes, net..................................................... 38,222 38,221 ----------- ----------- 258,674 259,471 Homebuilding Accounts payable and accrued expenses....................................... 89,310 82,164 Lines of credit............................................................. 42,359 43,490 Notes payable............................................................... 8,301 10,571 ----------- ----------- 139,970 136,225 Financial Services Accounts payable and accrued expenses....................................... 10,143 12,092 Line of credit.............................................................. 15,013 21,990 ----------- ----------- 25,156 34,082 Total Liabilities..................................................... 423,800 429,778 ----------- ----------- COMMITMENTS AND CONTINGENCIES.................................................. - - - - ----------- ----------- STOCKHOLDERS' EQUITY Preferred stock, $.01 par value; 25,000,000 shares authorized; none issued.. - - - - Common Stock, $.01 par value; 100,000,000 shares authorized; 22,606,000 shares issued at March 31, 1996 and December 31, 1995................... 226 226 Additional paid-in capital.................................................. 135,884 136,022 Retained earnings........................................................... 91,595 87,476 ----------- ----------- 227,705 223,724 Less treasury stock, at cost; 3,332,000 and 3,157,000 shares, respectively, at March 31, 1996 and December 31, 1995................................... (20,002) (18,691) ----------- ----------- Total Stockholders' Equity............................................ 207,703 205,033 ----------- ----------- Total Liabilities and Stockholders' Equity............................ $ 631,503 $ 634,811 =========== ===========
See notes to condensed consolidated financial statements. -2- M.D.C. HOLDINGS, INC. Condensed Consolidated Statements of Income (In thousands, except per share amounts) (Unaudited)
Three Months Ended March 31, 1996 1995 ----------- ----------- REVENUES Homebuilding............................................................... $ 191,276 $ 184,529 Financial Services......................................................... 7,738 6,150 Corporate.................................................................. 232 413 ----------- ----------- Total Revenues......................................................... 199,246 191,092 ----------- ----------- COSTS AND EXPENSES Homebuilding............................................................... 185,242 176,520 Financial Services......................................................... 2,742 2,394 Corporate general and administrative....................................... 2,601 3,127 Corporate and homebuilding interest (Note C)............................... 1,851 2,839 ----------- ----------- Total Expenses......................................................... 192,436 184,880 ----------- ----------- Income before income taxes.................................................... 6,810 6,212 Provision for income taxes.................................................... 2,486 2,144 ----------- ----------- Net Income.................................................................... $ 4,324 $ 4,068 =========== =========== EARNINGS PER SHARE Primary.................................................................... $ .22 $ .20 =========== =========== Fully diluted.............................................................. $ .20 $ .19 =========== =========== WEIGHTED-AVERAGE SHARES OUTSTANDING Primary.................................................................... 19,863 20,323 =========== =========== Fully diluted.............................................................. 23,510 23,936 =========== =========== DIVIDENDS PER SHARE........................................................... $ .03 $ .02 =========== ===========
See notes to condensed consolidated financial statements. -3- M.D.C. HOLDINGS, INC. Condensed Consolidated Statements of Cash Flows (In thousands) (Unaudited)
Three Months Ended March 31, 1996 1995 ----------- ----------- OPERATING ACTIVITIES Net Income.......................................................... $ 4,324 $ 4,068 Adjustments To Reconcile Net Income To Net Cash Provided By Operating Activities: Depreciation and amortization.................................. 2,519 2,123 Deferred income taxes.......................................... 5,061 109 Gains on sales of mortgage-related assets...................... (935) - - Net Changes In Assets and Liabilities Mortgage loans held in inventory............................... 2,197 4,199 Homebuilding inventories....................................... (9,178) 1,257 Receivables.................................................... 6,482 (4,530) Accounts payable and accrued expenses.......................... 4,393 (6,476) Other, net..................................................... (2,431) 3,565 ------------ ----------- Net Cash Provided By Operating Activities............................ 12,432 4,315 ----------- ----------- INVESTING ACTIVITIES Net Proceeds From Mortgage-Related Assets and Liabilities........... 693 (92) Other, net.......................................................... (31) 368 ----------- ----------- Net Cash Provided By Investing Activities............................ 662 276 ----------- ----------- (Continued)
See notes to condensed consolidated financial statements. -4- M.D.C. HOLDINGS, INC. Condensed Consolidated Statements of Cash Flows (In thousands) (Unaudited) (Continued)
Three Months Ended March 31, 1996 1995 ------------ ------------ FINANCING ACTIVITIES Lines of Credit Advances....................................................... $ 179,344 $ 155,308 Principal payments............................................. (187,452) (172,586) Notes Payable Borrowings..................................................... 480 1,075 Principal payments............................................. (2,770) (8,315) Treasury Stock Repurchases.......................................... (1,645) - - Dividend Payments................................................... (576) (387) Other, net.......................................................... 265 279 ------------ ------------ Net Cash Used In Financing Activities............................... (12,354) (24,626) ------------ ------------ Net Increase (Decrease) In Cash and Cash Equivalents................ 740 (20,035) Cash and Cash Equivalents Beginning Of Period............................................ 20,795 43,564 ------------ ------------ End Of Period.................................................. $ 21,535 $ 23,529 ============ ============ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the period for: Interest, net of amounts capitalized.......................... NA(1) NA(1) Income taxes.................................................. $ 990 $ 657 (1) Interest capitalized exceeded interest paid during the period. SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS Homebuilding land inventory sales financed by MDC................... $ - - $ 156 Homebuilding inventory purchases financed by seller................. - - 1,688
See notes to condensed consolidated financial statements. -5- M.D.C. HOLDINGS, INC. Notes to Condensed Consolidated Financial Statements (Unaudited) A. Presentation of Financial Statements The condensed consolidated financial statements of M.D.C. Holdings, Inc. ("MDC" or the "Company," which, unless otherwise indicated, refers to M.D.C. Holdings, Inc. and its subsidiaries) have been prepared by MDC, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. These statements reflect all adjustments (including all normal recurring accruals) which, in the opinion of management, are necessary to present fairly the financial position, results of operations and cash flows of MDC as of March 31, 1996 and for all of the periods presented. These statements are condensed and do not include all of the information required by generally accepted accounting principles in a full set of financial statements. These statements should be read in conjunction with MDC's financial statements and notes thereto included in MDC's Annual Report on Form 10-K for its fiscal year ended December 31, 1995. Price Waterhouse LLP has made a review, and not an audit, of the unaudited condensed consolidated financial statements of the Company for the three-month periods ended March 31, 1996 and 1995 (based on procedures adopted by the American Institute of Certified Public Accountants) as set forth in their separate report dated April 24, 1996, which is included as an exhibit to this Form 10-Q. This report is not a "report" within the meaning of Sections 7 and 11 of the Securities Act of 1933, and the independent accountant's liability under Section 11 does not extend to it. Certain reclassifications have been made in the 1995 financial statements to conform to the classifications used in the current year. B. Information on Business Segments The Company operates in two business segments: homebuilding and financial services (which consists of mortgage lending and asset management operations). A summary of the Company's segment information is shown below (in thousands).
Three Months Ended March 31, 1996 1995 ----------- ----------- Homebuilding Home sales.................................. $ 186,023 $ 182,064 Land sales.................................. 5,159 2,313 Other revenues.............................. 94 152 ----------- ----------- 191,276 184,529 ----------- ----------- Home cost of sales.......................... 160,816 157,015 Land cost of sales.......................... 4,932 1,993 Marketing................................... 11,982 11,117 General and administrative.................. 7,512 6,395 ----------- ----------- 185,242 176,520 ----------- ----------- Homebuilding Operating Profit........... 6,034 8,009 ----------- ----------- -6- Three Months Ended March 31, 1996 1995 ----------- ----------- Financial Services Mortgage Lending Revenues Interest revenues......................... $ 805 $ 693 Origination fees.......................... 1,389 1,074 Gains on sale of mortgage servicing....... 2,622 2,670 Gains (losses) on sale of mortgage loans, net..................................... 542 (336) Mortgage servicing and other.............. 386 566 Asset Management Revenues Management fees and other................. 1,059 1,483 Gains on sales of mortgage-related assets. 935 - - ----------- ----------- 7,738 6,150 ----------- ----------- General and Administrative Expenses Mortgage Lending............................ 2,122 1,784 Asset Management............................ 620 610 ----------- ----------- 2,742 2,394 ----------- ----------- Financial Services Operating Profit..... 4,996 3,756 ----------- ----------- Total Operating Profit........................... 11,030 11,765 ----------- ----------- Corporate Other revenues.............................. 232 413 Interest expense............................ (1,851) (2,839) General and administrative expense.......... (2,601) (3,127) ------------ ------------ Net Corporate Expenses.................. (4,220) (5,553) ----------- ----------- Income Before Income Taxes....................... $ 6,810 $ 6,212 =========== ===========
-7- C. Corporate and Homebuilding Interest Activity
Three Months Ended March 31, 1996 1995 ----------- ----------- (In thousands) Interest capitalized in homebuilding inventory, beginning of period.............................. $ 40,217 $ 42,478 Interest incurred................................... 7,774 8,989 Interest expensed................................... (1,851) (2,839) Previously capitalized interest included in cost of sales............................................ (5,798) (6,590) ----------- ----------- Interest capitalized in homebuilding inventory, end of period........................................ $ 40,342 $ 42,038 =========== =========== Interest capitalized in homebuilding inventory as a percent of homebuilding inventory................ 8.9% 9.1% =========== ===========
D. Stockholders' Equity On January 19, 1996, the Company repurchased 230,000 shares of MDC Common Stock at $7.13 per share, substantially completing a program authorized by the MDC Board of Directors to repurchase up to 1,100,000 shares of MDC Common Stock. During 1995, the Company repurchased 865,600 shares of Common Stock pursuant to this program at prices ranging from $5.88 to $6.50 per share ($6.32 per share average, including commissions). In April 1996, the Company repurchased 473,000 shares of MDC Common Stock for $7.13 per share from Spencer I. Browne (former President, Co-Chief Operating Officer and a director of the Company) pursuant to an agreement between Mr. Browne and the Company. -8- E. Earnings Per Share Primary earnings per share are based on the weighted-average number of common and common equivalent shares outstanding during each period. The computation of fully diluted earnings per share also assumes the conversion into MDC Common Stock of all of the $28,000,000 outstanding principal amount of the 8 3/4% convertible subordinated notes due December 2005 (the "Convertible Notes") at a conversion price of $7.75 per share of MDC Common Stock. The primary and fully diluted earnings per share calculations are shown below (in thousands, except per share amounts).
Three Months Ended March 31, 1996 1995 ----------- ----------- Primary Earnings Per Share Calculation Net Income................................................... $ 4,324 $ 4,068 =========== =========== Weighted-average shares outstanding.......................... 19,284 19,128 Dilutive stock options....................................... 579 1,195 ----------- ----------- Total Weighted-Average Shares........................... 19,863 20,323 =========== =========== Primary Earnings Per Share................................... $ .22 $ .20 =========== =========== Fully Diluted Earnings Per Share Calculation Net Income................................................... $ 4,324 $ 4,068 Adjustment for interest on Convertible Notes, net of income tax benefit; conversion assumed........................... 402 384 ----------- ----------- Adjusted Net Income..................................... $ 4,726 $ 4,452 =========== =========== Weighted-average shares outstanding.......................... 19,284 19,128 Dilutive stock options....................................... 613 1,195 Shares issuable upon conversion of Convertible Notes; conversion assumed........................................ 3,613 3,613 ----------- ----------- Total Weighted-Average Shares........................... 23,510 23,936 =========== =========== Fully Diluted Earnings Per Share............................. $ .20 $ .19 =========== ===========
F. Supplemental Guarantor Information The Senior Notes are guaranteed unconditionally on an unsecured subordinated basis, jointly and severally (the "Guaranties"), by Richmond American Homes of California, Inc., Richmond American Homes of Maryland, Inc., Richmond American Homes of Nevada, Inc., Richmond American Homes of Virginia, Inc., Richmond American Homes, Inc., Richmond Homes, Inc. I and Richmond Homes, Inc. II (collectively, the "Guarantors"). The Guaranties are subordinated to all Guarantor Senior Indebtedness (as defined in the Senior Notes Indenture). Supplemental combining financial information follows. -9- Supplemental Combining Balance Sheet March 31, 1996 (In thousands)
Unconsolidated ---------------------------------------- Non- ASSETS Guarantor Guarantor Eliminating Consolidated MDC Subsidiaries Subsidiaries Entries MDC ------------ ------------ ------------ ------------ ------------ Corporate Cash and cash equivalents............... $ 10,013 $ - - $ - - $ - - $ 10,013 Investments in subsidiaries............. 208,029 - - 17,434 (225,463) - - Advances and notes receivable - Parent and subsidiaries...................... 227,304 6 20,157 (247,467) - - Property and equipment, net............. 9,549 - - - - - - 9,549 Deferred income taxes................... 8,669 - - - - - - 8,669 Deferred issue costs, net............... 9,746 - - - - - - 9,746 Other assets, net....................... 3,386 - - 351 - - 3,737 ------------ ------------ ------------ ------------ ------------ 476,696 6 37,942 (472,930) 41,714 ------------ ------------ ------------ ------------ ------------ Homebuilding Cash and cash equivalents............... 6 10,067 1 - - 10,074 Home sales and other accounts receivable............................ - - 28,468 - - (8,758) 19,710 Investments and marketable securities, net................................... 6,560 - - - - - - 6,560 Inventories, net Housing completed or under construction........................ - - 279,507 - - - - 279,507 Land and land under development......................... - - 144,390 28,417 (1,005) 171,802 Prepaid expenses and other assets ...... 3,411 38,092 - - - - 41,503 ------------ ------------ ------------ ------------ ------------ 9,977 500,524 28,418 (9,763) 529,156 ------------ ------------ ------------ ------------ ------------ Financial Services Cash and cash equivalents............... - - - - 1,448 - - 1,448 Accrued interest and other assets ...... - - - - 4,304 - - 4,304 Mortgage loans held in inventory ....... - - - - 50,956 - - 50,956 Mortgage Collateral, net of mortgage-backed bonds, and related assets and liabilities................ - - - - 3,925 - - 3,925 ------------ ------------ ------------ ------------ ------------ - - - - 60,633 - - 60,633 ------------ ------------ ------------ ------------ ------------ Total Assets...................... $ 486,673 $ 500,530 $ 126,993 $ (482,693) $ 631,503 ============ ============ ============ ============= ============
-10- Supplemental Combining Balance Sheet March 31, 1996 (In thousands)
(continued) Unconsolidated ---------------------------------------- Non- LIABILITIES Guarantor Guarantor Eliminating Consolidated MDC Subsidiaries Subsidiaries Entries MDC ------------ ------------ ------------ ------------ ------------ Corporate Accounts payable and accrued expenses... $ 20,339 $ - - $ 452 $ - - $ 20,791 Advances and notes payable - Parent and subsidiaries.......................... 10,715 217,171 27,891 (255,777) - - Income taxes payable.................... 8,564 - - - - - - 8,564 Notes payable........................... 3,525 - - - - - - 3,525 Senior Notes, net....................... 187,572 - - - - - - 187,572 Subordinated notes, net................. 38,222 - - - - - - 38,222 ----------- ----------- ----------- ------------ ----------- 268,937 217,171 28,343 (255,777) 258,674 ----------- ----------- ----------- ------------ ----------- Homebuilding Accounts payable and accrued expenses... 6,857 81,533 922 (2) 89,310 Lines of credit......................... - - 42,359 - - - - 42,359 Notes payable........................... 3,176 1,657 3,468 - - 8,301 ----------- ----------- ----------- ------------ ----------- 10,033 125,549 4,390 (2) 139,970 ----------- ----------- ----------- ------------ ----------- Financial Services Accounts payable and accrued expenses... - - - - 18,903 (8,760) 10,143 Line of credit.......................... - - - - 15,013 - - 15,013 ----------- ----------- ----------- ------------ ----------- - - - - 33,916 (8,760) 25,156 ----------- ----------- ----------- ------------ ----------- Total Liabilities................. 278,970 342,720 66,649 (264,539) 423,800 ----------- ----------- ----------- ------------ ----------- STOCKHOLDERS' EQUITY Preferred stock......................... - - - - 10 (10) - - Common Stock............................ 226 19 81 (100) 226 Additional paid-in capital.............. 135,884 144,756 224,914 (369,670) 135,884 Retained earnings....................... 91,595 13,035 (164,652) 151,617 91,595 Less treasury stock..................... (20,002) - - (9) 9 (20,002) ----------- ----------- ----------- ------------ ----------- Total Stockholders' Equity........ 207,703 157,810 60,344 (218,154) 207,703 ----------- ----------- ----------- ------------ ----------- Total Liabilities and Stockholders' Equity............ $ 486,673 $ 500,530 $ 126,993 $ (482,693) $ 631,503 =========== =========== =========== ============= ===========
-11- Supplemental Combining Balance Sheet December 31, 1995 (In thousands)
Unconsolidated --------------------------------------- Non- ASSETS Guarantor Guarantor Eliminating Consolidated MDC Subsidiaries Subsidiaries Entries MDC ------------ ------------ ------------ ------------ ------------ Corporate Cash and cash equivalents.............. $ 10,290 $ - - $ - - $ - - $ 10,290 Investments in subsidiaries............ 303,694 - - 17,434 (321,128) - - Advances and notes receivable - Parent and subsidiaries..................... 210,656 33 21,550 (232,239) - - Property and equipment, net............ 9,550 - - - - - - 9,550 Deferred income taxes.................. 13,730 - - - - - - 13,730 Deferred issue costs, net.............. 9,931 - - - - - - 9,931 Other assets, net...................... 3,730 - - 100 - - 3,830 ---------- ---------- ---------- ------------ ---------- 561,581 33 39,084 (553,367) 47,331 ---------- ---------- ---------- ------------ ---------- Homebuilding Cash and cash equivalents.............. 6 5,054 36 - - 5,096 Home sales and other accounts receivable........................... - - 37,726 - - (11,534) 26,192 Investments and marketable securities, net.................................. 6,481 - - - - - - 6,481 Inventories, net Housing completed or under construction....................... - - 265,205 - - - - 265,205 Land and land under development...... - - 150,531 27,676 (1,247) 176,960 Prepaid expenses and other assets...... 3,633 38,453 25 - - 42,111 ---------- ---------- ---------- ------------ ---------- 10,120 496,969 27,737 (12,781) 522,045 ---------- ---------- ---------- ------------ ---------- Financial Services Cash and cash equivalents.............. - - - - 5,409 - - 5,409 Accrued interest and other assets...... - - - - 3,129 - - 3,129 Mortgage loans held in inventory....... - - - - 53,153 - - 53,153 Mortgage Collateral, net of mortgage-backed bonds, and related assets and liabilities............... - - - - 3,744 - - 3,744 ---------- ---------- ---------- ------------ ---------- - - - - 65,435 - - 65,435 ---------- ---------- ---------- ------------ ---------- Total Assets..................... $ 571,701 $ 497,002 $ 132,256 $ (566,148) $ 634,811 ========== ========== ========== ============ ==========
-12- Supplemental Combining Balance Sheet December 31, 1995 (In thousands)
(continued) Unconsolidated --------------------------------------- Non- LIABILITIES Guarantor Guarantor Eliminating Consolidated MDC Subsidiaries Subsidiaries Entries MDC ------------ ------------ ------------ ------------ ------------ Corporate Accounts payable and accrued expenses.... $ 17,897 $ - - $ 361 $ - - $ 18,258 Advances and notes payable - Parent and Subsidiaries........................... 98,525 210,754 20,434 (329,713) - - Income taxes payable..................... 11,930 - - - - - - 11,930 Notes payable............................ 3,537 - - - - - - 3,537 Senior Notes, net........................ 187,525 - - - - - - 187,525 Subordinated notes, net.................. 38,221 - - - - - - 38,221 ----------- ----------- ----------- ------------ ----------- 357,635 210,754 20,795 (329,713) 259,471 ----------- ----------- ----------- ------------ ----------- Homebuilding Accounts payable and accrued expenses.... 5,403 75,831 924 6 82,164 Lines of credit.......................... - - 43,490 - - - - 43,490 Notes payable............................ 3,630 3,192 3,749 - - 10,571 ----------- ----------- ----------- ------------ ----------- 9,033 122,513 4,673 6 136,225 ----------- ----------- ----------- ------------ ----------- Financial Services Accounts payable and accrued expenses.... - - - - 23,655 (11,563) 12,092 Line of credit........................... - - - - 21,990 - - 21,990 ----------- ----------- ----------- ------------ ----------- - - - - 45,645 (11,563) 34,082 ----------- ----------- ----------- ------------ ----------- Total Liabilities.................. 366,668 333,267 71,113 (341,270) 429,778 ----------- ----------- ----------- ------------ ----------- STOCKHOLDERS' EQUITY Preferred stock.......................... - - - - 10 (10) - - Common Stock............................. 226 19 82 (101) 226 Additional paid-in capital............... 136,022 144,756 224,914 (369,670) 136,022 Retained earnings........................ 87,476 18,960 (163,854) 144,894 87,476 Less treasury stock...................... (18,691) - - (9) 9 (18,691) ----------- ----------- ----------- ------------ ----------- Total Stockholders' Equity......... 205,033 163,735 61,143 (224,878) 205,033 ----------- ----------- ----------- ------------ ----------- Total Liabilities and Stockholders' Equity............. $ 571,701 $ 497,002 $ 132,256 $ (566,148) $ 634,811 =========== =========== =========== ============ ===========
-13- Supplemental Combining Statements of Income (In thousands)
Unconsolidated ---------------------------------------- Non- Guarantor Guarantor Eliminating Consolidated MDC Subsidiaries Subsidiaries Entries MDC ------------ ------------ ------------ ------------ ------------ THREE MONTHS ENDED MARCH 31, 1996 REVENUES Homebuilding............................. $ 79 $ 191,194 $ 3 $ - - $ 191,276 Financial Services....................... - - - - 7,738 - - 7,738 Corporate................................ 217 6 9 - - 232 Equity in earnings of subsidiaries....... 5,591 - - - - (5,591) - - ----------- ----------- ----------- ----------- ----------- Total Revenues..................... 5,887 191,200 7,750 (5,591) 199,246 ----------- ----------- ----------- ----------- ----------- COSTS AND EXPENSES Homebuilding............................. 418 184,581 168 75 185,242 Financial Services....................... - - - - 2,742 - - 2,742 Corporate general and administrative..... 2,594 - - 7 - - 2,601 Corporate and homebuilding interest............................... (3,935) 5,048 703 35 1,851 ----------- ----------- ----------- ----------- ----------- Total Expenses..................... (923) 189,629 3,620 110 192,436 ----------- ----------- ----------- ----------- ----------- Income before income taxes.................. 6,810 1,571 4,130 (5,701) 6,810 Provision for income taxes.................. 2,486 626 1,678 (2,304) 2,486 ----------- ----------- ----------- ----------- ----------- NET INCOME.................................. $ 4,324 $ 945 $ 2,452 $ (3,397) $ 4,324 =========== =========== =========== =========== =========== THREE MONTHS ENDED MARCH 31, 1995 REVENUES Homebuilding............................. $ 33 $ 184,802 $ 91 $ (397) $ 184,529 Financial Services....................... - - - - 6,150 - - 6,150 Corporate................................ 413 - - - - - - 413 Equity in earnings of subsidiaries....... 6,000 1,196 - - (7,196) - - ----------- ----------- ----------- ----------- ----------- Total Revenues..................... 6,446 185,998 6,241 (7,593) 191,092 ----------- ----------- ----------- ----------- ----------- COSTS AND EXPENSES Homebuilding............................. 546 175,850 124 - - 176,520 Financial Services....................... - - - - 2,394 - - 2,394 Corporate general and administrative......................... 3,092 - - 35 - - 3,127 Corporate and homebuilding interest............................... (3,404) 5,959 740 (456) 2,839 ----------- ----------- ----------- ----------- ----------- Total Expenses..................... 234 181,809 3,293 (456) 184,880 ----------- ----------- ----------- ----------- ----------- Income before income taxes.................. 6,212 4,189 2,948 (7,137) 6,212 Provision for income taxes.................. 2,144 1,593 913 (2,506) 2,144 ----------- ----------- ----------- ----------- ----------- NET INCOME.................................. $ 4,068 $ 2,596 $ 2,035 $ (4,631) $ 4,068 =========== =========== =========== =========== ===========
-14- Supplemental Combining Statement of Cash Flows Three Months Ended March 31, 1996 (In thousands)
Unconsolidated ---------------------------------------- Non- Guarantor Guarantor Eliminating Consolidated MDC Subsidiaries Subsidiaries Entries MDC ------------ ------------ ------------ ------------ ------------ NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES............................... $ 73,593 $ 1,550 $ (4,003) $ (58,708) $ 12,432 ----------- ----------- ----------- ----------- ----------- INVESTING ACTIVITIES Net Proceeds From Mortgage-Related Assets And Liabilities.......................... - - - - 693 - - 693 Affiliate Notes Receivable.................. 16,648 (27) (1,393) (15,228) - - Other, net.................................. (299) 322 (54) - - (31) ----------- ----------- ----------- ----------- ----------- Net Cash Provided By (Used In) Investing Activities............................... 16,349 295 (754) (15,228) 662 ----------- ----------- ----------- ----------- ----------- FINANCING ACTIVITIES Net Increase (Reduction) In Borrowings From Parent and Subsidiaries.................. (87,810) 6,417 7,457 73,936 - - Lines of Credit Advances............................... - - 179,344 - - - - 179,344 Principal payments..................... - - (180,475) (6,977) - - (187,452) Notes Payable Borrowings............................. - - 480 - - - - 480 Principal payments..................... (453) (2,598) 281 - - (2,770) Treasury Stock Repurchases.................. (1,645) - - - - - - (1,645) Dividend Payments........................... (576) - - - - - - (576) Other, net.................................. 265 - - - - - - 265 ----------- ----------- ----------- ----------- ----------- Net Cash Provided By (Used In) Financing Activities............................... (90,219) 3,168 761 73,936 (12,354) ----------- ----------- ----------- ----------- ----------- Net Increase (Decrease) In Cash And Cash Equivalents.............................. (277) 5,013 (3,996) - - 740 Cash And Cash Equivalents Beginning Of Period...................... 10,296 5,054 5,445 - - 20,795 ----------- ----------- ----------- ----------- ----------- End Of Period............................ $ 10,019 $ 10,067 $ 1,449 $ - - $ 21,535 =========== =========== =========== =========== ===========
-15- Supplemental Combining Statement of Cash Flows Three Months Ended March 31, 1995 (In thousands)
Unconsolidated ---------------------------------------- Non- Guarantor Guarantor Eliminating Consolidated MDC Subsidiaries Subsidiaries Entries MDC ------------ ------------ ------------ ------------ ------------ NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES............................... $ (23,026) $ (21,079) $ 6,233 $ 42,187 $ 4,315 ----------- ----------- ----------- ----------- ----------- INVESTING ACTIVITIES Net Proceeds From Mortgage-Related Assets And Liabilities.............................. - - - - (92) - - (92) Affiliate Notes Receivable.................. 14,257 - - - - (14,257) - - Other, net.................................. - - - - 368 - - 368 ----------- ----------- - ----------- ----------- - ----------- Net Cash Provided By Investing Activities................................ 14,257 - - 276 (14,257) 276 ----------- ----------- ----------- ----------- ----------- FINANCING ACTIVITIES Net Increase (Reduction) In Borrowings From Parent and Subsidiaries............. (8,545) 23,038 13,437 (27,930) - - Lines of Credit Advances............................... - - 155,308 - - - - 155,308 Principal payments..................... - - (152,865) (19,721) - - (172,586) Notes Payable Borrowings............................. - - 1,075 - - - - 1,075 Principal payments..................... (12) (7,243) (1,060) - - (8,315) Dividend Payments........................... (387) - - - - - - (387) Other, net.................................. 279 - - - - - - 279 ----------- ----------- ----------- ----------- ----------- Net Cash Provided By (Used In) Financing Activities...................... (8,665) 19,313 (7,344) (27,930) (24,626) ----------- ----------- ----------- ----------- ----------- Net Decrease In Cash And Cash Equivalents... (17,434) (1,766) (835) - - (20,035) Cash And Cash Equivalents Beginning Of Period...................... 31,210 9,656 2,698 - - 43,564 ----------- ----------- ----------- ----------- ----------- End Of Period............................ $ 13,776 $ 7,890 $ 1,863 $ - - $ 23,529 =========== =========== =========== =========== ===========
-16- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. INTRODUCTION MDC is the seventh largest homebuilder in the United States based on homebuilding revenues. The Company operates in two segments: homebuilding and financial services. In its homebuilding segment, MDC is engaged in the construction and sale of residential housing in (i) metropolitan Denver and Colorado Springs, Colorado; (ii) northern Virginia and suburban Maryland (the "Mid-Atlantic"); (iii) Northern and Southern California; (iv) Phoenix and Tucson, Arizona; and (v) Las Vegas, Nevada. In its financial services segment, (i) HomeAmerican Mortgage Corporation (a wholly owned subsidiary of M.D.C. Holdings, Inc., "HomeAmerican") provides mortgage loans primarily to the Company's home buyers and, to a lesser extent, to others (the mortgage lending operations); and (ii) Financial Asset Management LLC (an indirect subsidiary of M.D.C. Holdings, Inc., "FAMC") manages, by contract, the operations of two publicly traded real estate investment trusts (each, a "REIT") (the asset management operations). RESULTS OF OPERATIONS The table below summarizes MDC's results of operations during each of the periods presented (in thousands, except per share amounts). Three Months Ended March 31, 1996 1995 ----------- ----------- Revenues.......................................... $ 199,246 $ 191,092 Income Before Income Taxes........................ 6,810 6,212 Net Income........................................ 4,324 4,068 Earnings Per Share: Primary...................................... .22 .20 Fully diluted................................ .20 .19 Revenues for the first quarter of 1996 reached the highest first quarter level in the Company's history and increased 4% compared with the same period in 1995, primarily due to an increase in the number of homes closed. The Company closed 1,051 homes during the first quarter of 1996, the highest level of first quarter home closings in the Company's history and a 4% increase over the 1,008 homes closed in the same period in 1995. Income before income taxes and net income were higher in the first quarter of 1996 compared with the first quarter of 1995 as a result of (i) higher operating profit from the Company's financial services segment, primarily due to larger gains on sales of mortgage loans and mortgage-related assets in 1996; (ii) lower interest expense as the Company had fewer completed unsold homes in the first quarter of 1996 compared with 1995; and (iii) lower corporate general and administrative expenses in 1996. These increases to income partially were offset by a reduction in operating profit from the Company's homebuilding operations in the first quarter of 1996 compared with the first quarter of 1995 primarily resulting from (i) lower operating profit from the Company's Mid-Atlantic operations due to fewer home closings and a decline in Home Gross Margins (as hereinafter defined); (ii) lower operating profit from the Company's Colorado operations due to fewer home closings at lower average selling prices; and (iii) increased marketing and general and administrative expenses incurred in support of the Company's expanding homebuilding activities. -17- Impact of Home Mortgage Interest Rates. The Company's homebuilding and mortgage lending operations are dependent upon the availability and cost of mortgage financing. Increases in home mortgage interest rates (i) may reduce the demand for homes and home mortgages; and (ii) generally will reduce home mortgage refinancing activity. In October 1993, home mortgage interest rates reached their lowest levels in 25 years, dropping to an average of 6.7% on a 30-year, fixed-rate mortgage. From October 1993 to December 1994, home mortgage interest rates increased to as high as 9.25%. During this period of rising interest rates, the Company experienced a general weakening in demand for new homes in most of its markets. This weakened demand, along with a general buildup in unsold homes under construction by the Company and other homebuilders, adversely affected the Company's home sales and Home Gross Margins on such sales in 1995, particularly in the first quarter. Since December 1994, home mortgage interest rates generally declined to as low as 6.9% in February 1996. The decline during 1995 and early 1996, among other things, led to improved home sales levels in the last three quarters of 1995 and the first quarter of 1996 compared with the same periods in the prior year. However, Home Gross Margins have not recovered as quickly, as the Company and other homebuilders in the Company's markets have continued to offer increased incentives to sell homes, especially unsold homes under construction. Mortgage interest rates have recently increased to as high as 8.1%. The Company is unable to predict the extent to which recent or future increases in home mortgage interest rates will affect adversely the Company's operating activities and results of operations. -18- Homebuilding Segment. The table below sets forth certain information with respect to the Company's homes sold, closed and delivered during each of the periods presented, as well as units sold under a contract but not delivered ("Backlog") and active subdivisions at each date shown (dollars in thousands).
Three Months, Ended March 31, 1996 1995 ----------- ------------ Home sales revenues............................... $ 186,023 $ 182,064 Operating profit.................................. $ 6,034 $ 8,009 Average selling price per housing unit............ $ 177.0 $ 180.6 Home Gross Margins................................ 13.6% 13.8% Homes (units) Sales contracted, net Colorado................................... 668 540 Mid-Atlantic............................... 427 330 California................................. 249 160 Arizona.................................... 326 178 Nevada..................................... 51 25 ------------ ------------ Total................................ 1,721 1,233 ============ ============ Closed and delivered Colorado................................... 437 480 Mid-Atlantic............................... 157 191 California................................. 195 126 Arizona.................................... 216 184 Nevada..................................... 46 27 ----------- ------------ Total................................ 1,051 1,008 =========== ============
March 31, December 31, March 31, 1996 1995 1995 ----------- ------------ ----------- Backlog (units) Colorado................................... 889 658 670 Mid-Atlantic............................... 545 275 476 California................................. 229 175 135 Arizona.................................... 344 234 251 Nevada..................................... 74 13 27 ----------- ------------ ----------- Total................................ 2,081 1,355 1,559 =========== ============ =========== Estimated sales value............................. $ 370,100 $ 243,000 $ 288,700 =========== ============ =========== Active Subdivisions Colorado................................... 51 49 52 Mid-Atlantic............................... 49 48 41 California................................. 20 23 16 Arizona.................................... 24 22 20 Nevada..................................... 6 2 3 ----------- ------------ ----------- Total................................ 150 144 132 =========== ============ ===========
-19- Home Sales Revenues and Homes Closed and Delivered. Home sales revenues for the three months ended March 31, 1996 reached their highest first quarter level in the Company's history, representing an increase of 2% over home sales revenues for the same period in 1995, primarily as a result of increased home closings, partially offset by reduced average selling prices on homes closed. The Company experienced increases in home closings in (i) California (a 55% increase) due to the Company's acquisition and opening of several new subdivisions in Southern California, including five active subdivisions in Paloma del Sol, a master planned community in Temecula, Riverside County, acquired from Mesa Homes in July 1995; (ii) Arizona (a 17% increase) primarily due to continued expansion of the Company's operations in Phoenix; and (iii) Nevada (a 70% increase) as the Company began closing homes in four active subdivisions acquired from Longford Homes in February 1996. The Company's Mid-Atlantic and Colorado operations delivered fewer homes in the first quarter of 1996 compared with the same period in 1995. Home closings in the Company's Mid-Atlantic market adversely were impacted by lower home sales Backlog at the end of 1995 than at the end of 1994 and adverse weather conditions in the first three months of 1996 which delayed construction and development activities and the delivery of certain homes. Such construction and development delays will also impair the delivery of some homes originally scheduled to close in the second quarter of 1996. Home closings were lower in Colorado primarily due to the favorable impact in the first quarter of 1995 of the sale and delivery of unsold homes under construction at December 31, 1994 which were considered to be in excess of the Company's plan and needs. Average Selling Price Per Housing Unit. The decrease in the average selling price per housing unit in the first quarter of 1996 compared with the first quarter of 1995 reflects the impact of management's continuing emphasis on offering lower-priced, more affordable homes primarily marketed to first-time and first-time move-up home buyers. This strategy resulted in lower average sales prices in the first quarter of 1996 compared with prices in the first quarter of 1995 in (i) Colorado, Maryland and Arizona; and (ii) Southern California and Nevada as the Company closed affordably priced homes in subdivisions acquired from Mesa Homes and Longford Homes, respectively. These decreases partially were offset by an increase in the average selling price in the Northern California market principally due to the mix of homes closed. The Company believes that its average selling price will be lower during the remainder of 1996 than in comparable periods in 1995 and could decline an additional two to three percent from the first quarter 1996 level. Home Gross Margins. Gross margins (home sales revenues less cost of goods sold, which primarily includes land and construction costs, capitalized interest, a reserve for warranty expense and financing costs) as a percent of home sales revenues ("Home Gross Margins") decreased slightly during the first quarter of 1996 compared with the first quarter of 1995. The 1996 first quarter decline largely was due to increased incentives offered to home buyers (i) in order to stimulate sales in view of weakening conditions in the Mid-Atlantic market; (ii) to counter increased competition in each of the Company's markets; and (iii) to continue to reduce the Company's older inventory of unsold homes under construction. Although the first quarter 1996 Home Gross Margins improved from the fourth quarter of 1995, the Company believes that further growth in Home Gross Margins over the next two quarters will be limited primarily due to the continued impact of increased incentives offered to home buyers. In addition, increases in, among other things, the costs of subcontracted labor, finished lots and building materials may affect adversely future Home Gross Margins to the extent that market conditions prevent the recovery of increased costs through higher sales prices. Home Sales and Backlog. Home sales increased 40% during the first quarter of 1996 compared with the first quarter of 1995 primarily due to a 14% increase in active subdivisions and a 29% increase -20- in home sales per active subdivision to 3.6 per month during the first quarter of 1996 compared with 2.8 per month during the same period in 1995. As a result of these strong sales, the Company's Backlog at March 31, 1996 increased to 2,081 homes, representing a 54% increase from a Backlog of 1,355 homes at December 31, 1995 and a 33% increase from 1,559 homes at March 31, 1995. These strong year-over-year increases in sales and Backlog are a result of increased sales in each of MDC's markets, particularly Southern California, Phoenix and Las Vegas due to the Company's continued expansion in these markets. Strong sales results also were experienced in Colorado and the Mid-Atlantic region fueled in part by the relatively low level of mortgage interest rates during the first quarter of 1996. Additionally, the Company increased the number of active subdivisions in the Mid-Atlantic region by 14% in the first quarter of 1996 compared with the same period in 1995. MDC expects approximately 70% of its March 31, 1996 Backlog to close under existing sales contracts during the remainder of 1996, assuming no significant change in interest rates. The Company's home sales in April 1996 totalled 457 units compared with 426 homes sold in April 1995. The Company is unable to predict if this trend of higher home sales in 1996 compared with 1995 will continue in the future, particularly in view of recent increases in mortgage interest rates. Marketing. Marketing expenses (which include, among other things, amortization of deferred marketing, model home expenses and sales commissions) totalled $11,982,000 for the first quarter of 1996 compared with $11,117,000 for the same period in 1995. This 8% increase during 1996 principally was due to (i) variable cost increases resulting from the increase in homebuilding revenues; and (ii) additional marketing-related salary, advertising and model home operation expenses incurred to support the Company's expanded operations and to stimulate sales in response to increased competition in each of its markets. General and Administrative. General and administrative expenses increased to $7,512,000 during the first quarter of 1996 compared with $6,395,000 during the same period in 1995 primarily due to additional costs incurred in support of the Company's expanded operations in Southern California, Phoenix and Las Vegas. Land Sales. Revenues from land sales totalled $5,159,000 and $2,313,000, respectively, for the first quarter of 1996 and 1995. The land sales for both periods primarily were in Colorado. Gross profits from these land sales were $227,000 and $320,000, respectively, for the first quarter of 1996 and 1995. First quarter 1996 land sales include a sale of approximately 54 acres of land held for future development or sale in the Company's Rock Creek Ranch development in Colorado for approximately $4,800,000, which generated gross profit of $234,000. The purchaser acquired the option to purchase this land in August 1995. -21- Land Inventory. The table below shows (in thousands) the carrying value of MDC's land and land under development in each of its homebuilding markets at March 31, 1996, December 31, 1995 and March 31, 1995.
March 31, December 31, March 31, 1996 1995 1995 ----------- ----------- ----------- Finished or currently under development Colorado............................... $ 29,009 $ 34,331 $ 42,033 Mid-Atlantic........................... 50,579 47,247 33,162 California............................. 18,451 26,694 32,642 Arizona................................ 23,247 20,586 22,073 Nevada................................. 10,011 4,559 6,414 ----------- ----------- ----------- Total.............................. 131,297 133,417 136,324 Held for future development or sale*........ 40,505 43,543 49,827 ----------- ----------- ----------- Total.............................. $ 171,802 $ 176,960 $ 186,151 =========== =========== ===========
*The substantial majority of the land held for future development or sale consists of unfinished lots located in Colorado which generally are in close proximity to projects currently being developed. In addition to its land inventory, the Company controls a portion of the land it will require for its homebuilding operations in future periods utilizing "rolling" option contracts. Generally, in a rolling option contract, the Company obtains the right to purchase finished lots in consideration for an option deposit (generally $50,000 to $200,000 per contract). In the event the Company elects not to purchase the finished lots within a specified period of time (generally, 5 to 20 lots per project per calendar quarter), the agreements limit the Company's loss to the option deposit, thereby limiting the Company's risk while preserving its liquidity. At March 31, 1996, 7,708 lots were controlled under rolling option agreements with $7,500,000 in total option deposits. Because of increased demand for finished lots in certain of the markets where the Company builds homes, the Company's ability to acquire lots using rolling options has been reduced or has become more expensive. -22- Financial Services Segment. Mortgage Lending Operations. The table below summarizes the results of HomeAmerican's operations during each of the periods presented (in thousands).
Three Months Ended March 31, 1996 1995 ----------- ----------- Gains from sales of mortgage servicing: Bulk........................................... $ 2,402 $ 2,218 Other.......................................... 220 452 Net interest income............................... 805 693 Origination fees.................................. 1,389 1,074 Gains (losses) on sales of mortgage loans......... 542 (336) Mortgage servicing and other...................... 386 566 General and administrative expenses............... (2,122) (1,784) ----------- ----------- Operating profit......................... $ 3,622 $ 2,883 =========== =========== Principal amount of originations and purchases: MDC home buyers.............................. $ 99,401 $ 77,743 Spot......................................... 13,333 6,017 Correspondent................................ 10,963 9,130 ----------- ----------- Total.................................... $ 123,697 $ 92,890 =========== =========== Capture Rate...................................... 65.4% 53.8% =========== ===========
March 31, December 31, March 31, 1996 1995 1995 ----------- ------------ ----------- Composition of Servicing Portfolio at End of Period: FHA insured/VA guaranteed...................... $ 96,946 $ 85,002 $ 208,981 Conventional................................... 347,959 401,809 416,409 ----------- ------------ ---------- Total Servicing Portfolio.......................... $ 444,905 $ 486,811 $ 625,390 =========== ============ ========== Salable Portion of Servicing Portfolio*............ $ 309,097 $ 429,328 $ 448,166 =========== ============ ==========
*Salable servicing portfolio at March 31, 1996 includes servicing originated prior to 1996 of $202,156. HomeAmerican's operating profit for the first quarter of 1996 increased compared with the same period in 1995 primarily due to the recording of gains on sales of mortgage loans totalling $542,000 in 1996, compared with losses totalling $336,000 in 1995. These increased gains primarily resulted from the Company's adoption in 1996 of SFAS 122 (as hereinafter defined). SFAS 122 requires the Company to allocate the cost of mortgage loans originated by HomeAmerican after January 1, 1996 between the mortgage loans and the right to service the mortgage loans, based on their relative values. Prior to 1996, the cost of mortgage loans originated by HomeAmerican was assigned to the mortgage loans, with no cost assigned to the servicing rights. The net effect of the adoption of SFAS 122, all other factors held constant, will be higher gains (or lower -23- losses) on sales of mortgage loans originated by HomeAmerican after January 1, 1996 and lower gains on sales of the related servicing rights, compared with gains on sales of mortgage loans and related servicing rights originated by HomeAmerican prior to January 1, 1996. The Company's adoption of SFAS 122 resulted in additional gains in the first quarter of 1996 of approximately $830,000 on the sale of mortgage loans which were originated and sold by HomeAmerican during such period. In addition, gains from the non-bulk sale of mortgage servicing rights in the first quarter of 1996 were reduced by $210,000 due to the allocation of mortgage loan costs to the servicing rights sold in accordance with the requirements of SFAS 122. Gains from bulk sales of mortgage servicing in the first quarter of 1996 were not impacted significantly by the adoption of SFAS 122 as the servicing rights sold primarily were originated by HomeAmerican prior to January 1, 1996. HomeAmerican's loan originations and purchases increased by 33% in the first quarter of 1996 compared with the same period in 1995 primarily due to increases in (i) the Company's home closings; (ii) HomeAmerican's "Capture Rate", or the number of mortgage loans originated for MDC home buyers as a percentage of total MDC home closings; and (iii) the dollar amount of spot originations primarily resulting from increased refinancing activity in view of lower mortgage interest rates. HomeAmerican opened origination facilities in Southern California and Nevada in late 1995 and February 1996, respectively, which favorably affected, and favorably will affect in the future, HomeAmerican's total originations and Capture Rate. HomeAmerican continues to benefit from the Company's homebuilding growth as MDC home buyers were the source of more than 80% of the principal amount of mortgage loans originated or purchased in 1996 and throughout 1995. Forward Sales Commitments. HomeAmerican's operations are affected by, among other things, changes in mortgage interest rates. HomeAmerican utilizes forward mortgage securities contracts to manage the interest rate risk on its fixed-rate mortgage loans owned and rate-locked mortgage loans in the pipeline. Such contracts are the only significant financial derivative instrument utilized by HomeAmerican. Asset Management Operations. The following table summarizes the results of the asset management operations during the periods presented (in thousands).
