-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, fFXKWB6D+c2awwamr/syjo1WzR4w8/OcQEjU2bQ/Sa4hdWGAcgOeuo5TNrj1Mnzi Z60AaTG5t8D6O0Z/N5pNTw== 0000950148-95-000095.txt : 19950601 0000950148-95-000095.hdr.sgml : 19950601 ACCESSION NUMBER: 0000950148-95-000095 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19941130 FILED AS OF DATE: 19950228 SROS: NYSE SROS: PHLX FILER: COMPANY DATA: COMPANY CONFORMED NAME: KAUFMAN & BROAD HOME CORP CENTRAL INDEX KEY: 0000795266 STANDARD INDUSTRIAL CLASSIFICATION: OPERATIVE BUILDERS [1531] IRS NUMBER: 953666267 STATE OF INCORPORATION: DE FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-09195 FILM NUMBER: 95517147 BUSINESS ADDRESS: STREET 1: 10877 WILSHIRE BLVD CITY: LOS ANGELES STATE: CA ZIP: 90024 BUSINESS PHONE: 3104438000 10-K 1 FOR THE FISCAL YEAR ENDED NOVEMBER 30, 1994 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED NOVEMBER 30, 1994 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO . COMMISSION FILE NO. 1-9195 KAUFMAN AND BROAD HOME CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) INCORPORATED IN DELAWARE (STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) 95-3666267 (I.R.S. EMPLOYER IDENTIFICATION NO.) 10990 WILSHIRE BOULEVARD, LOS ANGELES, CALIFORNIA 90024 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 231-4000 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED COMMON STOCK (PAR VALUE $1.00 PER SHARE) NEW YORK STOCK EXCHANGE RIGHTS TO PURCHASE SERIES A PARTICIPATING CUMULATIVE NEW YORK STOCK EXCHANGE PREFERRED STOCK DEPOSITARY SHARES, EACH REPRESENTING ONE-FIFTH OF A NEW YORK STOCK EXCHANGE SHARE OF SERIES B MANDATORY CONVERSION PREMIUM DIVIDEND PREFERRED STOCK (PAR VALUE $1.00 PER SHARE) 10 3/8% SENIOR NOTES DUE 1999 NEW YORK STOCK EXCHANGE 9 3/8% SENIOR SUBORDINATED NOTES DUE 2003 NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO --- --- INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILES PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. / / THE AGGREGATE MARKET VALUE OF VOTING STOCK HELD BY NON-AFFILIATES OF THE COMPANY ON JANUARY 31, 1995 WAS $376,616,612. THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES OF COMMON STOCK ON JANUARY 31, 1995 WAS AS FOLLOWS: Common Stock (par value $1.00 per share) 32,379,217 shares DOCUMENTS INCORPORATED BY REFERENCE 1994 Annual Report to Shareholders (incorporated into Part II). Notice of 1995 Annual Meeting of Stockholders and Proxy Statement (incorporated into Part III). ================================================================================ 2 PART I ITEM 1. BUSINESS GENERAL The Company is a builder of single-family homes with domestic operations throughout the western United States, and international operations in France, Canada and Mexico. The Company is the largest home builder in the western United States and among the largest builders in greater metropolitan Paris, France. The Company builds and markets innovatively designed homes, generally in medium-sized developments close to major metropolitan areas, that cater primarily to first-time home buyers. In France, the Company is also a developer of commercial projects and high-density residential properties, such as condominium and apartment complexes. The Company also provides mortgage banking services to its domestic home buyers through its wholly owned subsidiary, Kaufman and Broad Mortgage Company ("KBMC"). The Company's business originated in 1957 and was operated through various subsidiaries of SunAmerica Inc. ("SunAmerica"), previously known as Kaufman and Broad Inc. and Broad Inc., until 1986. At that time, SunAmerica transferred to the Company all of the outstanding stock of the subsidiaries then conducting SunAmerica's on-site housing businesses as well as the stock of KBMC. The Company shortly thereafter completed an initial public offering of its common stock, after which SunAmerica continued to own approximately 92.6% of the Company's outstanding common stock. In 1989, SunAmerica distributed substantially all of its holdings in the Company's common stock pro-rata to holders of SunAmerica's common stock. Immediately prior to this distribution, a wholly owned subsidiary of SunAmerica, Sun Life Insurance Company of America ("SLICA"), acquired warrants (the "Warrants") to purchase up to 7,500,000 shares of the Company's special common stock in connection with the financing of a portion of the special cash dividend paid to holders of the common stock at the time of the distribution. In 1992, pursuant to the exercise of certain registration rights held by SLICA, the Company registered shares of special common stock issuable upon exercise of the Warrants under the Securities Act of 1993, and subsequently issued 5,123,000 shares in connection with a public offering. At the conclusion of such offering, SLICA continued to retain the balance of Warrants to purchase 2,377,000 shares of special common stock. In November 1993, the Company commenced a tender offer to purchase all of its 5,123,000 outstanding shares of special common stock at a price of $19 per share. The offer concluded in December 1993 with a total of 2,331,785 shares tendered. Shortly thereafter, the Company purchased the remaining 2,377,000 Warrants held by SLICA, at a price equal to the tender offer