Three Months Ended March 31, 1996 1995 ----------- ----------- Management fees from REITs......................... $ 796 $ 637 Gains on sales of mortgage-related assets.......... 935 - - Other revenues, net................................ 263 846 General and administrative expenses................ (620) (610) ----------- ----------- Operating profit........................ $ 1,374 $ 873 =========== ===========
The Company currently does not anticipate making additional mortgage-related investments. As a result, future income from the asset management operations substantially will be dependent on management fees earned from two publicly traded REITs. At March 31, 1996, the REITs had approximately $151,500,000 in assets under management by the Company. -24- Other Operating Results. Interest Expense. Corporate and homebuilding interest incurred decreased by 14% to $7,774,000 for the first quarter of 1996 compared with $8,989,000 for the same period in 1995, primarily due to (i) lower average effective interest rates with respect to the Company's variable-rate bank lines of credit and project loans in 1996; and (ii) lower average outstanding borrowings during the first quarter of 1996 compared with the first quarter of 1995 as the Company had lower levels of completed unsold homes in the first quarter of 1996 compared with 1995. The portion of corporate and homebuilding interest which was capitalized (the Company capitalizes interest on its homebuilding inventories during the period of active development and through the completion of construction) during the first quarter of 1996 totalled $5,923,000, which was slightly lower than the $6,150,000 of interest capitalized in the final quarter of 1995. Corporate and homebuilding interest incurred but not capitalized is reflected as interest expense and totalled $1,851,000 for the first quarter of 1996 compared with $2,839,000 for the first quarter of 1995, reflecting the net impact of the $1,215,000 decrease in interest incurred, partially offset by the $227,000 decrease in interest capitalized. For a reconciliation of interest incurred, capitalized and expensed, see Note C to the Company's Condensed Consolidated Financial Statements. Corporate General and Administrative Expenses. Corporate general and administrative expenses totalled $2,601,000 during the three months ended March 31, 1996, compared with $3,127,000 during the first quarter of 1995. The decrease in the first quarter of 1996 primarily was due to an insurance settlement of $1,250,000 received in the first quarter of 1996 related to the recovery of certain homebuilding expenditures which were previously expensed, which more than offset increases in certain insurance costs and expenses incurred in connection with the Company's new national marketing initiative. Income Taxes. M.D.C. Holdings, Inc. and its wholly owned subsidiaries file a consolidated federal income tax return (an "MDC Consolidated Return"). Richmond Homes and its wholly owned subsidiaries filed a separate consolidated federal income tax return (each a "Richmond Homes Consolidated Return") from its inception (December 28, 1989) through February 2, 1994, the date Richmond Homes became a wholly owned subsidiary of MDC. MDC's overall effective income tax rates of 36.5% and 34.5%, respectively, for the first quarter of 1996 and 1995 differed from the federal statutory rate of 35%. These differences primarily were due to, among other things, (i) the impact of state income taxes; and (ii) in 1995, the realization of non-taxable income for financial reporting purposes for which no tax liability was recorded. In April 1995, the Company and the Internal Revenue Service (the "IRS") reached final agreement on the IRS examinations of (i) the MDC Consolidated Returns for the years 1984 and 1985; and (ii) the Richmond Homes Consolidated Returns for the years 1989 and 1990. These agreements had no material impact upon the Company's financial position or results of operations. The IRS has completed its examination of the MDC Consolidated Returns for the years 1986 through 1990 and has proposed adjustments that would shift the recognition of certain items of income and expense from one year to another ("Timing Adjustments"). To the extent taxable income in a prior -25- year is increased by proposed Timing Adjustments, taxable income may be reduced by a corresponding amount in other years; however, the Company would incur an interest charge as a result of such adjustment. The Company currently is protesting many of these proposed adjustments through the IRS appeals process. In the opinion of management, adequate provision has been made for any additional income taxes and interest which may result from the proposed adjustments; however, it is reasonably possible that the ultimate resolution could result in amounts which differ materially in the near-term from amounts provided. The IRS currently is examining the MDC and Richmond Homes Consolidated Returns for the years 1991, 1992 and 1993. No reports have been issued by the IRS in connection with these examinations. In the opinion of management, adequate provision has been made for additional income taxes and interest, if any, which may result from these examinations; however, it is reasonably possible that the ultimate resolution could result in amounts which differ materially in the near term from amounts provided. LIQUIDITY AND CAPITAL RESOURCES MDC uses its liquidity and capital resources to, among other things, (i) support its operations, including its inventories of homes, home sites and land; (ii) provide working capital; and (iii) provide mortgage loans for its home buyers. Liquidity and capital resources are generated internally from operations and from external sources. Capital Resources. The Company's capital structure is a combination of (i) permanent financing, represented by Stockholders' Equity; (ii) long-term financing, represented by publicly traded Senior Notes and subordinated notes due primarily in 2003 and 2005, respectively; and (iii) current financing, primarily lines of credit, as discussed below. The Company believes that its current financial condition is both balanced to fit its current operational structure and adequate to satisfy its current and near-term capital requirements. The Company's debt-to-equity ratio improved to 1.42 to 1 at March 31, 1996 compared with 1.49 to 1 at December 31, 1995. The improvement primarily is a result of (i) the earnings of the Company, which contributed to the increase in the Company's Stockholders' Equity at March 31, 1996; and (ii) the use of internally generated cash flow to reduce debt. Based upon its current business plan, MDC anticipates the acquisition of various parcels of finished lots and partially developed land for use in its future homebuilding operations during the remainder of 1996. The Company currently intends to acquire a portion of the land inventories required in future periods through takedowns of lots subject to "rolling" options entered into in prior periods and under new "rolling" options. The use of "rolling" options lessens the Company's land-related risk and improves liquidity. Based upon its current capital resources and additional liquidity available under existing credit relationships, MDC anticipates that it has adequate financial resources to satisfy its current and near-term capital requirements. The Company believes that it can meet its long-term capital needs (including, among other things, meeting future debt payments and refinancing or paying off other long-term debt as it becomes due) from operations and external financing sources, assuming that no significant adverse -26- changes in the Company's business occur as a result of the various risk factors described elsewhere herein, in particular, increases in interest rates. Lines of Credit and Notes Payable. Homebuilding. MDC's homebuilding bank line of credit facilities at March 31, 1996 aggregated $158,500,000. At March 31, 1996, $42,359,000 was borrowed and an additional $113,079,000 was collateralized and available to be borrowed under the bank lines of credit. All such agreements were paid in full and cancelled in April 1996 as discussed below. In April 1996, the Company entered into a $150,000,000 unsecured revolving credit agreement maturing June 30, 2000, although a term-out may commence earlier under certain circumstances. The new unsecured line of credit will result in reduced administrative expenses and related direct costs compared with levels incurred under the secured line of credit agreements. Initial advances at closing of $40,000,000 primarily were used to retire the borrowings under the cancelled bank lines of credit collateralized by homebuilding inventories. Financial Services. To provide funds to originate and purchase mortgage loans and to finance these mortgage loans on a short-term basis, HomeAmerican utilizes its mortgage lending bank line of credit (the "Mortgage Line"). These mortgage loans are pooled into GNMA, FNMA and FHLMC pools or retained as whole loans and subsequently are sold in the open market on a "spot" basis or pursuant to mortgage loan sale commitments. During the first quarter of 1996 and 1995, respectively, HomeAmerican sold $125,452,000, and $85,350,000, respectively, principal amount of mortgage loans and mortgage certificates to unaffiliated purchasers. The aggregate amount available under the Mortgage Line at March 31, 1996 was $51,000,000. Borrowings under the Mortgage Line are collateralized by mortgage loans and mortgage-backed certificates and are limited to the value of "eligible collateral" (as defined in the credit agreement). At March 31, 1996, $15,013,000 was borrowed and an additional $23,557,000 was collateralized and available to be borrowed under the Mortgage Line. The Company also has additional borrowing capability with available repurchase agreements. General. The Company's line of credit and notes payable require compliance with certain covenants, representations and warranties. Currently, the Company believes that it is in compliance with these covenants, representations and warranties. Consolidated Cash Flow. During the first quarter of 1996, the Company generated $12,432,000 in cash from operating activities. The Company primarily used this cash to pay down lines of credit and notes payable by $10,398,000 and to repurchase, for $1,645,000, 230,000 shares of MDC Common Stock at $7.13 per share. This stock repurchase substantially completed an announced program to repurchase up to 1,100,000 shares of MDC Common Stock. During the first quarter of 1995, MDC used $20,035,000 of cash and other internally generated funds totalling $4,483,000 to pay down lines of credit and notes payable by $24,518,000. -27- ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"). The Company's adoption of SFAS 121 on January 1, 1996 did not have a material impact on the results of operations or financial position of the Company upon adoption. In May 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 122 "Accounting for Mortgage Servicing Rights an Amendment of FASB Statement No. 65" ("SFAS 122"). As previously discussed, the Company adopted this statement effective January 1, 1996. OTHER Forward-Looking Statements. Some of the statements in this Form 10-Q Quarterly Report, as well as statements made by the Company in periodic press releases, oral statements made by the Company's officials to analysts and shareowners in the course of presentations about the Company and conference calls following quarterly earnings releases, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Such factors include, among other things, (i) general economic and business conditions; (ii) interest rate changes; (iii) competition; (iv) the availability and cost of land and other raw materials used by the Company in its homebuilding operations; (v) unanticipated demographic changes; (vi) shortages of labor; (vii) weather related slowdowns; (viii) slow growth initiatives; (ix) building moratoria; (x) governmental regulation including environmental laws; and (xi) other factors over which the Company has little or no control. -28- M.D.C. HOLDINGS, INC. FORM 10-Q PART II ITEM 1. LEGAL PROCEEDINGS. Expansive Soils Cases. On October 21, 1994, a complaint was served on several of the Company's subsidiaries in an action initiated by six homeowners in Highlands Ranch, Colorado. On January 26, 1995, counsel for the Company accepted service of two additional complaints by a homeowner in the Stonegate subdivision in Douglas County, Colorado and by a homeowner in the Rock Creek development located in Boulder County, Colorado. On September 12, 1995, the Company was served with a similar complaint relating to homeowners in Douglas County, Colorado. The complaints, each of which seek certification of a class action, purport to allege substantially identical claims relating to the construction of homes on lots with expansive soils, including negligence, breach of express and implied warranties, violation of the Colorado Consumer Protection Act, non-disclosure and a claim for exemplary damages. The homeowners in each complaint seek, individually and on behalf of the alleged class, recovery in unspecified amounts including actual damages, statutory damages, exemplary damages and treble damages. The Company has filed a response to each of the complaints and to initial discovery requests in the first filed case. The ultimate outcome of the cases is uncertain at this time; however, management does not believe that the outcome of these matters will have a material adverse effect on the financial condition or results of operations of the Company. The Company has notified its insurance carriers of these complaints and currently is reviewing with the carriers how the Company will proceed. The insurance carriers providing primary coverage have agreed to defend the Company in the cases subject to reservations of rights. Other. The Company and certain of its subsidiaries and affiliates have been named as defendants in various other claims, complaints and legal actions arising in the normal course of business. Because of the nature of the homebuilding business, and in the ordinary course of the Company's operations, the Company from time to time may be subject to product liability claims, including claims similar to those discussed under the description of the Expansive Soils Cases, above. In the opinion of management, the outcome of these matters will not have a material adverse effect upon the financial condition or results of operations of the Company. The Company is not aware of any litigation, matter or pending claim against the Company which would result in material contingent liabilities related to environmental hazards or asbestos. - -------- Colescott, et al vs. Richmond Homes Limited, et al. in the District Court, Douglas County, State of Colorado, Civil Action No. 94 CV 352, Division 2. Moore vs. Richmond Homes Limited, et al. in the District Court, Douglas County, State of Colorado, Civil Action No. 95 CV 321, Division 2. Constantini vs. Richmond Homes Limited, et al. in the District Court, Boulder County, State of Colorado, Civil Action No. 95 CV 1052, Division 3. Rodenburg vs. Richmond Homes Limited, et al.in the District Court, Douglas County, State of Colorado, Civil Action No. 95 CV 298, Division 1. -29- ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREOWNERS. No matters were submitted to shareowners during the first quarter of 1996. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibit: 4.1 Credit Agreement dated as of April 10, 1996 among Richmond American Homes of California, Inc., Richmond American Homes of Maryland, Inc., Richmond American Homes of Nevada, Inc., Richmond American Homes of Virginia, Inc., Richmond American Homes, Inc., Richmond Homes, Inc. I and Richmond Homes, Inc. II as Borrowers and the Banks Named Herein as Banks and Bank One, Arizona, NA as Agent (the "Credit Agreement"). 4.2 Schedule "2.21" to Credit Agreement-- Terms Relating to Last 24 Months of Term/No Extension. 4.3 Schedule "2.22" to Credit Agreement-- Terms Relating to Conversion Period. 4.4 Guaranty of Credit Agreement dated as of April 10, 1996 by M.D.C. Holdings, Inc. 4.5 Form of Promissory Note of Richmond American Homes of California, Inc., Richmond American Homes of Maryland, Inc., Richmond American Homes of Nevada, Inc., Richmond American Homes of Virginia, Inc., Richmond American Homes, Inc., Richmond Homes, Inc. I and Richmond Homes, Inc. II as Makers dated April __, 1996. 27 Financial Data Schedule. 28 Form of Independent Accountants' Review Report dated April 24, 1996. (b) Reports on Form 8-K: No Current Reports on Form 8-K were filed by the Registrant during the period covered by this Quarterly Report on Form 10-Q. -30- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: May 14, 1996 M.D.C. HOLDINGS, INC. (Registrant) By: /s/ Paris G. Reece III --------------------------- Paris G. Reece III, Senior Vice President, Chief Financial Officer and Principal Accounting Officer -31- EX-4.1 2 Exhibit 4.1 CREDIT AGREEMENT DATED AS OF APRIL 10, 1996 AMONG RICHMOND AMERICAN HOMES OF CALIFORNIA, INC. RICHMOND AMERICAN HOMES OF MARYLAND, INC. RICHMOND AMERICAN HOMES OF NEVADA, INC. RICHMOND AMERICAN HOMES OF VIRGINIA, INC. RICHMOND AMERICAN HOMES, INC. RICHMOND HOMES, INC. I and RICHMOND HOMES, INC. II as Borrowers AND THE BANKS NAMED HEREIN as Banks AND BANK ONE, ARIZONA, NA as Agent TABLE OF CONTENTS Page ARTICLE I DEFINITIONS.......................................... 1 ARTICLE II THE CREDITS.......................................... 22 2.1 Commitment........................................... 22 2.2 Required Payments.................................... 22 2.3 Ratable Loans........................................ 23 2.4 Types of Advances.................................... 23 2.5 Fees; Reduction in Commitment........................ 23 2.6 Minimum Amount of Each Advance....................... 25 2.7 Optional Principal Payments.......................... 25 2.8 Method of Selecting Types and Interest Periods for New Advances........................... 26 2.9 Conversion and Continuation of Outstanding Advances.. 27 2.10 Changes in Interest Rate, etc........................ 28 2.11 Determination of Applicable Margins and Applicable Unused Commitment Rate............................. 28 2.12 Rates Applicable After Event of Default.............. 29 2.13 Method of Payment.................................... 29 2.14 Notes; Telephonic Notices............................ 30 2.15 Interest Payment Dates; Interest Basis............... 30 2.16 Notification of Advances, Interest Rates, Prepayments and Commitment Reductions.............. 30 2.17 Lending Installations................................ 30 2.18 Non-Receipt of Funds by Agent........................ 30 2.19 Swing Line........................................... 31 2.20 Withholding Tax Exemption............................ 32 2.21 Extension of Facility Termination Date............... 33 2.22 Conversion Period.................................... 35 2.23 Replacement of Certain Banks......................... 40 ARTICLE III CHANGE IN CIRCUMSTANCES.............................. 41 3.1 Yield Protection..................................... 41 3.2 Changes in Capital Adequacy Regulations.............. 42 3.3 Availability of Types of Advances.................... 43 3.4 Funding Indemnification.............................. 43 3.5 Bank Statements; Survival of Indemnity............... 43 -i- ARTICLE IV THE LETTER OF CREDIT FACILITY........................ 44 4.1 Facility Letters of Credit........................... 44 4.2 Limitations.......................................... 44 4.3 Conditions........................................... 45 4.4 Procedure for Issuance of Facility Letters of Credit..46 4.5 Duties of Issuing Bank............................... 47 4.6 Participation........................................ 48 4.7 Compensation for Facility Letters of Credit.......... 50 4.8 Issuing Bank Reporting Requirements.................. 51 4.9 Indemnification; Nature of Issuing Bank's Duties..... 52 4.10 No Obligation to Issue............................... 53 4.11 Obligations of Issuing Bank and Other Banks.......... 53 ARTICLE V CONDITIONS PRECEDENT................................. 54 5.1 Initial Advance...................................... 54 5.2 Each Advance......................................... 55 ARTICLE VI REPRESENTATIONS AND WARRANTIES....................... 56 6.1 Existence and Standing............................... 56 6.2 Authorization and Validity........................... 57 6.3 No Conflict; Government Consent...................... 57 6.4 Financial Statements................................. 57 6.5 Material Adverse Change.............................. 58 6.6 Taxes................................................ 58 6.7 Litigation and Contingent Obligations................ 58 6.8 Subsidiaries......................................... 58 6.9 ERISA................................................ 58 6.10 Accuracy of Information.............................. 58 6.11 Regulation U......................................... 59 6.12 Material Agreements.................................. 59 6.13 Labor Disputes and Acts of God....................... 59 6.14 Ownership............................................ 59 6.15 Operation of Business................................ 59 6.16 Laws; Environment.................................... 59 6.17 Investment Company Act............................... 60 6.18 Public Utility Holding Company Act................... 60 6.19 Subordination Provisions............................. 60 6.20 Indenture Provisions................................. 60 -ii- ARTICLE VII AFFIRMATIVE COVENANTS................................ 61 7.1 Financial Reporting.................................. 61 7.2 Use of Proceeds...................................... 63 7.3 Notice of Event of Default........................... 64 7.4 Conduct of Business.................................. 64 7.5 Taxes................................................ 64 7.6 Insurance............................................ 64 7.7 Compliance with Laws................................. 64 7.8 Maintenance of Properties............................ 64 7.9 Inspection........................................... 65 7.10 Environment.......................................... 65 ARTICLE VIII NEGATIVE COVENANTS................................... 65 8.1 Dividends............................................ 65 8.2 Indebtedness......................................... 66 8.3 Merger............................................... 67 8.4 Sale of Assets....................................... 68 8.5 Investments and Acquisitions......................... 68 8.6 Liens................................................ 70 8.7 Affiliates........................................... 72 8.8 Modifications to Certain Indebtedness................ 73 8.9 Amendments........................................... 73 ARTICLE IX FINANCIAL COVENANTS.................................. 73 9.1 Minimum Consolidated Tangible Net Worth.............. 73 9.2 Leverage Test; Interest Coverage Test................ 73 9.3 Net Worth............................................ 75 9.4 Spec Unit Inventory.................................. 75 ARTICLE X EVENTS OF DEFAULT.................................... 76 10.1 Representations and Warranties....................... 76 10.2 Non-payment.......................................... 76 10.3 Other Defaults....................................... 76 10.4 Other Indebtedness................................... 76 10.5 Bankruptcy........................................... 77 10.6 Receiver............................................. 77 10.7 Judgment............................................. 77 10.8 Unfunded Liabilities................................. 78 10.9 Withdrawal Liability................................. 78 10.10 Increased Contributions.............................. 78 -iii- 10.11 Change in Control.................................... 78 10.12 Dissolution.......................................... 78 10.13 Guaranty............................................. 78 10.14 Collateral........................................... 78 10.15 No Defaults.......................................... 78 ARTICLE XI ACCELERATION, WAIVERS, AMENDMENTS AND REMEDIES....... 79 11.1 Acceleration......................................... 79 11.2 Amendments........................................... 80 11.3 Preservation of Rights............................... 80 11.4 New Borrowers........................................ 81 ARTICLE XII GENERAL PROVISIONS................................... 81 12.1 Survival of Representations.......................... 81 12.2 Governmental Regulation.............................. 81 12.3 Taxes................................................ 82 12.4 Headings............................................. 82 12.5 Entire Agreement..................................... 82 12.6 Nature of Obligations; Benefits of this Agreement.... 82 12.7 Expenses; Indemnification............................ 82 12.8 Numbers of Documents................................. 83 12.9 Accounting........................................... 83 12.10 Severability of Provisions........................... 83 12.11 Nonliability of Banks and Issuing Bank............... 83 12.12 CHOICE OF LAW........................................ 83 12.13 Arbitration.......................................... 83 12.14 CONSENT TO JURISDICTION.............................. 85 12.15 WAIVER OF JURY TRIAL................................. 85 12.16 Confidentiality...................................... 85 ARTICLE XIII AGENT................................................ 86 13.1 Appointment.......................................... 86 13.2 Powers............................................... 86 13.3 General Immunity..................................... 86 13.4 No Responsibility for Loans, Recitals, etc........... 86 13.5 Action on Instructions of Banks...................... 86 13.6 Employment of Agents and Counsel..................... 87 13.7 Reliance on Documents; Counsel....................... 87 13.8 Agent's Reimbursement and Indemnification............ 87 13.9 Rights as a Bank or Issuing Bank..................... 87 13.10 Bank Credit Decision................................. 88 -iv- 13.11 Successor Agent...................................... 88 13.12 Agent's Fee.......................................... 89 ARTICLE XIV RATABLE PAYMENTS..................................... 89 14.1 Ratable Payments..................................... 89 ARTICLE XV BENEFIT OF AGREEMENT, ASSIGNMENTS; PARTICIPATIONS....................................... 89 15.1 Successors and Assigns............................... 89 15.2 Participations....................................... 90 15.2.1 Permitted Participants; Effect............. 90 15.2.2 Voting Rights.............................. 90 15.2.3 Waiver of Setoff........................... 90 15.3 Assignments.......................................... 90 15.3.1 Permitted Assignments...................... 90 15.3.2 Effect; Effective Date..................... 90 15.4 Dissemination of Information......................... 91 15.5 Tax Treatment........................................ 91 ARTICLE XVI NOTICES.............................................. 91 16.1 Giving Notice........................................ 91 16.2 Change of Address.................................... 92 ARTICLE XVII COUNTERPARTS......................................... 92 -v- LIST OF SCHEDULES AND EXHIBITS EXHIBITS: Exhibit A Form of Deed of Trust Exhibit B Form of Mortgage Exhibit C Form of Environmental Agreement Exhibit D Form of Guaranty Exhibit E Form of Note Exhibit F Form of Opinion of Haligman & Lottner Exhibit G Form of Certificate of General Counsel Exhibit H Form of Opinion of Local Counsel Exhibit I Form of Borrowing Notice Exhibit J Form of Compliance Certificate of Authorized Officer (Financial Covenant Tests) Exhibit K Form of Assignment (with Form of Notice of Assignment attached) SCHEDULES: Schedule "1" Refinanced Loans Schedule "2.21" Terms Relating to Last 24 Months of Term/No Extension Schedule "2.22" Terms Relating to Conversion Period Schedule "6.3" Required Orders, Consents and Approvals Schedule "8.2(ii)" Existing Indebtedness Schedule "8.6(iv)" Existing Liens CREDIT AGREEMENT THIS AGREEMENT is entered into as of April 10, 1996, among the Borrowers named herein, the Banks listed on the signature pages of this Agreement, and BANK ONE, ARIZONA, NA, a national banking association, as Agent. The parties hereto agree as follows: ARTICLE I DEFINITIONS As used in this Agreement: "Acquisition" means any transaction, or any series of related transactions, consummated on or after the date of this Agreement, by which Guarantor or any Borrower (i) acquires any going concern or all or substantially all of the assets of any firm, corporation or division thereof, whether through purchase of assets, merger or otherwise or (ii) directly or indirectly acquires (in one transaction or as the most recent transaction in a series of transactions) at least a majority (in number of votes) of the securities of a corporation which have ordinary voting power for the election of directors (other than securities having such power only by reason of the happening of a contingency) or a majority (by percentage or voting power) of the outstanding partnership or other ownership interests of a partnership, joint venture, limited liability company or other similar business organization. "Adjusted Consolidated Tangible Net Worth" means Consolidated Tangible Net Worth, plus (i) Indebtedness evidenced by the Convertible Subordinated Notes, but only to the extent that the maturity date of such Indebtedness will occur after the Facility Termination Date, and (ii) any other Public Indebtedness constituting convertible subordinated notes with convertible and subordination features similar to the Convertible Subordinated Notes, but only to the extent that the maturity date of such Indebtedness will occur after the Facility Termination Date. Adjusted Consolidated Tangible Net Worth shall specifically not include the Net Worth of any Subsidiary (taken as a whole on a consolidated basis) engaged primarily or substantially in the business of mortgage lending or asset management. As used in this definition, "Net Worth" means, as to each such Subsidiary (taken as a whole on a consolidated basis), the sum of (A) all capital accounts (including without limitation, any paid-in capital, capital surplus, and retained earnings), less (B) all advances or other sums or consideration paid and outstanding from such Subsidiary to Guarantor, all as determined in conformity with Agreement Accounting Principles. "Advance" means a borrowing hereunder consisting of the aggregate amount of the several Loans made by Banks (or Swing Line Advances made by Bank One) to a Borrower of the same Type and, in the case of a LIBOR Advance, for the same Interest Period. "Affected Bank" is defined in Section 2.23. "Affiliate" of any Person means any other Person directly or indirectly controlling, controlled by or under common control with such Person. A Person shall be deemed to control another Person if the controlling Person beneficially owns (within the meaning of Rule 13d-3 of the Securities Exchange Act of 1934, as amended) 10% or more of any class of voting securities (or other ownership interests) of the controlled Person or possesses, directly or indirectly, the power to direct or cause the direction of the management or policies of the controlled Person, whether through ownership of stock, by contract or otherwise. "Agent" means Bank One, Arizona, NA, a national banking association, in its capacity as agent for Banks pursuant to Article XIII, and not in its individual capacity as a Bank, and any successor Agent appointed pursuant to Article XIII. "Aggregate Available Credit" means the aggregate of the Available Credits of all of Banks. "Aggregate Commitment" means the aggregate of the Commitments of all Banks, as reduced from time to time pursuant to the terms hereof. As of the date of this Agreement, the Aggregate Commitment is $150,000,000. "Aggregate Debt Coverage Test" is defined in Section 9.3(b). "Agreement" means this Credit Agreement, as it may be amended or modified and in effect from time to time. "Agreement Accounting Principles" is defined in Section 12.9. "Applicable Floating Rate Margin" means, as at any date of determination, the margin indicated in Section 2.11 as then applicable in the determination of the Floating Rate. "Applicable Letter of Credit Rate" means, as at any date of determination, the rate per annum indicated in Section 4.7(b) as then applicable in the determination of the Facility Letter of Credit Fee under Section 4.7. "Applicable LIBOR Rate Margin" means, as at any date of determination, the margin indicated in Section 2.11 as then applicable in the determination of LIBOR Rates. "Applicable Margin(s)" means the Applicable LIBOR Rate Margin and/or the Applicable Floating Rate Margin, as the case may be. "Applicable Unused Commitment Rate" means, as at any date of determination, the rate per annum indicated in Section 2.11 as then applicable in the determination of the Unused Commitment Fee under Section 2.5(b). -2- "Article" means an article of this Agreement unless another document is specifically referenced. "Authorized Officer" means any one or more of the Chairman, President, Senior Vice President or any Vice President, Chief Financial Officer, or other officer of each Borrower or Guarantor, as applicable, acting singly or together, in accordance with the applicable resolutions and bylaws of such Borrower or Guarantor. "Available Credit" means, at any date with respect to any Bank, the amount (if any) by which such Bank's Commitment exceeds the sum of (i) the outstanding principal balance of such Bank's Loans as of such date, plus (ii) such Bank's ratable share (determined in accordance with Section 4.6) of the Facility Letter of Credit Obligations as of such date. "Bank One" means Bank One, Arizona, NA, in its individual capacity, and its successors. "Banks" means the lending institutions listed on the signature pages of this Agreement and their respective successors and assigns. "Borrowers" means RICHMOND AMERICAN HOMES OF CALIFORNIA, INC., a Colorado corporation, RICHMOND AMERICAN HOMES OF MARYLAND, INC., a Maryland corporation, RICHMOND AMERICAN HOMES OF NEVADA, INC., a Colorado corporation, RICHMOND AMERICAN HOMES OF VIRGINIA, INC., a Virginia corporation, RICHMOND AMERICAN HOMES, INC., a Delaware corporation, RICHMOND HOMES, INC. I, a Delaware corporation, and RICHMOND HOMES, INC. II, a Delaware corporation, and their successors and assigns, and any Subsidiary that shall hereafter become a Borrower in accordance with Section 11.4 hereof, and any successors and assigns of any of the foregoing. "Borrower" means any one of the Borrowers. "Borrowing Base" means, with respect to an Inventory Valuation Date for which it is to be determined, an amount equal to the sum of the following assets of each Borrower (but only to the extent that such assets are not subject to any Liens other than Permitted Liens): (i) the Receivables, multiplied by ninety percent (90%), plus (ii) the book value of Presold Units, multiplied by eighty percent (80%), plus (iii) the book value of Spec Units, multiplied by seventy percent (70%), plus (iv) the book value of Model Units, multiplied by seventy percent (70%), plus -3- (v) the book value of Land Under Development, multiplied by fifty percent (50%); provided, however, that (A) the aggregate of the amounts calculated pursuant to clauses (iii) and (v) with respect to all Borrowers shall not exceed, on any Inventory Valuation Date, the aggregate of the amounts calculated pursuant to clauses (ii) and (iv) with respect to all Borrowers, and (B) the aggregate of the amounts calculated pursuant to clause (v) shall not exceed at any time fifty percent (50%) of the Aggregate Commitment. "Borrowing Base Certificate" means, with respect to each Borrower, a written certificate in a form acceptable to Agent setting forth the amount of the Borrowing Base with respect to the calendar month most recently completed, certified as true and correct by an Authorized Officer of the applicable Borrower. "Borrowing Date" means a date on which an Advance is made hereunder. "Borrowing Notice" is defined in Section 2.8. "Business Day" means (i) with respect to any borrowing, payment or rate selection of LIBOR Advances, a day (other than a Saturday or Sunday) on which banks generally are open in Phoenix and New York for the conduct of substantially all of their commercial lending activities and on which dealings in United States dollars are carried on in the London interbank market, and (ii) for all other purposes, a day (other than a Saturday or Sunday) on which banks generally are open in Phoenix for the conduct of substantially all of their commercial lending activities. "Capitalized Lease" of a Person means any lease of Property by such Person as lessee which would be capitalized on a balance sheet of such Person prepared in accordance with Agreement Accounting Principles. "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 Agreement Accounting Principles. "Cash Equivalents" means: (a) U.S. Treasury bills and notes; (b) GNMA securities; (c) debt insured by other agencies guaranteed by the full faith and credit of the United States of America; -4- (d) commercial paper rated either "A1" or better by Standard and Poor's or "P1" by Moody's Investor Service; (e) Dutch Auction Preferred Stocks (DAP) rated either "AA" or better by Standard & Poor's or Moody's Investor Service; (f) certificates of deposit issued by commercial banks, savings banks or savings and loan associations whose short-term debt is rated either "A1" or better by Standard and Poor's or "P1" or better by Moody's Investor Service, or if such an institution is a subsidiary whose short-term debt is unrated, then its parent corporation must have such a rating; (g) bankers acceptances issued by financial institutions that meet the requirements for certificates of deposit; (h) deposits in institutions having the same qualifications required for investments in certificates of deposit; (i) repurchase agreements collateralized by any otherwise acceptable collateral as defined above; and (j) money market accounts a majority of whose assets are composed of items described by any of the foregoing clauses (a) through (i) through brokerage firms deemed acceptable by Guarantor's management. "Change in Control" means (a) as to Guarantor, the acquisition by any Person, or two or more Persons acting in concert, of beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Securities Exchange Act of 1934) of 50% or more of the outstanding shares of voting stock of Guarantor, or (b) as to any Borrower, the acquisition by any Person (except Guarantor or one or more of the Borrowers), or two or more Persons acting in concert of any beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Securities Exchange Act of 1934) of any of the outstanding shares of voting stock of such Borrower. "Code" means the Internal Revenue Code of 1986, as amended, reformed or otherwise modified from time to time. "Collateral" means the Presold Units, Spec Units, Model Units and Land Under Development owned by Borrowers from time to time upon which Banks hold a properly perfected first and prior Deed of Trust as security for the Obligations. "Collateral Documents" is defined in Paragraph C(5) of Schedule "2.22." -5- "Commitment" means, for each Bank, the obligation of such Bank to make Loans, and to participate in the Facility Letters of Credit in accordance with Section 4.6(a), not exceeding the amount set forth opposite its signature below or as set forth in any Notice of Assignment relating to any assignment that has become effective pursuant to Section 15.3.2, as such amount may be modified from time to time pursuant to the terms hereof. "Consolidated Indebtedness" means, at any date, the outstanding amount of all Indebtedness of Borrowers and Guarantor, without duplication, all determined on a consolidated basis for Guarantor in conformity with Agreement Accounting Principles. For purposes of this definition, "Consolidated Indebtedness" shall specifically not include: (i) Indebtedness of any Subsidiary that is not engaged in either the construction of Housing Units and/or land development for the future construction of Housing Units and such Indebtedness is not otherwise directly related to the construction of Housing Units and/or land development for the future construction of Housing Units; and (ii) Indebtedness of Borrowers and Guarantor evidenced by existing and future guarantees (or other enhancements) in favor of Rock Creek special districts not to exceed in the aggregate $45,000,000; and (iii) Indebtedness evidenced by the Convertible Subordinated Notes, and any other Public Indebtedness constituting convertible subordinated notes with convertible and subordination features similar to the Convertible Subordinated Notes, but only to the extent, in each case, that the maturity date of such Indebtedness will occur after the Facility Termination Date. "Consolidated Interest Expense" means for any period, without duplication, the aggregate amount of interest which, in conformity with Agreement Accounting Principles, would be set opposite the caption "interest expense" or any like caption on a consolidated income statement for Guarantor (other than for Guarantor's mortgage lending and financial asset management Subsidiaries), including, without limitation, imputed interest included on Capitalized Lease Obligations, all commissions, discounts and other fees and charges owed with respect to Letters of Credit and bankers' acceptance financing, the net costs associated with Rate Hedging Obligations, amortization of other financing fees and expenses, the interest portion of any deferred payment obligation, amortization of discount or premiums, if any, and all other noncash interest expense, other than interest and other charges amortized to cost of sales. Consolidated Interest Expense includes, with respect to Borrowers and Guarantor (other than for Guarantor's mortgage lending and financial asset management Subsidiaries), without duplication, all interest included as a component of cost of sales for such period. "Consolidated Interest Incurred" means for any period, without duplication, the aggregate amount of interest which, in conformity with Agreement Accounting Principles, would be set opposite the caption "interest expense" or any like caption on a consolidated income statement -6- for Guarantor (other than for Guarantor's mortgage lending and financial asset management Subsidiaries), including, without limitation, imputed interest included on Capitalized Lease Obligations, all commissions, discounts and other fees and charges owed with respect to Letters of Credit and bankers' acceptance financing, the net costs associated with Rate Hedging Obligations, amortization of other financing fees and expenses, the interest portion of any deferred payment obligation, amortization of discount or premium, if any, and all other noncash interest expense other than interest and other charges amortized to cost of sales. Consolidated Interest Incurred includes, with respect to a Borrower and Guarantor, without duplication, all capitalized interest for such period, all interest attributable to discontinued operations for such period to the extent not set forth on the income statement under the caption "interest expense" or any like caption, and all interest actually paid by a Borrower or Guarantor (other than for Guarantor's mortgage lending and financial asset management Subsidiaries) under any contingent obligation during such period. "Consolidated Net Income" means, for any period, the net income (or loss) of Guarantor on a consolidated basis for such period taken as a single accounting period, determined in conformity with Agreement Accounting Principles. "Consolidated Tangible Net Worth" means, as to Guarantor, at any date, the sum of all capital accounts (including without limitation, any paid-in capital, capital surplus, and retained earnings) determined on a consolidated basis in conformity with Agreement Accounting Principles, less (i) its consolidated Intangible Assets, and (ii) loans and advances to directors, officers and employees of Guarantor but excluding (I) loans for purposes of exercising options to purchase capital stock in Guarantor to the extent not otherwise netted out in the determination of shareholders equity, and (II) any arms-length mortgage loans made by any Subsidiary in the ordinary course of such Subsidiary's business, and (III) any advances made to employees in the ordinary course of business for travel and other items, and (IV) other such loans and advances not to exceed $5,000,000 in the aggregate outstanding at any one time, all determined as of such date. For purposes of this definition "Intangible Assets" means the amount (to the extent reflected in determining such consolidated stockholders' equity) of (A) all write-ups in the book value of any asset owned by Guarantor or any Subsidiary, (B) any amount, however designated on the balance sheet, representing the excess of the purchase price paid for assets or stock acquired over the value assigned thereto on the books of Guarantor or any Subsidiary, (C) all unamortized debt discount, goodwill, patents, trademarks, service marks, trade names, copyrights, organization or developmental expenses and other intangible items, and (D) all items that would be considered intangible assets under Agreement Accounting Principles. "Consolidated Tangible Net Worth Test" is defined in Section 9.1. "Controlled Group" means all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with Guarantor, a Borrower or any of their respective Subsidiaries, are treated as a single employer under Section 414 of the Code. -7- "Conversion/Continuation Notice" is defined in Section 2.9. "Convertible Subordinated Notes" means the 8-3/4% Convertible Subordinated Notes due 2005 of Guarantor issued in the original principal amount of $28,000,000. "Conversion Date" means the first day of the Conversion Period, determined pursuant to Section 2.22. "Conversion Period" means the period of time commencing on the Conversion Date and expiring on the Facility Termination Date. The Conversion Period shall be either (i) a Secured Conversion Period, (ii) an Unsecured Conversion Period, or (iii) a Modified Secured Conversion Period. "Deed of Trust" means each and all Deeds of Trust, Assignment of Rents, Security Agreement and Fixture Filing, securing the Obligations, granted from time to time by a Borrower, as Trustor, for the benefit of Agent on behalf of Banks, as Beneficiary, as the same may be amended or modified and in effect from time to time, each being substantially in the form of Exhibit A attached hereto (conformed as necessary with respect to the laws of the state where the Collateral described therein is located), and each and all Mortgages, Assignment of Rents, Security Agreement and Fixture Filing, securing the Obligations, granted from time to time by a Borrower, as Mortgagor, for the benefit of Agent on behalf of Banks, as Mortgagee, as the same may be amended or modified and in effect from time to time, each being substantially in the form of Exhibit B attached hereto (conformed as necessary with respect to the laws of the state where the Collateral described therein is located). "Dividend" means (i) any dividend paid or declared by any Borrower or Guarantor, as applicable; (ii) any purchase, redemption, retirement or other acquisition by any Borrower or Guarantor, as applicable for value, or the setting aside of any funds or issuance of any warrants for such purpose, of any of the capital stock of such Borrower or Guarantor, as applicable now or hereafter outstanding or any interest therein; and (iii) as to any Borrower, any distribution of assets, properties, cash, rights, obligations or other consideration or securities of such Borrower, directly or indirectly, to Guarantor. "Dollars" and the sign "$" mean lawful money of the United States of America. "Due Diligence Documents" is defined in Paragraph C(6) of Schedule "2.22." "EBITDA" means, for any period, without duplication, the following, all as determined on a consolidated basis for Guarantor in conformity with Agreement Accounting Principles, (i) the sum of the amounts for such period of (a) Consolidated Net Income, (b) Consolidated Interest Expense, (c) charges against income for all federal, state and local taxes, (d) depreciation expense, (e) amortization expense, (f) other non-cash charges and expenses, and (g) any losses arising outside of the -8- ordinary course of business which have been included in the determin- ation of Consolidated Net Income, less (ii) any gains arising outside of the ordinary course of business which have been included in the determination of Consolidated Net Income. "Environmental Agreement" means each and all Environmental Indemnity Agreements executed by Borrowers and Guarantor from time to time for the benefit of Banks and Agent, and relating to the Collateral, as the same may be amended or modified and in effect from time to time, each being substantially in the form of Exhibit C. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and any rule or regulation issued thereunder. "Event of Default" means an event described in Article X after the expiration of any applicable cure or notice period provided in Article X. "Excluded Taxes" is defined in Section 3.1(i). "Existing Letters of Credit" is defined in Section 4.4(f). "Extension Request" is defined in Section 2.21(a). "Facility Letter of Credit" means a Letter of Credit issued by the Issuing Bank for the account of a Borrower in accordance with Article IV. "Facility Letter of Credit Fee" means a fee, payable with respect to each Facility Letter of Credit issued by the Issuing Bank, in an amount per annum equal to the product of (i) the Applicable Letter of Credit Rate (determined as of the date on which the quarterly installment of such fee is due) and (ii) the face amount of such Facility Letter of Credit. "Facility Letter of Credit Obligations" means, at any date, the sum of (i) the aggregate undrawn face amount of all outstanding Facility Letters of Credit, plus (ii) the aggregate amount paid by an Issuing Bank on any Facility Letters of Credit to the extent (if any) not reimbursed by a Borrower or by Banks under Section 4.4. "Facility Rating" means the publicly announced ratings by any two (2) of the following nationally recognized rating agencies: Moody's Investors Service, Inc., Standard & Poor's Corporation, Fitch's Investment Service, and Duff & Phelps Credit Rating Co., as selected by Borrowers, on Borrowers' Debt evidenced by this Agreement and the Notes; provided, however, (i) except as provided in clause (ii), if the two ratings are not identical, the Facility Rating shall be the lower of the two ratings, (ii) if more than one rating gradation exists between the two ratings, the Facility Rating shall be the rating that is one gradation below the higher of the two ratings, and (iii) if only one rating is announced, the Facility Rating shall be the rating that is -9- one gradation below the announced rating. The Facility Rating shall change if and when such rating(s) change. "Facility Termination Date" means June 30, 2000, as the same may be extended as provided in Section 2.21. "Federal Funds Effective Rate" means, for any day, an interest rate per annum equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published for such day (or, if such day is not a Business Day, for the immediately preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations at approximately 10:00 a.m., Phoenix time, on such day on such transactions received by Agent from three (3) Federal funds brokers of recognized standing selected by Agent in its sole discretion. "Financial Covenant Test" means each of the Consolidated Tangible Net Worth Test, the Leverage Test, the Individual Debt Coverage Test and the Aggregate Debt Coverage Test. "Floating Rate" means, for any day, a rate per annum equal to (i) the Prime Rate for such day, plus (ii) the Applicable Floating Rate Margin, in each case changing when and as the Prime Rate changes. "Floating Rate Advance" means an Advance which bears interest at the Floating Rate. "Floating Rate Loan" means a Loan which bears interest at the Floating Rate. "GAAP" means generally accepted accounting principles in effect from time to time, consistently applied. "Guarantor" means M.D.C. HOLDINGS, INC., a Delaware corporation. "Guarantor Permitted Liens" means, as to Guarantor, any of the following: (i) Liens for taxes, assessments or governmental charges or levies on Guarantor's Property if the same shall not at the time be delinquent or thereafter can be paid without penalty, or are being contested in good faith and by appropriate proceedings and for which adequate reserves shall have been established on Guarantor's books in accordance with Agreement Accounting Principles. (ii) Liens imposed by law, such as carriers', warehousemen's, mechanics' and materialmen's Liens and other similar Liens arising in the ordinary course of business with respect to amounts that either (A) are not yet delinquent, or (B) are delinquent but are being contested in good faith by -10- appropriate proceedings and for which adequate reserves shall have been established on Guarantor's books in accordance with Agreement Accounting Principles. (iii) Utility easements, rights of way, zoning restrictions, covenants, reservations, and such other burdens, encumbrances or charges against real property, or other minor irregularities of title, as are of a nature generally existing with respect to properties of a similar character and which do not in any material way interfere with the use thereof or the sale thereof in the ordinary course of business of any Borrower or Guarantor. (iv) Easements, dedications, assessment district or similar Liens in connection with municipal financing and other similar encumbrances or charges, in each case reasonably necessary or appropriate for the development of real property of Guarantor, and which are granted in the ordinary course of the business of Guarantor, and which in the aggregate do not materially burden or impair the fair market value or use of such real property (or the project to which it is related) for the purposes for which it is or may reasonably be expected to be held. (v) Any option or right of first refusal to purchase real property granted to the master developer or the seller of real property that arises as a result of the non-use or non-development of such real property by Guarantor. (vi) Any agreement or contract to participate in the income or revenue or to pay lot premiums, in each case derived from the sale of Housing Units and granted in the ordinary course of business to the seller of the real property upon which the Housing Unit is constructed. "Guaranty" means a Guaranty, in substantially the form of Exhibit D, duly executed by Guarantor, as the same may be amended or modified and in effect from time to time. "Housing Unit" means a single-family dwelling (where construction has commenced), whether detached or attached (including condominiums but excluding mobile homes), including the parcel of land on which such dwelling is located, that is or will be available for sale by a Borrower. Each "Housing Unit" is either a Presold Unit, a Spec Unit or a Model Unit. "Housing Unit Closing" means a closing of the sale of a Housing Unit by a Borrower to a bona fide purchaser for value. "Indebtedness" of a Person means, without duplication, such Person's (i) obligations for borrowed money, -11- (ii) obligations representing the deferred purchase price of Property or services (other than trade accounts payable and accrued expenses arising or occurring in the ordinary course of such Person's business, and other than the obligations evidenced by the Permitted Liens or Guarantor Permitted Liens, as applicable, described in clause (vi) of the definition of Permitted Liens or Guarantor Permitted Liens, as applicable, all of which shall specifically not be included in the calculation of Indebtedness), (iii) obligations, whether or not assumed, secured by Liens on, or payable out of the proceeds or production from, Property now or hereafter owned or acquired by such Person, other than the obligations evidenced by the Permitted Liens or Guarantor Permitted Liens, as applicable, described in clause (vi) of the definition of Permitted Liens or Guarantor Permitted Liens, as applicable, (iv) obligations which are evidenced by notes, bonds, debentures, or other similar instruments, (v) Capitalized Lease Obligations, (vi) net liabilities under Rate Hedging Obligations, (vii) all liabilities and obligations of others of the kind described in clauses (i) through (vi) and (viii) that such Person has guaranteed or that is otherwise its legal liability, and (viii) reimbursement obligations for which such Person is obligated with respect to a Letter of Credit; Indebtedness shall specifically not include contingent obligations with respect to a Letter of Credit. Indebtedness includes, without limitation, (A) in the case of each Borrower, the Obligations, and (B) in the case of Guarantor, the obligations under the Guaranty, and the obligations evidenced by the Senior Notes and the Convertible Subordinated Notes and the documents executed in connection therewith. "Indenture" means that certain Indenture, dated as of December 15, 1993, between Guarantor, Borrowers, the pledgors named therein, and First Bank National Association pursuant to which the Senior Notes were issued, as amended by the First Supplemental Indenture dated as of February 2, 1994. "Individual Debt Coverage Test" is defined in Section 9.3(a). "Interest Coverage Test" is defined in Section 9.2(b). -12- "Interest Period" means, for each LIBOR Advance, the period commencing on the date of such LIBOR Advance and ending on the last day of the period selected by the applicable Borrower pursuant to the provisions herein and, thereafter, each subsequent period commencing on the last day of the immediately preceding Interest Period and ending on the last day of the period selected by such Borrower pursuant to the provisions of this Agreement. The duration of each Interest Period shall be 7 days or one (1), two (2), three (3), or six (6) months as selected by the applicable Borrower (A), for a new Advance, in the Borrowing Notice, or (B), for an outstanding Advance, in the Conversion/Continuation Notice; provided, however, that: (i) Whenever the last day of any Interest Period would otherwise occur on a day other than a Business Day, the last day of such Interest Period shall be extended to occur on the next succeeding Business Day, provided that if such extension would cause the last day of such Interest Period to occur in the next following calendar month, the last day of such Interest Period shall occur on the next preceding Business Day; and (ii) No Interest Period with respect to any LIBOR Advance shall extend beyond the Facility Termination Date. "Inventory Valuation Date" means the last day of the most recent calendar month with respect to which a Borrower is required to have delivered a Borrowing Base Certificate pursuant to Section 7.1(vi) hereof. "Investment" of a Person means any loan, advance, extension of credit (other than accounts receivable arising in the ordinary course of business), or contribution of capital by such Person to any other Person or any investment in, or purchase or other acquisition of, the stock, partnership, joint venture or limited liability company interests, notes, debentures or other securities of any other Person made by such Person. "Issuance Date" means the date on which a Facility Letter of Credit is issued, amended or extended. "Issuing Bank" means Bank One or such other Bank as Borrowers, Agent and such other Bank may agree upon, that may from time to time issue Facility Letters of Credit. "Land Under Development" means parcels of land owned by any Borrower (including without limitation Finished Lots, as defined in Schedule "2.22") which are zoned for Housing Units with respect to which development activity has commenced for the purpose of construction of Housing Units by such Borrower; provided, however, that the term "Land Under Development" shall not include (i) any real property upon which the construction of a Housing Unit has commenced, and (ii) vacant land held by a Borrower for future development or sale and designated as inactive land in the footnotes to Guarantor's financial statements. For purposes of this definition, the construction of a Housing Unit shall be deemed to have commenced upon commencement of the trenching for the foundation of the Housing Unit. -13- "Lending Installation" means, with respect to a Bank or Agent, any office, branch, banking subsidiary of the holding company of a Bank or Agent, or banking Affiliate of such Bank or Agent located in each event in the United States. "Letter of Credit" means a letter of credit or similar instrument which is issued by a financial institution upon the application of a Person or upon which such Person is an account party or for which such Person is in any way liable. "Leverage Multiplier" means, at the date hereof, 2.15, as such amount may hereafter be adjusted from time to time as provided in Section 9.2(c). "Leverage Test" is defined in Section 9.2(a). "LIBOR Advance" means an Advance which bears interest at a LIBOR Rate. "LIBOR Base Rate" means, with respect to a LIBOR Advance for the relevant Interest Period, the rate of interest determined by Agent, based on Telerate System reports or other source as may be selected by Agent, to be the "London Interbank Offered Rate" at which deposits in United States dollars are offered by major banks in London, England, two (2) Business Days before the first day of the respective Interest Period, in the approximate amount of the relevant LIBOR Advance and having a maturity approximately equal to such LIBOR Advance's Interest Period. "LIBOR Loan" means a Loan which bears interest at a LIBOR Rate. "LIBOR Rate" means, with respect to a LIBOR Advance for the relevant Interest Period, the sum of (i) the quotient of (a) the LIBOR Base Rate applicable to such Interest Period, divided by (b) one minus the Reserve Requirement (expressed as a decimal) applicable to such Interest Period, plus (ii) the Applicable LIBOR Rate Margin. The LIBOR Rate shall be rounded to the next higher multiple of 1/16 of 1% if the rate is not such a multiple. "Lien" means any lien (statutory or other), mortgage, pledge, hypothecation, assignment (the purpose of which is to grant a security interest), deposit arrangement (the purpose of which is to grant a security interest), encumbrance or other security agreement or arrangement of any kind or nature whatsoever the purpose of which is to grant a security interest, whether or not filed or recorded or otherwise perfected (including the interest of a vendor or lessor under any conditional sale, any Capitalized Lease or any lease deemed to constitute a security interest, any other title retention agreement). "Loan" means, with respect to a Bank, such Bank's portion of any Advance. For purposes of a Swing Line Advance, Bank One's portion of such Advance is 100%. "Loan Documents" means this Agreement, the Notes and any Reimbursement Agreements, and if applicable, the Deeds of Trust and Environmental Agreements. -14- "Majority Banks" means Banks in the aggregate having more than fifty percent (50%) of the Aggregate Commitment, or if the Aggregate Commitment has been terminated, Banks in the aggregate holding more than fifty percent (50%) of the aggregate unpaid principal amount of the outstanding Advances; provided, however, if Agent and any Lending Installation(s) of Agent have in the aggregate fifty percent (50%) or more of the Aggregate Commitment or hold fifty percent (50%) or more of the aggregate unpaid principal amount of the outstanding Advances, as applicable, then "Majority Banks" shall mean all Banks other than Agent and its Lending Installation(s). "Material Adverse Effect" means a material adverse effect, based on commercially reasonable standards, on (i) the business, Property, condition (financial or otherwise), or results of operations of Borrowers and Guarantor, taken as a whole, (ii) the ability of Guarantor to perform its obligations under the Guaranty, or (iii) the validity or enforceability under applicable law of any of the Loan Documents or the Guaranty or the rights or remedies of Agent, Banks or any Issuing Bank thereunder (other than as to clause (iii), a Material Adverse Effect resulting solely from the acts or omissions of Agent and/or any Bank(s)). Items disclosed by Guarantor in its form 10-Q and form 10-K or any other filings with the Securities and Exchange Commission shall not be deemed to have a Material Adverse Effect solely because of such disclosure, and the existence and content of such disclosure shall not be prima facia evidence of a Material Adverse Effect. "Model Unit" means a Housing Unit constructed initially for inspection by prospective purchasers that is not intended to be sold until all or substantially all other Housing Units in the applicable subdivision are sold. "Modified Secured Conversion Period" means the period commencing on the first day of the first month following the second consecutive fiscal quarter in which Borrowers have breached a Financial Covenant Test and expiring on the Facility Termination Date, all as more specifically described in Section 2.22, during the term of which, among other things, (i) the Aggregate Commitment is reduced from time to time, and (ii) Borrowers shall provide to Banks Collateral for the Obligations. "Multiemployer Plan" means a Plan maintained pursuant to a collective bargaining agreement or any other arrangement as described in Section 3(37) of ERISA to which Guarantor, any Borrower or any member of the Controlled Group is a party to which more than one employer is obligated to make contributions. "Net Worth" is defined in Section 9.3(a). "Non-Recourse Indebtedness" with respect to any Person means Indebtedness of such Person (i) for which the sole legal recourse for collection of principal and interest on such Indebtedness is against the specific property identified in the instruments evidencing or securing such Indebtedness and such property was acquired with the proceeds of such Indebtedness or such Indebtedness was incurred within ninety (90) days after the acquisition of such property and -15- for which no other assets of such Person may be realized upon in collection of principal or interest on such Indebtedness, or (ii) that refinances Indebtedness described in clause (i) and for which the recourse is limited to the same extent described in clause (i). "Note" means a promissory note, in substantially the form of Exhibit E hereto, duly executed by Borrowers and payable to the order of a Bank in the amount of its Commitment, including any amendment, modification, renewal or replacement of such promissory note. "Notice of Assignment" is defined in Section 15.3.2. "Obligations" means all unpaid principal of and accrued and unpaid interest on the Notes, the Facility Letter of Credit Obligations, all accrued and unpaid fees and all expenses, reimbursements, indemnities and other obligations of a Borrower to Banks or to any Bank, Agent, any Issuing Bank or any indemnified party hereunder arising under the Loan Documents. "Participants" is defined in Section 15.2.1. "PBGC" means the Pension Benefit Guaranty Corporation, or any successor thereto. "Permitted Liens" means, as to each Borrower, any of the following: (i) Liens for taxes, assessments or governmental charges or levies on such Borrower's Property if the same (A) shall not at the time be delinquent or thereafter can be paid without penalty, or (B) are being contested in good faith and by appropriate proceedings and for which adequate reserves shall have been established on such Borrower's or Guarantor's books in accordance with Agreement Accounting Principles. (ii) Liens imposed by law, such as carriers', warehousemen's, mechanics' and materialmen's Liens and other similar Liens arising in the ordinary course of business with respect to amounts that either (A) are not yet delinquent, or (B) are delinquent but are being contested in good faith by appropriate proceedings and for which adequate reserves shall have been established on such Borrower's or Guarantor's books in accordance with Agreement Accounting Principles. (iii) Utility easements, rights of way, zoning restrictions, covenants, reservations, and such other burdens, encumbrances or charges against real property, or other minor irregularities of title, as are of a nature generally existing with respect to properties of a similar character and which do not in any material way interfere with the use thereof or the sale thereof in the ordinary course of business of any Borrower. -16- (iv) Easements, dedications, assessment district or similar Liens in connection with municipal financing and other similar encumbrances or charges, in each case reasonably necessary or appropriate for the development of real property of such Borrower, and which are granted in the ordinary course of the business of such Borrower, and which in the aggregate do not materially burden or impair the fair market value or use of such real property (or the project to which it is related) for the purposes for which it is or may reasonably be expected to be held. (v) Any option or right of first refusal to purchase real property granted to the master developer or the seller of real property that arises as a result of the non-use or non-development of such real property by the applicable Borrower. (vi) Any agreement or contract to participate in the income or revenue or to pay lot premiums, in each case derived from the sale of Housing Units and granted in the ordinary course of business to the seller of the real property upon which the Housing Unit is constructed. "Person" means any natural person, corporation, firm, joint venture, partnership, limited liability company, association, enterprise, trust or other entity or organization, or any government or political subdivision or any agency, department or instrumentality thereof. "Plan" means an employee pension benefit plan which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code as to which Guarantor, any Borrower or any member of the Controlled Group may have any liability. "Presold Unit" means a Housing Unit owned by a Borrower that is subject to a bona fide written agreement between such Borrower and a third Person purchaser for sale in the ordinary course of such Borrower's business of such Housing Unit and the related lot, accompanied by a cash earnest money deposit or down payment in an amount that is customary, and subject only to ordinary and customary contingencies to the purchaser's obligation to buy the Housing Unit and related Lot. "Prime Rate" means the rate per annum most recently publicly announced by Bank One, or its successors, in Phoenix, Arizona, as its "prime rate," as in effect from time to time. The Prime Rate will change on each day the "prime rate" changes. The "prime rate" is not necessarily the best or lowest rate offered by said bank, and said bank my lend to its customers at rates that are at, above, or below its "prime rate." "Property" of a Person means any and all property, whether real, personal, tangible, intangible, or mixed, of such Person, or other assets owned, leased or operated by such Person. -17- "Public Indebtedness" means Indebtedness evidenced by notes, debentures, or other similar instruments issued after the date of this Agreement pursuant to either (i) a registered public offering or (ii) a private placement of such instruments in accordance with an exemption from registration (other than Indebtedness evidenced by the Senior Notes, the Convertible Subordinated Notes, or the 6.6421% Subordinated Exchangeable Variable Rate Notes of Guarantor due April 1, 1998 in the existing amount of $10,230,000, or any Refinancing Indebtedness with respect to any of the foregoing) under the Securities Act of 1933 and/or the Securities Exchange Act of 1934 or similar law. "Purchasers" is defined in Section 15.3.1. "Rate Hedging Obligations" of a Person means any and all obligations of such Person, whether absolute or contingent and howsoever and whensoever created, arising, evidenced or acquired (including all renewals, extensions and modifications thereof and substitutions therefor), under (i) any and all agreements, devices or arrangements designed to protect at least one of the parties thereto from the fluctuations of interest rates, exchange rates or forward rates applicable to such party's assets, liabilities or exchange transactions, including, but not limited to, dollar-denominated or cross-currency interest rate exchange agreements, forward currency exchange agreements, interest rate cap or collar protection agreements, forward rate currency or interest rate options, puts and warrants, and (ii) any and all cancellations, buy backs, reversals, terminations or assignments of any of the foregoing. "Receivables" means the net proceeds payable to, but not yet received by, any Borrower following a Housing Unit Closing. "Refinanced Loans" means, severally and collectively, the loans listed on Schedule "1" hereto. "Refinancing Indebtedness" means Indebtedness that refunds, refinances or extends any Indebtedness described in Schedule "8.2" hereto (or that refunds, refinances or extends any refund, refinancing or extension of such Indebtedness), but only to the extent that (i) the Refinancing Indebtedness is subordinated to or pari passu with the Obligations (or Guarantor's obligations under the Guaranty, as applicable) to the same extent as the Indebtedness being refunded, refinanced or extended, (ii) the Refinancing Indebtedness is scheduled to mature no earlier than the then current maturity date of such Indebtedness, (iii) such Refinancing Indebtedness is in an aggregate amount that is equal to or less than the sum of the aggregate amount then outstanding plus all amounts committed but undisbursed under the Indebtedness being refunded, refinanced or extended, -18- (iv) the Person or Persons liable for the payment of such Refinancing Indebtedness are the same Person or Persons (or successor(s) thereto) that were liable for the Indebtedness being refunded, refinanced or extended when such Indebtedness was initially incurred, and (v) such Refinancing Indebtedness is incurred within 120 days after the Indebtedness being refunded, refinanced or extended is so refunded, refinanced or extended. "Regulation D" means Regulation D of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor thereto or other regulation or official interpretation of said Board of Governors relating to reserve requirements applicable to member banks of the Federal Reserve System. "Regulation U" means Regulation U of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor thereto or other regulation or official interpretation of said Board of Governors relating to the extension of credit by banks for the purpose of purchasing or carrying margin stocks applicable to member banks of the Federal Reserve System. "Related Business" means any line or lines of business or business activity reasonably related to (i) the home building business, or (ii) a substantial business segment of Guarantor, Borrowers, and their Subsidiaries on the date hereof, all as reasonably determined by Agent. "Rejecting Bank" is defined in Section 2.21(b). "Reimbursement Agreement" means, with respect to a Facility Letter of Credit, such form of application therefor and form of reimbursement agreement therefor (whether in a single or several documents, taken together) as an Issuing Bank may employ in the ordinary course of business for its own account, with such modifications thereto as may be agreed upon by such Issuing Bank and a Borrower and as are not materially adverse (in the reasonable judgment of such Issuing Bank and Agent) to the interests of Banks; provided, however, in the event of any conflict between the terms of any Reimbursement Agreement and this Agreement, the terms of this Agreement shall control. "Replacement Bank" is defined in Section 2.23. "Reportable Event" means a reportable event as defined in Section 4043 of ERISA and the regulations issued under such Section, with respect to a Plan, excluding, however, such events as to which the PBGC by regulation waived the requirement of Section 4043(a) of ERISA that it be notified within thirty (30) days of the occurrence of such event; provided, however, that a failure to meet the minimum funding standard of Section 412 of the Code and of Section 302 of ERISA shall be a Reportable Event regardless of the issuance of any such waiver of the -19- notice requirement in accordance with either Section 4043(a) of ERISA or waiver of the funding requirements under Section 412(d) of the Code. "Required Banks" means at least three (3) Banks in the aggregate having at least 66-2/3% of the Aggregate Commitment or, if the Aggregate Commitment has been terminated, at least three (3) Banks in the aggregate holding at least 66-2/3% of the aggregate unpaid principal amount of the outstanding Advances. Solely for purposes of this definition, Agent and all of its Lending Installations that are Banks shall be deemed to be a single Bank. "Reserve Requirement" means, with respect to an Interest Period, the maximum aggregate reserve requirement (including all basic, supplemental, marginal and other reserves) which is imposed under Regulation D on Eurocurrency liabilities (as defined therein). "Section" means a numbered section of this Agreement, unless another document is specifically referenced. "Secured Conversion Period" means the 24-month Conversion Period described in Section 2.22 during the term of which, among other things, (i) the Aggregate Commitment is reduced from time to time, and (ii) Borrowers shall provide to Banks Collateral for the Obligations. "Senior Debt" means the Senior Notes or, if the Senior Notes are refinanced, the Refinancing Indebtedness with respect thereto. "Senior Debt Rating" means the publicly announced ratings by any two (2) of the following nationally recognized rating agencies: Moody's Investors Service, Inc., Standard & Poor's Corporation, Fitch's Investment Service, and Duff & Phelps Credit Rating Co., as selected by Borrowers, on Guarantor's Senior Debt; provided, however, (i) except as provided in clause (ii), if the two ratings are not identical, the Senior Debt Rating shall be the lower of the two ratings, (ii) if more than one rating gradation exists between the two ratings, the Senior Debt Rating shall be the rating that is one gradation below the higher of the two ratings, and (iii) if only one rating is announced, the Senior Debt Rating shall be the rating that is one gradation below the announced rating. The Senior Debt Rating shall change if and when such rating(s) change. "Senior Notes" means the 11-1/8% Senior Notes due 2003 of Guarantor issued in the original principal amount of $190,000,000 pursuant to the Indenture. "Single Employer Plan" means a Plan maintained by Guarantor, any Borrower or any member of the Controlled Group for employees of Guarantor, any Borrower or any member of the Controlled Group. "Spec Unit" means any Housing Unit owned by any Borrower that is not a Presold Unit or a Model Unit. -20- "Subordinated Indebtedness" means any Indebtedness of Borrower the payment of which is subordinated to payment of the Obligations to the reasonable satisfaction of Agent, including Borrowers' Indebtedness under the guarantees of the Senior Notes. Subordinated Indebtedness shall specifically not include Indebtedness of any Borrower to Guarantor. "Subsidiary" of a Person means (i) any corporation more than 50% of the outstanding securities having ordinary voting power for the election of the board of directors of which shall at the time be beneficially owned (within the meaning of Rule 13d-3 of the Securities Exchange Act of 1934, as amended) directly or indirectly, by such Person or by one or more of its Subsidiaries or by such Person and one or more of its Subsidiaries, or (ii) any partnership, association, joint venture, limited liability company or similar business organization more than 50% of the ownership interests having ordinary voting power of which shall at the time be so owned or controlled. Unless otherwise expressly provided, all references herein to a "Subsidiary" shall mean a direct or indirect Subsidiary of Guarantor. "Substantial Portion" means, with respect to the Property of Borrowers and Guarantor, taken as a whole, Property which represents more than 10% of Consolidated Tangible Net Worth, as would be shown in the consolidated financial statements of Guarantor as of the beginning of the fiscal quarter in which such determination is made. "Swing Line Advances" has the meaning set forth in Section 2.19. "Swing Line Advance Maturity Date" means that day that is the second Business Day following the date in which a Swing Line Advance was funded by Bank One. "Transferee" is defined in Section 15.4. "Type" means, with respect to any Advance, its nature as a Floating Rate Advance or LIBOR Advance. "Unfunded Liabilities" means the amount (if any) by which the present value of all vested nonforfeitable benefits under all Single Employer Plans exceeds the fair market value of the assets of such Plans allocable to such benefits, all determined as of the then most recent valuation date for such Plans, using the actuarial methods and assumptions utilized in the actuarial report for each such Plan as of such date. "Unmatured Event of Default" means an event which but for the lapse of time or the giving of notice, or both, would constitute an Event of Default. "Unsecured Conversion Period" means the 12-month Conversion Period described in Section 2.22 during the term of which, among other things, (i) the Aggregate Commitment shall be reduced from time to time, and (ii) Borrowers shall not be required to provide to Banks Collateral for the Obligations. -21- "Unused Commitment" means, at any date with respect to any Bank, the amount (if any) by which such Bank's Commitment exceeds the sum of (i) the outstanding principal balance of such Bank's Loans as of such date, plus (ii) such Bank's ratable share (determined in accordance with Section 4.6) of the outstanding amount of the Facility Letters of Credit. "Unused Commitment Fee" means a fee payable by Borrowers to each Bank with respect to such Bank's Unused Commitment, calculated in accordance with Section 2.5(b). "Wholly-Owned Subsidiary" of a Person means (i) any Subsidiary all of the outstanding voting securities (or the election of the board of directors) of which shall at the time be beneficially owned (within the meaning of Rule 13d-3 of the Securities Exchange Act of 1934, as amended) directly or indirectly, by such Person or one or more Wholly-Owned Subsidiaries of such Person, or by such Person and one or more Wholly-Owned Subsidiaries of such Person, or (ii) any partnership, association, joint venture, limited liability company or similar business organization 100% of the ownership interests having ordinary voting power of which shall at the time be so owned or controlled. The foregoing definitions shall be equally applicable to both the singular and plural forms of the defined terms. ARTICLE II THE CREDITS 2.1 Commitment. From and including the date of this Agreement and prior to the Facility Termination Date, each Bank severally agrees, on the terms and conditions set forth in this Agreement, to make Loans and to issue Facility Letters of Credit to Borrowers from time to time in amounts not to exceed in the aggregate at any one time outstanding the amount of its Commitment; provided, however, that (i) a Bank shall not be required to make any Loan or Loans in excess of the amount of such Bank's then Available Credit, and (ii) the aggregate principal amount of all Advances plus the aggregate amount of the Facility Letter of Credit Obligations outstanding at any time and from time to time to any individual Borrower shall not exceed the Borrowing Base for such Borrower determined as of the most recent Inventory Valuation Date, and (iii) the aggregate principal amount of all Advances plus the aggregate amount of the Facility Letter of Credit Obligations outstanding with respect to all Borrowers shall not exceed the aggregate of all Borrowing Bases for all Borrowers determined as of the most recent Inventory Valuation Date. Subject to the terms of this Agreement, each Borrower may borrow, repay and reborrow at any time prior to the Facility Termination Date. The Commitments to lend hereunder shall expire on the Facility Termination Date. 2.2 Required Payments. Any outstanding Advances and all other unpaid Obligations shall be paid in full by Borrowers on the Facility Termination Date. Additionally, if for any reason at any time either (i) the principal amount of all Advances plus the aggregate amount of the Facility Letter of Credit Obligations outstanding with respect to all Borrowers exceeds the -22- Aggregate Commitment, or (ii) the aggregate principal amount of all Advances plus the aggregate amount of the Facility Letter of Credit Obligations outstanding to any individual Borrower exceeds the Borrowing Base for such Borrower determined as of the most recent Inventory Valuation Date, or (iii) the aggregate principal amount of all Advances plus the aggregate amount of the Facility Letter of Credit Obligations outstanding with respect to all Borrowers exceeds the aggregate of all Borrowing Bases for all Borrowers determined as of the most recent Inventory Valuation Date, then: (a) Borrowers or the applicable Borrower shall, within five (5) days after notice from Agent, make a payment to Agent for the benefit of Banks from the funds of the applicable Borrower or Borrowers in an amount equal to such excess principal amount; and (b) Until Borrowers or the applicable Borrower shall have made the payment to Agent described in subparagraph (a) above, Borrowers shall not, directly or indirectly, declare, make or pay, or incur any liability to make or pay, or cause or permit to be declared, made or paid, any Dividend. 2.3 Ratable Loans. Each Advance hereunder, including without limitation, any Advance made by the Banks pursuant to Section 2.19(d), but excluding Swing Line Advances, shall consist of Loans made by the several Banks ratably in proportion to the ratio that their respective Commitments bear to the Aggregate Commitment. Swing Line Advances shall consist of Loans made by Bank One. 2.4 Types of Advances. The Advances may be Floating Rate Advances or LIBOR Advances, or a combination thereof, selected by Borrowers in accordance with Sections 2.8 and 2.9. 2.5 Fees; Reduction in Commitment. (a) Commitment Fee. Borrowers agree to pay to Agent, for the account of each Bank, a commitment fee, at a rate equal to the applicable rate set forth below, determined with respect to the amount of such Bank's initial Commitment notified to Agent during syndication and multiplied by the amount of such Bank's actual Commitment: Commitment Fee (as a percentage Bank's Initial Commitment of Bank's Commitment) $30,000,000 or more .33% Less than $30,000,000 .22% The commitment fee shall be paid by Borrowers to Agent in advance, contemporaneously with the execution of this Agreement, and shall be non- -23- refundable in any event. Notwithstanding anything herein to the contrary, each Borrower shall be responsible to pay a portion of the commitment fee calculated as follows: the total commitment fee divided by the number of Borrowers equals the portion of the commitment fee to be paid by each Borrower. (b) Unused Commitment Fee. Borrowers agree to pay to Agent for the account of each Bank an Unused Commitment Fee, at a rate per annum equal to the Applicable Unused Commitment Rate, calculated on the basis of a 365-day year in accordance with this Section from the date hereof and to and including the Facility Termination Date, and payable quarterly in arrears on the first day of each January, April, July and October hereafter and on the Facility Termination Date. For each quarter (or portion thereof), the Unused Commitment Fee shall be equal to (A) such Bank's average daily Commitment during such quarter (or portion thereof) minus (B) such Bank's "average daily outstandings" for the quarter (or portion thereof) with respect to which the Unused Commitment Fee is being computed, with the resulting number multiplied by (C) the Applicable Unused Commitment Rate, and the final product divided by (D) four (4). As used herein, "average daily outstandings" means the sum of (i) the outstanding principal balance of such Bank's Loans (including, with respect to Bank One only, the outstanding principal balance of Swing Line Advances) plus (ii) such Bank's ratable share (determined in accordance with Section 4.5) of the outstanding amount of the Facility Letters of Credit, all calculated for each day during the quarter (or portion thereof) for which the fee is being computed, divided by the number of days in that quarter (or portion thereof). If the Unused Commitment Fee is being computed for less than a full quarter, the number used in clause (D) above shall be computed on a daily basis for the number of days for which the fee is being computed. The Unused Commitment Fee shall continue to be payable during the Conversion Period. All accrued Unused Commitment Fees shall be payable on the effective date of any termination of the obligations of Banks to make Loans hereunder. Notwithstanding anything herein to the contrary, each Borrower shall be responsible to pay a portion of the Unused Commitment Fee calculated as follows: the total Unused Commitment Fee divided by the number of Borrowers equals the portion of the Unused Commitment Fee to be paid by each Borrower. (c) Extension Fee. If the Facility Maturity Date is extended pursuant to the provisions of Section 2.21, then Borrowers shall pay to Agent, for the account of each Bank an extension fee for each such extension, at a rate equal to the applicable rate set forth below determined with respect to the amount of such Bank's initial Commitment notified to Agent during syndication and multiplied by the amount of such Bank's actual Commitment: -24- Extension Fee (as a percentage Bank's Initial Commitment of Bank's Commitment) $30,000,000 or more .15% Less than $30,000,000 .10% The extension fee shall be paid by Borrowers to Agent in advance, in the manner provided in Section 2.21(d). The extension fee shall be non-refundable in any event. Notwithstanding anything herein to the contrary, each Borrower shall be responsible to pay a portion of the extension fee calculated as follows: the total extension fee divided by the number of Borrowers equals the portion of the extension fee to be paid by each Borrower. (d) Reductions in Aggregate Commitment. Borrowers may permanently reduce the Aggregate Commitment in whole, or in part ratably among Banks (in proportion to the ratio that their respective Commitment bear to the Aggregate Commitment) in integral multiples of $5,000,000 at any time or from time to time, upon at least three (3) Business Days' written notice to Agent, which notice shall specify the amount of any such reduction; provided, however, that the amount of the Aggregate Commitment may not be reduced below the sum of (i) the aggregate principal amount of the outstanding Advances plus (ii) the Facility Letter of Credit Obligations. 2.6 Minimum Amount of Each Advance. Except with respect to Swing Line Advances, each Advance shall be in the minimum amount of $2,000,000 (and in multiples of $1,000,000 if in excess thereof). Borrowers shall be entitled to aggregate, on a single day, the amount of all Advances requested by Borrowers solely for purposes of satisfying the minimum Advance amount set forth in this Section 2.6. Any Advances that are so aggregated shall be deemed to be a single Advance for purposes of complying with the provisions of this Agreement relating to requesting, electing, repaying, and converting LIBOR Advances, and all Borrowers requesting, electing, repaying and converting such Advances shall be considered a single "Borrower" for purposes thereof and in computing the outstanding number of LIBOR Advances. 2.7 Optional Principal Payments. (a) Repayment of Advances. Any Borrower may at any time or from time to time pay, without penalty or premium, all Floating Rate Advances outstanding with respect to such Borrower, or, in a minimum aggregate amount of $1,000,000 or any integral multiple of $500,000 in excess thereof (except with respect to Swing Line Advances), any portion of the outstanding Floating Rate Advances upon one (1) Business Day's prior notice to Agent. Borrowers shall be entitled to aggregate, on a single day, the amount of all repayments made by Borrowers solely for purposes of satisfying the minimum repayment amount set forth in this Section 2.7. Any Advances that are so aggregated shall be deemed -25- to be a single Advance for purposes of complying with the provisions of this Agreement relating to requesting, electing, repaying, and converting LIBOR Advances, and all Borrowers requesting, electing, repaying and converting such Advances shall be considered a single "Borrower" for purposes thereof. Any Borrower may, (i) upon one (1) Business Days' prior notice to Agent, pay, without penalty or premium, any LIBOR Advance outstanding with respect to such Borrower in full on the last day of the Interest Period for such LIBOR Advance, and (ii) upon three (3) Business Days' prior notice to Agent, prepay any LIBOR Advance outstanding with respect to such Borrower in full prior to the last day of the Interest Period for such LIBOR Advance, provided that such Borrower shall also pay at the time of such prepayment all amounts payable with respect thereto pursuant to Section 3.4 hereof. (b) Several Liability. Except as otherwise indicated in Section 12.7 of this Agreement, the obligations of Borrowers under this Agreement, the Notes and the other Loan Documents shall not be the joint obligations of Borrowers, but shall instead be the several obligations of each Borrower. Each Borrower shall only be obligated to pay principal, interest, and other amounts that relate to Advances made to such Borrower, or that relate to Property owned by such Borrower, or that relate to such Borrower's obligations under this Agreement, the Notes and the other Loan Documents. 2.8 Method of Selecting Types and Interest Periods for New Advances. Any Borrower requesting an Advance shall select the Type of Advance and, in the case of each LIBOR Advance, the Interest Period applicable to each Advance from time to time. Such Borrower shall give Agent irrevocable notice (a "Borrowing Notice") in the form of Exhibit I not later than (a) 10:00 a.m., Phoenix time, one (1) Business Day before the Borrowing Date of each Floating Rate Advance (except a Swing Line Advance), (b) 10:00 a.m., Phoenix time, three (3) Business Days before the Borrowing Date of each LIBOR Advance, and (c) noon, Phoenix time, on the Borrowing Date of each Swing Line Advance, specifying: (i) the Borrower requesting the Advance, (ii) the Borrowing Date, which shall be a Business Day, of such Advance, (iii) whether the Advance is a Swing Line Advance, (iv) the aggregate amount of such Advance, (v) the Type of Advance selected; provided, however, that the aggregate number of LIBOR Advances of all Borrowers outstanding at any one time shall not exceed five (5) (for purposes of this clause (v), Borrowers shall be entitled to aggregate, on a single day, the number of LIBOR Advances -26- outstanding pursuant to the provisions of Sections 2.6 and 2.7), and further provided that any Swing Line Advance shall be a Floating Rate Advance, and (vi) in the case of each LIBOR Advance, the Interest Period applicable thereto. Not later than 11:00 a.m., Phoenix time, on each Borrowing Date, each Bank shall make available its Loan or Loans, in funds immediately available in Phoenix to Agent at its address specified pursuant to Article XVI. Agent will make the funds so received from Banks available to the applicable Borrower at Agent's aforesaid address. Disbursements of all Advances (other than Swing Line Advances) to any single Borrower may be made not more frequently than one time per Business Day. Disbursements of all Swing Line Advances to any single Borrower may be made not more frequently than one time per Business Day, or on a more frequent basis as Bank One may agree. Interest on all Advances shall be calculated on the basis of a 360 day year, based on the actual days elapsed. 2.9 Conversion and Continuation of Outstanding Advances. Floating Rate Advances shall continue as Floating Rate Advances unless and until such Floating Rate Advances are converted into LIBOR Advances. Each LIBOR Advance shall continue as a LIBOR Advance until the end of the then applicable Interest Period therefor, at which time such LIBOR Advance shall be automatically converted into a Floating Rate Advance unless the applicable Borrower(s) shall have given Agent a Conversion/Continuation Notice requesting that, at the end of such Interest Period, such LIBOR Advance either continues as a LIBOR Advance for the same or another Interest Period or be repaid. Subject to the terms of Section 2.6, the applicable Borrower may elect from time to time to convert all or any part of an Advance of any Type into any other Type or Types of Advances; provided, however, that any conversion of any LIBOR Advance may be made on, and only on, the last day of the Interest Period applicable thereto, and further provided that the aggregate number of LIBOR Advances of all Borrowers outstanding at any one time shall not exceed five (5). The applicable Borrower(s) shall give Agent irrevocable notice (a "Conversion/Continuation Notice") of each conversion of an Advance or continuation of a LIBOR Advance not later than 10:00 a.m., Phoenix time, at least one (1) Business Day, in the case of a conversion into a Floating Rate Advance, or three (3) Business Days, in the case of a conversion into or continuation of a LIBOR Advance, prior to the date of the requested conversion or continuation, specifying: (i) the Borrower(s) requesting the conversion or continuation; (ii) the requested date which shall be a Business Day, of such conversion or continuation; (iii) the aggregate amount and Type of the Advance which is to be converted or continued; and -27- (iv) the amount and Type(s) of Advance(s) into which such Advance is to be converted or continued and, in the case of a conversion into or continuation of a LIBOR Advance, the Interest Period applicable thereto. 2.10 Changes in Interest Rate, etc. Each Floating Rate Advance shall bear interest on the outstanding principal amount thereof, for each day from and including the date such Advance is made or is converted from a LIBOR Advance into a Floating Rate Advance pursuant to Section 2.9 to but excluding the date it becomes due or is converted into a LIBOR Advance pursuant to Section 2.9 hereof, at a rate per annum equal to the Floating Rate for such day. Changes in the rate of interest on any Advance maintained as a Floating Rate Advance will take effect simultaneously with each change in the Floating Rate or in the Applicable Floating Rate Margin. Each LIBOR Advance shall bear interest from and including the first day of the Interest Period applicable thereto to (but not including) the last day of such Interest Period at the interest rate determined as applicable to such LIBOR Advance. No Interest Period may end after the Facility Termination Date. 2.11 Determination of Applicable Margins and Applicable Unused Commitment Rate. (a) Facility Rating. The Applicable Margins and the Applicable Unused Commitment Rate shall be determined by reference to the Facility Rating or, if no Facility Rating exists, by reference to the Senior Debt Rating, in accordance with the following table: Facility or Applicable Applicable Senior Debt LIBOR Rate Floating Rate Applicable Unused Rating Margin (%) Margin (%) Commitment Rate (%) BBB-/Baa3 or 1.00 0 0.250 higher BB+/Ba1 1.25 0 0.300 BB/Ba2 1.50 0 0.350 BB-/Ba3 1.75 0.125 0.375 B+/B1 2.00 0.250 0.375 Lower or no 2.10 0.250 0.425 Rating (b) Adjustment of Margins. The Applicable Floating Rate Margin and the Applicable Unused Commitment Rate shall be adjusted, as applicable from time to time, effective on the first Business Day after any change in the Facility Rating or the Senior Debt Rating, as applicable. The applicable LIBOR Rate Margin in respect of any LIBOR Advance shall be adjusted, as applicable from time to time, effective on the first day of the Interest Period for any LIBOR Advance after any change in the Facility Rating or the Senior Debt Rating, as applicable. -28- (c) Changes to Ratings. Notwithstanding the foregoing, (i) if either of the two (2) rating agencies selected by Borrowers for purposes of calculating the foregoing amounts shall not have in effect a Facility Rating or a Senior Debt Rating for a reason related to the creditworthiness of Borrowers or Guarantor or to any act or failure to act on the part of Borrowers or Guarantor, then the Applicable Margins and the Applicable Unused Commitment Rate shall be determined by reference to the last category listed above, and (ii) if the rating system used by either such rating agency shall change, or if neither rating agency shall have in effect a Senior Debt Rating nor a Facility Rating and clause (i) above shall not be applicable, then Borrowers and Banks, acting through Agent, shall negotiate in good faith to amend the references to specific ratings in this definition to reflect such changed rating system or the non-availability of ratings from such rating agencies. 2.12 Rates Applicable After Event of Default. Notwithstanding anything to the contrary contained in Section 2.8, 2.9 or 2.10, during the continuance of an Event of Default the Required Banks may, at their option, by notice to Borrowers (which notice may be revoked at the option of the Required Banks notwithstanding any provision of Section 11.2 requiring unanimous consent of Banks to changes in interest rates), declare that no Advance may be made as, converted into or continued as a LIBOR Advance. Notwithstanding anything to the contrary contained in Section 2.8, 2.9 or 2.10, during the continuance of an Unmatured Event of Default the Required Banks may, at their option, by notice to Borrowers (which notice may be revoked at the option of the Required Banks notwithstanding any provision of Section 11.2 requiring unanimous consent of Banks to changes in interest rates), declare that no Advance may be made as or converted into a LIBOR Advance. During the continuance of an Event of Default, the Required Banks may, at their option, by notice to a Borrower (which notice may be revoked at the option of the Required Banks notwithstanding any provision of Section 11.2 requiring unanimous consent of Banks to changes in interest rates), declare that (i) each LIBOR Advance shall bear interest for the remainder of the applicable Interest Period at the rate otherwise applicable to such Interest Period plus 2% per annum and (ii) each Floating Rate Advance shall bear interest at a rate per annum equal to the Floating Rate otherwise applicable to the Floating Rate Advance plus 2% per annum. 2.13 Method of Payment. All payments of the Obligations hereunder shall be made, without setoff, deduction, or counterclaim, in immediately available funds to Agent at Agent's address specified pursuant to Article XVI, or at any other Lending Installation of Agent specified in writing by Agent to a Borrower, by noon (local time at the place of receipt) on the date when due (or with respect to Swing Line Advances, in accordance with Section 2.19), and, except for Swing Line Advances shall be applied ratably by Agent among Banks, in proportion to the ratio that each Bank's Commitment bears to the Aggregate Commitment. Each payment delivered to Agent for the account of any Bank shall be delivered promptly by Agent to such Bank in the same type of funds that Agent received at its address specified pursuant to Article XVI or at any Lending Installation specified in a notice received by Agent from such Bank. If Agent receives, for the account of a Bank, a payment from a Borrower and fails to remit such payment to the -29- Bank on the Business Day such payment is received (if received by noon, Phoenix time, by Agent) or on the next Business Day (if received after noon, Phoenix time, by Agent), Agent shall pay to such Bank interest on such payment at a rate per annum equal to the Federal Funds Effective Rate for each day for which such payment is so delayed. 2.14 Notes; Telephonic Notices. Each Bank is hereby authorized to record the principal amount of each of its Loans and each repayment on the schedule attached to its Note; provided, however, that the failure to so record shall not affect Borrowers' obligations under such Note. Each Borrower hereby authorizes Agent to extend, convert or continue Advances, effect selections of Types of Advances and to transfer funds based on telephonic notices made by any person or persons who Agent in good faith believes to be acting on behalf of such Borrower. Each Borrower agrees to deliver promptly to Agent a written confirmation, if such confirmation is requested by Agent, of each telephonic notice signed by an Authorized Officer of such Borrower. If the written confirmation differs in any material respect from the action taken by Agent, the records of Agent shall govern absent manifest error. 2.15 Interest Payment Dates; Interest Basis. Interest accrued on each Advance shall be payable on the first day of each calendar month, commencing with the first such date to occur after the date hereof, and on any date on which the Advance is prepaid, whether due to acceleration or otherwise. Interest shall be payable for the day an Advance is made but not for the day of any payment on the amount paid if payment is received prior to noon (local time at the place of receipt). If any payment of principal of or interest on an Advance shall become due on a day which is not a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall be included in computing interest in connection with such payment. 2.16 Notification of Advances, Interest Rates, Prepayments and Commitment Reductions. Promptly after receipt thereof, Agent will notify each Bank of the contents of each Aggregate Commitment reduction notice, Borrowing Notice, Conversion/Continuation Notice, and repayment notice received by it hereunder. Agent will notify each Bank of the interest rate applicable to each LIBOR Advance promptly upon determination of such interest rate and will give each Bank prompt notice of each change in the Floating Rate, the applicable Margin or the Applicable Unused Commitment Rate. 2.17 Lending Installations. Each Bank may book its Loans at any Lending Installation selected by such Bank and may change its Lending Installation from time to time. All terms of this Agreement shall apply to any such Lending Installation and the Notes shall be deemed held by each Bank for the benefit of such Lending Installation. Each Bank may, by written or telex notice to Agent and Borrowers, designate a Lending Installation through which Loans will be made by it and for whose account Loan payments are to be made. 2.18 Non-Receipt of Funds by Agent. Unless the applicable Borrower(s) or a Bank, as the case may be, notifies Agent prior to the date on which such payment is due to Agent of (i) in the case of a Bank, the proceeds of a Loan or (ii) in the case of a Borrower, a payment -30- of principal, interest, fees or other amounts due under the Loan Documents to Agent for the account of Banks, that it does not intend to make such payment, Agent may assume that such payment has been made. Agent may, but shall not be obligated to, make the amount of such payment available to the intended recipient in reliance upon such assumption. If the applicable Borrower(s) or such Bank, as the case may be, has not in fact made such payment to Agent, the recipient of such payment shall, on demand by Agent, repay to Agent the amount so made available together with interest thereon in respect of each day during the period commencing on the date such amount was so made available by Agent until the date Agent recovers such amount at a rate per annum equal to (a) in the case of payment by a Bank, the Federal Funds Effective Rate for such day or (b) in the case of payment by a Borrower, the interest rate applicable to the relevant Advance. 