price per share less the $6.96 per Warrant exercise price. As a result, SLICA no longer holds any Warrants, nor beneficially owns any shares of the Company's special common stock. The remaining 2,791,215 outstanding shares of special common stock were exchanged by the Company at a ratio of .95 shares of common stock for each share of special common stock on various dates throughout 1994. There were no outstanding shares of special common stock at November 30, 1994. The Company is a Delaware corporation and maintains its principal executive offices at 10990 Wilshire Boulevard, Los Angeles, California 90024. Its telephone number is (310) 231-4000. As used herein, the term "Company" refers to Kaufman and Broad Home Corporation and its subsidiaries, unless the context indicates otherwise. MARKETS The Company's two principal geographic markets are the western United States (California, Nevada, Arizona, Colorado and Utah) and the greater metropolitan area of Paris, France. To a lesser extent, the Company builds single-family homes in Toronto, Canada. The Company delivered its first homes in California in 1963, France in 1970, Toronto in 1971, Nevada in 1993, and Arizona and Colorado in 1994. The Company expects to seek its first deliveries from its Salt Lake City, Utah and Mexico City divisions in 1995. 1 3 United States. The Company continued to expand its domestic housing operations in 1994 as recently established divisions in Phoenix, Arizona and Denver, Colorado delivered their first homes during the year. These expansion efforts gained momentum as the Company initiated operations in Salt Lake City, Utah in the second half of 1994 and acquired Oppel Jenkins, a regional builder of single family homes primarily in Albuquerque, New Mexico in January 1995. The Company's operations in California accounted for 88% of domestic home deliveries in 1994, a percentage which is expected to decrease as the remaining domestic divisions establish and solidify their market positions. During the 1980s, the Company benefited from the relative strength and growth of the California housing market. With new housing permits issued in the state having declined in four of the last five years, the Company has maintained a trend of increasing deliveries in California during the past four years. While California housing permits increased approximately 8% in 1994, the Company delivered 6,238 new homes in California, an increase of 9% over the prior year. This increase was accomplished through further penetration of existing markets and expansion into areas of the state which were particularly attractive to first-time buyers. In Southern California, the Company concentrates its home building activity in Los Angeles, Kern, San Bernardino, Riverside, Orange and San Diego counties. In Northern California, the Company's activities are concentrated in the San Francisco Bay-San Jose, Monterey Bay, Sacramento, Central Valley and Fresno regions. To enhance its operating capabilities in regional submarkets, the Company conducted its domestic home building business in 1994 through twelve divisional offices and three satellite offices in California and one divisional office in each of Nevada, Arizona, Colorado, and Utah. In January 1995, the Company began operating in New Mexico with the acquisition of Oppel Jenkins. Most of the communities developed by the Company consist of single-family detached homes. Responding to the relative strength in the entry-level housing market in the 1990s, the Company reduced the average size of its California homes from 1,676 square feet in 1990 to 1,516 square feet in 1994. These homes ranged in size from 892 to 2,531 square feet in 1994 and sold at an average price of $165,900, well below the statewide new home average of $221,200, as a result of the Company's emphasis on the entry-level market. France. The Company delivered its first homes in France in 1970, and its first commercial development project in 1987. In 1994, the Company's French operations posted a slight pre-tax profit after having its first overall loss in 24 years in 1993. Beginning in 1986, the Company decided to concentrate its French operations solely in the greater metropolitan Paris market. Despite the current tenuous economic climate in France, the Company continues to believe that the greater Paris metropolitan area, which is the principal population, economic and government center of France, continues to offer long-term potential for growth in both the Company's residential and commercial operations. The French economy is large and diverse, continuing to rank among the top ten world economies in gross national product. The nation's residential and commercial real estate markets, particularly within the greater metropolitan Paris region, experienced substantial growth through the second half of the 1980s, as a strong economy and approaching European market unification fueled business expansion and individual home purchases. In the early 1990s, however, the French economy experienced a significant recession reflecting low consumer confidence, high unemployment and declines in both consumer and business investments in real estate. In spite of the recent modest improvement in the French economy, total housing units completed in