2.19 Swing Line. Notwithstanding the minimum amount of an Advance that may be requested and the minimum amount of an Advance repaid under this Agreement, Banks desire to fund Advances for Borrowers in amounts that may be less than the minimum Advance amounts required under Section 2.6, and Banks desire to permit Borrowers to repay Advances in amounts that may be less than the minimum repayment amounts required under Section 2.7. Such Advances made pursuant to this Section 2.19 shall be deemed to be Advances for purposes of this Agreement and are referred to herein as "Swing Line Advances." Swing Line Advances shall be requested, advanced, and repaid in accordance with the provisions and limitations of this Agreement relating to all Advances, subject to the following: (a) Aggregate Limit. The aggregate amount of all outstanding Swing Line Advances shall not exceed at any one time $10,000,000. (b) Floating Rate Advances. All Swing Line Advances shall be Floating Rate Advances. (c) Funding Swing Line Advances. Swing Line Advances shall be funded by Bank One pursuant to the procedures set forth in Section 2.8 of this Agreement. The principal amount of each Swing Line Advance, together with all accrued interest, shall be repaid by the applicable Borrower to Bank One in same day funds by 5:00 p.m. (or such later time as may be acceptable to Agent), Phoenix time, on the Swing Line Advance Maturity Date. Additionally, if the aggregate principal amount of all outstanding Swing Line Advances exceeds $10,000,000, Borrowers shall pay to Bank One the excess amount in same day funds by noon, Phoenix time, on the first Business Day following the day that the excess amount occurs. (d) Repayment of Swing Line Advances. If Borrowers fail to pay any Swing Line Advances on the applicable Swing Line Advance Maturity Date, then such Advances shall no longer be Swing Line Advances, but shall continue to be Floating Rate Advances for purposes of this Agreement. Each Bank shall be deemed to have irrevocably and unconditionally purchased and received from -31- Agent an undivided interest and participation (ratably in proportion to the ratio that such Bank's Commitment bears to the Aggregate Commitment) in such Advances. In such event, as of 11:59 p.m., Phoenix time, on the Swing Line Advance Maturity Date, Agent shall notify each Bank of the total principal amount of all Matured Swing Line Advances and each Bank's ratable share thereof. Upon receipt of such notice, each Bank shall promptly and unconditionally pay to Agent for the account of Bank One the amount of such Bank's share (ratably in proportion to the ratio that such Bank's Commitment bears to the Aggregate Commitment) of such payment in same day funds, and Agent shall promptly pay such amount, and any other amounts received by Agent for Bank One's account pursuant to this Section 2.19(d), to Bank One. If Agent so notifies such Bank prior to 10:00 a.m., Phoenix time, on any Business Day, such Bank shall make available to Agent for the account of Bank One such Bank's share of the amount of such payment on such Business Day in same day funds. If Agent notifies such Bank after 10:00 a.m., Phoenix time, on any Business Day, such Bank shall make available to Agent for the account of Bank One such Bank's share of the amount of such payment on the next succeeding Business Day in same day funds. If and to the extent such Bank shall not have so made its share of the amount of such payment available to Agent for the account of Bank One, such Bank agrees to pay to Agent for the account of Bank One forthwith on demand such amount, together with interest thereon, for each day from the date such payment was first due until the date such amount is paid to Agent for the account of Bank One, at the Federal Funds Effective Rate. The failure of any Bank to make available to Agent for the account of Bank One such Bank's share of any such payment shall not relieve any other Bank of its obligation hereunder to make available to Agent for the account of Bank One its share of any payment on the date such payment is to be made. (e) Advances. The payments made by Banks to Bank One in reimbursement of Swing Line Advances shall constitute, and Borrowers hereby expressly acknowledge and agree that such payments shall constitute, Advances hereunder to the applicable Borrower and such payments shall for all purposes be treated as Advances to such Borrower (notwithstanding that the amounts thereof may not comply with the provisions of Section 2.6 and 2.7(a)). Such Advances shall be Floating Rate Advances, subject to Borrowers' rights under Article II hereof. 2.20 Withholding Tax Exemption. At least five (5) Business Days prior to the first date on which interest or fees are payable hereunder for the account of any Bank, each Bank (if any) that is not incorporated under the laws of the United States of America, or a state thereof, agrees that it will deliver to each of Borrowers and Agent two (2) duly completed copies of United States Internal Revenue Service Form 1001 or 4224, certifying in either case that such Bank is entitled to receive payments under this Agreement and the Notes without deduction or withholding of any United States federal taxes and an Internal Revenue Service Form W-8 or -32- W-9 entitling such Bank to receive a complete exemption from United States tax backup withholding. Each Bank which so delivers a Form 1001 or 4224 further undertakes to deliver to each of Borrowers and Agent two (2) additional copies of such form (or a successor form) on or before the date that such form expires (currently, three (3) successive calendar years for Form 1001 and one (1) calendar year for Form 4224) or becomes obsolete or after the occurrence of any event requiring a change in the most recent forms so delivered by it, and such amendments thereto or extensions or renewals thereof as may be reasonably requested by Borrowers or Agent, in each case certifying that such Bank is entitled to receive payments under this Agreement and the Notes without deduction or withholding of any United States federal taxes, unless an event (including without limitation any change in treaty, law or regulation) has occurred prior to the date on which any such delivery would otherwise be required which renders all such forms inapplicable or which would prevent such Bank from duly completing and delivering any such form with respect to it and such Bank advises Borrowers and Agent that it is not capable of receiving payments without any deduction or withholding of United States federal tax. If a Bank does not provide duly executed forms to Borrowers and Agent within the time periods set forth in the preceding paragraph, Borrowers or Agent shall withhold taxes from payments to such Bank at the applicable statutory rates and Borrowers shall not be required to pay any additional amounts as a result of such withholding. Upon the reasonable request of Borrowers or Agent, each Bank that has not provided the forms or other documents, as provided above, on the basis of being a "United States person," shall submit to Borrowers and Agent a certificate or other evidence to the effect that it is such a "United States person." 2.21 Extension of Facility Termination Date. (a) Extension Requests. Borrowers may request a two-year extension of the Facility Termination Date by submitting a request for an extension to Agent (an "Extension Request") no more than 28 months nor less than 26 months prior to the then scheduled Facility Termination Date. Promptly upon (but not later than five (5) Business Days after) receipt of the Extension Request, Agent shall notify each Bank of the contents thereof and shall request each Bank to approve the Extension Request. Each Bank approving the Extension Request shall deliver its written approval no later than sixty (60) days after the date of the Extension Request. If the approval of each of Banks is received by Agent within sixty (60) days after the date of the Extension Request (or as otherwise provided in Section 2.21(b)), Agent shall promptly so notify Borrowers and each Bank, and the Facility Termination Date shall be extended by two (2) years, and in such event Borrowers may thereafter request further extension(s) of the then scheduled Facility Termination Date in accordance with this Section 2.21. If any of Banks does not deliver to Agent such Bank's written approval to any Extension Request within sixty (60) days after the date of such Extension Request, the Facility Termination Date shall not be extended, except as otherwise provided in Section 2.21(b) or 2.21(c). -33- (b) Rejecting Banks/Full Assignment. If (i) any Banks whose pro rata shares of the Aggregate Commitment do not exceed (in the aggregate) 20% of the Aggregate Commitment ("Rejecting Banks") shall not approve an Extension Request, (ii) all rights and obligations of such Rejecting Banks under this Agreement and under the other Loan Documents (including, without limitation, their Commitment and all Loans owing to them) shall have been assigned, within ninety (90) days following such Extension Request, in accordance with Section 2.23, to one or more Replacement Banks who shall have approved in writing such Extension Request at the time of such assignment, and (iii) no other Bank shall have given written notice to Agent of such Bank's withdrawal of its approval of the Extension Request, Agent shall promptly so notify Borrowers and each Bank and the Facility Termination Date shall be extended by two (2) years, and in such event Borrowers may thereafter request further extension(s) as provided in Section 2.21(a). (c) Rejecting Banks/No Full Assignment. If (A) the Rejecting Banks shall not approve an Extension Request, (B) the provisions of clause (b)(ii) above do not apply, and (iii) no other Bank shall have given written notice to Agent of such Bank's withdrawal of its approval of the Extension Request, Agent shall promptly notify Borrowers and each Bank and any Replacement Bank, and the Facility Termination Date shall be extended by two (2) years, and in such event Borrowers may thereafter request further extension(s) as provided in Section 2.21 (a); provided, however, that the Aggregate Commitment shall be automatically reduced, effective as of the first day of the extension period, and shall equal the aggregate Commitments of the Banks who are not Rejecting Banks and the Banks who are Replacement Banks. All rights and obligations of such Rejecting Banks under this Agreement and under the other Loan Documents (including, without limitation, their Commitment and all Loans owing to them) shall either be (I) assigned to Replacement Banks pursuant to Section 2.21(b), or (II) terminated, effective as of the then existing Facility Termination Date (or such earlier date as Borrowers and Agent may designate), in which case the terminated Bank shall have concurrently received, in cash, all amounts due and owing to the terminated Bank hereunder or under any other Loan Document, including without limitation the aggregate outstanding principal amount of the Loans owed to such Bank, together with accrued interest thereon through the date of such termination, all amounts payable under Sections 3.1 and 3.2 with respect to such Bank and all fees payable to such Bank hereunder (and payment of such amount may not be waived except with the consent of each Bank, as more specifically provided in Section 11.2(i)); provided that, upon such Bank's termination, such Bank shall cease to be a party hereto but shall continue to be entitled to the benefits of Article III and Section 12.7, as well as to any fees accrued hereunder and not yet paid, and shall continue to be obligated under Section 13.8 with respect to obligations and liabilities accruing prior to the termination of such Bank. -34- (d) Approval of Extension. Within ten (10) days after Agent's notice to Borrowers that all (or some, as applicable) of Banks have approved an Extension Request (whether pursuant to Section 2.21(a), (b) or (c)), Borrowers shall pay to Agent for the account of each Bank approving the extension and each Replacement Bank an extension fee calculated in the manner set forth in Section 2.5(c). (e) No Extension. If the Extension Request is not approved pursuant to Section 2.21(a), (b) or (c), or if Borrowers do not request an extension pursuant to this Section 2.21, then during the twenty-four (24) months preceding the Facility Termination Date, the terms and conditions set forth on Schedule "2.21" shall be deemed to be incorporated into this Agreement by this reference, and Borrowers, Banks and Agent agree that the terms and conditions set forth in Schedule "2.21" shall be controlling to the extent the same are inconsistent with the terms and conditions of this Agreement, and Borrowers, Banks and Agent shall act in accordance therewith. 2.22 Conversion Period. (a) Commencement of Conversion Period. If (A) any Financial Covenant Test is breached, and such breach in each case continues for two (2) consecutive fiscal quarters, or (B) the representations and warranties in Section 6.7 are untrue or incorrect as of the date which the same were made (or deemed to be made), and such date is after the date of this Agreement, then unless the Required Banks in their sole and absolute discretion agree otherwise, the Conversion Period shall automatically commence. In the case of clause (A), the Conversion Date shall be first day of the first month after the second consecutive fiscal quarter of such breach, and in the case of clause (B), the Conversion Date shall be the first day of the first month after such breach. If the Conversion Date occurs pursuant to clause (A), Borrowers shall have the right to elect, by notice given to Agent on or before that day that is thirty (30) days after the Conversion Date, that the Conversion Period be an Unsecured Conversion Period or a Secured Conversion Period. If Borrowers fail to provide such notice within such 30-day period, then Borrowers shall be deemed to have elected that the Conversion Period be an Unsecured Conversion Period. If the Conversion Date occurs pursuant to clause (B), the Conversion Period shall be a Secured Conversion Period. Notwithstanding the foregoing, with respect to clause (A), if as of the end of the second consecutive fiscal quarter of such failure to comply with the foregoing tests, either (I) With respect to the Consolidated Tangible Net Worth Test, Consolidated Tangible Net Worth is less than (i) -35- $150,000,000 plus (ii) fifty percent (50%) of the Consolidated Net Income earned after January 1, 1996 (excluding any quarter in which there is a loss, but applying any Consolidated Net Income thereafter first to such loss before determining 50% of such amount for purposes of this calculation) plus (iii) one hundred percent (100%) of the net proceeds of capital stock issued by Guarantor after January 1, 1996, or (II) With respect to the Leverage Test, Consolidated Indebtedness exceeds the product of 2.50 multiplied by Adjusted Consolidated Tangible Net Worth, then the Conversion Period shall be a Secured Conversion Period (or, subject to the provisions of Section 2.22(f) hereof, a Modified Secured Conversion Provision, as applicable). (b) Unsecured Conversion Period. If Borrowers elect, or are deemed to have elected, that the Conversion Period be an Unsecured Conversion Period, then: (i) The Facility Termination Date shall be that date that is the day preceding the first anniversary date of the Conversion Date. (ii) From and after three (3) calendar months after the Conversion Date, the Aggregate Commitment (and each Bank's Commitment) in effect as of the Conversion Date shall be reduced on the first day after the end of each three-month period by a percentage of such Aggregate Commitment amount (or such Bank's Commitment amount) as follows: -36- Percentage Percentage of Commitment of Commitment Period Reduction Remaining 3 calendar months after Conversion Date 25% 75% 6 calendar months after Conversion Date 25% 50% 9 calendar months after Conversion Date 25% 25% 12 calendar months after Conversion Date 25% 0% (c) Secured Conversion Period. If Borrowers elect, or are deemed to have elected pursuant to Section 2.22(a), that the Conversion Period be a Secured Conversion Period, then: (i) The Facility Termination Date shall be that date that is the day preceding the second anniversary date of the Conversion Date. (ii) From and after three (3) calendar months after the Conversion Date, the Aggregate Commitment (and each Bank's Commitment) in effect as of the Conversion Date shall be reduced on the first day after the end of each three-month period by a percentage of such Aggregate Commitment amount (or such Bank's Commitment amount) as follows: -37- Percentage Percentage of Commitment of Commitment Period Reduction Remaining 3 calendar months after Conversion Date 5% 95% 6 calendar months after Conversion Date 10% 85% 9 calendar months after Conversion Date 10% 75% 12 calendar months after Conversion Date 15% 60% 15 calendar months after Conversion Date 15% 45% 18 calendar months after Conversion Date 15% 30% 21 calendar months after Conversion Date 15% 15% 24 calendar months after Conversion Date 15% 0% (iii) Borrowers shall provide, and Agent and Banks shall accept, Collateral for the Obligations in accordance with the terms of Schedule "2.22". Within thirty (30) days after the Conversion Date, Borrowers shall provide to Agent all Collateral Documents relating to the Collateral. Within ninety (90) days after the Conversion Date, Borrowers shall provide to Agent all Due Diligence Documents relating to the Collateral. (iv) During the Conversion Period, the terms and conditions set forth on Schedule "2.22" shall be deemed to be incorporated into this Agreement by this reference, and Borrowers, Banks and Agent agree that the terms and conditions set forth in Schedule "2.22" shall be controlling to the extent the same are inconsistent with the terms and conditions of this Agreement, and Borrowers, Banks and Agent shall act in accordance therewith. -38- (d) Breach During Certain Periods. Notwithstanding the provisions of Section 2.22(a) above, if any Financial Covenant Test is breached for two (2) consecutive fiscal quarters and the second such fiscal quarter occurs (i) during an Unsecured Conversion Period, or (ii) during a Secured Conversion Period, or (iii) during a Modified Secured Conversion Period, or (iv) during the twelve-month period immediately preceding the Facility Termination Date where no Conversion Period is in effect, then the provisions of Section 2.22(a) shall not apply, and such breach shall not be deemed to be an Event of Default under this Agreement. (e) Breach During End of Term. Notwithstanding the provisions of subparagraph 2.22(a) above, if (A) any Financial Covenant Test is breached for two (2) consecutive fiscal quarters and the second such fiscal quarter occurs during the period that is twenty-four (24) months to thirteen (13) months immediately preceding the Facility Termination Date, or (B) the representations and warranties in Section 6.7 are untrue or incorrect as of the date which the same were made (or deemed to be made), and such date occurs during the period that is twenty-four (24) to thirteen (13) months immediately preceding the Facility Termination Date, and (C) in either event, no Conversion Period is then in effect, then unless the Required Banks in their sole and absolute discretion agree otherwise, the Conversion Period shall automatically commence. The Conversion Date shall be first day of the first month after (I) the second consecutive fiscal quarter of such breach, in the case of clause (A), or (II) such breach, in the case of clause (B). Borrowers shall have the right to elect, by notice given to Banks on or before that day that is thirty (30) days after the Conversion Date, that the Conversion Period be an Unsecured Conversion Period or a Modified Secured Conversion Period; provided, however, that the Conversion Period shall be a Secured Conversion Period if the provisions of Section 2.22(a)(I) or (II) apply, or if the Conversion Period results from a breach of Section 6.7. If Borrowers fail to provide such notice within such 30-day period, then Borrowers shall be deemed to have elected that the Conversion Period be an Unsecured Conversion Period. If Borrowers elect (or are deemed to have elected) that the Conversion Period be an Unsecured Conversion Period, then the provisions of subparagraph 2.22(a) shall apply. If Borrowers elect that the Conversion Period be a Modified Secured Conversion Period, then: (i) the Aggregate Commitment (and each Bank's Commitment) in effect as of end of the second fiscal quarter to which such breach relates shall be reduced on the first day after the end of each three-month period thereafter in an equal portion of such Aggregate Commitment amount (or such Bank's Commitment amount), such that the Aggregate Commitment amount (and each Bank's Commitment amount) shall be zero on the Facility Termination Date. -39- (ii) Borrowers shall provide, and Agent and Banks shall accept, Collateral for the Obligations in accordance with the terms of Schedule "2.22". Within thirty (30) days after the end of the second fiscal quarter to which the breach relates, Borrowers shall provide to Agent all Collateral Documents relating to the Collateral. Within ninety (90) days after the end of the second fiscal quarter to which such breach relates, Borrowers shall provide to Agent all Due Diligence Documents relating to the Collateral. (iii) During the Conversion Period, the terms and conditions set forth on Schedule "2.22" shall be deemed to be incorporated into this Agreement by this reference, and Borrowers, Banks and Agent agree that the terms and conditions set forth in Schedule "2.22" shall be controlling to the extent the same are inconsistent with the terms and conditions of this Agreement, and Borrowers, Banks and Agent shall act in accordance therewith. 2.23 Replacement of Certain Banks. In the event a Bank (the "Affected Bank"): (i) shall have requested compensation from Borrowers under Sections 3.1 or 3.2 to cover additional costs incurred by such Bank that are not being incurred generally by the other Banks, or (ii) shall have delivered a notice pursuant to Section 3.3 that such Affected Bank is unable to extend LIBOR Loans for reasons not generally applicable to the other Banks, or (iii) is a Rejecting Bank pursuant to Section 2.21, then, in any such case, and at any time after such event occurs, Borrowers or Agent may make written demands on such Affected Bank (with a copy to Agent in the case of a demand by Borrowers and a copy to Borrowers in the case of a demand by Agent) for the Affected Bank to assign, and such Affected Bank shall assign, pursuant to one or more duly executed assignment agreements in substantially the form provided for in Section 15.3.1, within five (5) Business Days after the date of such demand, to one or more financial institutions that comply with the provisions of Section 15.3, and that are selected by Borrowers and/or Agent, that are reasonably acceptable to Agent or Borrowers, as applicable, that Borrowers or Agent, as the case may be, shall have engaged for such purpose (the "Replacement Bank"), all of such Affected Bank's rights and obligations under this Agreement and the other Loan Documents (including, without limitation, its Commitment and all Loans owing to it) in accordance with Section 15.3. If any Affected Bank fails to execute and deliver such assignment -40- agreements within thirty (30) days after demand, then such Affected Bank shall have no further right to receive any amounts payable under Sections 3.1 and 3.2 with respect to such Affected Bank. Agent agrees, upon the occurrence of such events with respect to an Affected Bank and upon written request of Borrowers, to use its reasonable efforts to obtain the commitments from one or more financial institutions to act as a Replacement Bank. Agent is authorized, but shall not be obligated to, execute one or more of such assignment agreements as attorney-in-fact for any Affected Bank failing to execute and deliver the same within five (5) Business Days after the date of such demand. Further, with respect to such assignment, the Affected Bank shall have concurrently received, in cash, all amounts due and owing to the Affected Bank hereunder or under any other Loan Document, including without limitation the aggregate outstanding principal amount of the Loans owed to such Bank, together with accrued interest thereon through the date of such assignment, amounts payable under Sections 3.1 and 3.2 with respect to such Affected Bank and all fees payable to such Affected Bank hereunder; provided that, upon such Affected Bank's replacement, such Affected Bank shall cease to be a party hereto but shall continue to be entitled to the benefits of Article III and Section 12.7, as well as to any fees accrued hereunder and not yet paid, and shall continue to be obligated under Section 13.8 with respect to obligations and liabilities accruing prior to the replacement of such Affected Bank. ARTICLE III CHANGE IN CIRCUMSTANCES 3.1 Yield Protection. If any law or any governmental or quasi-governmental rule, regulation, policy, guideline or directive (whether or not having the force of law), or any interpretation thereof, or the compliance of any Bank therewith, (i) subjects any Bank or any applicable Lending Installation to any tax, duty, charge or withholding on or from payments due from Borrowers (excluding any taxes imposed on, or based on, or determined by reference to the net income of any Bank or applicable Lending Installation, including, without limitation, franchise taxes, alternative minimum taxes and any branch profits tax (collectively, "Excluded Taxes")), any taxes imposed on, or based on, or determined by reference to or changes the basis of taxation of payments to any Bank in respect of its Loans or other amounts due it hereunder (except for Excluded Taxes), (ii) imposes or increases or deems applicable any reserve, assessment, insurance charge, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Bank or any applicable Lending Installation (other than reserves and assessments taken into account in determining the interest rate applicable to LIBOR Rates), or -41- (iii) imposes any other condition or requirement the result of which is to increase the cost to any Bank or any applicable Lending Installation of making, funding or maintaining loans or reduces any amount receivable by any Bank or any applicable Lending Installation in connection with loans, or requires any Bank or any applicable Lending Installation to make any payment calculated by reference to the amount of loans held or interest received by it, by an amount deemed material by such Bank, then, within fifteen (15) days after demand by such Bank, Borrowers shall pay such Bank that portion of such increased expense incurred or reduction in an amount received which such Bank determines is attributable to making, funding and maintaining its Loans and its Commitment; provided, however, that Borrowers shall not be required to increase any such amounts payable to any Bank (1) if such Bank fails to comply with the requirements of Section 2.20 hereof or (2) to the extent that such Bank determines, in its sole reasonable discretion, that it can, after notice from Borrowers, through reasonable efforts, eliminate or reduce the amount of tax liabilities payable (without additional costs or expenses unless Borrowers agree to bear such costs or expenses) or other disadvantages or risks (economic or otherwise) to such Bank or Agent. If any Bank receives a refund in respect of any amount described in clause (i), (ii) and (iii) above for which such Bank has received payment from Borrowers hereunder, such Bank shall promptly notify Borrowers of such refund and such Bank shall repay the amount of such refund to Borrowers, provided that Borrowers, upon the request of such Bank, agree to return such refund to such Bank in the event such Bank is required to repay such refund. The determination as to whether any Bank has received a refund shall be made by such Bank and such determination shall be conclusive absent manifest error. 3.2 Changes in Capital Adequacy Regulations. If a Bank or Issuing Bank determines the amount of capital required or expected to be maintained by such Bank, any Lending Installation of such Bank or Issuing Bank or any corporation controlling such Bank or Issuing Bank is increased as a result of a Change, then, within fifteen (15) days after demand by such Bank or Issuing Bank, Borrowers shall pay such Bank or Issuing Bank the amount necessary to compensate for any shortfall in the rate of return on the portion of such increased capital which such Bank or Issuing Bank determines is attributable to this Agreement, its Loans or its obligation to make Loans hereunder, or its issuance or maintenance of or participation in, or commitment to issue, to maintain or to participate in, the Facility Letters of Credit hereunder (after taking into account such Bank's or Issuing Bank's policies as to capital adequacy). "Change" means (i) any change after the date of this Agreement in the Risk-Based Capital Guidelines or (ii) any adoption of or change in any other law, governmental or quasi-governmental rule, regulation, policy, guideline, interpretation, or directive (whether or not having the force of law) after the date of this Agreement which affects the amount of capital required or expected to be maintained by any Bank, Issuing Bank, Lending Installation or any corporation controlling any Bank or Issuing Bank. "Risk-Based Capital Guidelines" means (A) -42- the risk-based capital guidelines in effect in the United States on the date of this Agreement, including transition rules, and (B) the corresponding capital regulations promulgated by regulatory authorities outside the United States implementing the July 1988 report of the Basle Committee on Banking Regulation and Supervisory Practices Entitled "International Convergence of Capital Measurements and Capital Standards," including transition rules, and any amendments to such regulations adopted prior to the date of this Agreement. 3.3 Availability of Types of Advances. If any Bank determines and notifies Agent that maintenance of any of such Bank's LIBOR Loans at a suitable Lending Installation would violate any applicable law, rule, regulation or directive, whether or not having the force of law, Agent shall suspend the availability of the affected Type of Advance and require any LIBOR Advances of the affected Type to be repaid; or if the Required Banks determine and notify Agent that (i) deposits of a type or maturity appropriate to match fund LIBOR Advances are not available, Agent shall suspend the availability of the affected Type of Advance with respect to any LIBOR Advances made after the date of any such determination, or (ii) an interest rate applicable to a Type of Advance does not accurately reflect the cost of making a LIBOR Advance of such Type, then, if for any reason whatsoever the provisions of Section 3.1 are inapplicable, Agent shall suspend the availability of the affected Type of Advance with respect to any LIBOR Advance made after the date of any such determination. 3.4 Funding Indemnification. If any payment of a LIBOR Advance occurs on a date which is not the last day of the applicable Interest Period, whether because of acceleration, prepayment or otherwise, or a LIBOR Advance is not made on the date specified by Borrowers for any reason other than default by Banks, Borrowers will indemnify each Bank for any loss or cost or expense incurred by it resulting therefrom, including, without limitation, any loss or cost in liquidating or employing deposits acquired to fund or maintain the LIBOR Advance. 3.5 Bank Statements; Survival of Indemnity. To the extent reasonably possible, each Bank shall designate an alternate Lending Installation with respect to its LIBOR Advances to reduce any liability of Borrowers to such Bank under Sections 3.1 and 3.2 or to avoid the unavailability of a Type of Advance under Section 3.3, so long as such designation is not disadvantageous to such Bank. Each Bank or Issuing Bank shall deliver a written statement of such Bank or Issuing Bank as to the amount due, if any, under Sections 3.1, 3.2 or 3.4. Such written statement shall set forth in reasonable detail the calculations upon which such Bank or Issuing Bank determined such amount and shall be final, conclusive and binding on Borrowers in the absence of manifest error. Determination of amounts payable under such Sections in connection with a LIBOR Advance shall be calculated as though each Bank funded its LIBOR Advance through the purchase of a deposit of the type and maturity corresponding to the deposit used as a reference in determining the LIBOR Advance applicable to such Loan, whether in fact that is the case or not. Unless otherwise provided herein, the amount specified in the written statement shall be payable within three (3) days after receipt by Borrowers of the written statement. The obligations of Borrowers under Sections 3.1, 3.2 and 3.4 shall survive payment of the Obligations and termination of this Agreement. -43- ARTICLE IV THE LETTER OF CREDIT FACILITY 4.1 Facility Letters of Credit. The Issuing Bank agrees, on the terms and conditions set forth in this Agreement, to issue from time to time for the account of a Borrower, through such offices or branches as it and a Borrower may jointly agree, one or more Facility Letters of Credit in accordance with this Article IV, during the period commencing on the date hereof and ending on the Business Day prior to the Facility Termination Date. Each Facility Letter of Credit shall be either (i) a standby letter of credit to support obligations of the requesting Borrower(s), contingent or otherwise, arising in the ordinary course of business, or (ii) a documentary letter of credit in respect of the purchase of goods or services by such Borrower(s) in the ordinary course of business. 4.2 Limitations. No Issuing Bank shall issue, amend or extend, at any time, any Facility Letter of Credit: (i) if the aggregate maximum amount then available for drawing under Letters of Credit issued by such Issuing Bank, after giving effect to the Facility Letter of Credit or amendment or extension thereof requested hereunder, shall exceed any limit imposed by law or regulation upon such Issuing Bank; (ii) if, after giving effect to the Facility Letter of Credit or amendment or extension thereof requested hereunder, the aggregate principal amount of the Facility Letter of Credit Obligations of all Borrowers would exceed $20,000,000; (iii) that, in the case of the issuance of a Facility Letter of Credit, is in, or in the case of an amendment of a Facility Letter of Credit, increases the face amount thereof by, an amount in excess of the then Aggregate Available Credit; (iv) if, after giving effect to the Facility Letter of Credit or amendment or extension thereof requested hereunder, the aggregate principal amount of the Facility Letter of Credit Obligations of such Borrower plus the principal amount of all Advances outstanding with respect to such Borrower would exceed the Borrowing Base for such Borrower as of the most recent Inventory Valuation Date; (v) if, after giving effect to the Facility Letter of Credit or amendment or extension thereof requested hereunder, the aggregate principal amount of all Facility Letter of Credit Obligations plus the principal amount of all Advances outstanding would exceed the aggregate Borrowing Bases determined as of the most recent Inventory Valuation Date; -44- (vi) if such Issuing Bank receives written notice from Agent at or before noon, Phoenix time, on the proposed Issuance Date of such Facility Letter of Credit that one or more of the conditions precedent contained in Sections 5.1 or 5.2, as applicable, would not on such Issuance Date be satisfied, unless such conditions are thereafter satisfied and written notice of such satisfaction is given to such Issuing Bank by Agent; (vii) that has an expiration date (taking into account any automatic renewal provisions thereof) that is later than one (1) year after the Issuance Date, or such later time as the Issuing Bank may agree; provided, however in no event shall the expiration date be later than the Business Day next preceding the scheduled Facility Termination Date; or (viii) that is in a currency other than Dollars, or that is not consistent with the Uniform Customs and Practice for Documentary Credits (1993 Revision), International Chamber of Commerce Publication No. 500, as the same may be updated. 4.3 Conditions. In addition to being subject to the satisfaction of the conditions contained in Sections 5.1 and 5.2, as applicable, the issuance of any Facility Letter of Credit is subject to the satisfaction in full of the following conditions: (i) the Borrower requesting the Facility Letter of Credit shall have delivered to the Issuing Bank at such times and in such manner as the Issuing Bank may reasonably prescribe a Reimbursement Agreement and such other documents and materials as may be reasonably required pursuant to the terms thereof, and the proposed Facility Letter of Credit shall be reasonably satisfactory to such Issuing Bank in form and content; and (ii) as of the Issuance Date no order, judgment or decree of any court, arbitrator or governmental authority shall enjoin or restrain such Issuing Bank from issuing the Facility Letter of Credit and no law, rule or regulation applicable to such Issuing Bank and no directive from and governmental authority with jurisdiction over the Issuing Bank shall prohibit such Issuing Bank from issuing Letters of Credit generally or from issuing that Facility Letter or Credit. 4.4 Procedure for Issuance of Facility Letters of Credit. (a) Request for Facility Letter of Credit. The requesting Borrower shall give the Issuing Bank and Agent not less than five (5) Business Days' prior written notice of any requested issuance of a Facility Letter of Credit under this Agreement. Such notice shall specify (i) the stated amount of the Facility Letter of Credit requested, (ii) the requested Issuance Date, which shall be a Business Day, (iii) the date on which such requested Facility Letter of Credit is to expire, -45- which date shall be in compliance with the requirements of Section 4.2(vii), (iv) the purpose for which such Facility Letter of Credit is to be issued (which shall be a purpose permitted pursuant to Section 7.2), and (v) the Person for whose benefit the requested Facility Letter of Credit is to be issued. At the time such request is made, the requesting Borrower shall also provide Agent and the Issuing Bank with a copy of the form of the Facility Letter of Credit it is requesting be issued. (b) Issuing Bank. Within two (2) Business Days after receipt of a request for issuance of a Facility Letter of Credit in accordance with Section 4.4(a), the Issuing Bank shall approve or disapprove, in its reasonable discretion, the form of such requested Facility Letter of Credit, but the issuance of such approved Facility Letter of Credit shall continue to be subject to the provisions of this Article IV. The Issuing Bank shall use reasonable efforts to notify the applicable Borrower of any changes in the Issuing Bank's policies or procedures that could reasonably be expected to affect adversely the Issuing Bank's approval of the form of any requested Facility Letters of Credit. (c) Confirmation of Issuance. Upon receipt of a request for issuance of a Facility Letter of Credit in accordance with Section 4.4(a), Agent shall determine, as of the close of business on the day it receives such request, whether the issuance of such Facility Letter of Credit would be permitted under the provisions of Sections 4.2(ii), (iii), (iv) and (v) and, prior to the close of business on the second Business Day after Agent received such request, Agent shall notify the Issuing Bank and such Borrower (in writing or by telephonic notice confirmed promptly thereafter in writing) whether issuance of the requested Facility Letter of Credit would be permitted under the provisions of Sections 4.2(ii), (iii), (iv) and (v). If Agent notifies the Issuing Bank and the applicable Borrower that such issuance would be so permitted, then, subject to the terms and conditions of this Article IV and provided that the applicable conditions set forth in Sections 5.1 and 5.2 have been satisfied, the Issuing Bank shall, on the requested Issuance Date, issue the requested Facility Letter of Credit in accordance with the Issuing Bank's usual and customary business practices. The Issuing Bank shall give Agent written notice, or telephonic notice confirmed promptly thereafter in writing, of the issuance of a Facility Letter of Credit. (d) Extension and Amendment. An Issuing Bank shall not extend or amend any Facility Letter of Credit unless the requirements of this Section 4.4 are met as though a new Facility Letter of Credit were being requested and issued; provided, however, that if the Facility Letter of Credit, as originally issued, sets forth such extension or amendment, then the Issuing Bank shall so extend or amend the Facility Letter of Credit upon the request of the applicable Borrower given in the manner set forth in Section 4.4(a) and upon satisfaction of the terms and conditions of Section 4.4(c). -46- (e) Other Letters of Credit. Any Bank may, but shall not be obligated to, issue to a Borrower Letters of Credit (that are not Facility Letters of Credit) for its own account, and at its own risk. None of the provisions of this Article IV shall apply to any Letter of Credit that is not a Facility Letter of Credit. (f) Existing Letters of Credit. As of the date of this Agreement, certain of the Banks have previously issued, and there are currently outstanding, Letters of Credit for the benefit of one or more Borrowers (the "Existing Letters of Credit"), all pursuant to the Refinanced Loans. Such Existing Letters of Credit shall remain outstanding after the date of this Agreement. Borrowers remain obligated with respect to the Existing Letters of Credit, and the Refinanced Loans shall remain outstanding obligations of Borrowers to the extent of such Existing Letters of Credit. At the request of the applicable Borrower from time to time pursuant to, and subject to the limitations and procedures of, Section 4.4(a), the Existing Letters of Credit shall be converted to Facility Letters of Credit. The date of such conversion shall be deemed to be the date of issuance of such Facility Letter of Credit for purposes of this Agreement, including without limitation, for purposes of calculating the fees payable under Section 4.7. Immediately upon such conversion, the Issuing Bank, through Agent, shall be deemed to have sold and transferred, and each Bank shall be deemed to have irrevocably and unconditionally purchased and received from Agent, without recourse or warranty, in each case without further action on the part of any Person, an undivided interest and participation, (ratably in proportion to the ratio that such Bank's Commitment bears to the Aggregate Commitment) in such Facility Letter of Credit. Each Bank severally agrees to fund any disbursements by the Issuing Bank pursuant to Existing Letters of Credit by funding in accordance with Section 4.6. The Existing Letters of Credit converted to Facility Letters of Credit pursuant to this Section 4.4(f) shall be deemed to be Facility Letters of Credit for all purposes under this Agreement, and shall be subject to all terms and conditions hereof. 4.5 Duties of Issuing Bank. Any action taken or omitted to be taken by an Issuing Bank under or in connection with any Facility Letter of Credit, if taken or omitted in the absence of willful misconduct or gross negligence, shall not put such Issuing Bank under any resulting liability to any Bank or, assuming that such Issuing Bank has complied with the procedures specified in Section 4.4, relieve any Bank of its obligations hereunder to such Issuing Bank. In determining whether to pay under any Facility Letter of Credit, the Issuing Bank shall have no obligation relative to Banks other than to confirm that any documents required to be delivered under such Facility Letter of Credit appear to have been delivered in compliance and that they appear to comply on their face with the requirements of such Facility Letter of Credit. -47- 4.6 Participation. (a) Proportionate Share of Banks. Immediately upon issuance by an Issuing Bank of any Facility Letter of Credit in accordance with Section 4.4, each Bank shall be deemed to have irrevocably and unconditionally purchased and received from such Issuing Bank, without recourse or warranty, an undivided interest and participation (ratably in proportion to the ratio that such Bank's Commitment bears to the Aggregate Commitment) in such Facility Letter of Credit. (b) Payment by Issuing Bank. In the event that an Issuing Bank makes any payment under any Facility Letter of Credit and the applicable Borrower shall not have repaid such amount to such Issuing Bank on or before the date of such payment by such Issuing Bank, such Issuing Bank shall promptly so notify Agent, which shall promptly so notify each Bank. Upon receipt of such notice, each Bank shall promptly and unconditionally pay to Agent for the account of such Issuing Bank the amount of such Bank's share (ratably in proportion to the ratio that such Bank's Commitment bears to the Aggregate Commitment) of such payment in same day funds, and Agent shall promptly pay such amount, and any other amounts received by Agent for such Issuing Bank's account pursuant to this Section 4.6(b), to such Issuing Bank. If Agent so notifies such Bank prior to 10:00 a.m., Phoenix time, on any Business Day, such Bank shall make available to Agent for the account of such Issuing Bank such Bank's share of the amount of such payment on such Business Day in same day funds. If and to the extent such Bank shall not have so made its share of the amount of such payment available to Agent for the account of such Issuing Bank, such Bank agrees to pay to Agent for the account of such Issuing Bank forthwith on demand such amount, together with interest thereon, for each day from the date such payment was first due until the date such amount is paid to Agent for the account of such Issuing Bank, at the Federal Funds Effective Rate. The failure of any Bank to make available to Agent for the account of such Issuing Bank such Bank's share of any such payment shall not relieve any other Bank of its obligation hereunder to make available to Agent for the account of such Issuing Bank its share of any payment on the date such payment is to be made. (c) Advances. The payments made by Banks to an Issuing Bank in reimbursement of amounts paid by it under a Facility Letter of Credit shall constitute, and Borrowers hereby expressly acknowledge and agree that such payments shall constitute, Advances hereunder to the applicable Borrower and such payments shall for all purposes be treated as Advances to such Borrower (notwithstanding that the amounts thereof may not comply with the provisions of Section 2.6). Such Advances shall be Floating Rate Advances, subject to Borrowers' rights under Article II hereof. -48- (d) Copies of Documents. Upon the request of Agent or any Bank, an Issuing Bank shall furnish to the requesting Agent or Bank copies of any Facility Letter of Credit or Reimbursement Agreement to which such Issuing Bank is party and such other documentation as may reasonably be requested by Agent or the Bank. (e) Obligations of Banks. The obligations of Banks to make payments to Agent for the account of an Issuing Bank with respect to a Facility Letter of Credit shall be irrevocable, not subject to any qualification or exception whatsoever and shall be made in accordance with, but not subject to, the terms and conditions of this Agreement under all circumstances notwithstanding: (i) any lack of validity or enforceability of this Agreement, any Facility Letter of Credit (except where due to the gross negligence or willful misconduct of the Issuing Bank), or any of the other Loan Documents; (ii) the existence of any claim, setoff, defense or other right which any Borrower may have at any time against a beneficiary named in a Facility Letter of Credit or any transferee of any Facility Letter of Credit (or any Person for whom any such transferee may be acting), such Issuing Bank, Agent, any Bank, or any other Person, whether in connection with this Agreement, any Facility Letter of Credit, the transactions contemplated herein or any unrelated transactions (including any underlying transactions between a Borrower or any Subsidiary and the beneficiary named in any Facility Letter of Credit) other than the defense of payment in accordance with this Agreement or a defense based on the gross negligence or willful misconduct of the Issuing Bank; (iii) any draft, certificate or any other document presented under the Facility Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect of any statement therein being untrue or inaccurate in any respect so long as the payment by the Issuing Bank under such Facility Letter of Credit against presentation of such draft, certificate or other document shall not have constituted gross negligence or willful misconduct; (iv) the surrender or impairment of any security for the performance or observance of any of the terms of any of the Loan Documents; (v) any failure by Agent or the Issuing Bank to make any reports required pursuant to Section 4.8; or -49- (vi) the occurrence of any Event of Default or Unmatured Event of Default. 4.7 Compensation for Facility Letters of Credit. (a) Payment of Facility Letter of Credit Fee. Each Borrower agrees to pay to Agent, in the case of each outstanding Facility Letter of Credit, the Facility Letter of Credit Fee therefor, payable in quarterly installments in advance on the Issuance Date and on the first day of each January, April, July and October after the Issuance Date (which installment shall be a pro rata portion of the annual Facility Letter of Credit Fee for the 3-month period in which such payment date occurs). If the Issuance Date is a date other than the first day of January, April, July or October, then the first quarterly installment of the Facility Letter of Credit Fee shall be payable in arrears, on the first day of January, April, July, or October, as applicable, next following the Issuance Date. Such initial installment shall be a pro rata portion of the annual Facility Letter of Credit Fee for the period commencing on the Issuance Date and ending on the day preceding such payment date. Facility Letter of Credit Fees shall be calculated, on a pro rata basis for the period to which such payment applies, for actual days that will elapse during such period, on the basis of a 365 day year. Agent shall promptly remit such Facility Letter of Credit Fees, when paid, to Banks (ratably in the proportion that each Bank's Commitment bears to the Aggregate Commitment). (b) Calculation of Fee. The Facility Letter of Credit Fee shall be determined by reference to the Facility Rating or, if no Facility Rating exists, by reference to the Senior Debt Rating, in accordance with the following table: Facility or Applicable Senior Debt Letter of Credit Rating Rate (%) BBB-/Baa3 or higher 1.125 BB+/Ba1 1.125 BB/Ba2 1.250 BB-/Ba3 1.250 B+/B1 1.375 Lower or no 1.375 Rating (c) Adjustment of Fee. The Applicable Letter of Credit Rate shall be adjusted, as applicable from time to time, effective on the first January 1, April 1, June 1, or October 1 to occur after any change in the Facility Rating or the Senior Debt Rating, as applicable. -50- (d) Changes to Ratings. Notwithstanding the foregoing, (i) if either of the two (2) rating agencies selected by Borrowers for purposes of calculating the Applicable Letter of Credit Rate shall not have in effect a Facility Rating or a Senior Debt Rating for a reason related to the creditworthiness of Borrowers or Guarantor or to any act or failure to act on the part of Borrowers or Guarantor, then the Applicable Letter of Credit Rate shall be determined by reference to the last category listed above, and (ii) if the rating system used by either such rating agency shall change, or if neither rating agency shall have in effect a Senior Debt Rating nor a Facility Rating and clause (i) above shall not be applicable, then Borrowers and Banks, acting through Agent, shall negotiate in good faith to amend the references to specific ratings in this definition to reflect such changed rating system or the non-availability of ratings from such rating agencies. (e) Amounts Owed to Issuing Bank. An Issuing Bank shall have the right to receive solely for its own account such amounts as the applicable Borrower may agree, in writing, to pay to such Issuing Bank with respect to issuance fees and for such Issuing Bank's out-of-pocket costs of issuing and servicing Facility Letters of Credit. 4.8 Issuing Bank Reporting Requirements. Each Issuing Bank shall, no later than the tenth day following the last day of each month, provide to Agent a schedule of the Facility Letters of Credit issued by it, in form and substance reasonably satisfactory to Agent, showing the Issuance Date, account party, original face amount, amount (if any) paid thereunder, expiration date and the reference number of each Facility Letter of Credit outstanding at any time during such month and the aggregate amount (if any) payable by each Borrower to such Issuing Bank during the month pursuant to Section 3.2. Copies of such reports shall be provided promptly to each Bank and Borrowers by Agent. 4.9 Indemnification; Nature of Issuing Bank's Duties. (a) Indemnity. In addition to amounts payable as elsewhere provided in this Article IV, each Borrower hereby agrees to protect, indemnify, pay and hold harmless Agent and each Bank and Issuing Bank from and against any and all claims, demands, liabilities, damages, losses, costs, charges and expenses (including reasonable attorneys' fees) arising from the claims of third parties against Agent, Issuing Bank or Bank as a consequence, direct or indirect, of (i) the issuance of any Facility Letter of Credit for such Borrower other than, in the case of an Issuing Bank, as a result of its willful misconduct or gross negligence, or (ii) the failure of an Issuing Bank issuing a Facility Letter of Credit for such Borrower to honor a drawing under such Facility Letter of Credit as a result of any act or omission, whether rightful or wrongful, of any present or future de jure or de facto government or governmental authority. -51- (b) Assumption of Risk. As among Borrowers, Banks, Agent and the Issuing Bank, Borrowers assume all risks of the acts and omissions of, or misuse of Facility Letters of Credit by, the respective beneficiaries of such Facility Letters of Credit. In furtherance and not in limitation of the foregoing, neither the Issuing Bank nor Agent nor any Bank shall be responsible: (i) for the form, validity, sufficiency, accuracy, genuineness or legal effect of any document submitted by any party in connection with the application for and issuance of the Facility Letters of Credit, even if it should in fact prove to be in any or all respects invalid, insufficient, inaccurate, fraudulent or forged; (ii) for the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign a Facility Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, which may prove to be invalid or ineffective for any reason; (iii) for failure of the beneficiary of a Facility Letter of Credit to comply fully with conditions required in order to draw upon such Facility Letter of Credit; (iv) or errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, cable, telegraph, telex or otherwise, whether or not they be in cipher; (v) for errors in interpretation of technical terms; (vi) for any loss or delay in the transmission or otherwise of any document required in order to make a drawing under any Facility Letter of Credit or of the proceeds thereof; (vii) for the misapplication by the beneficiary of a Facility Letter of Credit of the proceeds of any drawing under such Facility Letter of Credit; and (viii) for any consequences arising from causes beyond the control of Agent, the Issuing Bank and Banks including, without limitation, any act or omission, whether rightful or wrongful, of any present or future de jure or de facto government or governmental authority. None of the above shall affect, impair, or prevent the vesting of any of the Issuing Bank's rights or powers under this Section 4.9. -52- (c) Good Faith. In furtherance and extension and not in limitation of the specific provisions hereinabove set forth, any action taken or omitted by an Issuing Bank under or in connection with the Facility Letters of Credit or any related certificates, if taken or omitted in good faith under commercially reasonable standards, shall not put such Issuing Bank, Agent or any Bank under any resulting liability to any Borrower or relieve any Borrower of any of its obligations hereunder to any such Person. (d) Certain Acts of Issuing Bank. Notwithstanding anything to the contrary contained in this Section 4.9, Borrowers shall have no obligation to indemnify an Issuing Bank under this Section 4.9 in respect of any liability incurred by such Issuing Bank arising primarily out of the willful misconduct or gross negligence of such Issuing Bank, as determined by a court of competent jurisdiction, or out of the wrongful dishonor by such Issuing Bank of a proper demand for payment made under the Facility Letters of Credit issued by such Issuing Bank, unless such dishonor was made at the request of a Borrower. 4.10 No Obligation to Issue. The Issuing Bank shall not at any time be obligated to issue any Facility Letter of Credit if such issuance would conflict with, or cause the Issuing Bank or any other Bank, to exceed any limits imposed by any applicable law, rule or regulation. 4.11 Obligations of Issuing Bank and Other Banks. Except to the extent that a Bank shall have agreed to be designated as an Issuing Bank, no Bank shall have any obligation to accept or approve any request for, or to issue, amend or extend, any Letter of Credit, and the obligations of the Issuing Bank to issue, amend or extend any Facility Letter of Credit are expressly limited by and subject to the provisions of this Article IV. ARTICLE V CONDITIONS PRECEDENT 5.1 Initial Advance. Banks shall not be required to make the initial Advance hereunder, and the Issuing Bank shall not be required to issue the initial Facility Letter of Credit hereunder, unless Borrowers have paid to Agent the fees set forth in the letter agreement of even date herewith between Agent and Borrowers, and Borrowers have furnished to Agent with sufficient copies for Banks: (i) Copies of the certificate of incorporation of each Borrower and Guarantor, together with all amendments, and a certificate of good standing, all certified by the appropriate governmental officer in the jurisdiction of incorporation. (ii) Copies, certified by the Secretary or Assistant Secretary of each Borrower and Guarantor, of each such corporation's by-laws and of its -53- Board of Directors' resolutions (and resolutions of other bodies, if any are deemed necessary by counsel for any Bank) authorizing the execution of the Loan Documents and the Guaranty. (iii) Incumbency certificates, executed by the Secretary or Assistant Secretary of each Borrower and Guarantor, which shall identify by name and title and bear the signature of the officers of the such corporation authorized to sign the Loan Documents and the Guaranty (as applicable) and (if applicable) to make borrowings hereunder and to request, apply for and execute Facility Letter of Credit Reimbursement Agreements with respect to Facility Letters of Credit hereunder, upon which certificates Agent, Banks and the Issuing Bank shall be entitled to rely until informed of any change in writing by the applicable Borrower or Guarantor. (iv) A written opinion of Haligman & Lottner, P.C., counsel to Borrowers and Guarantor, addressed to Agent and Banks in substantially the form of Exhibit F hereto. (v) A written certificate of General Counsel of Guarantor, addressed to Agent and Banks in substantially the form of Exhibit G hereto. (vi) A written opinion of local counsel to Borrowers and Guarantor, addressed to Agent and Banks in substantially the form of Exhibit H hereto. (vii) A letter or other evidence from Price Waterhouse LLP, accountants for Borrowers and Guarantor, in form acceptable to Agent, indicating that no material accounting adjustments have occurred with respect to Guarantor's consolidated financial statements in connection with the adoption of FASB 121. (viii) Notes payable to the order of each of Banks. (ix) Written money transfer instructions, in form acceptable to Agent, addressed to Agent and signed by an Authorized Officer, together with such other related money transfer authorizations as Agent may have reasonably requested. (x) The Guaranty duly executed by Guarantor. (xi) Evidence satisfactory to Agent (A) of payment in full (which payment may be made from the proceeds of the initial Advance hereunder) of all obligations of Borrowers and Guarantor to, and termination of the financing arrangements evidenced by, the Refinanced Loans, and (B) that all Liens securing the obligations and financing arrangements related to the Refinanced Loans shall -54- be discharged promptly, but in no event later than ninety (90) days, following the payment of such obligations. (xii) An accurate list of all of the Subsidiaries of Guarantor and each Borrower, setting forth their respective jurisdictions of incorporation or formation and the percentage of their respective capital stock or partnership interests owned by Guarantor or any Borrower or their Subsidiaries. (xiii) Such other documents as any Bank or Issuing Bank or their respective counsel may have reasonably requested. 5.2 Each Advance. Banks shall not be required to make any Advance (other than the conversion of an Advance of one Type to an Advance of another Type that does not increase the aggregate amount of outstanding Advances), unless on the applicable Borrowing Date, and an Issuing Bank shall not be required to issue, amend or extend a Facility Letter of Credit unless on the applicable Issuance Date: (i) There exists no Event of Default or Unmatured Event of Default. (ii) The representations and warranties contained in Article VI are true and correct in all material respects as of such Borrowing Date or Issuance Date except to the extent any such representation or warranty is stated to relate solely to an earlier date, in which case such representation or warranty shall be true and correct in all material respects on and as of such earlier date and except for changes permitted by this Agreement. Solely for purposes of this Section 5.2, the representations and warranties in Sections 6.5 and 6.7 relate solely to the date of this Agreement. (iii) After the making of such Advance or issuance of such Facility Letter of Credit, (A) the principal amount of all Advances plus the aggregate amount of the Facility Letter of Credit Obligations outstanding shall not exceed the Aggregate Commitment, and (B) the aggregate principal amount of all Advances plus the aggregate amount of the Facility Letter of Credit Obligations outstanding to any individual Borrower shall not exceed the Borrowing Base for such Borrower (determined as of the most recent Inventory Valuation Date), and (C) the aggregate principal amount of all Advances plus the aggregate amount of the Facility Letter of Credit Obligations outstanding shall not exceed the aggregate Borrowing Bases (determined as of the most recent Inventory Valuation Date). (iv) Borrowers shall have delivered to Agent, within the time period specified in Section 2.8, a duly completed Borrowing Notice in substantially the form of Exhibit I hereto. -55- (v) All legal matters incident to (A) the making of such Advance shall be reasonably satisfactory to Agent and its counsel and (B) the issuance of such Facility Letter of Credit shall be reasonably satisfactory to Agent, such Issuing Bank and their respective counsel. Each Borrowing Notice with respect to each such Advance and each request for a Facility Letter of Credit shall constitute a representation and warranty by Borrowers that the conditions contained in Sections 5.2(i) and (ii) have been satisfied. ARTICLE VI REPRESENTATIONS AND WARRANTIES Borrowers represent and warrant to Banks and Agent that: 6.1 Existence and Standing. Each Borrower is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation and has all requisite authority to conduct its business in each jurisdiction in which its business is conducted (except to the extent that a failure to maintain such existence, good standing or authority would not reasonably be expected to have and does not have a Material Adverse Effect). Guarantor is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation and has all requisite authority to conduct its business in each jurisdiction in which its business is conducted (except to the extent that a failure to maintain such existence, good standing or authority would not reasonably be expected to have and does not have a Material Adverse Effect). 6.2 Authorization and Validity. Each Borrower has the corporate power and authority to execute and deliver the Loan Documents and to perform its obligations hereunder and thereunder. The execution and delivery by each Borrower of the Loan Documents and the performance of its obligations thereunder have been duly authorized and the Loan Documents constitute legal, valid and binding obligations of each Borrower enforceable against each Borrower in accordance with their terms, subject to bankruptcy, insolvency or similar laws affecting the enforcement of creditors' rights generally and general principles of equity. Guarantor has the corporate power and authority to execute and deliver the Guaranty and to perform its obligations thereunder. The execution and delivery by Guarantor of the Guaranty and the performance of its obligations thereunder have been duly authorized, and the Guaranty constitutes the legal, valid and binding obligations of Guarantor enforceable against Guarantor in accordance with its terms, subject to bankruptcy, insolvency or similar laws affecting the enforcement of creditors' rights generally and general principles of equity. 6.3 No Conflict; Government Consent. Neither the execution and delivery by each Borrower of the Loan Documents or by Guarantor of the Guaranty, nor the consummation of the transactions herein contemplated, nor compliance with the provisions hereof or thereof will violate in any material respect any law, rule, regulation, order, writ, judgment, injunction, -56- decree or award binding on each Borrower or Guarantor or a Borrower's or Guarantor's certificate of incorporation or bylaws or the provisions of any indenture (including without limitation the Indenture), instrument or agreement to which each Borrower or Guarantor is a party or is subject, or by which it, or its Property, is bound, or conflict with or constitute a default thereunder, or result in the creation or imposition of any Lien in, of or on the Property of each Borrower or Guarantor pursuant to the terms of any such indenture, instrument or agreement. Except as set forth on Schedule "6.3" hereto, no order, consent, approval, license, authorization, or validation of, or filing, recording or registration with, or exemption by, any governmental or public body or authority, or any subdivision thereof, is required to authorize, or is required in connection with the execution, delivery and performance of, or the legality, validity, binding effect or enforceability of, any of the Loan Documents or the Guaranty. 6.4 Financial Statements. The December 31, 1995 audited consolidated financial statements of Guarantor and the December 31, 1995 unaudited financial statements of Borrowers and the Subsidiaries delivered to Banks were prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Such statements fairly present, in all material respects, the consolidated financial condition and operations of Guarantor, Borrowers and their Subsidiaries at such date and the consolidated results of their operations for the period then ended. 6.5 Material Adverse Change. Since the date of the financial statements (whether quarterly or annual) of each Borrower and Guarantor described in Section 6.4, there has been no change in the business, Property, condition (financial or otherwise) or results of operations of Borrowers and Guarantor (taken as a whole) that has had or would reasonably be expected to have a Material Adverse Effect. The foregoing representation and warranty is made solely as of the date of this Agreement. 6.6 Taxes. Each Borrower and Guarantor have filed all United States federal income tax returns and all other material tax returns which are required to be filed and have paid all taxes due pursuant to said returns or pursuant to any assessment received by a Borrower or Guarantor, except such taxes, if any, as are being contested in good faith and as to which adequate reserves have been provided. No tax Liens (except Permitted Liens) have been filed and no claims are being asserted with respect to any such taxes that have had or would reasonably be expected to have a Material Adverse Effect. The charges, accruals and reserves on the books of each Borrower and Guarantor in respect of any taxes or other governmental charges are adequate in accordance with Agreement Accounting Principles. 6.7 Litigation and Contingent Obligations. Except as set forth in Guarantor's form 10-K report for the period ending December 30, 1995, there is no litigation, arbitration, governmental investigation, proceeding or inquiry pending or, to the knowledge of any Authorized Officer, threatened against or affecting any Borrower or Guarantor that has had or would reasonably be expected to have a Material Adverse Effect. Other than any liability incident to such litigation, arbitration or proceedings, each Borrower and Guarantor have no material contingent obligations not provided for or disclosed in the financial statements (whether -57- quarterly or annual) of Guarantor and Borrowers that have been most recently delivered by Guarantor and Borrowers to Agent that has had or would reasonably be expected to have a Material Adverse Effect. 6.8 Subsidiaries. All of the issued and outstanding shares of capital stock of Borrowers have been duly authorized and validly issued and are fully paid and non-assessable. 6.9 ERISA. The Unfunded Liabilities of all Single Employer Plans do not in the aggregate exceed $5,000,000. The withdrawal liabilities to Multiemployer Plans of the Guarantor, any Borrower and any other member of the Controlled Group do not, and are not reasonably expected to, exceed $5,000,000 in the aggregate. Each Plan complies in all material respects with all applicable requirements of law and regulations, no Reportable Event has occurred with respect to any Plan, neither Guarantor, nor any Borrower nor any other member of the Controlled Group has withdrawn from any Multiemployer Plan or initiated steps to do so, and no steps have been taken to terminate any Plan. 6.10 Accuracy of Information. All factual information heretofore or contemporaneously furnished in writing by or on behalf of any Borrower or Guarantor to Agent or any Issuing Bank for purposes of or in connection with this Agreement or any transaction contemplated hereby is, and all other such factual information hereafter furnished in writing by or on behalf of any Borrower or Guarantor to Agent or any Issuing Bank will be, true and accurate (taken as a whole), in all material respects, on the date as of which such information is dated or certified and not incomplete by omitting to state any material fact necessary to make such information (taken as a whole) not misleading at such time. 6.11 Regulation U. Neither Guarantor, nor any Borrower nor any Subsidiary is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying Margin Stock (as defined in Regulation U). 6.12 Material Agreements. Neither any Borrower nor Guarantor is in default in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in (i) any agreement to which it is a party, or (ii) any agreement or instrument evidencing or governing Indebtedness, which default has had or would reasonably be expected to have a Material Adverse Effect. 6.13 Labor Disputes and Acts of God. Neither the business nor the Property of any Borrower or of Guarantor is affected by any fire, explosion, accident, strike, lockout, or other labor dispute, drought, storm, hail, earthquake, embargo, act of God or of the public enemy, or other casualty (whether or not covered by insurance), which has had or would reasonably be expected to have a Material Adverse Effect. 6.14 Ownership. Each Borrower and Guarantor have title to, or valid leasehold interests in, all of their respective properties and assets, real and personal, including the properties and assets and leasehold interests reflected in the financial statements referred to in -58- Section 6.4 (except to the extent that (i) such properties or assets have been disposed of in the ordinary course of business or (ii) the failure to have such title has not had and would not reasonably be expected to have a Material Adverse Effect). 6.15 Operation of Business. Each Borrower and Guarantor possess all licenses, permits, franchises, patents, copyrights, trademarks, and trade names, or rights thereto, to conduct their respective businesses substantially as now conducted, and as presently proposed to be conducted, with such exceptions as have not had and would not reasonably be expected to have a Material Adverse Effect. 6.16 Laws; Environment. Except as set forth in Guarantor's form 10-K report for the period ending December 31, 1995, each Borrower and Guarantor have duly complied, and their businesses, operations and Property are in compliance, in all material respects, with the provisions of all federal, state, and local statutes, laws, codes, and ordinances and all rules and regulations promulgated thereunder (including without limitation those relating to the environment, health and safety). Except as set forth in the form 10-K described herein, each Borrower and Guarantor have been issued all required federal, state, and local permits, licenses, certificates, and approvals relating to (1) air emissions; (2) discharges to surface water or groundwater; (3) solid or liquid waste disposal; (4) the use, generation, storage, transportation, or disposal of toxic or hazardous substances or hazardous wastes (intended hereby and hereafter to include any and all such materials listed in any federal, state, or local law, code, or ordinance and all rules and regulations promulgated thereunder as hazardous); or (5) other environmental, health or safety matters. Except in accordance with a valid governmental permit, license, certificate or approval or as set forth in the form 10-K described herein, to the best knowledge of each Borrower, there has been no material emission, spill, release, or discharge into or upon (1) the air; (2) soils, or any improvements located thereon; (3) surface water or groundwater; or (4) the sewer, septic system or waste treatment, storage or disposal system servicing any Property of a Borrower or Guarantor, of any toxic or hazardous substances or hazardous wastes at or from such Property. Neither Guarantor nor any Borrower has received notice of any written complaint, order, directive, claim, citation, or notice from any governmental authority or any person or entity with respect to violations of law or damage by reason of any Borrower's or Guarantor's (1) air emissions; (2) spills, releases, or discharges to soils or improvements located thereon, surface water, groundwater or the sewer, septic system or waste treatment, storage or disposal systems servicing any Property; (3) solid or liquid waste disposal; (4) use, generation, storage, transportation, or disposal of toxic or hazardous substances or hazardous waste; or (5) other environmental, health or safety matters affecting any Borrower or Guarantor or its business, operation or Property. Except as set forth in the form 10-K described herein, neither any Borrower nor Guarantor has any material Indebtedness, obligation, or liability, absolute or contingent, matured or not matured, with respect to the storage, treatment, cleanup, or disposal of any solid wastes, hazardous wastes, or other toxic or hazardous substances (including without limitation any such indebtedness, obligation, or liability with respect to any current regulation, law or statute regarding such storage, treatment, cleanup, or disposal). A matter will not constitute a breach of this Section 6.16 unless it is reasonably likely to result in a Material Adverse Effect. -59- 6.17 Investment Company Act. Neither Guarantor nor any Borrower is an "investment company" or a company "controlled" by an "investment company," within the meaning of the Investment Company Act of 1940, as amended. 6.18 Public Utility Holding Company Act. Neither Guarantor nor any Borrower nor any Subsidiary is a "holding company" or a "subsidiary company" of a "holding company," or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company," within the meaning of the Public Utility Holding Company Act of 1935, as amended. 6.19 Subordination Provisions. The Obligations to the Banks constitute senior indebtedness which is entitled to the benefits of the subordination provisions of the Convertible Subordinated Notes. The Obligations to the Banks constitute Guarantor Senior Indebtedness of Borrowers under the Indenture which entitle the Banks to the benefits of the subordination provisions of the Indenture. 6.20 Indenture Provisions. Each Borrower is a Wholly-Owned Restricted Subsidiary, as that term is defined in the Indenture. Each Borrower is a Guarantor, as that term is defined in the Indenture. ARTICLE VII AFFIRMATIVE COVENANTS During the term of this Agreement, unless the Required Banks shall otherwise consent in writing: 7.1 Financial Reporting. Each Borrower will maintain, and Guarantor will maintain, a system of accounting established and administered in accordance with GAAP, and furnish to Banks: (i) Within 100 days after the close of each fiscal year, (A) an unqualified (or qualified as reasonably acceptable to Agent) audited financial statements of Guarantor certified by one of the "Big Six" accounting firms or other nationally recognized independent certified public accountants, reasonably acceptable to Banks, prepared in accordance with GAAP on a consolidated basis, including balance sheets as of the end of such fiscal year and statements of income and retained earnings and a statement of cash flows, in each case setting forth in comparative form the figures for the preceding fiscal year, and (B) unaudited financial statements, prepared in accordance with GAAP (excluding footnotes) on a consolidated basis for each Borrower and its respective Subsidiaries, including balance sheets as of the end of such fiscal year and statements of income and retained earnings and a statement of cash flows, in each case setting forth in comparative form the figures for the preceding fiscal year. -60- (ii) Within sixty (60) days after the close of the first three (3) quarterly periods of each fiscal year, for Guarantor and each Borrower and their respective Subsidiaries, on a consolidated basis, unaudited financial statements, including balance sheets as of the end of such period, statements of income and retained earnings, and a statement of cash flows for the portion of the fiscal year ending with such fiscal period, all certified by an Authorized Officer. All such balance sheets shall set forth in comparative form figures for the preceding year end. All such income statements shall reflect current period and year-to-date figures. (iii) Annually, together with the financial statements described in clause (i) above, a copy of the business plan of Guarantor and each Borrower for the upcoming two (2) fiscal years, including, as to Guarantor, a consolidated balance sheet, statement of income and projection of cash flows. (iv) Within sixty (60) days of the end of each of the first three quarterly periods of each fiscal year, a quarterly variance analysis comparing actual quarterly results versus projected quarterly results for the fiscal quarter most recently ended, including an analysis of revenues, Housing Unit Closings and operating profits (by operating division) for such period, and such other items as are reasonably requested by Agent, together with a written explanation of material variances. (v) Within 100 days after the end of each fiscal year, a variance analysis comparing actual annual results versus the business plan for the fiscal year most recently ended, including an analysis of revenues, Housing Unit Closings and operating profits (by operating division) for such period, and such other items as are reasonably requested by Agent, together with a written explanation of material variances. (vi) By the twenty-fifth day of each calendar month, a Borrowing Base Certificate of an Authorized Officer for each Borrower, with respect to the Inventory Valuation Date occurring on the last day of the immediately preceding calendar month. (vii) Within sixty (60) days after the end of each quarterly period of each fiscal year, a report identifying as to Guarantor and its Subsidiaries the inventory of real estate operations, including land and housing units as of such date, designated in the same categories as are identified in Guarantor's corporate status report currently delivered to Agent; such summary shall include a delineation of sold or unsold items in each category. (viii) Within sixty (60) days after the end of each of the first three quarterly periods, and within one hundred (100) days after the end, of each fiscal -61- year, a certificate of an Authorized Officer as to Borrower's and Guarantor's compliance with the Financial Covenant Tests in the form of Exhibit J hereto. (ix) Within 270 days after the close of each fiscal year, a statement of the Unfunded Liabilities of each Single Employer Plan, certified as correct by an actuary enrolled under ERISA (which requirement may be satisfied by the delivery of the most recent actuarial valuation of each such Single Employer Plan). (x) As soon as possible and in any event within ten (10) days after any Borrower knows that any Reportable Event has occurred with respect to any Plan, a statement, signed by an Authorized Officer of such Borrower, describing said Reportable Event and the action which such Borrower (or Guarantor) proposes to take with respect thereto. (xi) As soon as possible, and in any event within thirty (30) days after any Borrower knows or has reason to know that any circumstances exist that constitute grounds entitling the PBGC to institute proceedings to terminate a Plan subject to ERISA with respect to any Borrower or any member of the Controlled Group and promptly but in any event within two (2) Business Days of receipt by Guarantor, any Borrower or any member of the Controlled Group of notice that the PBGC intends to terminate a Plan or appoint a trustee to administer the same, and promptly but in any event within five (5) Business Days of the receipt of notice concerning the imposition of withdrawal liability in excess of $500,000 with respect to Guarantor, any Borrower or any member of the Controlled Group, a certificate of an Authorized Officer setting forth all relevant details of such event and the action which any Borrower (or Guarantor) proposes to take with respect thereto. (xii) Promptly after the sending or filing thereof, copies of all proxy statements, financial statements (including form 10-K and 10-Q, exclusive of exhibits unless otherwise requested by Agent), and reports which Guarantor sends to its stockholders, and copies of all regular (except form S-8), periodic, and special reports, and all registration statements (exclusive of exhibits unless otherwise requested by Agent) which Guarantor is required to file with the Securities and Exchange Commission or any governmental authority which may be substituted therefor, or with any national securities exchange. (xiii) Promptly after the commencement thereof, notice of all actions, suits and proceedings before any court or governmental department, commission, board, bureau, agency, or instrumentality, domestic or foreign, affecting a Borrower or Guarantor (a) which, if determined adversely to such Borrower or Guarantor, could reasonably be expected to have a Material Adverse Effect or (b) in which liability in excess of $2,500,000 (in the aggregate with respect to any -62- action, suit or proceeding) is claimed and alleged against such Borrower or Guarantor. (xiv) As soon as possible and in any event within ten (10) days after receipt by any Borrower or Guarantor, a copy of (a) any written notice or claim to the effect that any Borrower or Guarantor is or may be liable to any Person as a result of the release of any toxic or hazardous waste or substance into the environment, and (b) any notice alleging any violation of any federal, state or local environmental, health or safety law or regulation by any Borrower or Guarantor which, in the case of either (a) or (b), could reasonably be expected to have a Material Adverse Effect or could result in liability to any Borrower or Guarantor in excess of $2,500,000 (in the aggregate with respect to any notice or claim). (xv) Such other information (including non-financial information) as Agent may from time to time reasonably request. 7.2 Use of Proceeds. Subject to the limitations contained in this Agreement, each Borrower will use the proceeds of Advances for its own acquisition, development or holding of real property or the construction of improvements in connection with the home building, real estate operations or related businesses of such Borrower (including payment of reimbursement obligations with respect to Facility Letters of Credit), and any other use permitted with the definition of "Guarantor Senior Indebtedness" under the Indenture, and to repay outstanding Advances. Each Borrower will not, and Guarantor and each Subsidiary will not, use any of the proceeds of the Advances to purchase or carry any "margin stock" (as defined in Regulation U) or, except as otherwise permitted by this Agreement, to purchase any securities in any transaction that is subject to Sections 13 and 14 of the Securities Exchange Act of 1934, as amended. 7.3 Notice of Event of Default. Each Borrower will, and Guarantor will, give prompt notice in writing to Agent of the occurrence of (i) any Event of Default or Unmatured Event of Default and (ii) any other development, financial or otherwise, that has had or would be reasonably expected to have a Material Adverse Effect. 7.4 Conduct of Business. Except as otherwise permitted under this Agreement, each Borrower will, and Guarantor will, carry on and conduct business in the same general manner and in substantially the same fields of enterprise as presently conducted and to do all things necessary to remain duly incorporated, validly existing and in good standing as a domestic corporation in their respective jurisdictions of incorporation and maintain all requisite authority to conduct business in each jurisdiction in which business is conducted; provided, however, that nothing contained herein shall prohibit the dissolution of any Borrower as long as another Borrower succeeds to the assets, liabilities and business of the dissolved Borrower. -63- 7.5 Taxes. Each Borrower will, and Guarantor will, pay prior to delinquency all taxes, assessments and governmental charges and levies upon them or their income, profits or Property, except (i) those that solely encumber property abandoned or in the process of being abandoned and with respect to which there is no recourse to Guarantor or any Subsidiary; (ii) those that are being contested in good faith by appropriate proceedings and with respect to which adequate reserves have been established in accordance with GAAP, and (iii) to the extent that the failure to do so would not reasonably be expected to have and does not have a Material Adverse Effect. 7.6 Insurance. Each Borrower will, and Guarantor will, maintain with financially sound and reputable insurance companies insurance on all their Property in such amounts and covering such risks as is consistent with sound business practice, and each Borrower will furnish to Agent upon request full information as to the insurance carried. 7.7 Compliance with Laws. Each Borrower will, and Guarantor will, comply with all laws, rules, regulations, orders, writs, judgments, injunctions, decrees or awards to which it may be subject, except to the extent that the failure to do so would not reasonably be expected to have and does not have a Material Adverse Effect. 7.8 Maintenance of Properties. Each Borrower will, and Guarantor will, do all things necessary to maintain, preserve, protect and keep its Property in good repair, working order and condition, except to the extent that the failure to do so would not reasonably be expected to have and does not have a Material Adverse Effect. 7.9 Inspection. Each Borrower will, and Guarantor will, permit Agent and Banks, by their respective representatives and agents, to inspect any of the Property, corporate (or partnership) books and financial records of such Borrower and Guarantor to examine and make copies of the books of accounts and other financial records of such Borrower and Guarantor, and to discuss the affairs, finances and accounts of such Borrower and Guarantor with, and to be advised as to the same by, their respective officers at such reasonable times and intervals as Agent may designate. 7.10 Environment. Each Borrower will, and Guarantor will, (i) comply, in all material respects, with the provisions of all federal, state, and local environmental, health, and safety laws, codes and ordinances, and all rules and regulations issued thereunder; (ii) promptly contain and remove or otherwise remediate any hazardous discharge from or affecting the Property of any Borrower or Guarantor, to the extent required by and in compliance with all applicable laws; (iii) promptly pay any fine or penalty assessed in connection therewith or contest the same in good faith; and (iv) permit Agent to inspect such Property, to conduct tests thereon, and to inspect all books, correspondence, and records pertaining thereto at reasonable hours and places; and (v) at the request of the Required Banks, and at such Borrower's expense, provide a report of a qualified environmental engineer, satisfactory in scope, form, and content to the Required Banks, and such other and further assurances reasonably satisfactory to the Required Banks that any new condition or occurrence hereafter identified in any updated form 10-K or 10-Q has been -64- corrected; provided that a failure to comply with the provisions of clauses (i) through (v) of this Section 7.10 shall not constitute an Event of Default or an Unmatured Event of Default unless such noncompliance has resulted in or is reasonably likely to result in a Material Adverse Effect. ARTICLE VIII NEGATIVE COVENANTS During the term of the Agreement, unless the Required Banks shall otherwise consent in writing: 8.1 Dividends. Each Borrower will not, directly or indirectly, declare, make or pay, or incur any liability to make or pay, or cause or permit to be declared, made or paid, any Dividend if, prior to or after giving effect to the declaration and payment of any Dividend, there shall exist any Event of Default under this Agreement, or Borrowers shall be in breach of the Individual Debt Coverage Test or the Aggregate Debt Coverage Test. Guarantor will not, directly or indirectly, declare, make or pay, or incur any liability to make or pay, or cause or permit to be declared, made or paid, any Dividend if, prior to or after giving effect to the declaration and payment of any Dividend, there shall exist any Event of Default under this Agreement. 8.2 Indebtedness. Each Borrower will not, and Guarantor will not, create, incur or suffer to exist any Indebtedness, except, without duplication and without duplication as to Borrowers and Guarantor: (i) The Loans. (ii) Indebtedness existing on the date hereof (and not otherwise permitted under this Section 8.2) and described in Schedule "8.2(ii)" hereto and Refinancing Indebtedness with respect thereto. (iii) Indebtedness of Guarantor's mortgage lending and financial asset management Subsidiaries. (iv) Rate Hedging Obligations. (v) Intercompany Indebtedness between any Borrower, Guarantor and/or any Subsidiary, provided that, as to Indebtedness of a Borrower to Guarantor, such Indebtedness is subordinated by Guarantor under the Guaranty to the reasonable satisfaction of Agent. (vi) Trade accounts payable and accrued expenses arising or occurring in the ordinary course of business. -65- (vii) Indebtedness constituting Capitalized Lease Obligations. (viii) Indebtedness with respect to Letters of Credit (including Facility Letters of Credit) in an aggregate face amount outstanding at any time not to exceed $35,000,000. (ix) Indebtedness secured by purchase-money Liens permitted under Section 8.6(iii). (x) Subordinated Indebtedness. (xi) Non-Recourse Indebtedness incurred in the ordinary course of business. (xii) Performance bonds, completion bonds, guarantees of performance, and guarantees of Indebtedness of a special district entered into in the ordinary cause of business. (xiii) Indebtedness of a Person existing as of the time of the Acquisition of such Person by any Borrower or Guarantor, provided that, after giving effect to such Acquisition, Borrowers or Guarantor, as applicable, are in compliance with the terms of this Agreement (including without limitation the Financial Covenant Tests). (xiv) Indebtedness evidenced by the Senior Notes and the Convertible Subordinated Notes and Refinancing Indebtedness with respect thereto. (xv) Public Indebtedness, so long as such Indebtedness (A) as to Guarantor, is either subordinated to or pari passu with Guarantor's obligations under the Guaranty; and (B) as to Borrowers, is Subordinated Indebtedness. (xvi) Indebtedness of a Borrower or Guarantor secured by a Lien on real property owned by such Borrower or Guarantor, where (A) the real property is not related to Housing Units or Land Under Development, and (B) the aggregate outstanding amount of such Indebtedness, plus all amounts committed but undisbursed in connection with such Indebtedness, does not exceed seventy-five percent (75%) of the fair market value of the real property encumbered by such Lien. (xvii) Indebtedness, except Public Indebtedness, not otherwise permitted by this Section 8.2 in an aggregate amount outstanding at any time not to exceed $35,000,000. -66- (xviii) Indebtedness of Guarantor which arises pursuant to a guarantee of payment or collection executed by Guarantor, guaranteeing the Indebtedness of one or more Borrowers which is permitted under clauses (i) through (xvii) of this Section 8.2. 8.3 Merger. Each Borrower will not, nor will it permit Guarantor to, merge or consolidate with or into any other Person, unless: (i) the Borrower is merging with any other Borrower; (ii) a Subsidiary (other than a Borrower) is merging with any Borrower or Guarantor or another Subsidiary, and the Borrower or Guarantor, if applicable, is the continuing corporation; (iii) no Event of Default shall exist or shall occur after giving effect to such transaction; (iv) after giving effect to such transaction, Borrowers and Guarantor, as applicable, shall be in compliance with the Financial Covenant Tests; (v) (a) the other Person to the transaction is in a Related Business or, (b) if not in a Related Business, the aggregate net worth of the acquired non-related entities of all such transactions during any 24-month period shall not exceed $15,000,000, and the Borrower or Guarantor, if involved in the merger, is the continuing corporation; and (vi) the transaction is not otherwise prohibited under this Agreement. 8.4 Sale of Assets. Each Borrower will not lease, sell or otherwise dispose of its Property, in a single transaction or a series of transactions, to any other Person except (i) for sales or leases in the ordinary course of business, and (ii) for leases, sales or other dispositions of its Property that, together with all other Property of such Borrower previously leased, sold or disposed of (other than in the ordinary course of business) as permitted by this Section during the month in which any such lease, sale or other disposition occurs, do not constitute a Material Portion of the Property of any Borrower. For purposes of this Section 8.4, "Material Portion" means, with respect to the Property of any Borrower, Property which represents more than 25% of the book value of all assets of such Borrower. If a Material Portion of the Property of any Borrower is leased, sold or disposed of in violation of this Section 8.4, the applicable Borrower shall pay to Agent for the benefit of Banks at the time of such lease, sale or disposal, all amounts owed by such Borrower pursuant to Section 2.2, taking into account the effect of lease, sale or disposal. -67- 8.5 Investments and Acquisitions. Each Borrower will not, and Guarantor will not, make or suffer to exist any Investments (including without limitation, loans and advances to, and other Investments in, Subsidiaries), or commitments therefor, or to create any Subsidiary or to become or remain a partner in any partnership or joint venture, or to make any Acquisition of any Person, except: (i) Investments in Cash Equivalents. (ii) Loans or advances made to officers, directors or employees of Guarantor or any Borrower or any Subsidiary. (iii) Carryback loans made in the ordinary course of business in conjunction with the sale of Property of such Borrower or Guarantor. (iv) Investments in interests in issuances of collateralized mortgage obligations, mortgages, mortgage loan servicing or other mortgage related assets. (v) Investments in contract rights granted by, entitlements granted by, interests in securities issued by, or tangible assets of, political subdivisions or enterprises thereof related to the home building or real estate operations of Guarantor or any Borrower or any Subsidiary, including without limitation Investments in special districts as described in Section 8.2(xii). (vi) Investments in existing Subsidiaries and other Investments in existence on the date hereof. (vii) Investments in Subsidiaries or other Persons whose primary business is not a Related Business in an aggregate amount outstanding at any one time not to exceed $15,000,000. (viii) The Acquisition of or Investment in a business or entity engaged primarily in a Related Business, provided that (a) immediately upon the consummation of any such Acquisition or Investment each Borrower and Guarantor is in compliance with the terms, covenants and conditions of this Agreement (including without limitation the Financial Covenant Tests), and (b) Borrowers shall deliver to Agent a certificate, signed by an Authorized Officer, certifying to the best knowledge of Borrowers and Guarantor, that, on the date of, and taking into account, the consummation of such Acquisition, and based on the reasonable assumptions set forth in such Certificate, no Event of Default has occurred and is continuing, and Borrowers and Guarantor, as applicable, are in compliance with the Financial Covenant Tests. -68- (ix) The creation of new Subsidiaries engaged primarily in a Related Business (or the purpose of which is principally to preserve the use of a name in which such business is conducted). (x) stock, obligations or securities received in satisfaction of debts owing to any Borrower or Guarantor in the ordinary course of business. (xi) Pledges or deposits in cash by a Borrower or Guarantor to support surety bonds, performance bonds or guarantees of completion in the ordinary course of business. (xii) Loans representing intercompany Indebtedness between any Borrower, Guarantor and/or any Subsidiary, provided as to Loans from Guarantor to any Borrower, repayment of such Loans is subordinated to payment of the Obligations to the reasonable satisfaction of Agent. Borrowers shall be entitled to repay such loans, unless such repayment is prohibited by Section 2.2 or Section 8.1. (xiii) Investments pursuant to a Borrower's or Guarantor's employment compensation plans or agreements. (xiv) Payments on account of the purchase, redemption or other acquisition or retirement for value, or any payment in respect of any amendment (in anticipation of or in connection with any such retirement, acquisition or defeasance) in whole or in part, of any shares of capital stock or other securities of Guarantor, but only to the extent the same is permitted under the Indenture. (xv) Investments, in addition to those enumerated in this Section 8.5, in an aggregate amount outstanding at any time not to exceed $5,000,000. 8.6 Liens. Each Borrower will not, and Guarantor will not, create, incur, or suffer to exist any Lien in, of or on the Property of any Borrower or Guarantor, except: (i) Permitted Liens and Guarantor Permitted Liens. (ii) Liens for taxes, assessments or governmental charges or levies which solely encumber property abandoned or in the process of being abandoned and with respect to which there is no recourse to Guarantor or any Borrower or any Subsidiary. (iii) Purchase-money Liens on any Property hereafter acquired or the assumption of any Lien on Property existing at the time of such acquisition (and not created in contemplation of such acquisition), or a Lien incurred in connection -69- with any conditional sale or other title retention or a Capitalized Lease; provided that (a) Any Property subject to any of the foregoing is acquired by any Borrower or Guarantor in the ordinary course of its respective business and the Lien on any such Property attaches to such asset concurrently or within ninety (90) days after the acquisition thereof; (b) The obligation secured by any Lien so created, assumed, or existing shall not exceed ninety percent (90%) of the cost the Property covered thereby by any Borrower or Guarantor acquiring the same; and (c) Each Lien shall attach only to the Property so acquired. (iv) Liens existing on the date hereof (and not otherwise permitted under this Section 8.6) and described in Schedule "8.6(iv)" hereto and Liens securing Refinancing Indebtedness with respect thereto, but only to the extent such Liens encumber the same collateral in whole or in part as the previous Liens securing the Indebtedness being refunded, refinanced or extended. (v) Liens incurred in the ordinary course of business not otherwise permitted by this covenant, provided that the aggregate amount of Indebtedness secured by such Liens outstanding at any time shall not exceed $25,000,000. (vi) Judgments and similar Liens arising in connection with court proceedings; provided the execution or enforcement thereof is stayed and the claim is being contested in good faith. (vii) Liens securing Non-Recourse Indebtedness of Guarantor or any Borrower, where the amount of such Indebtedness is greater than fifty percent (50%) of the fair market value of the Property encumbered by the Liens. (viii) Liens existing with respect to Indebtedness of a Person acquired in an Acquisition permitted by this Agreement. (ix) Liens arising out of pledges or deposits under worker's compensation laws, unemployment insurance, old age pensions, or other social security or retirement benefits, or similar legislation. (x) Liens incurred or deposits made to secure the performance of tenders, bids, leases, statutory obligations, surety and appeal bonds, progress -70- payments, government contracts, utility services and other obligations of like nature in each case incurred in the ordinary course of business. (xi) Leases or subleases granted to others not materially interfering with the ordinary course of business of Guarantor or any Borrower. (xii) Any interest in or title of a lessor to property subject to any Capitalized Lease Obligations. (xiii) Liens in favor of the trustee named therein arising under the Indenture and liens for trustee's fees and similar costs under any Refinancing Indebtedness of the Senior Notes. (xiv) Any option, contract or other agreement to sell or purchase an asset or participate in the income or revenue derived therefrom. (xv) Any legal right of, or right granted in good faith to, a lender or lenders to which a Borrower or Guarantor may be indebted to offset against, or appropriate and apply to the payment of, such Indebtedness any and all balances, credits, deposits, accounts, or monies of Guarantor or Borrower with or held by such lender or lenders. (xvi) Any pledge or deposit of cash or property by Borrower or any Guarantor in conjunction with obtaining surety and performance bonds and letters of credit required to engage in constructing on-site and off-site improvements or as otherwise required by political subdivisions or other governmental authorities in the ordinary course of business. (xvii) Liens incurred in the ordinary course of business as security for Borrowers' or Guarantor's obligations with respect to indemnification in favor of title insurance providers. (xviii) Letters of credit, bonds or other assets pledged to secure insurance in the ordinary course of business. (xix) Liens on assets securing warehouse lines of credit and other credit facilities to finance the operations of Guarantor's mortgage lending Subsidiaries and/or financial asset management Subsidiaries and Liens related to issuances of CMOs and mortgage-related securities, so long as such assets are owned by such mortgage lending Subsidiaries and financial asset Subsidiaries. (xx) Liens described in Section 8.2(xvi) securing the Indebtedness described therein, so long as (i) each such Lien attaches only to the real property -71- described in Section 8.2(xvi) and (ii) the obligation secured by such Lien is limited to repayment of the Indebtedness permitted under Section 8.2(xvi). (xxi) Any other Liens; provided, however, that such Liens under this clause (xxi) do not at any time attach to Property with a book value, in the aggregate, in excess of $15,000,000. Notwithstanding anything herein to the contrary, each Borrower will not, and will not permit Guarantor to, create, incur, or suffer to exist any Lien in, of or on the capital stock of any Borrower except Liens granted by Guarantor pursuant to the Indenture and Refinancing Indebtedness with respect thereto. 8.7 Affiliates. Each Borrower will not, and Guarantor will not, enter into any transaction (including, without limitation, the purchase or sale of any Property or service) with, or make any payment or transfer to, any Affiliate (other than a Subsidiary) except (i) in the ordinary course of business and pursuant to the reasonable requirements of such Borrower's or Guarantor's business and upon fair and reasonable terms no less favorable to such Borrower or Guarantor than such Borrower or Guarantor would obtain in a comparable arms-length transaction, (ii) Investments permitted under Section 8.5, (iii) pursuant to employment compensation plans and agreements, and (iv) with officers, directors and employees of Guarantor or any Subsidiary so long as the same are duly authorized pursuant to the articles of incorporation or bylaws (or procedures conducted in accordance therewith) of Guarantor or such Borrower. 8.8 Modifications to Certain Indebtedness. Each Borrower will not, and Guarantor will not, make any amendment or modification to the subordination provisions of any indenture, note or other agreement evidencing or governing (i) as to any Borrower, any Subordinated Indebtedness, and (ii) as to Guarantor, Indebtedness that has been subordinated to Guarantor's obligations under the Guaranty. 8.9 Amendments. Each Borrower will not, nor will it permit Guarantor to, amend or modify the Indenture or the Senior Notes, except for amendments or modifications that do not (i) impose upon any Borrower or Guarantor obligations not contained therein as of the date of this Agreement, (ii) change the definition of Guarantor Senior Indebtedness or change any subordination provisions, or (iii) otherwise adversely affect any Borrower or Guarantor. ARTICLE IX FINANCIAL COVENANTS During the term of this Agreement, unless the Required Banks shall otherwise consent in writing: -72- 9.1 Minimum Consolidated Tangible Net Worth. Guarantor's Consolidated Tangible Net Worth shall not be less than (i) $170,000,000 plus (ii) fifty percent (50%) of the Consolidated Net Income earned after January 1, 1996 (excluding any quarter in which there is a loss, but applying any Consolidated Net Income thereafter first to such loss before determining 50% of such amount for purposes of this calculation) plus (iii) one hundred percent (100%) of the net proceeds of capital stock issued by Guarantor after January 1, 1996 (the "Consolidated Tangible Net Worth Test"). Guarantor's compliance with the foregoing covenant shall be measured on a quarterly basis, based on the financial statements delivered to Agent pursuant to Section 7.1. Guarantor's failure to maintain Consolidated Tangible Net Worth in the amount required herein shall not constitute an Event of Default or an Unmatured Event of Default; provided, however, that if Guarantor fail to maintain Consolidated Tangible Net Worth in the amount required herein for two (2) consecutive fiscal quarters, then the Conversion Period shall commence in accordance with, but subject to the limitations of, Section 2.22. 9.2 Leverage Test; Interest Coverage Test. (a) Leverage Test. Guarantor's Consolidated Indebtedness shall not exceed the product of (i) the then applicable Leverage Multiplier multiplied by (ii) Adjusted Consolidated Tangible Net Worth (the "Leverage Test"). (b) Interest Coverage Test. If at any time Guarantor shall fail to maintain, for two (2) consecutive fiscal quarters, a ratio, determined as of the last day of each fiscal quarter for the four-quarter period ending on such day, of (i) EBITDA to (ii) Consolidated Interest Incurred, of at least 1.75 to 1.0 (the "Interest Coverage Test"), then the Leverage Multiplier, effective as of the first day of the fiscal quarter immediately following the second quarter of such breach with respect to which Guarantor shall have so failed the Interest Coverage Test, shall be decreased to the extent herein provided. Upon any failure to satisfy the Interest Coverage Test (i.e., a failure for two (2) consecutive fiscal quarters) that occurs on a date on which the Leverage Multiplier is 2.15, the Leverage Multiplier shall be decreased by 0.25 to 1.90. Upon any failure (i.e., a failure for two (2) consecutive fiscal quarters) to satisfy the Interest Coverage Test that occurs on a date on which the Leverage Multiplier is less than 2.15, the Leverage Multiplier shall be decreased by 0.10. (c) Adjustment of Leverage Multiplier. If at any time at which the Leverage Multiplier is less than 2.15, Guarantor shall satisfy the Interest Coverage Test (which for purposes of this Section 9.2(c) shall be deemed satisfied only if, on the same day on which Guarantor maintains the Interest Coverage Test, Guarantor is also in compliance with the Leverage Test), then the Leverage Multiplier, effective as of the first day of the fiscal quarter immediately following the fiscal quarter with respect to which Guarantor shall have so satisfied the Interest Coverage Test, shall be increased to the extent herein provided. Upon satisfaction of the Interest Coverage Test on a date on which the Leverage -73- Multiplier is 1.90, the Leverage Multiplier shall be increased to 2.15. Upon satisfaction of the Interest Coverage Test on a date on which the Leverage Multiplier is less than 1.90, the Leverage Multiplier shall be increased by 0.10. In no event shall the Leverage Multiplier exceed 2.15. (d) Effectiveness of Change in Leverage Multiplier. Any increase or decrease of the Leverage Multiplier provided for in this Section 9.2 shall be effective as of the first day of a fiscal quarter as provided in Section 9.2(b) or (c) (as applicable), and the Leverage Multiplier (as adjusted) shall remain in effect for the entire fiscal quarter and thereafter unless and until adjusted as of the first day of any subsequent fiscal quarter as provided in this Section 9.2(b) or (c) (as applicable). (e) Measure of Compliance. Guarantor's compliance with covenants in this Section 9.2 shall be measured on a quarterly basis, based on the financial statements delivered to Agent pursuant to Section 7.1. A failure to satisfy the Leverage Test or the Interest Coverage Test shall not constitute an Event of Default or an Unmatured Event of Default; provided, however, if Guarantor fails to satisfy the Leverage Test for two (2) consecutive fiscal quarters, then the Conversion Period shall commence in accordance with, but subject to the limitations of, Section 2.22. 9.3 Net Worth of Borrowers. (a) Individual Net Worth. Each Borrower will not at any time permit the ratio of (i) the aggregate amount of all Advances outstanding to such Borrower plus the aggregate amount paid by an Issuing Bank on any Facility Letters of Credit for such Borrower to the extent (if any) not reimbursed by such Borrower under Section 4.4 to (ii) such Borrower's Net Worth, to be greater than .75 to 1 (the "Individual Debt Coverage Test"). For purposes of this covenant, "Net Worth" means, as to such Borrower, the sum of (A) all capital accounts (including without limitation, any paid-in capital, capital surplus, and retained earnings) plus (B) all advances or other sums or consideration paid and outstanding from Guarantor to such Borrower to the extent the same are subordinated to the Obligations, less (C) all advances or other sums or consideration paid and outstanding from such Borrower to Guarantor, all as determined in conformity with Agreement Accounting Principles. (b) Aggregate Net Worth. Borrowers will not at any time permit the ratio of (i) the aggregate amount of all Advances plus the aggregate amount paid by an Issuing Bank on any Facility Letters of Credit for any Borrower to the extent (if any) not reimbursed by such Borrower under Section 4.4, plus the aggregate amount, without duplications, of all contingent obligations of any Borrower whereby such Borrower guarantees any obligation or liability of -74- Guarantor (except pursuant to the Indenture or any Refinancing Indebtedness thereof), to (ii) the aggregate Net Worth of all Borrowers, to be greater than .75 to 1 (the "Aggregate Debt Coverage Test"). For purposes of this covenant, "Net Worth" shall have the meaning set forth in subparagraph (a) above. (c) Measure of Compliance. Borrowers' compliance with the covenants in this Section 9.3 shall be measured on a quarterly basis, based on the financial statements delivered to Agent pursuant to Section 7.1. A failure to satisfy the Individual Debt Coverage Test or the Aggregate Debt Coverage Test shall not constitute an Event of Default or an Unmatured Event of Default; provided, however, if Borrowers fail to satisfy the Individual Debt Coverage Test or the Aggregate Debt Coverage Test for two (2) consecutive fiscal quarters, then the Conversion Period shall commence in accordance with, but subject to the limitations of, Section 2.22. 9.4 Spec Unit Inventory. Borrowers will not at any time permit the aggregate number of all Spec Units owned by Borrowers to exceed the greater of (i) fifty percent (50%) of the number of Housing Unit Closings during the preceding twelve (12) months, or (ii) one hundred ten percent (110%) of the number of Housing Unit Closings during the preceding six (6) months. A failure to satisfy the requirements of this Section 9.4 shall not constitute an Event of Default or an Unmatured Event of Default, but any Spec Units owned by Borrowers in excess of the foregoing requirements shall not be included in the Borrowing Base. ARTICLE X EVENTS OF DEFAULT The occurrence of any one or more of the following events shall constitute an Event of Default: 10.1 Representations and Warranties. Any representation or warranty (except the representations and warranties in Section 6.7, but only to the extent the same are made, or deemed made, after the date hereof) made or deemed made by or on behalf of any Borrower or Guarantor to Banks, the Issuing Bank or Agent under or in connection with this Agreement, any Loan Document, or any certificate or information delivered in connection with this Agreement or any other Loan Document shall not be true and correct in any material respect on the date as of which made, and, with respect to any matter which is reasonably capable of being cured, such Borrower or Guarantor, as applicable, shall have failed to cure the occurrence causing the representation or warranty to be materially untrue or incorrect within thirty (30) days after notice thereof by Agent to Borrowers. 10.2 Non-payment. Nonpayment of principal of any Note when due, or nonpayment of interest upon any Note or of any fees or other obligations under any of the Loan Documents within five (5) days after billing therefor by Agent or Banks. -75- 10.3 Other Defaults. The breach by any Borrower (other than a breach which constitutes an Event of Default under any other Section of this Article X) of any of the terms or provisions of this Agreement which is not remedied within thirty (30) days after notice thereof to Borrowers. 10.4 Other Indebtedness. (a) Failure of any Borrower or Guarantor to pay when due (after any applicable grace period and after notice from the holder thereof) any Indebtedness (other than Non-Recourse Indebtedness) equal to or exceeding $5,000,000 (in the aggregate); or (b) The default (after any applicable grace period and after notice from the holder thereof) by any Borrower or Guarantor in the performance of any term, provision or condition contained in any agreement under which any Indebtedness (other than Non-Recourse Indebtedness) equal to or exceeding $5,000,000 (in the aggregate) was created or is governed; or (c) Any other event shall occur or condition exist (after any applicable grace period and after notice from the holder thereof), the effect of which is to cause, or to permit the holder or holders of any Indebtedness (other than Non- Recourse Indebtedness) of any Borrower or Guarantor equal to or exceeding $5,000,000 to cause such Indebtedness to become due prior to its stated maturity; or (d) Any Indebtedness (other than Non-Recourse Indebtedness) of any Borrower or Guarantor equal to or exceeding $5,000,000 (in the aggregate) shall be declared to be due and payable or required to be prepaid (other than by a regularly scheduled payment) prior to the stated maturity thereof (after any applicable grace period and after notice from the holder thereof); or (e) Any Borrower or Guarantor shall not pay, or shall admit in writing its inability to pay, its debts generally as they become due. 10.5 Bankruptcy. Any Borrower or Guarantor shall: (i) have an order for relief entered with respect to it under the Federal bankruptcy laws as now or hereafter in effect; (ii) make an assignment for the benefit of creditors; (iii) apply for, seek, consent to, or acquiesce in, the appointment of a receiver, custodian, trustee, examiner, liquidator or similar official for it or any Substantial Portion of the Property of Borrowers and Guarantor; -76- (iv) institute any proceeding seeking an order for relief under the Federal bankruptcy laws as now or hereafter in effect or seeking to adjudicate it a bankrupt or insolvent, or seeking dissolution, winding up, liquidation, reorganization, arrangement, adjustment or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors or fail to file, within the applicable time period for the filing thereof, an answer or other pleading denying the material allegations of any such proceeding filed against it; or (v) fail to contest in good faith any appointment or proceeding described in Section 10.6. 10.6 Receiver. A receiver, trustee, examiner, liquidator or similar official shall be appointed for any Borrower or Guarantor or any Substantial Portion of the Property of Borrowers and Guarantor without the application, approval or consent of any Borrower or Guarantor, or a proceeding described in Section 10.5(iv) shall be instituted against any Borrower or Guarantor and such appointment continues undischarged or such proceeding continues undismissed or unstayed for a period of sixty (60) consecutive days. 10.7 Judgment. Any Borrower or Guarantor shall fail within thirty (30) days to pay, bond or otherwise discharge any judgment or order for the payment of money in excess of $10,000,000 which has not been stayed on appeal or is not otherwise being appropriately contested in good faith. 10.8 Unfunded Liabilities. The Unfunded Liabilities of all Single Employer Plans shall exceed in the aggregate $5,000,000 or any Reportable Event shall occur in connection with any Plan, which Reportable Event has had or would reasonably be expected to have a Material Adverse Effect. 10.9 Withdrawal Liability. Any Borrower, or Guarantor or any member of the Controlled Group shall have been notified by the sponsor of a Multiemployer Plan that it has incurred withdrawal liability to such Multiemployer Plan in an amount which, when aggregated with all other amounts required to be paid to Multiemployer Plans by any Borrower or Guarantor or any other member of the Controlled Group as withdrawal liability (determined as of the date of such notification), exceeds $5,000,000 or requires payments exceeding $2,000,000 per annum; provided, however, that such event shall not constitute an Event of Default as long as such Borrower, Guarantor or the Controlled Group member, as applicable, is contesting in good faith the imposition of withdrawal liability. 10.10 Increased Contributions. Any Borrower, or Guarantor, or any other member of the Controlled Group shall have been notified by the sponsor of a Multiemployer Plan that such Multiemployer Plan is in reorganization, if as a result of such reorganization the aggregate annual contributions of Borrowers, Guarantor and the other members of the Controlled Group (taken as a whole) to all Multiemployer Plans which are then in reorganization have been or will -77- be increased over the amounts contributed to such Multiemployer Plans for the respective plan years of each such Multiemployer Plan immediately preceding the plan year in which the reorganization occurs by an amount exceeding $5,000,000. 10.11 Change in Control. Any Change in Control shall occur. 10.12 Dissolution. The dissolution or liquidation of Guarantor or any Borrower shall occur, except as permitted under Section 8.3. 10.13 Guaranty. The Guaranty shall fail to remain in full force or effect with respect to Guarantor or any action shall be taken by Guarantor to discontinue or to assert the invalidity or unenforceability of the Guaranty, or Guarantor shall fail to comply with any of the terms or provisions of the Guaranty, or Guarantor denies that it has any further liability under the Guaranty or gives notice to such effect. 10.14 Collateral. Borrowers shall fail to provide (i) Collateral for the Obligations in accordance with Section 2.22(c), or (ii) all Collateral Documents relating to the Collateral in accordance with Section 2.22(c). 10.15 No Defaults. The occurrence of any of the following events shall specifically not be an Event of Default or an Unmatured Event of Default under this Agreement: (a) The breach of any Financial Covenant Test. (b) The representations and warranties made by Borrowers and Guarantor pursuant to Section 6.7 shall be untrue or incorrect on the date as of which the same were made, and such date is after the date of this Agreement. (c) If any Borrower shall apply for, seek, consent to, or acquiesce in, the appointment of a receiver, custodiation, trustee, examiner, liquidator or similar official for it or for a Significant Amount of its Property, or if a receiver, custodian, trustee, examiner, liquidator or similar official shall be appointed for any Borrower without its application, approval or consent for it or for a Significant Amount of its Property; provided, however, that upon the occurrence and during the continuation of the foregoing, all Property of such Borrower shall be automatically excluded from the Borrowing Base; and provided further, that upon any such appointment for any Property of any Borrower that is not a Significant Amount of its Property (which appointment shall not be an Event of Default or Unmatured Event of Default under this Agreement), such Property shall be automatically excluded from the Borrowing Base. "Significant Amount" means, with respect to the Property of such Borrower and its Subsidiaries, taken as a whole, Property which represents more than 10% of the book value of the assets of such Borrower as would be shown on the financial statements of such -78- Borrower as of the beginning of the fiscal quarter in which such determination is made, all as determined in accordance with Agreement Accounting Principles. (d) Borrowers' failure to provide all Due Diligence Documents relating to the Collateral in accordance with Section 2.22(c); provided, however, that the affected Collateral shall be automatically excluded from the Borrowing Base. ARTICLE XI ACCELERATION, WAIVERS, AMENDMENTS AND REMEDIES 11.1 Acceleration; Remedies. (a) If any Event of Default described in Section 10.5 or 10.6 occurs with respect to any Borrower, the obligations of Banks to make Loans and of the Issuing Bank to issue Facility Letters of Credit hereunder shall automatically terminate and the Obligations shall immediately become due and payable without any election or action on the part of Agent, the Issuing Bank or any Bank. If any other Event of Default occurs, the Required Banks may terminate or suspend the obligations of Banks to make Loans and of the Issuing Bank to issue Facility Letters of Credit hereunder, or declare the Obligations to be due and payable, or both, whereupon the Obligations shall become immediately due and payable, without presentment, demand, protest or notice of any kind, all of which each Borrower hereby expressly waives. If, within five (5) days after acceleration of the maturity of the Obligations or termination of the obligations of Banks to make Loans hereunder as a result of any Event of Default (other than any Event of Default as described in Section 10.5 or 10.6 with respect to a Borrower) and before any judgment or decree for the payment of the Obligations due shall have been obtained or entered, the Required Banks (in their sole discretion) shall so direct, Agent shall, by notice to Borrowers, rescind and annul such acceleration and/or termination. (b) Upon the occurrence of any Event of Default and upon the directive of the Required Banks, Agent or (but only upon directive of the Required Banks) any Bank shall proceed to protect, exercise and enforce the rights and remedies of Agent and Banks under the Loan Documents and the Guaranty against any Borrower, Guarantor and any other party and such other rights and remedies as are provided by law or equity. (c) The order and manner in which Banks' rights and remedies are to be exercised shall be determined by the Required Banks in their sole discretion, and all payments received by Agent and Banks, or any of them, shall be applied first to the costs and expenses (including attorneys' fees and disbursements) of Agent and of Banks, and thereafter paid pro rata to each Bank in the same -79- proportions that each Bank's Commitment bears to the Aggregate Commitment, without priority or preference among Banks. Regardless of how each Bank may treat payments for the purpose of its own accounting, for the purpose of computing Borrower's obligations hereunder and under the Notes, payments shall be applied first, to the costs and expenses of Agent and Banks, as set forth above, second, to the payment of accrued and unpaid interest due under any Loan Documents to and including the date of such application (ratably, and without duplication, according to the accrued and unpaid interest due under each of the Loan Documents), and third, to the payment of all other amounts (including principal and fees) then owing to Agent or Banks under the Loan Documents. No application of payments will cure any Event of Default, or prevent acceleration, or continued acceleration, of amounts payable under the Loan Documents, or prevent the exercise, or continued exercise, of rights or remedies of Banks hereunder or thereunder or at law or in equity. 11.2 Amendments. Subject to the provisions of this Article XI, the Required Banks (or Agent with the consent in writing of the Required Banks) and Borrowers may enter into agreements supplemental hereto for the purpose of adding or modifying any provisions to the Loan Documents or changing in any manner the rights of Banks or any Borrower hereunder or waiving any Event of Default hereunder; provided, however, that no such supplemental agreement shall, without the consent of each Bank and Issuing Bank affected thereby: (i) Extend the maturity of any Loan or Note or forgive all or any portion of the principal amount thereof, or reduce the rate of, or extend the time of payment of, interest or fees thereon; (ii) Release Guarantor from any of its obligations under the Guaranty or the Environmental Agreements; (iii) Change the percentage specified in the definition of Required Banks or Majority Banks; (iv) Increase the amount of the Commitment of any Bank hereunder, or permit any Borrower to assign its rights under this Agreement except by operation of law pursuant to a merger permitted under Section 8.3; (v) Amend any provisions of this Agreement relating to Facility Letters of Credit; (vi) Amend any provisions of this Agreement relating to Swing Line Advances without the consent of Bank One; or (vii) Amend this Section 11.2, Section 12.7, Section 14.1 or Section 15.2.3. -80- No amendment of any provision of this Agreement relating to Agent shall be effective without the written consent of Agent. Agent may waive payment or reduce the amount of the fees referred to in Section 13.12 or the fee required under Section 15.3.2 without obtaining the consent of any other party to this Agreement. 11.3 Preservation of Rights. No delay or omission of any Bank or Issuing Bank or Agent to exercise any right under the Loan Documents shall impair such right or be construed to be a waiver of any Event of Default or an acquiescence therein, and the making of a Loan or the issuance, amendment or extension of a Facility Letter of Credit notwithstanding the existence of an Event of Default or the inability of any Borrower to satisfy the conditions precedent to such Loan or Facility Letter of Credit shall not constitute any waiver or acquiescence. Any single or partial exercise of any such right shall not preclude other or further exercise thereof or the exercise of any other right, and no waiver, amendment or other variation of the terms, conditions or provisions of the Loan Documents whatsoever shall be valid unless in writing signed by Banks (and, if applicable, Agent) required pursuant to Section 11.2, and then only to the extent in such writing specifically set forth. All remedies contained in the Loan Documents or by law afforded shall be cumulative and all shall be available to Agent, the Issuing Bank and Banks until the Obligations have been paid in full. 11.4 New Borrowers. Additional Persons may be added as Borrowers under this Agreement upon satisfaction of the following terms and conditions: (i) such Person is (a) a Wholly-Owned Subsidiary of Guarantor, (b) a Wholly Owned Restricted Subsidiary, as defined in the Indenture, and (c) a "Guarantor" (as defined therein) under the Indenture, and (ii) the addition of such Person as a Borrower shall not cause an Event of Default or an Unmatured Event of Default to occur, and (iii) Borrowers shall cause such Subsidiary to execute and deliver to Agent such documents and instruments whereby such Subsidiary assumes the obligations of a Borrower under this Agreement, the Notes and the other Loan Documents, and (iv) Borrowers shall deliver or cause to be delivered, by and with respect to such Subsidiary, certificates, opinions and other documents substantially similar to those required to be delivered under the provisions of Sections 5.1(i), (ii), (iii), (v), (vi) and (vii) and such other documents as Agent or any Issuing Bank or their respective counsel may reasonably request; all of the foregoing shall be in form and substance satisfactory to Agent or such Issuing Bank, as the case may be. -81- ARTICLE XII GENERAL PROVISIONS 12.1 Survival of Representations. All representations and warranties of each Borrower contained in this Agreement shall survive delivery of the Notes and the making of the Loans and the issuance, amendment or extension of any Facility Letter of Credit herein contemplated. 12.2 Governmental Regulation. Anything contained in this Agreement to the contrary notwithstanding, no Bank or Issuing Bank shall be obligated to extend credit to any Borrower in violation of any limitation or prohibition provided by any applicable statute or regulation effective after the date of this Agreement. 12.3 Taxes. Any recording, intangible, filing or stamp fees or taxes or other similar assessments or charges made by any governmental or revenue authority in respect of the Loan Documents shall be paid by Borrowers, together with interest and penalties, if any. 12.4 Headings. Section headings in the Loan Documents are for convenience of reference only, and shall not govern the interpretation of any of the provisions of the Loan Documents. 12.5 Entire Agreement. The Loan Documents and the letter agreement(s) referred to in this Agreement embody the entire agreement and understanding among Borrowers, Agent and Banks and supersede all prior agreements and understandings among Borrowers, Agent, and Banks relating to the subject matter thereof. 12.6 Nature of Obligations; Benefits of this Agreement. (a) The respective obligations of Banks hereunder are several and not joint and no Bank shall be the partner or agent of any other (except to the extent to which Agent is authorized to act as such). The failure of any Bank to perform any of its obligations hereunder shall not relieve any other Bank from any of its obligations hereunder. (b) This Agreement shall not be construed so as to confer any right or benefit upon any Person other than the parties to this Agreement and their respective successors and assigns. 12.7 Expenses; Indemnification. Borrowers shall reimburse Agent for any reasonable outside attorneys' fees and costs paid or incurred by Agent in connection with the preparation, negotiation, execution, delivery, review, amendment, modification, and administration of the Loan Documents. Borrowers also agree to reimburse Agent, Banks and each Issuing Bank for any reasonable costs and out-of-pocket expenses (including reasonable outside attorneys' fees and time charges of attorneys for Agent, Banks and such Issuing Bank) paid or incurred by Agent, -82- any Bank or such Issuing Bank in connection with the collection and enforcement of the Loan Documents. Borrowers further agrees to indemnify Agent and each Bank or Issuing Bank, its directors, officers and employees against all losses, claims, damages, penalties, judgments, liabilities and expenses (including, without limitation, all expenses of litigation or preparation therefor whether or not Agent or any Bank or Issuing Bank is a party thereto) which any of them may pay or incur arising out of or relating to this Agreement, the other Loan Documents, the transactions contemplated hereby or the direct or indirect application or proposed application of the proceeds of any Loan hereunder (except to the extent arising due to the gross negligence or willful misconduct of the indemnified Person or the failure of the indemnified Person to comply with regulatory requirements applicable to it). The obligations of Borrowers under this Section shall be joint and several and shall survive the termination of this Agreement. 12.8 Numbers of Documents. All statements, notices, closing documents, and requests hereunder shall be furnished to Agent with sufficient counterparts so that Agent may furnish one to each of Banks. 12.9 Accounting. Except as provided to the contrary herein, all accounting terms used herein shall be interpreted and all accounting determinations hereunder shall be made in accordance with GAAP applied on a basis consistent with the consolidated audited financial statements of Guarantor as of December 31, 1994 ("Agreement Accounting Principles"). If any change in GAAP from the principles used in preparing such statements would have a material effect upon the results of any calculation required by or compliance with any provision of this Agreement, then such calculation shall be made or calculated and compliance with such provision shall be determined using accounting principles used in preparing the consolidated audited financial statements of Guarantor as of December 31, 1994. 12.10 Severability of Provisions. Any provision in any Loan Document that is held to be inoperative, unenforceable, or invalid in any jurisdiction shall, as to that jurisdiction, be inoperative, unenforceable, or invalid without affecting the remaining provisions in that jurisdiction or the operation, enforceability, or validity of that provision in any other jurisdiction, and to this end the provisions of all Loan Documents are declared to be severable. 12.11 Nonliability of Banks and Issuing Bank. The relationship between Borrowers and Banks and Agent shall be solely that of borrowers and lender. Neither Agent nor any Bank or Issuing Bank shall have any fiduciary responsibilities to any Borrower. Neither Agent nor any Bank or Issuing Bank undertakes any responsibility to any Borrower to review or inform any Borrower of any matter in connection with any phase of any Borrower's business or operations. 12.12 CHOICE OF LAW. THE LOAN DOCUMENTS (OTHER THAN THOSE CONTAINING A CONTRARY EXPRESS CHOICE OF LAW PROVISION) SHALL BE CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS (AND NOT THE LAW OF CONFLICTS) OF THE STATE OF ARIZONA, BUT GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL BANKS. -83- 12.13 Arbitration. Subject to the provisions of this Section 12.13, Borrowers, Banks and Agent agree to submit to binding arbitration any and all claims, disputes and controversies between or among them (and their respective employees, officers, directors, attorneys, and other agents if permitted by law or a contract between them and such persons) relating to this Agreement and the Loan Documents and the negotiation, execution, collateralization, administration, repayment, modification, extension or collection thereof or arising thereunder. Such arbitration shall proceed in Phoenix, Arizona, shall be governed by Arizona law and shall be conducted in accordance with the Commercial Arbitration Rules of the American Arbitration Association (the "AAA"), as modified in this Section 12.13. Judgment upon the award rendered by each arbitrator(s) may be entered in any court having jurisdiction. (a) Nothing in the preceding paragraph, nor the exercise of any right to arbitrate thereunder, shall limit the right of any party hereto (1) to foreclose against any real or personal property collateral encumbered by a Deed of Trust or other Loan Document, or otherwise permitted under applicable law; (2) subject to provisions of applicable law, to exercise self-help remedies such as setoff or repossession or other self-help remedies provided in this Agreement or any other Loan Document; or (3) to obtain provisional or ancillary remedies such as replevin, injunctive relief, attachment, or appointment of a receiver from a court having jurisdiction, before, during or after the pendency of any arbitration proceeding, or (4) to defend or obtain injunctive or other equitable relief from a court of competent jurisdiction against the foregoing or assert mandatory counterclaims, if any, prior to and during the pendency of a determination in arbitration of issues of performance, default, damages and other such claims and disputes. (b) Arbitration hereunder shall be before a three-person panel of neutral arbitrators, consisting of one person from each of the following categories: (1) an attorney who has practiced in the area of commercial real estate law for at least ten (10) years; (2) a person with at least ten (10) years' experience in real estate lending; and (3) a person with at least ten (10) years' experience in the homebuilding industry. The AAA shall submit a list of persons meeting the criteria outlined above for each category of arbitrator, and the parties shall select one person from each category in the manner established by the AAA. (c) In any dispute between the parties that is arbitratable hereunder, where the aggregate of all claims and the aggregate of all counterclaims is an amount less than Fifty Thousand And No/100ths Dollars ($50,000), the arbitration shall be before a single neutral arbitrator to be selected in accordance with the Commercial Rules of the American Arbitration Association and shall proceed under the Expedited Procedures of said Rules. (d) In any arbitration hereunder, the arbitrators shall decide (by documents only or with a hearing, at the arbitrators' discretion) any pre-hearing -84- motions which are substantially similar to pre-hearing motions to dismiss for failure to state a claim or motions for summary adjudication. (e) In any arbitration hereunder, discovery shall be permitted in accordance with the Arizona Rules of Civil Procedure. Scheduling of such discovery may be determined by the arbitrators, and any discovery disputes shall be finally determined by the arbitrators. (f) The Arizona Rules of Evidence shall control the admission of evidence at the hearing in any arbitration conducted hereunder; provided, however, no error by the arbitrators in application of the Rules of Evidence shall be grounds, as such, for vacating the arbitrators' award. (g) Notwithstanding any AAA rule to the contrary, the arbitration award shall be in writing and shall specify the factual and legal basis for the award, including findings of fact and conclusions of law. (h) Each party shall each bear its own costs and expenses and an equal share of the arbitrators' costs and administrative fees of arbitration. 12.14 CONSENT TO JURISDICTION. EACH BORROWER AND BANK HEREBY IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL OR ARIZONA STATE COURT SITTING IN PHOENIX, ARIZONA IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO ANY LOAN DOCUMENTS AND EACH BORROWER AND BANK HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT AND IRREVOCABLY 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 IN THIS SECTION 12.14 SHALL LIMIT THE RIGHT OF AGENT OR ANY BANK OR ISSUING BANK TO BRING PROCEEDINGS AGAINST ANY BORROWER IN THE COURTS OF ANY OTHER JURISDICTION. SUBJECT TO THE PROVISIONS OF SECTION 12.13, UNLESS PROHIBITED BY LAW, ANY JUDICIAL PROCEEDING BY ANY BORROWER AGAINST AGENT OR ANY BANK OR ISSUING BANK OR ANY AFFILIATE OF AGENT OR ANY BANK OR ISSUING BANK INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH ANY LOAN DOCUMENT SHALL BE BROUGHT IN A COURT IN PHOENIX, ARIZONA. 12.15 WAIVER OF JURY TRIAL. SUBJECT TO THE PROVISIONS OF SECTION 12.13, EACH BORROWER, AGENT AND EACH BANK AND ISSUING BANK HEREBY WAIVE TRIAL BY JURY IN ANY JUDICIAL PROCEEDING INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER (WHETHER SOUNDING IN TORT, CONTRACT OR -85- OTHERWISE) IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH ANY LOAN DOCUMENT OR THE RELATIONSHIP ESTABLISHED THEREUNDER. 12.16 Confidentiality. Each Bank and Agent agree to use commercially reasonable efforts to keep confidential any financial reports and other information from time to time supplied to them by any Borrower hereunder to the extent that such information is not and does not become publicly available through or with the consent or acquiescence of any Borrower, except for disclosure (i) to Agent and the other Banks or to a Transferee, (ii) to legal counsel, accountants, and other professional advisors to a Bank, Agent or a Transferee, (iii) to regulatory officials, (iv) to any Person as required by law, regulation, or legal process, (v) to any Person in connection with any legal proceeding to which that Bank is a party, and (vi) permitted by Section 15.4. Any Bank or Agent disclosing such information shall use commercially reasonable efforts to advise the Person to whom such information is disclosed of the foregoing confidentiality agreement and to direct such Person to comply therewith. ARTICLE XIII AGENT 13.1 Appointment. Bank One is hereby appointed Agent hereunder and under each other Loan Document, and each of Banks irrevocably authorizes Agent to act as the agent of such Bank. Agent agrees to act as such upon the express conditions contained in this Article XIII. Agent shall not have a fiduciary relationship in respect of any Borrower, any Bank or the Issuing Bank by reason of this Agreement. 13.2 Powers. Agent shall have and may exercise such powers under the Loan Documents as are specifically delegated to Agent by the terms of each thereof, together with such powers as are reasonably incidental thereto. Agent shall have no implied duties to Banks, or any obligation to Banks to take any action thereunder except any action specifically provided by the Loan Documents to be taken by Agent. Agent shall have the sole and exclusive right to take any actions or to give any notices relating to this Agreement pursuant to the Indenture. 13.3 General Immunity. Neither Agent (in its capacity as Agent and not in its capacity as a Bank) nor any of its directors, officers, agents or employees shall be liable to any Borrower or any Bank for action taken or omitted to be taken by it or them hereunder or under any other Loan Document or in connection herewith or therewith except for its or their own gross negligence or willful misconduct. 13.4 No Responsibility for Loans, Recitals, etc. Neither Agent nor any of its directors, officers, agents or employees shall be responsible for or have any duty to ascertain, inquire into, or verify (i) any statement, warranty or representation made in connection with any Loan Document or any borrowing or any request for the issuance, amendment or extension of any Facility Letter of Credit hereunder; (ii) the performance or observance of any of the covenants or agreements of any obligor under any Loan Document or Reimbursement Agreement, -86- including, without limitation, any agreement by an obligor to furnish information directly to each Bank; (iii) the satisfaction of any condition specified in Article IV or V, except receipt of items required to be delivered to Agent; or (iv) the validity, effectiveness or genuineness of any Loan Document (including without limitation any Reimbursement Agreement) or any other instrument or writing furnished in connection with any of the foregoing. Agent shall have no duty to disclose to Banks information that is not required to be furnished by any Borrower to Agent at such time, but is voluntarily furnished by any Borrower to Agent (either in its capacity as Agent or in its individual capacity). 13.5 Action on Instructions of Banks. Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder and under any other Loan Document in accordance with written instructions signed by the Required Banks (except as otherwise provided in Section 11.2), and such instructions and any action taken or failure to act pursuant thereto shall be binding on all of Banks and on all holders of Notes. Agent shall be fully justified in failing or refusing to take any action hereunder and under any other Loan Document unless it shall first be indemnified to its satisfaction by Banks pro rata against any and all liability, cost and expense that it may incur by reason of taking or continuing to take any such action. 13.6 Employment of Agents and Counsel. Agent may execute any of its duties as Agent hereunder and under any other Loan Document by or through employees, agents, and attorneys-in-fact and shall not be answerable to Banks, except as to money or securities or other Property received by it or its authorized agents, for the default or misconduct of any such agents or attorneys-in-fact selected by it with reasonable care. Agent shall be entitled to advice of counsel concerning all matters pertaining to the agency hereby created and its duties hereunder and under any other Loan Document. 13.7 Reliance on Documents; Counsel. Agent shall be entitled to rely upon any Note, notice, consent, certificate, affidavit, letter, telegram, statement, paper or document believed by it to be genuine and correct and to have been signed or sent by the proper person or persons, and, in respect to legal matters, upon the opinion of counsel selected by Agent, which counsel may be employees of Agent. 13.8 Agent's Reimbursement and Indemnification. Banks agree to reimburse and indemnify Agent ratably in proportion to their respective Commitments (i) for any amounts not reimbursed by Borrowers for which Agent is entitled to reimbursement by Borrowers under the Loan Documents, (ii) for any other expenses incurred by Agent on behalf of Banks, in connection with the preparation, execution, delivery, administration and enforcement of the Loan Documents, and (iii) for any liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind and nature whatsoever which may be imposed on, incurred by or asserted against Agent in any way relating to or arising out of the Loan Documents or any other document delivered in connection therewith or the transactions contemplated thereby, or the enforcement of any of the terms thereof or of any such other documents, provided that no Bank shall be liable for any of the foregoing to the extent they arise -87- from the gross negligence or willful misconduct of Agent. The obligations of Banks under this Section 13.8 shall survive payment of the Obligations and termination of this Agreement. 13.9 Rights as a Bank or Issuing Bank. In the event Agent is a Bank, Agent shall have the same rights and powers hereunder and under any other Loan Document as any Bank and may exercise the same as though it were not Agent, and the term "Bank" or "Banks" shall, at any time when Agent is a Bank, unless the context otherwise indicates, include Agent in its individual capacity. In the event Agent is an Issuing Bank, Agent shall have the rights and powers of the Issuing Bank hereunder and may exercise the same as though it were not Agent, and the term "Issuing Bank" shall, at any time when Agent is the Issuing Bank, unless the context otherwise indicates, include and mean Agent in its capacity as the Issuing Bank. Agent may accept deposits from, lend money to, and generally engage in any kind of trust, debt, equity or other transaction, in addition to those contemplated by this Agreement or any other Loan Document, with any Borrower or any of its Subsidiaries in which such Borrower or such Subsidiary is not restricted hereby from engaging with any other Person. 13.10 Bank Credit Decision. Each Bank acknowledges that it has, independently and without reliance upon Agent or any other Bank and based on the financial statements prepared by Borrowers and Guarantor and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement and the other Loan Documents. Each Bank also acknowledges that it will, independently and without reliance upon Agent or any other Bank and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement and the other Loan Documents. 13.11 Successor Agent. Agent may resign at any time by giving written notice thereof to Banks and Borrowers, such resignation to be effective upon the appointment of a successor Agent or, if no successor Agent has been appointed, sixty (60) days after the retiring Agent gives notice of its intention to resign. Agent may be removed at any time with or without cause by written notice received by Agent from the Majority Banks, such removal to be effective on the date specified by such Banks. The consent of Borrowers shall be required prior to any removal of Agent becoming effective; provided, however, that if an Event of Default has occurred and is continuing, the consent of Borrowers shall not be required. Upon any such resignation or removal, the Majority Banks shall have the right to appoint, on behalf of a Borrower and Banks, a successor Agent. Any Bank can be a successor Agent upon the approval of the Majority Banks. Any other successor Agent shall be appointed only with the prior reasonable consent of Borrowers. If no successor Agent shall have been so appointed by the Majority Banks within forty-five (45) days after the resigning Agent's giving notice of its intention to resign, then the resigning Agent may appoint, on behalf of Borrowers and Banks, a successor Agent. If Agent has resigned or been removed and no successor Agent has been appointed, Banks may perform all the duties of Agent hereunder and each Borrower shall make all payments in respect of the Obligations to the applicable Bank and for all other purposes shall -88- deal directly with Banks. No successor Agent shall be deemed to be appointed hereunder until such successor Agent has accepted the appointment. Any such successor Agent shall be a commercial bank having capital and retained earnings of at least $50,000,000. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the resigning or removed Agent. Upon the effectiveness of the resignation or the Loan Documents, all amounts payable by Borrowers under this Agreement shall be determined as if such Bank had not sold such participating interests, and each Borrower, Agent and the Issuing Bank shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under the Loan Documents. 13.12 Agent's Fee. Borrowers agree to pay to Agent, for its own account, the fees agreed to by Borrowers and Agent pursuant to that certain letter agreement of even date herewith, or as otherwise agreed from time to time. ARTICLE XIV RATABLE PAYMENTS 14.1 Ratable Payments. If any Bank (whether by common law right of setoff or otherwise) has payment made to it upon its Loans (other than payments received pursuant to Sections 3.1, 3.2 or 3.4) in a greater proportion than that received by any other Bank, such Bank agrees, promptly upon demand, to purchase a portion of the Loans held by the other Banks so that after such purchase each Bank will hold its ratable proportion of Loans. If any Bank, whether in connection with common law right of setoff or amounts which might be subject to common law right of setoff or otherwise, receives collateral or other protection for its Obligations or such amounts which may be subject to setoff, such Bank agrees, promptly upon demand, to take such action necessary such that all Banks share in the benefits of such collateral ratably in proportion to their Loans. In case any such payment is prevented, restricted or otherwise impeded by legal process, or otherwise, appropriate further adjustments shall be made. ARTICLE XV BENEFIT OF AGREEMENT, ASSIGNMENTS; PARTICIPATIONS 15.1 Successors and Assigns. The terms and provisions of the Loan Documents shall be binding upon and inure to the benefit of Borrowers, Agent, Banks and the Issuing Bank and their respective successors and assigns, except that (i) no Borrower shall have the right to assign its rights or obligations under the Loan Documents (except as otherwise permitted under Section 8.3), and (ii) any assignment by any Bank must be made in compliance with Section 15.3. Notwithstanding clause (ii) of this Section, any Bank may at any time, without the consent of Borrowers or Agent, assign all or any portion of its rights under this Agreement and its Notes to a Federal Reserve Bank; provided, however, that no such assignment shall release the transferor Bank from its obligations hereunder. Agent may treat the payee of any Note as the -89- owner thereof for all purposes hereof unless and until such payee complies with Section 15.3 in the case of an assignment thereof or, in the case of any other transfer, a written notice of the transfer is filed with Agent. Any assignee or transferee of a Note agrees by acceptance thereof to be bound by all the terms and provisions of the Loan Documents. Any request, authority or consent of any Person, who at the time of making such request or giving such authority or consent is the holder of any Note, shall be conclusive and binding on any subsequent holder, transferee or assignee of such Note or of any Note or Notes issued in exchange therefor. 15.2 Participations. 15.2.1 Permitted Participants; Effect. Any Bank may, in the ordinary course of its business and in accordance with applicable law, at any time sell to one or more banks or other Persons that are not, and that are not Affiliates of a Person, in the home building business ("Participants") participating interests in any Loan owing to such Bank, any Note held by such Bank, any Commitment of such Bank or any other interest of such Bank under the Loan Documents in an amount of not less than $5,000,000, so long as immediately following such sale the selling Bank shall retain at least one-half (1/2) of its Commitment. In the event of any such sale by a Bank of participating interests to a Participant, such Bank's obligations under the Loan Documents shall remain unchanged, such Bank shall remain solely responsible to the other parties hereto for the performance of such obligations, such Bank shall remain the holder of any such Note for all purposes under the Loan Documents, all amounts payable by Borrowers under this Agreement shall be determined as if such Bank has not sold such participating interests, and Borrowers, Agent and the Issuing Bank shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under the Loan Documents. 15.2.2 Voting Rights. Each Bank shall retain the sole right to approve, and/or grant its consent to, without the consent of any Participant, any amendment, modification or waiver or other matter relating to any provision of the Loan Documents. 15.2.3 Waiver of Setoff. Each Participant shall be deemed to have waived any and all rights of setoff, including any common law right of setoff, in respect of its participating interest in amounts owing under the Loan Documents. 15.3 Assignments. 15.3.1 Permitted Assignments. Any Bank may, in the ordinary course of its business and in accordance with applicable law, at any time assign to one or more banks or other financial institutions that are not, and that are not Affiliates of a Person, in the home building business ("Purchasers") all or any part of its rights and obligations under the Loan Documents in the amount of not less than $10,000,000, provided that each such assignment shall be of a constant, and not a varying, percentage of the assigning Bank's rights and obligations under the Loan Documents; and provided further, that immediately following such assignment, the assigning Bank either (i) shall retain a Commitment of not less than $10,000,000 or, if the assigning Bank is Agent, not less than $40,000,000, or (ii) shall have assigned all of its -90- Commitment and have no remaining interest in the Obligations. Such assignment shall be substantially in the form of Exhibit K hereto or in such other form as may be agreed to by the parties thereto. The consent of Borrowers and Agent shall be required prior to an assignment becoming effective; provided, however, that if an Event of Default has occurred and is continuing, the consent of Borrowers shall not be required. 15.3.2 Effect; Effective Date. Upon (i) delivery to Agent of a notice of assignment, substantially in the form attached as Exhibit "1" to Exhibit K hereto (a "Notice of Assignment"), together with any consents required by Section 15.3.1, and (ii) payment by the Bank of a $5,000 fee to Agent for processing such assignment, such assignment shall become effective on the effective date specified in such Notice of Assignment. The Notice of Assignment shall contain a representation by the Purchaser to the effect that none of the consideration used to make the purchase of the Commitment and Loans under the applicable assignment agreement are "plan assets" as defined under ERISA and that the rights and interests of the Purchaser in and under the Loan Documents will not be "plan assets" under ERISA. On and after the effective date of such assignment, such Purchaser shall for all purposes be a Bank party to this Agreement and any other Loan Document executed by Banks and shall have all the rights and obligations of a Bank under the Loan Documents, to the same extent as if it were an original party hereto, and no further consent or action by Borrowers, Banks or Agent shall be required to release the transferor Bank with respect to the percentage of the Aggregate Commitment and Loans assigned to such Purchaser. Upon the consummation of any assignment to a Purchaser pursuant to this Section 15.3.2, the transferor Bank, Agent and Borrowers shall make appropriate arrangements so that replacement Notes are issued to such transferor Bank and new Notes or, as appropriate, replacement Notes, are issued to such Purchaser, in each case in principal amounts reflecting their Commitment, as adjusted pursuant to such assignment. 15.4 Dissemination of Information. Each Borrower authorizes each Bank to disclose to any Participant or Purchaser 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 public information in such Bank's possession concerning the creditworthiness of such Borrower, Guarantor and their Subsidiaries; provided that each Transferee and prospective Transferee agrees to be bound by Section 12.15 of this Agreement. 15.5 Tax Treatment. If any interest in any Loan Document is transferred to any Transferee which is organized under the laws of any jurisdiction other than the United States or any State thereof, the transferor Bank shall cause such Transferee, concurrently with the effectiveness of such transfer, to comply with the provisions of Section 2.19. -91- ARTICLE XVI NOTICES 16.1 Giving Notice. Except as otherwise permitted by Section 2.14 with respect to borrowing notices, all notices and other communications provided to any party hereto under this Agreement or any other Loan Document shall be in writing 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; any notice, if transmitted by telex or facsimile, shall be deemed given when transmitted (answerback confirmed in the case of telexes). 16.2 Change of Address. Any Borrower, Agent, any Bank and the Issuing Bank may each change the address for service of notice upon it by a notice in writing to the other parties hereto. ARTICLE XVII COUNTERPARTS This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one agreement, and any of the parties hereto may execute this Agreement by signing any such counterpart. This Agreement shall be effective when it has been executed by all Borrowers, Agent, and Banks and each party has notified Agent by telex or telephone, that it has taken such action. IN WITNESS WHEREOF, Borrowers, Banks, and Agent have executed this Agreement as of the date first above written. BORROWERS: RICHMOND AMERICAN HOMES OF CALIFORNIA, INC., a Colorado corporation ATTEST: By: ------------------------------------ - ------------------------- Name: John J. Heaney, Vice President 3600 South Yosemite, Suite 900 Denver, Colorado 80237 Attention: John J. Heaney -92- RICHMOND AMERICAN HOMES OF MARYLAND, INC., a Maryland corporation ATTEST: By: ------------------------------------ - ------------------------- Name: John J. Heaney, Vice President 3600 South Yosemite, Suite 900 Denver, Colorado 80237 Attention: John J. Heaney RICHMOND AMERICAN HOMES OF NEVADA, INC., a Colorado corporation ATTEST: By: ------------------------------------ - ------------------------- Name: John J. Heaney, Vice President 3600 South Yosemite, Suite 900 Denver, Colorado 80237 Attention: John J. Heaney RICHMOND AMERICAN HOMES OF VIRGINIA, INC., a Virginia corporation ATTEST: By: ------------------------------------ - ------------------------- Name: John J. Heaney, Vice President 3600 South Yosemite, Suite 900 Denver, Colorado 80237 Attention: John J. Heaney -93- RICHMOND AMERICAN HOMES, INC., a Delaware corporation ATTEST: By: ------------------------------------ - -------------------------- Name: John J. Heaney, Vice President 3600 South Yosemite, Suite 900 Denver, Colorado 80237 Attention: John J. Heaney RICHMOND HOMES, INC. I, a Delaware corporation ATTEST: By: ----------------------------------- - -------------------------- Name: John J. Heaney, Vice President 3600 South Yosemite, Suite 900 Denver, Colorado 80237 Attention: John J. Heaney RICHMOND HOMES, INC. II, a Delaware corporation ATTEST: By: ----------------------------------- - -------------------------- Name: John J. Heaney, Vice President 3600 South Yosemite, Suite 900 Denver, Colorado 80237 Attention: John J. Heaney -94- Commitments BANKS: $75,000,000.00 BANK ONE, ARIZONA, NA, a national banking association, Individually and as Agent By: ------------------------------ Name: Rhonda R. Williams Vice President Western Region Real Estate Department A-383 241 North Central Avenue Phoenix, Arizona 85004 Attention: Rhonda R. Williams $40,000,000.00 BANK UNITED OF TEXAS FSB, a federal savings bank By: --------------------------------- Name: Thomas S. Griffin Vice President 5970 South Greenwood Plaza Boulevard Suite 110 Englewood, Colorado 80111 Attention: Thomas S. Griffin -95- $20,000,000.00 SANWA BANK CALIFORNIA, a California corporation By: ------------------------------ Name: Russ Wakeham Vice President 4041 MacArthur Boulevard, Suite 100 Newport Beach, California 92660 Attention: Russ Wakeham $15,000,000.00 KEY BANK OF COLORADO, a Colorado state bank By: ------------------------------ Name: James R. Peoples Senior Vice President Southeast Branch 3600 South Yosemite Street Suite 410 Denver, Colorado 80237 Attention: James R. Peoples -96- The undersigned Guarantor is executing this Agreement solely to indicate its confirmation of all of the representations, warranties, covenants, terms and provisions that relate to Guarantor and to evidence its agreement to be bound by the same. Attest: M.D.C. HOLDINGS, INC., a Delaware corporation - -------------------------- By: ------------------------------------------ Name: John J. Heaney Title: Vice President -97- EX-4.2 3 Exhibit 4.2 SCHEDULE "2.21" Terms Relating to Last 24 Months of Term/No Extension I. If the Extension Request is not approved pursuant to Section 2.21(a), (b) or (c) of the Agreement, or if Borrowers do not request an extension pursuant to Section 2.21 of the Agreement, then during the twenty-four (24) months preceding the Facility Termination Date, the terms and condition set forth on this Schedule "2.21" shall be deemed to be incorporated into the Agreement, and Borrowers, Banks and Agent shall act in accordance herewith: (a) Section 2.1. Section 2.1(iii) of the Agreement shall be deemed to be modified in its entirety to read as follows: "(iii) the aggregate principal amount of all Advances plus the aggregate amount of the Facility Letter of Credit Obligations outstanding with respect to all Borrowers plus the aggregate principal amount outstanding of all Public Indebtedness described in Section 8.2(xv) shall not exceed the aggregate of all Borrowing Bases for all Borrowers determined as of the most recent Inventory Valuation Date." (b) Section 2.2. Section 2.2(iii) of the Agreement shall be deemed to be modified in its entirety to read as follows: "(iii) the aggregate principal amount of all Advances plus the aggregate amount of the Facility Letter of Credit Obligations outstanding with respect to all Borrowers plus the aggregate principal amount outstanding of all Public Indebtedness described in Section 8.2(xv) exceeds the aggregate of all Borrowing Bases for all Borrowers determined as of the most recent Inventory Valuation Date." (c) Section 4.2. Section 4.2(v) of the Agreement shall be deemed to be modified in its entirety to read as follows: "(v) if, after giving effect to the Facility Letter of Credit or amendment or extension thereof requested hereunder, the aggregate principal amount of all Facility Letter of Credit Obligations plus the principal amount of all Advances outstanding plus the aggregate principal amount outstanding of all Public Indebtedness described in Section 8.2(xv) would exceed the aggregate of all Borrowing Bases determined as of the most recent Inventory Valuation Date." (d) Section 5.2. Section 5.2(iii)(C) of the Agreement shall be deemed to be modified in its entirety to read as follows: "(C) the aggregate principal amount of all Advances plus the aggregate amount of the Facility Letter of Credit Obligations outstanding plus the aggregate principal amount outstanding of all Public Indebtedness described in Section 8.2(xv) shall not exceed the aggregate of all Borrowing Bases (determined as of the most recent Inventory Valuation Date)." (e) Section 8.2(xv). Section 8.2(xv) of the Agreement shall be deemed to be modified in its entirety to read as follows: (xv) Public Indebtedness, so long as such Indebtedness (A) as to Guarantor, is either subordinated to or pari passu with Guarantor's obligations under the Guaranty; and (B) as to Borrowers, is Subordinated Indebtedness; provided, however, that the aggregate amount of such Public Indebtedness shall be subject to the limitations in Sections 2.1(iii), 2.2(iii), 4.2(v) and 5.2(iii)(C). (f) Section 8.2(xviii). The following Section 8.2 (xviii) shall be deemed to be added to the Agreement: 8.2(xviii) Indebtedness, except Public Indebtedness, secured by Liens permitted under Section 8.6(v). (g) Section 8.6. Section 8.6(v) shall be deemed to be modified in its entirety to read as follows: 8.6(v) Liens incurred in the ordinary course of business not otherwise permitted by this covenant, provided that (I) the Liens encumber real property owned by the obligor of the applicable Indebtedness (provided that a Borrower may be the obligor of such Indebtedness and Guarantor may guarantee such Indebtedness), and (II) the obligations secured by any Lien shall not exceed eighty percent (80%) of the fair market value of the real property covered thereby (if the obligations do not relate to the construction of improvements on, or development of, the real property) or eighty percent (80%) of the value of the real property covered thereby as if all Improvements to be located thereon have been completed (if the obligations relate to the construction of Improvements on the real property), as applicable. 1. If the Extension Request is not approved pursuant to Section 2.21, or if Borrowers do not request an extension pursuant to Section 2.21, then if a Conversion Period occurs during the twenty-four (24) months preceding the Facility Termination Date, the terms and conditions of this Schedule "2.21" shall be of no further force and effect, and the provisions of Schedule "2.22" shall become effective. -2- EX-4.3 4 Exhibit 4.3 SCHEDULE "2.22" Terms Relating to Conversion Period During any Conversion Period (including without limitation any Conversion Period occurring during the twenty-four (24) months preceding the Facility Termination Date), the terms and conditions set forth on this Schedule "2.22" shall be deemed to be incorporated into the Agreement, and Borrowers, Banks and Agent shall act in accordance herewith. I. ADJUSTMENTS TO CERTAIN COVENANTS. 1. Adjustments During a Secured Conversion Period or a Modified Secured Conversion Period. If the Conversion Period is a Secured Conversion Period or a Modified Secured Conversion Period, then during the Conversion Period, Sections 8.2, 8.4, 8.5 and 8.6 shall be deemed to be deleted from the Agreement. 2. Adjustments to Certain Covenants During an Unsecured Conversion Period. If the Conversion Period is an Unsecured Conversion Period, then during the Conversion Period: (a) Section 2.1. Section 2.1(iii) of the Agreement shall be deemed to be modified in its entirety to read as follows: "(iii) the aggregate principal amount of all Advances plus the aggregate amount of the Facility Letter of Credit Obligations outstanding with respect to all Borrowers plus the aggregate principal amount outstanding of all Public Indebtedness described in Section 8.2(xv) shall not exceed the aggregate of all Borrowing Bases for all Borrowers determined as of the most recent Inventory Valuation Date." (b) Section 2.2. Section 2.2(iii) of the Agreement shall be deemed to be modified in its entirety to read as follows: "(iii) the aggregate principal amount of all Advances plus the aggregate amount of the Facility Letter of Credit Obligations outstanding with respect to all Borrowers plus the aggregate principal amount outstanding of all Public Indebtedness described in Section 8.2(xv) exceeds the aggregate of all Borrowing Bases for all Borrowers determined as of the most recent Inventory Valuation Date." (c) Section 4.2. Section 4.2(v) of the Agreement shall be deemed to be modified in its entirety to read as follows: "(v) if, after giving effect to the Facility Letter of Credit or amendment or extension thereof requested hereunder, the aggregate principal amount of all Facility Letter of Credit Obligations plus the principal amount of all Advances outstanding plus the aggregate principal amount outstanding of all Public Indebtedness described in Section 8.2(xv) would exceed the aggregate of all Borrowing Bases determined as of the most recent Inventory Valuation Date." (d) Section 5.2. Section 5.2(iii)(C) of the Agreement shall be deemed to be modified in its entirety to read as follows: "(C) the aggregate principal amount of all Advances plus the aggregate amount of the Facility Letter of Credit Obligations outstanding plus the aggregate principal amount outstanding of all Public Indebtedness described in Section 8.2(xv) shall not exceed the aggregate of all Borrowing Bases (determined as of the most recent Inventory Valuation Date)." (e) Section 8.2(xv). Section 8.2(xv) of the Agreement shall be deemed to be modified in its entirety to read as follows: (xv) Public Indebtedness, so long as such Indebtedness (A) as to Guarantor, is either subordinated to or pari passu with Guarantor's obligations under the Guaranty; and (B) as to Borrowers, is Subordinated Indebtedness; provided, however, that the aggregate amount of such Public Indebtedness shall be subject to the limitations in Sections 2.1(iii), 2.2(iii), 4.2(v) and 5.2(iii)(C). (f) Section 8.2(xviii). The following Section 8.2 (xviii) shall be deemed to be added to the Agreement: 8.2(xviii) Indebtedness, except Public Indebtedness, secured by Liens permitted under Section 8.6(v). (g) Section 8.6. Section 8.6(v) shall be deemed to be modified in its entirety to read as follows: 8.6(v) Liens incurred in the ordinary course of business not otherwise permitted by this covenant, provided that (I) the Liens encumber real property owned by the obligor of the applicable Indebtedness (provided that a Borrower may be the obligor of such Indebtedness and Guarantor may guarantee such Indebtedness), and (II) the obligations secured by any Lien shall not exceed eighty percent (80%) of the fair market value of the real property covered thereby (if the obligations do not relate to the construction of improvements on, or development of, the real property) or eighty percent (80%) of the value of the real property covered thereby as if all Improvements to be located thereon have been completed (if the obligations relate to the construction of Improvements on the real property), as applicable. -2- A. CHANGES AND ADDITIONS TO DEFINED TERMS. As used in this Schedule "2.22", "Borrowing Base" shall have the meaning set forth in the Agreement during the first thirty (30) days after the Conversion Date. Thereafter, and until that day that is ninety (90) days (or 120 days, as applicable, pursuant to the provisions of Paragraph 6 below) after the Conversion Date, Borrowing Base shall mean, with respect to an Inventory Valuation Date for which it is to be determined, an amount equal to the sum of the following assets of each Borrower: (i) the aggregate of the following amounts with respect to each Presold Unit that constitutes Pledged Collateral or Eligible Collateral: the lesser of (a) eighty percent (80%) of the respective Unit Base Appraised Value (if a Unit Base Appraisal has been received), or (b) eighty percent (80%) of the respective purchase price under the applicable purchase contract, or (c) eighty percent (80%) of the respective book value; plus (ii) the aggregate of the following amounts with respect to each Spec Unit that constitutes Pledged Collateral or Eligible Collateral: the lesser of (a) seventy percent (70%) of the respective Unit Base Appraised Value (if a Unit Base Appraisal has been received), or (b) seventy percent (70%) of the respective book value; plus (iii) the aggregate of the following amounts with respect to each Model Unit that constitutes Pledged Collateral or Eligible Collateral: the lesser of (a) seventy percent (70%) of the respective Unit Base Appraised Value (if a Unit Base Appraisal has been received), or (b) seventy percent (70%) of the respective book value; plus (iv) the aggregate of the following amounts with respect to each parcel of Land Under Development that constitutes Pledged Collateral or Eligible Collateral: the lesser of (a) fifty percent (50%) of the respective Land Appraised Value (if a Land Appraisal has been received); or (b) fifty percent (50%) of the respective book value; provided, however, that (A) the aggregate of the amounts calculated pursuant to clauses (ii) and (iv) with respect to all Borrowers shall not exceed, on any Inventory Valuation Date, the aggregate of the amounts calculated pursuant to clauses (i) and (iii) with respect to all Borrowers, and (B) the aggregate of the amounts calculated pursuant to clause (iv) shall not exceed at any time fifty percent (50%) of the Aggregate Commitment. -3- After that day that is ninety (90) days (or 120 days, as applicable, pursuant to the provisions of Paragraph 6 below) after the Conversion Date, Borrowing Base shall mean, with respect to an Inventory Valuation Date for which it is to be determined, an amount equal to the sum of the following assets of each Borrower: (I) the aggregate of the following amounts with respect to each Presold Unit that constitutes Eligible Collateral: the lesser of (a) eighty percent (80%) of the respective Unit Base Appraised Value, or (b) eighty percent (80%) of the respective purchase price under the applicable purchase contract, or (c) eighty percent (80%) of the respective book value; plus (II) the aggregate of the following amounts with respect to each Spec Unit that constitutes Eligible Collateral: the lesser of (a) seventy percent (70%) of the respective Unit Base Appraised Value, or (b) seventy percent (70%) of the respective book value; plus (III) the aggregate of the following amounts with respect to each Model Unit that constitutes Eligible Collateral: the lesser of (a) seventy percent (70%) of the respective Unit Base Appraised Value, or (b) seventy percent (70%) of the respective book value; plus (IV) the aggregate of the following amounts with respect to each parcel of Land Under Development that constitutes Eligible Collateral: the lesser of (a) fifty percent (50%) of the respective Land Appraised Value, or (b) fifty percent (50%) of the respective book value. provided, however, that (A) the aggregate of the amounts calculated pursuant to clauses (II) and (IV) with respect to all Borrowers shall not exceed, on any Inventory Valuation Date, the aggregate of the amounts calculated pursuant to clauses (I) and (III) with respect to all Borrowers, and (B) the aggregate of the amounts calculated pursuant to clause (IV) shall not exceed at any time fifty percent (50%) of the Aggregate Commitment. "Collateral Documents" is defined in Paragraph C(5). "Due Diligence Documents" is defined in Paragraph C(6). "Eligible Collateral" means Collateral which satisfies each of the following requirements: (i) the applicable Borrower has provided all Collateral Documents and otherwise satisfied the conditions precedent set forth in Paragraph C(5) with respect to such Collateral, and (ii) the applicable Borrower has provided all Due Diligence Documents and otherwise satisfied the -4- conditions precedent set forth in Paragraph C(6) with respect to such Collateral, and (iii) such Collateral has not become subject to Paragraph C(4). "Finished Lots" means parcels of land owned by any Borrower which are duly recorded and platted for use as Housing Units and zoned for such use, with respect to which all requisite governmental consents and approvals have been obtained and on which (i) all development activity, other than finishing detail permitted by the local jurisdiction where such lot is located, has been completed and (ii) water and sewer connections have been brought to the lot shown on the plat covering such parcel and are available for hook-up to a Housing Unit; provided, however, that the term "Finished Lots" shall not include any real property upon which the construction of a Housing Unit has commenced. For purposes of this definition, the construction of Housing Unit shall be deemed to have commenced upon commencement of the trenching for the foundation of the Housing Unit. "Improvements" means (i) offsite improvements on the Land Under Development (including, without limitation, curbs, grading, landscaping, sprinklers, storm and sanitary sewers, paving, sidewalks, and utilities) necessary to make the Land Under Development suitable for the construction of Housing Units, and (ii) any common area improvements to be constructed on the Land Under Development. "Land Appraisal" means an appraisal of the Land Under Development and the Improvements (as they exist, if completed, or as they will exist upon completion) (i) ordered by Agent, (ii) prepared by an appraiser satisfactory to Agent, (iii) in compliance with all federal and state standards for appraisals, (iv) reviewed by Agent, and (v) in form and substance satisfactory to Agent in its absolute and sole discretion. "Land Appraised Value" means the market value for the Land Under Development and the Improvements (as they exist, if completed, or as they will exist upon completion), which shall be the value approved or determined by Agent in its absolute and sole discretion after review of a Land Appraisal. "Net Sales Proceeds" means the gross sales price of a Housing Unit set forth in the purchase contract for such Housing Unit, less (i) any earnest money deposit, (ii) customary tax prorations, (iii) reasonable and customary real estate brokerage commissions payable to any Person who is neither (A) employed by any Borrower or Guarantor, nor (B) engaged in on-site sales at the Subdivision in which the Unit is located, and (iv) reasonable and customary closing costs, including any "points" payable by the Borrower. "Pledged Collateral" means Collateral where the applicable Borrower has satisfied the conditions precedent set forth in Paragraph C(5). -5- "Subdivision" means a group of lots designated on the final subdivision plat or filing; provided, however, that with respect to multiple subdivision plats or filings that are phases of a larger development and are in reasonable proximity to each other, then all of the lots shown on such subdivision plats or filing or in such phases in which a common product type is being constructed shall be deemed in the aggregate to constitute a single Subdivision, as approved by Agent in its reasonable discretion. "Unit Base Appraisal" means, with respect to each type of Unit, an appraisal of the Unit and a typical lot in the applicable Subdivision, as selected by Agent, as such Unit will exist upon completion (i) ordered by Agent, (ii) prepared by an appraiser satisfactory to Agent, (iii) in compliance with all federal and state standards for appraisals, (iv) reviewed by Agent, and (v) in form and substance satisfactory to Agent in its absolute and sole discretion. "Unit Base Appraised Value" means the value of a Unit and a typical lot in the applicable Subdivision, as selected by Agent, without lot premiums, options, and upgrades, as approved or determined by Agent in its absolute and sole discretion after review of a Unit Base Appraisal. "Unit Budget" means, with respect to each type of Housing Unit, the budget of the costs, expenses, and fees necessary for or related to construction of that type of Housing Unit. Such budget shall include (i) the onsite cost of labor and materials directly related to construction of the type of Unit, other "hard costs," construction permits, tap fees and other fees for permits required by any governmental authority, and costs of direct project supervision, (ii) costs and expenses related to upgrades, options, and decorator items, (iii) insurance costs, advertising and marketing costs, escrow and title fees, processing and closing fees, wire transfer fees, legal fees, and appraisal fees, and (iv) a reserve for repair and maintenance. There shall be a separate budget for each type of Housing Unit. "Unit Plans and Specifications" means, with respect to each type of Housing Unit, plans and specifications for construction of that type of Housing Unit, prepared by an architect, certified by the applicable Borrower to Agent together with any amendments or modifications thereof. B. BORROWERS' OBLIGATION TO PROVIDE COLLATERAL. 1. Collateral. If the Conversion Period is a Secured Conversion or a Modified Secured Conversion Period, then Borrowers shall provide, and Agent shall accept on behalf of Banks, Collateral as security for the Obligations, which security shall be on the terms and conditions set forth in this Schedule "2.22." During the first thirty (30) days after the Conversion Date, Agent and Banks shall continue to make Advances in accordance with, and pursuant to the limitations of, the Agreement. Thereafter, and until that day that is ninety (90) days after the Conversion Date, Advances shall be made to each Borrower only with respect to Pledged Collateral (as defined herein) that is owned by such Borrower, pursuant to the terms of this Schedule "2.22." Thereafter, Advances shall be made to each Borrower only with respect to -6- Eligible Collateral (as defined herein) that is owned by such Borrower, pursuant to the terms of this Schedule "2.22." 2. Amount of Collateral to be Provided. Within thirty (30) days after the Conversion Date (where the Conversion Period is a Secured Conversion Period or a Modified Secured Conversion Period), and thereafter during the Conversion Period, Borrowers shall comply with the provisions of Paragraph C(5) with respect to Housing Units and Land Under Development listed on the most recent Borrowing Base Certificate in an amount sufficient to cause Borrowers to be in compliance at all times with Section 2.1 of the Agreement. Within ninety (90) days after the Conversion Date (where the Conversion Period is a Secured Conversion Period or a Modified Secured Conversion Period), and thereafter during the Conversion Period, Borrowers shall also comply with the provisions of Section C(6) of this Schedule "2.22" with respect to Housing Units and Land Under Development listed on the most recent Borrowing Base Certificate in an amount sufficient to cause Borrowers to be in compliance at all times with Section 2.1 of the Agreement. 3. Advances and Additional Collateral During Conversion Period. Borrowers may continue to request Advances and Facility Letters of Credit during the Conversion Period. If the Conversion Period is a Secured Conversion Period or a Modified Secured Conversion Period, Borrowers may continue to provide to Agent, for the benefit of Banks, additional Eligible Collateral in accordance with the terms hereof; provided, however, a. After Borrowers provide the initial Eligible Collateral during the 90- day period described in Paragraph 5 above, a Borrower may not add any new Land Under Development except Finished Lots during the Conversion Period; and b. A Borrower may not add any new Housing Units to Eligible Collateral during the last six (6) months of the Conversion Period. 4. Extraordinary Events Affecting Collateral. Upon the occurrence of any of the following events, Housing Units or Land Under Development, as applicable, at any time constituting Pledged Collateral (or Eligible Collateral, as applicable) may be declared by Agent to no longer be Pledged Collateral (or Eligible Collateral, as applicable): a. Material Damage, Destruction, or Condemnation. Any Housing Unit is materially damaged, destroyed, or becomes subject to any condemnation proceeding or environmental impairment (as reasonably determined by Agent). b. Default Regarding Title Insurance. Any title company fails to perform its obligations under any agreement with Agent respect to such Collateral or the requirements of the Loan Documents for title insurance with respect to such Collateral are not satisfied. -7- 5. Collateral Documents to be Provided by Borrower. Within thirty (30) days after the Conversion Date (where the Conversion Period is a Secured Conversion Period or a Modified Secured Conversion Period), Borrowers shall deliver to Agent, for the benefit of Banks, the following documents, each of which shall be acceptable to Agent in its reasonable discretion, with respect to Housing Units and Land Under Development shown on the most recent Borrowing Base Certificate in an amount sufficient to cause Borrowers to be in compliance at all times with Section 2.1 of the Agreement. The documents delivered by Borrowers pursuant to this Paragraph C(5) are referred to herein as the "Collateral Documents." a. Deed of Trust. The applicable Borrower shall have executed, delivered to Agent, acknowledged, and recorded and filed a Deed of Trust (or an amendment or modification thereof), UCC-1 financing statements (as required by Agent) and such other documents as Agent or any Bank may reasonably require to attach, perfect or otherwise secure the Collateral, and Agent shall execute, file and record such documents as applicable. b. Environmental Agreement. The applicable Borrower and Guarantor shall have executed and delivered to Agent an Environmental Agreement covering the Collateral. c. Title Insurance. The applicable Borrower shall have provided to Agent an American Land Title Association loan policy or policies of title insurance (or other reasonably acceptable policy) or an irrevocable and unconditional commitment to issue such policy or policies, or an endorsement to an existing title policy or policies in form satisfactory to Agent, issued by a title company reasonably acceptable to Agent, insuring the Deed of Trust. Such policy or policies shall have a liability limit in an amount to be determined by Agent in its reasonable discretion shall provide coverage and otherwise be in form and substance satisfactory to Agent (including, without limitation, mechanic's lien coverage with respect to claims existing on the date the Deed of Trust is recorded or that would have priority over the Deed of Trust, if available in the jurisdiction at a reasonable premium, as determined by Borrowers and Agent) insuring Agent's interest on behalf of Banks under the applicable Deed of Trust as a valid first lien on the property encumbered by the Deed of Trust. Such policy shall be accompanied by such reinsurance and co-insurance agreements and endorsements as Agent may require. Such policy must contain exceptions only for those items described in the definition of Permitted Liens and such other exceptions as are satisfactory to Agent and must have attached such endorsements (including, without limitation, endorsements insuring over any items described in clauses (i)(B) or (ii)(B) in the definition of Permitted Liens) as Agent may reasonably require. d. Insurance Policies. The applicable Borrower shall have delivered to Agent a certificate of insurance or other evidence thereof satisfactory to Agent, and at Agent's request, certified copies of the policies of insurance required under the Loan Documents. -8- e. Opinion Letter. If requested by Agent, the applicable Borrower shall have delivered to Agent a favorable opinion from a law firm representing Borrowers and Guarantor covering such matters as Agent may require. 6. Due Diligence Documents to be Provided by Borrower. Within ninety (90) days after the Conversion Date (where the Conversion Period is a Secured Conversion Period or a Modified Secured Conversion Period), Borrowers shall deliver to Agent, for the benefit of Banks, the following documents, each of which shall be acceptable to Agent in its reasonable discretion, with respect to Housing Units and Land Under Development shown on the most recent Borrowing Base Certificate in an amount sufficient to cause Borrowers to be in compliance at all times with Section 2.1 of the Agreement (except that the appraisal described in item (c) below shall be ordered by Agent, in a diligent and timely manner, at Borrower's expense); provided, however, that if Borrowers have diligently obtained all items described in this Paragraph 6 during such 90-day period with respect to any Housing Unit or Land under Development other than the appraisal described in item (c) below, then Borrowers shall have an additional thirty (30) days to provide such appraisal. The documents delivered by Borrowers pursuant to this Paragraph C(6) are referred to herein as the "Due Diligence Documents." a. Plat and/or Survey. The applicable Borrower shall have delivered to Agent one or more recorded plats, covering the Collateral. Each plat must contain a legal description of the land covered by the plat, must describe and show all boundaries of and lot lines within such land, all streets and other dedications, and all easements affecting such land. In addition, if no plat is available, if requested by Agent, such Borrower shall provide Agent an ALTA survey for such Collateral, in form and substance acceptable to Agent. b. Types of Housing Units. The applicable Borrower shall have provided Agent a description of the types of Housing Units to be constructed within the Subdivision relating to such Collateral together with Unit Budgets for each such type of Unit, and a pro forma for the Subdivision in a form satisfactory to Agent showing such Borrower's expected profit from the Subdivision. c. Appraisal. Agent shall have received a Land Appraisal or, as applicable, a Unit Base Appraisal for the type of Unit in question. Agent shall have the right to order reappraisals, at the applicable Borrower's expense, no more frequently than annually unless otherwise required by applicable law or regulation. The Land Appraised Value and the Unit Base Appraised Value for the type of Unit shall have been approved by Agent in its absolute and sole discretion. d. Lot Information. The applicable Borrower shall have provided Agent documentation relating to such Borrower's acquisition of the applicable lots, including, without limitation, the identity of the seller of such lots. The applicable Borrower also shall have -9- provided to Agent documentation establishing the acquisition price of such lots, including, without limitation, a copy of the applicable option agreement or other agreement for purchase of such lots. e. Approvals. If requested by Agent the applicable Borrower shall have made available to Agent for Agent's inspection evidence of appropriate zoning and existence of all approvals of governmental authorities and other third parties necessary to permit the construction and sale of Housing Units in the Subdivision relating to the Collateral for the applicable stage of construction; including, without limitation, all applicable public reports, architectural committee approvals and any other approvals required under the CC&Rs. f. Soils Tests. At Agent's request, the applicable Borrower shall have provided a soils test report prepared by a licensed soils engineer satisfactory to Agent showing the location of, and containing boring logs from, all borings, together with recommendations for the design of the foundations, paved areas and underground utilities for the Subdivision relating to the Collateral. At Agent's request, the applicable Borrower shall also provide such soils test reports for individual Lots within such Subdivision. g. Environmental Assessment. The applicable Borrower shall have delivered to Agent a report of an environmental assessment (including a fifty (50) year chain of title review) of each Subdivision (or applicable phase thereof) addressed to Agent by an environmental engineer acceptable to Agent containing such information, results, and certifications as Agent may require, in its absolute and sole discretion, and dated not earlier than six (6) calendar months before the Borrower's request. Depending upon the results of the environmental assessment, the Borrower shall also provide such follow up testing, reports, and other actions as may be required by Agent in its absolute and sole discretion. The contents of the environmental assessment report and any follow up must be satisfactory to Agent in its absolute and sole discretion. If such reports are not addressed to Agent, the Borrower shall cause a reliance letter, in form and substance satisfactory to Agent, to be provided to Agent. h. Environmental Questionnaire. The applicable Borrower shall have delivered to Agent, Agent's form of environmental questionnaire, fully completed and duly executed by such Borrower. The answers to the questions in the questionnaire must be satisfactory to Agent. i. Utilities. The applicable Borrower shall have provided to Agent evidence, which may be in the form of letters from local utility companies or local authorities (if not evidenced on the plat of the Subdivision or disclosed by other documents provided in this Paragraph), that (a) telephone service, electric power, storm sewer, sanitary sewer and water facilities are or will be available to the Subdivision relating to the Collateral and to the boundary of each lot therein; (b) such utilities are adequate to serve the lots in such Subdivision and exist at the boundary of the Subdivision; and (c) no conditions exist to affect such Borrower's right to connect into and have adequate use of such utilities except for the payment of a normal connection -10- charge or tap charges and except for the payment of subsequent charges for such services to the utility supplier. j. Flood Report. The applicable Borrower shall have provided to Agent evidence satisfactory to Agent as to whether (a) the Collateral is located in an area designated by the Department of Housing and Urban development as having special flood or mudslide hazards, and (b) if the Collateral is located in such an area, the community in which the Collateral is located is participating in the National Flood Insurance Program. k. Assessments, Charges, and Taxes. For taxes, assessments, and other charges that Agent has approved in writing for payment in installments pursuant to the Deed of Trust, the applicable Borrower shall have delivered to Agent evidence that such installments are current. For all other taxes, assessments, water, sewer, and other charges levied or assessed which are then due and payable, such Borrower shall have delivered to Agent evidence that such amounts have been paid in full. l. Assignments. If requested by Agent, the applicable Borrower shall have made available to Agent for Agent's inspection copies of the Unit Plans and Specifications and all executed contracts relating to design and construction of the Housing Unit or the Improvements between the Borrower and any other Person (including, without limitation, the architect and each contractor or subcontractor for labor, materials, or services), together with assignments thereof as Agent may request. m. Purchase Contract. If requested by Agent, if such Housing Unit is a Presold Unit, the applicable Borrower shall have made available to Agent for Agent's inspection a copy of the purchase contract for such Housing Unit if requested by Agent. n. Distressed Improvement Districts. If requested by Agent, the applicable Borrower shall have provided evidence that any improvement or assessment district in which the Collateral is located shall not (i) be insolvent under applicable law or subject to any bankruptcy or similar proceedings; or (ii) directly or indirectly cause the Subdivision relating to the Collateral to be subject to any suspension, disqualification, or disapproval by FHA, FNMA, VA, FHLMC, or any similar governmental or quasi-governmental agency that originates, purchases, insures or guarantees home mortgage loans. o. Other Items. The applicable Borrower shall have provided to Agent such other agreements, documents, and instruments as Agent may reasonably require. p. Other Actions. Borrowers and Guarantor have performed such other actions as Agent may reasonably require. -11- 7. Conditions Precedent to Adding Additional Eligible Collateral to Borrowing Base. Each Borrower may, from time to time, request Agent to approve additional Housing Units or Finished Lots as Eligible Collateral for inclusion in such Borrower's Borrowing Base. Approval of new Eligible Collateral shall be at Agent's reasonable discretion. When requesting consideration of new Eligible Collateral, if requested by Agent a Borrower shall deliver to Agent a completed subdivision checklist in form and substance satisfactory to Agent, supported by such documentation as Agent may require, and each of the following conditions precedent shall have been satisfied (or waived) in Agent's absolute and sole discretion, and each of the following deliveries shall have been approved by Agent in its absolute and sole discretion: a. Defaults. No Event of Default shall have occurred and be continuing. b. Satisfaction of Other Conditions. Borrowers or the applicable Borrower shall have satisfied the conditions precedent set forth in Paragraphs C(5) and C(6) with respect to such Eligible Collateral. 8. Additional Conditions Precedent to All Advances Against Eligible Collateral that Includes Housing Units. During a Secured Conversion Period or a Modified Secured Conversion Period, Agent shall be obligated to make Advances against Eligible Collateral that includes Housing Units only upon satisfaction of the following additional conditions precedent, as determined by Agent in its absolute and sole discretion. If any of the following conditions precedent are not satisfied as to any Eligible Collateral, then such Collateral shall be automatically excluded from the Borrowing Base: a. Inspection Report. If required by Agent, Agent shall not have received written evidence from Agent's inspector(s) or from Agent's employee(s) performing inspections for Agent that construction of each Housing Unit constituting Eligible Collateral does not comply with the respective Unit Plans and Specifications in all material respects. b. Lot Location Survey. If requested by Agent in its absolute and sole discretion, the applicable Borrower shall have obtained and made available to Agent for inspection a lot location survey for any Housing Units constituting Eligible Collateral. c. Approvals and Inspections by Governmental Authorities. If requested by Agent, all inspections and approvals by governmental authorities required for the stage of completion of each Housing Unit shall have been obtained and made available to Agent to Agent for inspection. d. Payment of costs, Expenses, and Fees. All costs, expenses, and fees to be paid by any Borrower or Guarantor on or before the date of the Advance under the Loan Documents or the Guaranty have been paid in full. -12- 9. Release of Collateral. So long as no Event of Default has occurred and is continuing, a Borrower may request releases of Housing Units and Land Under Development (including Finished Lots) from the lien and encumbrance of a Deed of Trust from time to time; provided, however, Agent (on behalf of Banks) shall be under no obligation to release any Housing Unit or Land Under Development unless each of the following conditions precedent is satisfied: a. In the case of any Housing Unit or Land Under Development that is being released for the purpose of sale, (i) such Borrower shall have paid to Agent, for the benefit of Banks, from its own funds (including Net Sales Proceeds) and not from proceeds of Advances, the greater of (A) any amount payment then required pursuant to Section 2.2 of the Agreement as a result of such release, or (B) the Net Sales Proceeds; and (ii) if requested by Agent, such Borrower shall have delivered to Agent a closing report required under Paragraph D(2)(a); or b. With respect to releases of Land Under Development or Housing Units for purposes other than sale, both before and after giving effect to such release, the outstanding Advances do not exceed the limitations in Section 2.1 of the Agreement and the applicable Borrower has made any payments required pursuant to Section 2.2 of the Agreement; and c. The property to be released and the property remaining subject to the Deed of Trust shall be a legal lot(s) or parcel(s); and d. If requested by Agent with respect to any Housing Unit, a Declaration of Covenants, Conditions and Restrictions shall have been recorded covering the property providing, among other things, for the ownership of common areas by a property owners association as common areas and for certain easement and other rights by the owner of each lot in the common areas. That Declaration, the documents for the property owners association, and all other related documents and instruments shall be satisfactory to Agent in both form and substance, and the interest of the applicable Borrower thereunder shall have been assigned to Agent as further security for the Obligations. That assignment and any financing statements or related documents shall be in form required by Agent. e. Agent shall have received such endorsements to its policy of title insurance insuring the lien of the applicable Deed of Trust as Agent may require; and f. Agent shall have received a written request for the partial release together with such documents and information as Agent may reasonably request to verify that the conditions for such release have been satisfied; and -13- g. All costs and expenses of Agent relating to all partial releases shall be paid by the applicable Borrower, including but not limited to reconveyance fees, title fees, recording fees and legal expenses; and h. No partial release shall impair or adversely affect Banks' security in the property remaining subject to the applicable Deed of Trust or any term or provision of the Deed of Trust as it pertains to the property remaining subject to the Deed of Trust. Any amounts paid to Agent under subparagraph (a) including, without limitation, Net Sales Proceeds, shall be applied to the outstanding principal balance of all Advances made to such Borrower, and if no unpaid Advances are then outstanding, for deposit into a cash collateral account maintained with Agent, pledged by such Borrower and controlled by Agent, and established with respect to such Borrower. Notwithstanding the foregoing, if an Event of Default or Unmatured Event of Default has occurred and is continuing, a Borrower may request releases of Land Under Development or Housing Units that are not included in Eligible Collateral from the lien and encumbrance of a Deed of Trust from time to time; provided, however, Agent (on behalf of Banks) shall be under no obligation to release any Land Under Development or Housing Unit unless each of the conditions precedent set forth in subparagraphs (a) and (c) through (h) have been satisfied. For purposes of satisfying the condition precedent in subparagraph (a)(i), such Borrower shall be required to pay to Agent, from its own funds (including Net Sales Proceeds) and not from proceeds of Advances, the greater of (I) the appraised value of such Land Under Development or Housing Unit, as determined by Agent in its absolute and sole discretion, based on an appraisal provided by such Borrower to Agent, at such Borrower's expense, or (II) the Net Sales Proceeds (if the release is requested in connection with a sale). C. ADDITIONAL AFFIRMATIVE COVENANTS DURING A SECURED CONVERSION PERIOD OR A MODIFIED SECURED CONVERSION PERIOD. During a Secured Conversion Period or a Modified Secured Conversion Period: 1. Appraisal Fees, Title Insurance Premium, and Other Costs, Expenses, and Fees. Each Borrower shall pay to Agent, for the benefit of Banks, the following fees, from such Borrower's own funds, which shall be earned by Banks on the date due under the Loan Documents and shall be non-refundable to such Borrower: appraisal fees, appraisal review fees, title insurance premium, and other costs, expenses, and fees that each Borrower is obligated to pay pursuant to the Loan Documents, including, without limitation, all fees and costs associated with periodic inspections of the Eligible Collateral owned by such Borrower, in the amounts specified by Agent, payable monthly during the term of a Secured Conversion Period or a Modified Secured Conversion Period, within five (5) days after demand by Agent. -14- 2. Information and Statements. If requested by Agent Borrowers shall furnish to Agent each of the following, which shall be segregated for each Borrower and shall be cumulated for all Borrowers so as to include information for all Borrowers and all Eligible Collateral, as applicable: a. Closing Report. On each Business Day, a report of all Housing Unit sales closed on the previous Business Day, in form and substance satisfactory to Agent, together with a reconciliation of the most recently submitted inventory report pursuant to clause (b) below and recalculation of Eligible Collateral after giving effect to such closings. For purposes of this clause (a), a sale will be deemed to have closed when the escrow agent for the sale has received all funds necessary to close the sale and paid to Agent, for the benefit of Banks, all sums owed to Agent pursuant to Paragraph C(9) and is unconditionally prepared to record the deed conveying title to such Housing Unit. b. Sales and Inventory Reports. As soon as the same are available and in any event within twenty-five (25) days after the end of each calendar month, (i) a report showing sales and cancellation of sales of Housing Units during the preceding calendar month, and (ii) a report showing the inventory of Housing Units (including Housing Units in progress) as of the end of the preceding calendar month. Such report shall contain such detailed information as Agent may reasonably require. c. Gross Profit Analysis. Within sixty (60) days after the end of each calendar quarter, an analysis of gross profit for each Subdivision, as of the end of such calendar quarter, and cumulatively for the calendar year. d. Land Holdings. Within sixty (60) days after the end of each quarter, a detailed schedule of all land owned by each Borrower and Guarantor, setting forth, without limitation, the location and book value of all such holdings. e. Unit Budgets. On each anniversary of the Conversion Date, and at such other time as requested by Agent, updated Unit Budgets. f. Other Items and Information. Such other information (including without limitation supporting schedules for financial statements) concerning any Borrower and Guarantor, the Property, and the assets, business, financial condition, operations, property, prospects, and results of operations of any Borrower and Guarantor as Agent reasonably requests from time to time. Additionally, promptly upon request of Agent, the applicable Borrower shall deliver to Agent counterparts and/or conditional assignments as security of any and all construction contracts, receipted invoices, bills of sale, statements, conveyances, and other agreements, documents, and instruments of any nature relating to the Eligible Collateral owned by such Borrower or under which such Borrower claims title to any materials or supplies used or to be used in the Eligible Collateral. Also, in this regard, promptly upon request of Agent, each -15- Borrower shall deliver to Agent a complete list of all contractors, subcontractors, material suppliers, other vendors, artisans, and laborers performing work or services or providing materials or supplies for the Eligible Collateral owned by such Borrower. 3. Insurance. Borrowers shall obtain and maintain the following insurance and pay all related premiums as they become due: a. Property. Insurance of the Eligible Collateral against damage or loss by fire, lightning, and other perils, on an all-risks basis, such coverage to be in an amount not less than the full replacement value of any and all Housing Units constituting Eligible Collateral. During the period of construction of the Housing Units or Improvements, such policy shall be written on an all-risks basis, with no coinsurance requirement, and shall contain a provision granting the insured permission to complete and/or occupy the Housing Units or Land Under Development, as applicable. b. Liability. Commercial general liability insurance protecting Borrowers, Agent and Banks against loss or losses from standard liability, including contractual liability, and arising from bodily injury, death, or property damage with a limit of liability of not less than the following amounts: Per occurrence: $ 1,000,000. General aggregate: $ 2,000,000. Minimum umbrella excess liability insurance amount: $50,000,000. Such policies must be written on an occurrence basis so as to provide blanket contractual liability, broad form property damage coverage, and coverage for products and completed operations. In addition, there shall be obtained and maintained business motor vehicle liability insurance protecting Borrowers, Agent and Banks against loss or losses from liability relating to motor vehicles owned, non-owned, or hired used by a Borrower with a limit of liability of not less than $1,000,000 (combined single limit for personal injury (including bodily injury and death) and property damage). c. Flood. A policy or policies of flood insurance in the maximum amount of flood insurance available with respect to all Collateral under the Flood Disaster Protection Act of 1973, as amended. This requirement will be waived with respect to any Collateral presentation of evidence satisfactory to Agent that no portion of the Collateral in question is located within an area identified by the U.S. Department of Housing and Urban Development as having special flood hazards. -16- d. Worker's Compensation. Worker's compensation insurance, disability benefits insurance, and such other forms of insurance as required by law covering loss resulting from injury, sickness, disability, or death of employees of each Borrower. Borrowers shall cause each contractor and each subcontractor having employees located on or assigned to the Collateral to obtain and maintain this same coverage for all eligible employees. e. Additional Insurance. Each Borrower shall obtain and maintain such other policies of insurance as Agent may reasonably request in writing. f. Other. All policies for required insurance shall be in form and substance satisfactory to Agent in its absolute and sole discretion. Such insurance may be carried under blanket policies, so long as such policy provides the coverage for each Housing Unit as provided in Paragraph D(3)(a) and otherwise complies with this Paragraph D(3). All required insurance shall be procured and maintained in financially sound and generally recognized responsible insurance companies selected by Borrowers and approved by Agent. Such companies must be authorized to write such insurance in the State where the Collateral is located. Each company shall be rated "A" or better by A.M. Best Co., in Bests' Key Guide, or such other rating acceptable to Agent in Agent's absolute and sole discretion. All property policies evidencing required insurance shall name Agent on behalf of Banks as first mortgagee and loss payee. All liability policies evidencing required insurance shall name Agent on behalf of Banks as additional insured. The policies shall not be cancelable as to the interests of Banks due to the acts of any Borrower or Guarantor. The policies shall provide for at least thirty (30) days prior written notice of the cancellation or modification thereof to Agent. g. Evidence. A certificate and, if requested by Agent, a certified copy of each insurance policy or, if acceptable to Agent in its absolute and sole discretion, certificates of insurance evidencing that such insurance is in full force and effect, shall be delivered to Agent, together with proof of the payment of the premiums thereof. At least five (5) days prior to the expiration of each such policy, Borrowers shall furnish Agent evidence that such policy has been renewed or replaced in the form of the original or a certified copy of the renewal or replacement policy or, if acceptable to Agent in its absolute and sole discretion, a certificate reciting that there is in full force and effect, with a term covering at least the next succeeding calendar year, insurance of the types and in the amounts required in this Paragraph D(3). 4. Appraisals. Agent shall have the right to order Unit Base Appraisals and Land Appraisals from time to time. Each Appraisal is subject to review and approval by Agent. Each Unit Base Appraisal shall be accompanied by the following documents and information: (i) one (1) set of Unit Plans and Specifications for the type of Housing Unit covered by the Unit Base Appraisal; (ii) the proposed sales price for the type of Housing Unit; (iii) the final Unit Budget (or the estimated Unit Budget, if the final Unit Budget is not approved) for the type of Housing Unit covered by the Unit Base Appraisal; (iv) mini floor plans, square footage, anticipated absorption, estimated unit mix, and number of models (by floor plan), all for the applicable -17- Subdivision; and (v) a complete legal description of the specific lots in the Subdivision, together with applicable recording information. The Borrower that owns the appraised Housing Units agrees, within fifteen (15) days after demand by Agent, to pay to Agent the cost and expense for such Unit Base Appraisals. All FNMA appraisals or other appraisals of Housing Units accepted by Agent that do not have a specific expiration date shall be updated at Agent's request. Based on the updated, respective Unit Base Appraised Value approved or determined by Agent in its reasonable discretion, Agent shall have the right to revise the most recent Borrowing Base Certificate delivered to Agent. If the outstanding principal amount of Advances exceeds the limitations in Section 2.1 of the Agreement as a result of such revision, then the applicable Borrower shall be required to make a mandatory prepayment to Agent pursuant to Section 2.2 of the Agreement. 5. Commencement and Completion of Improvements and Housing Units. Each Borrower shall cause construction of its respective Improvements and Housing Units to be prosecuted and completed in good faith, with due diligence, and without delay subject to acts of God, labor strikes and other force majeure events beyond the reasonable control of such Borrower. A Borrower may commence construction of Housing Units at any time. Each Borrower shall cause its respective Improvements and Housing Units to be constructed (i) in a good and workmanlike manner, (ii) in compliance with all applicable laws, rules and regulations, and (iii), with respect to Housing Units, unless otherwise consented to by Agent in advance in writing in the absolute and sole discretion of Agent, in substantial accordance with the respective Unit Plans and Specifications. Upon demand by Agent, each Borrower shall correct any defect in its respective Improvements or Housing Units or any material departure from any applicable laws, rules and regulations or, to the extent not theretofore approved in writing by Agent, the respective Unit Plans and Specifications. Each Borrower understands and agrees that inspection of the Land Under Development and Housing Units by or on behalf of Agent, the review by Agent of Borrowing Notices and related documents and information, the making of Advances by Banks, any actions by Agent pursuant to Paragraph D(6), and any other actions by Agent or any Bank shall not be a waiver of Agent's right to require compliance with this Paragraph D(5). If Agent shall ever be required to complete the construction of the Improvements or any Housing Units, whether occasioned by the occurrence of an Event of Default or for any other reason, any sums expended by Agent or any Bank in constructing such Improvements or Housing Units shall be treated as Advances to the applicable Borrower hereunder and shall be deemed the legal, valid and binding obligations of such Borrower to Banks. 6. Rights of Inspection; Correction of Defects; Agency. Agent and its agents, employees, and representatives shall have the right at any time and from time to time to enter upon the Collateral in order to inspect the Collateral; provided, however, any Person entering upon the Collateral shall observe and comply with the applicable Borrower's safety requirements. So long as no Event of Default has occurred and is continuing, Agent shall inspect each Housing Unit and each Land Under Development no less frequently than once in any calendar quarter; -18- provided, however, that if the results of any such inspection disclose with respect to Housing Units, errors in the information provided by the applicable Borrower with respect to Housing Units that constitute, in the aggregate, three percent (3%) or more of the total Housing Units owned by such Borrower that constitute Eligible Collateral, then Agent may, in its sole and absolute discretion, (A) increase the frequency of all inspections conducted with respect to all Housing Units that are Eligible Collateral, and/or (B) increase the frequency of all inspections conducted with respect to all Housing Units owned by the such Borrower. If Agent, in its judgment, determines that any Improvements or Housing Units or any materials or work do not conform with the applicable plans and specifications in all material respects or with any applicable laws, rules and regulations or are otherwise not in conformity with sound building practice, Agent shall have the right to stop the work (unless such Collateral is removed from Eligible Collateral) and to order replacement or correction of any such materials or work regardless of whether or not such materials or work have theretofore been incorporated in the Improvements or Housing Units, as applicable, regardless of whether Agent's representatives have previously inspected such work or materials. The Borrower that owns the Housing Unit or Land Under Development shall promptly make such replacement or correction. Inspection by Agent or any Bank or by Agent's or any Bank's inspectors of the Land Under Development or the Housing Units is for the sole purpose of protecting the security of Banks and is not to be construed as a representation by Agent or any Bank that there has been compliance with the applicable plans and specifications, the applicable laws, rules and regulations or that the Housing Units or Improvements are free of defects in materials or workmanship. Borrowers may make or cause to be made such other independent inspections as Borrowers may desire for their own protection. 7. Miscellaneous. Any inspections or determinations made by Agent or any Bank or lien waivers, receipts, or other agreements, documents, and instruments obtained by Agent or any Bank are made or obtained solely for Agent's and Bank's own benefit and not in any way for the benefit or protection of any Borrower. Agent and Banks may accept and rely on any information from an architect, any other Person providing labor, materials, or services for Housing Units or Improvements, any Borrower, or any other Person as to labor or materials furnished or incorporated in the Housing Units or the Improvements and the cost and payment therefor and as to all other matters relating to construction of the Housing Units and the Improvements without the necessity of verifying such information. Agent and Banks have no obligation to any Borrower or Guarantor to ensure compliance by contractor, engineer, or any other Person in carrying out construction of the Housing Units or Improvements. 8. Agent's Inspector(s). Each Borrower agrees that during construction of Housing Units and Improvements, Agent shall have the right to employ an outside inspector or inspectors who shall review all construction activities undertaken in regard to Housing Units and Improvements and who shall prepare reports of such reviews. Alternatively, Agent may elect to have employees of Agent or any Bank(s) perform such reviews and prepare such reports. In -19- addition, the employees of Agent will review the inspection reports of any outside inspector(s), will review Borrowing Notices, will perform other activities related to Borrowing Notices, and will perform other activities in administering and monitoring the Advances. 9. Further Assurances. Each Borrower shall promptly execute, acknowledge, and deliver such additional agreements, documents, and instruments and do or cause to be done such other acts as Agent may reasonably request from time to time to better assure, preserve, protect, and perfect the interest of Banks in the Collateral of such Borrower and the rights and remedies of Banks under the Loan Documents. 10. Payment of Net Sales Proceeds. Each Borrower shall, upon the closing of a sale of any Housing Unit, pay to Agent, for the benefit of Banks, from its own funds for application to the outstanding unpaid aggregate amount of Advances against Eligible Collateral owned by such Borrower, an amount equal to the Net Sales Proceeds from such Housing Unit sale, and, if applicable, any additional amounts owed pursuant to Paragraph C(9). To the extent that such Net Sales Proceeds are held by the title company closing such sale or any other Person, such Borrower shall take all action requested by Agent to cause such Net Sales Proceeds to be paid directly to Agent. If a Borrower collects or receives any such Net Sales Proceeds, such Borrower will forthwith, upon receipt, transmit and deliver to Agent, in the form received, all cash, checks, drafts, chattel paper, and other instruments or writings for the payment of money (endorsed without recourse, where required, so that such items may be collected by Agent). 11. Construction and Sales Records. Each Borrower shall, at all times, maintain complete and accurate records of its construction and sales activities and shall, upon prior notice thereof by Agent, permit Agent and any Bank to review such records upon request by Agent at any time and from time to time during regular business hours. Such records shall include, without limitation, (i) any and all documents, instruments, contracts and agreements relating to the construction or sale of Housing Units entered into by such Borrower with or for the benefit of purchasers, contractors, subcontractors, or other Persons, as applicable, (ii) lien waivers and releases with respect to all construction in place, (iii) requests for disbursement and vouchers submitted by contractors, subcontractors, or other Persons, and (iv) all permits, licenses and approvals necessary for the continuation and completion of construction. 12. Discharge of Liens; Protection of Collateral. At their option and upon written notice to Borrowers, Banks or Agent on behalf of Banks, at the instruction of the Required Banks, may discharge taxes, Liens, or security interests or other encumbrances at any time levied or placed on the Collateral, may pay for insurance on the Collateral, and may pay for the maintenance and preservation of the Collateral. Subject to Borrowers' rights to contest the same pursuant to the provisions of the Deeds of Trust, should Borrowers fail or refuse to make any payment, perform any covenant or obligation, observe any condition, or take any action that Borrowers are obligated hereunder to make, perform, observe, take, or do, at the time or in the manner herein provided, then Agent may, on behalf of Banks, at the instruction of the Required -20- Banks, without notice to or demand upon Borrowers and without releasing Borrowers from any obligation, covenant or condition hereof, make, perform, observe, take, or do the same in such manner and to such extent as Agent on behalf of Banks may deem necessary to protect the security of this Agreement. Banks shall reimburse Agent for each Bank's proportionate share of all such expenditures upon receipt from Agent of notice of such expenditure and request for payment. Borrowers agree to reimburse Agent, for the benefit of Banks, on demand, for any payment made or any expense incurred by Agent pursuant to the foregoing authorization, together with interest thereon at the rate of two percent (2%) per annum greater than the Prime Rate, as the same may change from time to time, from the date of expenditure; any such payments and expenditures, together with interest thereon, shall be added to the aggregate amount of outstanding Advances under the Loan Documents and shall be secured by the Loan Documents. D. ADDITIONAL PROVISIONS RELATING TO REMEDIES AND EVENTS OF DEFAULT DURING A SECURED CONVERSION PERIOD OR A MODIFIED SECURED CONVERSION PERIOD. During a Secured Conversion Period or a Modified Secured Conversion Period, 1. Remedies of Banks. If any Event of Default occurs, Agent on behalf of Banks, shall at the written request of the Required Banks, or may, solely with the written consent of the Required Banks, at its option and without presentment, demand, protest, or notice of legal process of any kind, all of which are hereby expressly waived by Borrowers, do any one or more of the following (in addition to all other rights and remedies provided for in the Agreement): a. Obtain the appointment of a receiver of the businesses and assets of Borrowers; b. Take possession of the Collateral and, as applicable for the type of Collateral, use it or remove it from Borrowers' business premises; c. If applicable, require that Borrowers assemble all or any portion of the Collateral and make it available to Agent at a place designated by Agent; d. As applicable, foreclose all security interests in or liens on the Collateral in the manner provided under the Arizona Uniform Commercial Code. Expenses of retaking, holding, preparing for sale, selling or the like shall include Banks' reasonable attorneys' fees and legal expenses; e. As to any Collateral consisting of real property, foreclose all liens in the manner provided under the laws of the state where such property is located and pursue all other remedies thereunder; -21- f. Exercise all the remedies of a secured party under the Uniform Commercial Code as enacted in Arizona; g. As applicable for the type of Collateral, enter upon any premises where the Collateral may be located, exclude Borrowers therefrom and take immediate possession of the Collateral, either personally or by means of a receiver appointed by a court therefor, using necessary force, and Agent may, at Agent's option, use, operate, manage and control the Collateral in any lawful manner or business and may collect and receive all rents and income therefrom and collect, compromise, extend, modify, repair, renovate, alter or remove all or part of the Collateral as Agent may determine in Agent's discretion, and any monies so collected or received by Agent shall be applied to, or may be accumulated for application upon, the payment of all costs and expenses payable by Borrowers hereunder, including without limitation all costs and expenses of Agent's taking and maintaining possession of the Collateral, reasonable management fees for such operation thereof, all costs and expenses of such actions and counsel fees in a reasonable sum with the remainder, if any, to be applied upon the Notes, as the same may have been accelerated, the application of all such monies to be made in accordance herewith; h. Take immediate possession of all records, instruments, documents and writings of Borrowers pertaining to the Collateral, without notice or demand and without resort to legal process, and for such purpose to enter upon any premises on which such records, instruments, documents, writings or any part thereof may be situated and remove the same therefrom; i. Retain the funds due or to become due on the Collateral or other rights to payment in satisfaction of the obligations secured hereunder by sending written notice of such election to Borrowers, but unless such written notice is sent by Agent as aforesaid, retention of such funds or rights to payment shall not be in satisfaction of any obligation under the Agreement; j. If the proceeds realized from disposition of the Collateral shall fail to satisfy all of the obligations of Borrowers to Banks, Borrowers shall pay any deficiency balance to Agent, for the benefit of Banks, upon demand. 2. No Waiver of Remedies. In the election of any remedy, Agent and Banks shall not be deemed to have waived any right with respect to any other remedies. In all cases, Agent invoking any remedy shall be entitled to recover from Borrowers Agent's reasonable costs incurred in connection therewith, including reasonable attorneys' fees, whether or not suit is brought. 3. Possession by Agent. In the event Agent takes possession of the Collateral or a receiver appointed upon Agent's application takes possession of the Collateral, Agent or the receiver may use such Collateral or cause the same to be used by its agents or other persons -22- without charge or cost whatsoever to Agent or the receiver for such use and without compensation therefor to Borrowers during the exercise by Agent or the receiver of any rights or powers herein contained with reference thereto, as well as pending any sale thereof or pending any foreclosure proceedings and during and at all times Agent may, by legal proceedings or otherwise, cause a receiver or agent to be placed and maintained upon the premises upon which the Collateral may be situated and neither the present nor the entry of such receiver or such agent in or upon such premises and the use of such premises shall be deemed a trespass thereupon or an interference with any person's possession thereof. 4. Proceeds of Disposition. Any proceeds of any sale, lease, or other disposition of any of the Collateral by Agent may be applied by Agent to the payment of reasonable costs and expenses in connection with the enforcement of this Agreement and the Loan Documents, including without limitation the reasonable costs and expenses of retaking, holding, preparing for and in connection with such sale, lease or other disposition, reasonable attorneys' fees and legal expenses, and any balance of such proceeds may be applied by Agent toward payment of the indebtedness of Borrowers to Banks in such order of application as the Required Banks may from time to time instruct. 5. Rights of Entry. Upon the occurrence of any Event of Default hereunder, Agent shall be entitled to enter upon and use Borrowers' business premises and shall be entitled to use Borrowers' equipment and facilities in selling, leasing, or otherwise disposing of any of the Collateral, or exercising its remedies as a secured creditor under the Arizona Uniform Commercial Code and Borrower shall not be entitled to charge or collect any rental or other fee for such use by Agent. 6. Receipt of Proceeds. Upon any such sale, lease, or other disposition of the Collateral by Agent (whether by virtue of a power granted in any security agreement, pursuant to judicial process, or otherwise), the receipt of Agent or the officer making such sale, lease, or other disposition, shall be a sufficient discharge to the person or persons making payment for such sale, lease, or other disposition of the Collateral and such person or persons shall not be obligated to see to the application of any part of the money paid over to Agent or such officer or be answerable in any way for the misapplication or nonapplication thereof. 7. Actions Relating to Collateral. As to any matters relating to the Collateral, Banks hereby appoint and authorize Agent to take such action as agent on their behalf and to exercise such powers under the Loan Documents as are delegated by the terms thereof, together with such powers as are reasonably incidental thereto. Without limiting the generality of the foregoing, Banks hereby authorize Agent to release Collateral, subject to the terms of this Schedule "2.22", and to execute on behalf of Banks all documents and to take all other actions necessary to effect such release. As to any matters not expressly provided for by this Agreement or the other Loan Documents (including without limitation, enforcement of rights against any Collateral prior to or after the Facility Termination Date), Agent shall not be required to exercise -23- any discretion or take any action, but shall be required to act or to refrain from acting (and shall be fully protected in so acting or refraining from acting) upon the instructions of the Required Banks and such instructions shall be binding upon all Banks; provided, however, that Agent shall not be required to take any action that exposes Agent to personal liability or that is contrary to this Agreement, any other Loan Documents or applicable law. 8. Agent's Reliance. Etc. Neither Agent nor any of its directors, officers, agents or employees shall be liable for any action taken or omitted to be taken by it or them under or in connection with this Schedule "2.22", except for its or their own gross negligence or willful misconduct. Without limiting the generality of the foregoing, Agent: (i) may consult with legal counsel (including counsel for Borrowers), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts; (ii) makes no warranty or representation to any Bank and shall not be responsible to any Bank for any statements, warranties or representations made in or in connection with this Agreement; (iii) shall not have any duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of this Agreement on the part of Borrowers or to inspect the Collateral or other property (including the books and records) of Borrowers; (iv) shall not be responsible to any Bank for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other instrument or document furnished pursuant hereto; and (v) shall incur no liability under or in respect of this Agreement by acting upon any notice, consent, certificate or other instrument or writing (which may be by telegram or telefax) believed by it to be genuine and signed or sent by the proper party or parties. -24- EX-4.4 5 Exhibit 4.4 EXHIBIT "D" GUARANTY TO: BANK ONE, ARIZONA, NA, a national banking association, as Agent (in such capacity, the "Agent") for the banks (the "Banks") parties to the Credit Agreement dated as of April 10, 1996 (as amended, supplemented or otherwise modified from time to time, the "Credit Agreement"), among RICHMOND AMERICAN HOMES OF CALIFORNIA, INC., a Colorado corporation, RICHMOND AMERICAN HOMES OF MARYLAND, INC., a Maryland corporation, RICHMOND AMERICAN HOMES OF NEVADA, INC., a Colorado corporation, RICHMOND AMERICAN HOMES OF VIRGINIA, INC., a Virginia corporation, RICHMOND AMERICAN HOMES, INC., a Delaware corporation, RICHMOND HOMES, INC. I, a Delaware corporation, and RICHMOND HOMES, INC. II, a Delaware corporation, (severally, a "Borrower" and collectively, "Borrowers"), Banks, and Agent, and to the Banks. Capitalized terms not otherwise defined herein shall have the meaning set forth in the Credit Agreement. FOR VALUABLE CONSIDERATION, the undersigned (hereinafter called "Guarantor"), whose address is set forth after Guarantor's signature below, unconditionally guarantees and promises to pay to Agent, for the benefit of Banks and their respective successors, endorsees, transferees and assigns, or order, within one (1) business day after demand, in lawful money of the United States, (i) the Notes, principal and interest and all other sums payable thereunder, or at the election of Agent any one or more installments thereof, in the event that any Borrower fail to punctually pay any one or more installments of the Note (principal and/or interest), or any other sum payable thereunder at the time and in the manner provided therein; and (ii) all other indebtedness of each Borrower to Agent or to any Bank arising under or in connection with the Notes, the Credit Agreement or any Loan Documents (the indebtedness evidenced by the Notes together with all other indebtedness specified above is hereinafter collectively called the "Indebtedness"). 1. The obligations of Guarantor hereunder are separate and independent of the obligations of each Borrower and of any other guarantor, and a separate action or actions may be brought and prosecuted against Guarantor whether action is brought against any or all Borrowers or any other guarantor or whether any or all Borrowers or any other guarantor is joined in any action or actions. The obligations of Guarantor hereunder shall survive and continue in full force and effect until payment in full of the Indebtedness is actually received by Agent for the benefit of Banks and the period of time has expired during which any payment made by any Borrower or Guarantor to Agent for the benefit of Banks may be determined to be a Preferential Payment (defined below), notwithstanding any release or termination of any Borrower's or any other guarantor's liability by express or implied agreement with Agent or any Bank or by operation of law and notwithstanding that the Indebtedness or any part thereof is deemed to have been paid or discharged by operation of law or by some act or agreement of Agent or Banks. For purposes of this Guaranty, the Indebtedness shall be deemed to be paid only to the extent that Agent, on behalf of Banks, actually receives immediately available funds and to the extent of any credit bid by Agent, on behalf of Banks, at any foreclosure or trustee's sale of any security for the Indebtedness. 2. Guarantor agrees that to the extent any Borrower or Guarantor makes any payment to Agent or Banks in connection with the Indebtedness, and all or any part of such payment is subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid by Agent or Banks or paid over to a trustee, receiver or any other entity, whether under any bankruptcy act or otherwise (any such payment is hereinafter referred to as a "Preferential Payment"), then this Guaranty shall continue to be effective or shall be reinstated, as the case may be, and, to the extent of such payment or repayment by Agent or Banks, the Indebtedness or part thereof intended to be satisfied by such Preferential Payment shall be revived and continued in full force and effect as if said Preferential Payment had not been made. 3. Guarantor is providing this Guaranty at the instance and request of Borrowers to induce Agent and Banks to extend or continue financial accommodations to Borrowers. Guarantor hereby represents and warrants that Guarantor is and will continue to be fully informed about all aspects of the financial condition and business affairs of Borrowers that Guarantor deems relevant to the obligations of Guarantor hereunder and hereby waives and fully discharges Agent and each Bank from any and all obligations to communicate to Guarantor any information whatsoever regarding Borrowers or Borrowers' financial condition or business affairs. Guarantor acknowledges that Guarantor owns, directly or indirectly, all of the issued and outstanding shares of stock of each Borrower, that Guarantor and each Borrower are engaged in related businesses, and that Guarantor will derive substantial direct and indirect benefit from the extension of credit by Banks evidenced by the Indebtedness. 4. Guarantor authorizes Agent and Banks, without notice or demand and without affecting Guarantor's liability hereunder, from time to time, to: (a) renew, modify, compromise, extend, accelerate or otherwise change the time for payment of, or otherwise change the terms of the Indebtedness or any part thereof, including increasing or decreasing the rate of interest thereon; (b) release, substitute or add any one or more Borrowers, endorsers, or other guarantors; (c) take and hold security for the payment of this Guaranty or the Indebtedness, and enforce, exchange, substitute, subordinate, waive or release any such security; (d) proceed against such security and direct the order or manner of sale of such security as Agent in its discretion may determine; and (e) apply any and all payments from Borrowers, Guarantor or any other guarantor, or recoveries from such security, in such order or manner as Agent in its discretion may determine. -2- 5. Guarantor waives and agrees not to assert: (a) any right to require Agent or Banks to proceed against any Borrower or any other guarantor, to proceed against or exhaust any security for the Indebtedness, to pursue any other remedy available to Agent and Banks, or to pursue any remedy in any particular order or manner; (b) the benefit of any statute of limitations affecting Guarantor's liability hereunder or the enforcement hereof; (c) demand, diligence, presentment for payment, protest and demand, and notice of extension, dishonor, protest, demand, nonpayment and acceptance of this Guaranty; (d) notice of the existence, creation or incurring of new or additional indebtedness of any Borrower to Agent or any Bank; (e) the benefits of any statutory provision limiting the liability of a surety, including without limitation the provisions of A.R.S. Sections 12-1641, et seq.; (f) any defense arising by reason of any disability or other defense of any or all Borrowers or by reason of the cessation from any cause whatsoever (other than payment in full of all amounts demanded to be paid by Guarantor under this Guaranty) of the liability of any or all Borrowers for the Indebtedness; and (g) the benefits of any statutory provision limiting the right of Agent or any Bank to recover a deficiency judgment, or to otherwise proceed against any person or entity obligated for payment of the Indebtedness, after any foreclosure or trustee's sale of any security for the Indebtedness, including without limitation the benefits, if any, to Guarantor of A.R.S. Section 33-814. Guarantor hereby expressly consents to any impairment of collateral, including, but not limited to, failure to perfect a security interest and release collateral and any such impairment or release shall not affect Guarantor's obligations hereunder. Until payment in full of the Indebtedness, Guarantor shall have no right of subrogation and hereby waives any right to enforce any remedy which Agent and Banks now have, or may hereafter have, against any Borrower, and waives any benefit of, and any right to participate in, any security now or hereafter held by Agent on behalf of Banks. 6. If from time to time any Borrower shall have liabilities or obligations to Guarantor, whether absolute or contingent, joint, several, or joint and several, such liabilities and obligations (the "Subordinated Indebtedness") and any and all assignments as security, grants in trust, liens, mortgages, security interests, other encumbrances, and other interests and rights securing such liabilities and obligations shall at all times be fully subordinate to payment and performance in full of the Obligations and the right of Agent or any Bank to realize upon any or all Collateral. Guarantor agrees that such liabilities and obligations of any Borrower to Guarantor shall not be secured by any assignment as security, grant in trust, lien, mortgage, security interest, other encumbrance or other interest or right in any property, interests in property, or rights to property of such Borrower. Guarantor and, by their acceptance of this Guaranty, Agent and each Bank agree that (i) so long as no Event of Default has occurred and is continuing, and so long as such payments are not prohibited under Section 2.2 of the Credit Agreement, payments of principal and interest on the Subordinated Indebtedness may be made by Borrowers and accepted by Guarantor as such payments become due; and (ii) after the occurrence and during the continuation of an Event of Default, or if such payments are prohibited under Section 2.2 of the Credit Agreement, Borrowers shall not make and Guarantor shall not accept any payments with respect to the Subordinated Indebtedness. If, notwithstanding the foregoing, subsequent to an Event of Default, -3- Guarantor receives any payment from any Borrower, such payment shall be held in trust by Guarantor for the benefit of Agent and Banks, shall be segregated from the other funds of Guarantor, and shall forthwith be paid by Guarantor to Agent for the benefit of Banks and applied to payment of the Obligations whether or not then due. (a) In the event of any distribution, division, or application, partial or complete, voluntary or involuntary, by operation of law or otherwise, of all or any part of the assets of any Borrower, or the proceeds thereof, to creditors of such Borrower, by reason of the liquidation, dissolution, or other winding up of such Borrower's business, or in the event of any receivership, insolvency or bankruptcy proceedings by or against any Borrower, or assignment for the benefit of creditors, or of any proceedings by or against any Borrower for any relief under any bankruptcy or insolvency laws, or relating to the relief of debtors, readjustment of indebtedness, reorganizations, arrangements, compositions or extensions, or of any other event whereby it becomes necessary or desirable to file or present claims against any Borrower for the purpose of receiving payment thereof, or on account thereof, then and in any such event, any payment or distribution of any kind or character, either in cash or other property, which shall be made or shall be payable with respect to any Subordinated Indebtedness shall be paid over to Agent on behalf of Banks for application to the payment of the Obligations, whether due or not due, and no payments shall be made upon or in respect of the Subordinated Indebtedness unless and until the Obligations shall have been paid and satisfied in full. In any such event, all claims of Agent and Banks and all claims of Guarantor shall, at the option of Agent and Banks, forthwith become due and payable without demand or notice. (b) In the event of any distribution, division, or application, partial or complete, voluntary or involuntary, by operation of law or otherwise, of all or any part of the assets of any Borrower, or the proceeds thereof, to creditors of such Borrower, by reason of the liquidation, dissolution, or other winding up of such Borrower's business, or in the event of any receivership, insolvency or bankruptcy proceedings by or against any Borrower, or assignment for the benefit of creditors, or of any proceedings by or against any Borrower for any relief under any bankruptcy or insolvency laws, or relating to the relief of debtors, readjustment of indebtedness, reorganizations, arrangements, compositions or extensions, or of any other event whereby it becomes necessary or desirable to file or present claims against any Borrower for the purpose of receiving payment thereof, or on account thereof, Guarantor irrevocably authorizes and empowers Agent, or any person Agent may designate, to act as attorney for Guarantor with full power and authority in the name of Guarantor, or otherwise, to make and present such claims or proofs of claims against such Borrower on account of the Subordinated -4- Indebtedness as Agent, or its appointee, may deem expedient and proper and, if necessary, to vote such claims in any proceedings and to receive and collect for the benefit of Banks any and all dividends or other payments and disbursements made thereon in whatever form they may be paid or issued, and to give acquittance therefor and to apply same to the Obligations, and Guarantor hereby agrees, from time to time and upon request, to make, execute and deliver to Agent such powers of attorney, assignments, endorsements, proofs of claim, pleadings, verifications, affidavits, consents, agreements or other instruments as may be requested by Agent in order to enable Agent and Banks to enforce any and all claims upon, or with respect to, the Subordinated Indebtedness, and to collect and receive any and all payments or distributions which may be payable or deliverable at any time upon or with respect to the Subordinated Indebtedness. (c) Except as otherwise permitted herein, should any payment or distribution or security or proceeds thereof be received by Guarantor upon or with respect to the Subordinated Indebtedness prior to the satisfaction of the Obligations, Guarantor will forthwith deliver the same to Agent on behalf of Banks in precisely the form as received except for the endorsement or assignment of Guarantor where necessary for application on the Obligations, whether due or not due, and until so delivered the same shall be held in trust by Guarantor as property of Agent on behalf of Banks. In the event of the failure of Guarantor to make any such endorsement or assignment, Agent, or any of its officers or employees, on behalf of Agent, is hereby irrevocably authorized to make the same. (d) Guarantor agrees to maintain in its records notations satisfactory to Agent of the rights and priorities of Agent and Banks hereunder, and from time to time, upon request, to furnish Agent for the benefit of Banks with sworn financial statements. Banks and Agent may inspect the books of account and any records of Guarantor at any time during business hours. Guarantor agrees that any promissory note now or hereafter evidencing the Subordinated Indebtedness shall be nonnegotiable and shall be marked with a specific statement that the indebtedness thereby evidenced is subject to the provisions of this Guaranty. 7. It is not necessary for Agent or any Bank to inquire into the powers of any Borrower or the officers, directors, members, managers, partners, trustees or agents acting or purporting to act on its behalf, and any of the Indebtedness made or created in reliance upon the professed exercise of such powers shall be guaranteed hereunder. 8. Guarantor agrees to deliver to Agent and Banks financial statements and other financial information relating to Guarantor in form and level of detail, and containing certifications, as required pursuant to Section 7.1 of the Credit Agreement. Guarantor further -5- agrees to comply all covenants, representations and warranties in the Credit Agreement relating to Guarantor, including without limitation the financial covenants set forth in Article IX of the Credit Agreement. 9. Guarantor agrees to pay all attorneys' fees and all other costs and expenses which may be incurred by Agent or any Bank in enforcing this Guaranty or in collecting all or any part of the Indebtedness. 10. This Guaranty sets forth the entire agreement of Guarantor, Agent and Banks with respect to the subject matter hereof and supersedes all prior oral and written agreements and representations by Agent or any Bank to Guarantor. No modification or waiver of any provision of this Guaranty or any right of Agent or any Bank hereunder and no release of Guarantor from any obligation hereunder shall be effective unless in a writing executed by an authorized officer of Agent and each Bank. There are no conditions, oral or otherwise, on the effectiveness of this Guaranty. 11. This Guaranty shall inure to the benefit of Agent and each Bank and their respective successors and assigns and shall be binding upon Guarantor and its heirs, personal representatives, successors and assigns. Agent and each Bank may assign this Guaranty in whole or in part without notice. 12. THIS GUARANTY SHALL BE CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS (AND NOT THE LAW OF CONFLICTS) OF THE STATE OF ARIZONA, BUT GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL BANKS. 13. Subject to the provisions of this Section 14, Guarantor agrees, and Banks and Agent by accepting this Guaranty agree, that they shall submit to binding arbitration any and all claims, disputes and controversies between or among them (and their respective employees, officers, directors, attorneys, and other agents if permitted by law or a contract between them and such persons) relating to this Guaranty and the Loan Documents and the negotiation, execution, collateralization, administration, repayment, modification, extension or collection thereof or arising thereunder. Such arbitration shall proceed in Phoenix, Arizona, shall be governed by Arizona law and shall be conducted in accordance with the Commercial Arbitration Rules of the American Arbitration Association (the "AAA") as modified in this Paragraph 14. Judgment upon the award rendered by each arbitrator(s) may be entered in any court having jurisdiction. (a) Nothing in the preceding paragraph, nor the exercise of any right to arbitrate thereunder, shall limit the right of any party hereto (1) to foreclose against any real or personal property collateral encumbered by a Deed of Trust or other Loan Document, or otherwise permitted under applicable law; (2) subject to provisions of applicable law, to exercise self-help remedies such as setoff or -6- repossession or other self-help remedies provided in the Credit Agreement or any other Loan Document; or (3) to obtain provisional or ancillary remedies such as replevin, injunctive relief, attachment, or appointment of a receiver from a court having jurisdiction, before, during or after the pendency of any arbitration proceeding, or (4) to defend or obtain injunctive or other equitable relief against the foregoing or assert mandatory counterclaims, if any, prior to and during the pendency of a determination in arbitration of issues of performance, default, damages and other such claims and disputes. (b) Arbitration hereunder shall be before a three-person panel of neutral arbitrators, consisting of one person from each of the following categories: (1) an attorney who has practiced in the area of commercial real estate law for at least ten (10) years; (2) a person with at least ten (10) years' experience in real estate lending; and (3) a person with at least ten (10) years' experience in the homebuilding industry. The AAA shall submit a list of persons meeting the criteria outlined above for each category of arbitrator, and the parties shall select one person from each category in the manner established by the AAA. (c) In any dispute between the parties that is arbitratable hereunder, where the aggregate of all claims and the aggregate of all counterclaims is an amount less than Fifty Thousand and No/100ths Dollars ($50,000.00), the arbitration shall be before a single neutral arbitrator to be selected in accordance with the Commercial Rules of the American Arbitration Association and shall proceed under the Expedited Procedures of said Rules. (d) In any arbitration hereunder, the arbitrators shall decide (by documents only or with a hearing, at the arbitrators' discretion) any pre-hearing motions which are substantially similar to pre-hearing motions to dismiss for failure to state a claim or motions for summary adjudication. (e) In any arbitration hereunder, discovery shall be permitted in accordance with the Arizona Rules of Civil Procedure. Scheduling of such discovery may be determined by the arbitrators, and any discovery disputes shall be finally determined by the arbitrators. (f) The Arizona Rules of Evidence shall control the admission of evidence at the hearing in any arbitration conducted hereunder, provided, however, no error by the arbitrators in application of the Rules of Evidence shall be grounds, as such, for vacating the arbitrators' award. -7- (g) Notwithstanding any AAA rule to the contrary, the arbitration award shall be in writing and shall specify the factual and legal basis for the award, including findings of fact and conclusions of law. (h) Each party shall each bear its own costs and expenses and an equal share of the arbitrators' costs and administrative fees of arbitration. 14. GUARANTOR, AND BANKS BY ACCEPTING THIS GUARANTY, HEREBY IRREVOCABLY SUBMIT TO THE NON-EXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL OR ARIZONA STATE COURT SITTING IN PHOENIX, ARIZONA IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO ANY LOAN DOCUMENTS AND GUARANTOR, AND BANKS BY ACCEPTING THIS GUARANTY, HEREBY IRREVOCABLY AGREE THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT AND IRREVOCABLY WAIVE ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT OR THAT SUCH COURT IS AN INCONVENIENT FORUM. NOTHING IN THIS PARAGRAPH 15 SHALL LIMIT THE RIGHT OF AGENT OR ANY BANK OR ISSUING BANK TO BRING PROCEEDINGS AGAINST GUARANTOR IN THE COURTS OF ANY OTHER JURISDICTION. SUBJECT TO THE PROVISIONS OF SECTION 14, UNLESS PROHIBITED BY LAW, ANY JUDICIAL PROCEEDING BY GUARANTOR AGAINST AGENT OR ANY BANK OR ISSUING BANK OR ANY AFFILIATE OF AGENT OR ANY BANK OR ISSUING BANK INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH THIS GUARANTY OR ANY OTHER LOAN DOCUMENT SHALL BE BROUGHT IN A COURT IN PHOENIX, ARIZONA. 15. SUBJECT TO THE PROVISIONS OF SECTION 14, GUARANTOR HEREBY WAIVES 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 THE GUARANTY, ANY OTHER LOAN DOCUMENT OR THE RELATIONSHIP ESTABLISHED THEREUNDER. -8- 16. Guarantor acknowledges that the rights and responsibilities of Agent under this Guaranty with respect to any action taken by Agent or the exercise or non-exercise by Agent of any option, right, request, judgment or other right or remedy provided for herein or resulting or arising out of this Guaranty shall, as between Agent and Banks, be governed by the Credit Agreement and by such other agreements with respect thereto as may exist from time to time among them, but, as between Agent and Guarantor, Agent shall be conclusively presumed to be acting as agent for Banks with full and valid authority so to act or refrain from acting, and Guarantor shall not be under any obligation or entitlement to make any inquiry respecting such authority. IN WITNESS WHEREOF these presents are executed as of the 10th day of April, 1996. GUARANTOR: ATTEST: M.D.C. HOLDINGS, INC., a Delaware corporation - ---------------------------- By: ------------------------------ Name: John J. Heaney Title: Vice President Address: 3600 South Yosemite, Suite 900 Denver, Colorado 80237 -9- EX-4.5 6 Exhibit 4.5 EXHIBIT "E" PROMISSORY NOTE $______________ April ___, 1996 Phoenix, Arizona FOR VALUE RECEIVED, RICHMOND AMERICAN HOMES OF CALIFORNIA, INC., a Colorado corporation, RICHMOND AMERICAN HOMES OF MARYLAND, INC., a Maryland corporation, RICHMOND AMERICAN HOMES OF NEVADA, INC., a Colorado corporation, RICHMOND AMERICAN HOMES OF VIRGINIA, INC., a Virginia corporation, RICHMOND AMERICAN HOMES, INC., a Delaware corporation, RICHMOND HOMES, INC. I, a Delaware corporation, and RICHMOND HOMES, INC., II, a Delaware corporation (collectively "Makers" and severally a "Maker"), hereby promise and agree to pay to the order of __________________________________ ("Payee"), the principal sum of _____________________________________ DOLLARS ($_____________) in lawful money of the United States of America, or, if less than such principal amount, the aggregate unpaid principal amount of all Advances made to Makers by the Payee pursuant to the Credit Agreement hereinafter referenced. Such payment shall be made on the Facility Termination Date, as defined in the Credit Agreement. Makers shall pay interest from the date hereof on the unpaid principal amount of this Note from time to time outstanding during the period from the date hereof until such principal amount is paid in full at the rates, determined in the manner, and on the dates or occurrences specified in the Credit Agreement (as hereinafter defined). This promissory note is one of the Notes referred to in the Credit Agreement dated as of April ___, 1996, among Makers, Bank One, Arizona, NA, as Agent, and the Banks named therein (as the same may be amended, modified, replaced, or renewed from time to time, the "Credit Agreement") and is entitled to the benefits of the Credit Agreement and the Loan Documents. Capitalized terms used in this Note without definition shall have the same meanings as are ascribed to such terms in the Credit Agreement. Both principal and interest are payable to the Agent for the account of Payee pursuant to the terms of the Credit Agreement. All Advances made by Payee pursuant to the Credit Agreement and all payments of the principal amount of such Advances, shall be endorsed by the holder of this Note on the schedule attached hereto. Failure to record such Advances or payment shall not diminish any rights of Payee or relieve Makers of any liability hereunder or under the Credit Agreement. This Note is subject to prepayment and its maturity is subject to acceleration, in each case upon the terms provided in the Credit Agreement. This Note may not be modified or discharged orally, by course of dealing or otherwise, but only by a writing duly executed by the holder hereof. In the event that any action, suit or proceeding is brought by the holder hereof to collect this Note, Makers agree to pay and shall be liable for all costs and expenses of collection, including without limitation, reasonable attorneys' fees and disbursements. Makers and all sureties, guarantors and/or endorsers hereof (or of any obligation hereunder) and accommodation parties hereon (all of which, including Makers, are severally each hereinafter called a "Surety") each: (a) agree that the liability under this Note of all parties hereto is several except as set forth in Section 12.7 of the Credit Agreement; (b) severally waive any homestead or exemption laws and right thereunder affecting the full collection of this Note; (c) severally waive any and all formalities in connection with this Note to the maximum extent allowed by law, including (but not limited to) demand, diligence, presentment for payment, protest and demand, and notice of extension, dishonor, protest, demand and nonpayment of this Note; and (d) consent that Holder may extend the time of payment or otherwise modify the terms of payment of any part or the whole of the debt evidenced by this Note, at the request of any other person liable hereon, and such consent shall not alter nor diminish the liability of any person hereon. In addition, each Surety waives and agrees not to assert: (a) any right to require the holder hereof to proceed against any other Surety, to proceed against or exhaust any security for the Note, to pursue any other remedy available to the holder hereof, or to pursue any remedy in any particular order or manner; (b) the benefit of any statute of limitations affecting its liability hereunder or the enforcement hereof; (c) the benefits of any legal or equitable doctrine or principle of marshalling; (d) notice of the existence, creation or incurring of new or additional indebtedness of any Maker to the holder hereof; (e) the benefits of any statutory provision limiting the liability of a surety, including without limitation the provisions of Sections 12-1641, et seq., of the Arizona Revised Statutes; (f) any defense arising by reason of any disability or other defense of any Maker or by reason of the cessation from any cause whatsoever (other than payment in full) of the liability of any Maker for payment of this Note; and (g) the benefits of any statutory provision limiting the right of the holder hereof to recover a deficiency judgment, or to otherwise proceed against any person or entity obligated for payment of this Note, after any foreclosure or trustee's sale of any security for this Note, including without limitation the benefits, if any, to a Surety of Arizona Revised Statutes Section 33-814. Until payment in full of this Note and the holder hereof has no obligation to make any further advances of the proceeds hereof, no Surety shall have any right of subrogation and each hereby waives any right to enforce any remedy which the holder hereof now has, or may hereafter have, against Maker or any other Surety, and waives any benefit of, and any right to participate in, any security now or hereafter held by the holder hereof. -2- Each Maker agrees that to the extent any Surety makes any payment to the holder hereof in connection with the indebtedness evidenced by this Note, and all or any part of such payment is subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid by Holder or paid over to a trustee, receiver or any other entity, whether under any bankruptcy act or otherwise (any such payment is hereinafter referred to as a "Preferential Payment"), then the indebtedness of Makers under this Note shall continue or shall be reinstated, as the case may be, and, to the extent of such payment or repayment by the holder hereof, the indebtedness evidenced by this Note or part thereof intended to be satisfied by such Preferential Payment shall be revived and continued in full force and effect as if said Preferential Payment had not been made. This Note has been delivered in the City of Phoenix and State of Arizona, and shall be enforced under and governed by the laws of the State of Arizona applicable to contracts made and to be performed entirely within said state, without references to any choice or conflicts of law principles. Notwithstanding anything in this Note to the contrary, except as otherwise indicated in Section 12.7 of the Credit Agreement, the obligations of Makers under this Note shall not be the joint obligations of Makers, but shall instead be the several obligations of each Maker. Each Maker shall only be obligated to pay principal, interest, and other amounts that relate to Advances made to such Maker, or that relate to Property owned by such Maker, or that relate to such Maker's obligations under the Credit Agreement, this Note and the other Loan Documents. ATTEST: RICHMOND AMERICAN HOMES OF CALIFORNIA, INC., a Colorado corporation - --------------------------- By: -------------------------------- Name: John J. Heaney Title: Vice President ATTEST: RICHMOND AMERICAN HOMES OF MARYLAND, INC., a Maryland corporation - --------------------------- By: --------------------------------- Name: John J. Heaney Title: Vice President -3- ATTEST: RICHMOND AMERICAN HOMES OF NEVADA, INC., a Colorado corporation - --------------------------- By: -------------------------------- Name: John J. Heaney Title: Vice President ATTEST: RICHMOND AMERICAN HOMES OF VIRGINIA, INC., a Virginia corporation - --------------------------- By: -------------------------------- Name: John J. Heaney Title: Vice President ATTEST: RICHMOND AMERICAN HOMES, INC., a Delaware corporation - --------------------------- By: ------------------------------- Name: John J. Heaney Title: Vice President ATTEST: RICHMOND HOMES, INC. I, a Delaware corporation - --------------------------- By: ------------------------------- Name: John J. Heaney Title: Vice President -4- ATTEST: RICHMOND HOMES, INC., II, a Delaware corporation - --------------------------- By: ------------------------------ Name: John J. Heaney Title: Vice President -5- EX-27 7
5 This schedule contains summary financial information extracted from MDC Holdings, Inc. consolidated financial statements included in its Form 10-Q for the quarter ended March 31, 1996 and is qualified in its entirety by reference to such financial statements. 1,000 3-MOS DEC-31-1996 JAN-01-1996 MAR-31-1996 21,535 6,560 19,710 0 451,309 0 9,549 0 631,503 0 294,992 0 0 226 207,477 631,503 191,276 199,246 185,242 187,984 0 0 1,851 6,810 2,486 4,324 0 0 0 4,324 .22 .20
EX-28 8 Exhibit 28 INDEPENDENT ACCOUNTANTS' REVIEW REPORT To the Board of Directors and Stockholders of M.D.C. Holdings, Inc. We have reviewed the accompanying condensed consolidated balance sheet of M.D.C. Holdings, Inc. and subsidiaries (the "Company") as of March 31, 1996, and the related condensed consolidated statements of income and of cash flows for the three-month periods ended March 31, 1996 and 1995. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed consolidated financial statements for them to be in conformity with generally accepted accounting principles. We previously audited in accordance with generally accepted auditing standards, the consolidated balance sheet as of December 31, 1995, and the related consolidated statements of income, of stockholders' equity, and of cash flows for the year then ended (not presented herein), and in our report dated February 20, 1996 we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 1995, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived. /s/ Price Waterhouse LLP PRICE WATERHOUSE LLP Denver, Colorado April 24, 1996 -----END PRIVACY-ENHANCED MESSAGE-----