the greater Paris region continued to decline in 1994. The Company focused on providing product to the entry-level buyer and as a result French deliveries increased in 1994, after having decreased in each of the preceding four years. In early 1994, as part of the Company's strategy to streamline operations in the midst of the modestly improved but still relatively weak French economy, the French home building operations were consolidated from two separate divisions, one of which focused on entry-level home buyers with the second concentrating on the upwardly mobile executive market. The consolidated division focused primarily on single-family detached and attached homes in 1994, ranging in size from 969 to 1,615 square feet with an average selling price of $182,300. This operation will continue to provide homes for both of the market niches previously serviced, with a greater emphasis on the entry-level market. In 1987, the Company formed another French division which has been engaged, directly and through joint ventures, in developing commercial office buildings and a variety of high-density residential projects in Paris for sale to institutional investors. Projects are generally pre-sold to investors prior to construction, and in many cases prior to the purchase of the land, in order to reduce market risks related to this business. Typically, the Company's policy is to fix its 2 4 construction costs at the time it sells a project to investors. In the late 1980s and early 1990s, the Company's commercial development activities became an increasingly important segment of the French operations. More recently, however, with the completion of large projects in prior years, the level of commercial operations has declined as the market absorbed existing commercial properties. The Company's involvement in its most significant commercial project is as a member of a consortium, consisting of eight of France's largest financial institutions and three development firms, that was selected in 1992 to acquire and redevelop the former Paris headquarters of Esso, the French subsidiary of the Exxon Corporation located in the prestigious La Defense quarter of metropolitan Paris. The Company is both a minority partner in the joint venture and the managing contractor for the redevelopment work for which it will receive a contractor's fee. Development of this project has currently been postponed as the consortium made the decision to await the recovery of the commercial market. Canada. In addition to its principal markets in the western United States and France, the Company operates a housing division in Toronto, Canada, which has been slowly winding down over the past few years. When completed, the Company does not intend to have any further operations in Canada. Mexico. The Company determined that the projected growth in the Mexican economy and a shortage of housing in that country's major metropolitan areas would represent a unique opportunity for the Company, and on that basis established a new housing operation in Mexico City in 1993. However, recent economic events, particularly the series of sharp devaluations of the peso in early fiscal 1995, have slowed an already complex regulatory process and heightened market uncertainties for new home sales. As a result, the Company is currently reassessing its Mexican operations, with the level and timing of deliveries, if any, in 1995 remaining uncertain. Unconsolidated Joint Ventures. The Company currently participates in the development, construction and sale of residential properties and commercial projects through a number of unconsolidated joint ventures. These include joint ventures in the Paris, Los Angeles and Toronto metropolitan areas. Selected Market Data. The following table sets forth, for each of the Company's markets, unit deliveries, average selling price of homes and total construction revenues for the years ended November 30, 1994, 1993 and 1992 (excluding the effect of unconsolidated joint ventures).
YEARS ENDED NOVEMBER 30, --------------------------------- 1994 1993 1992 --------- --------- --------- United States: Unit deliveries............................................. 7,072 5,952 3,944 Average selling price....................................... $ 159,900 $ 161,200 $ 164,100 Total construction revenues (in millions)(1)................ $ 1,149.2 $ 960.9 $ 650.0 France: Unit deliveries............................................. 685 657 839 Average selling price(2).................................... $ 182,300 $ 187,800 $ 217,400 Total construction revenues (in millions)(1)(2)............. $ 143.4 $ 219.8 $ 375.0 Canada: Unit deliveries............................................. 67 155 170 Average selling price(2).................................... $ 97,300 $ 88,300 $ 109,900 Total construction revenues (in millions)(1)(2)............. $ 15.0 $ 19.1 $ 27.5 Total: Unit deliveries............................................. 7,824 6,764 4,953 Average selling price(2).................................... $ 161,300 $ 162,100 $ 171,300 Total construction revenues (in millions)(1)(2)............. $ 1,307.6 $ 1,199.8 $ 1,052.5
- ------------ (1) Total construction revenues include revenues from commercial and residential development activities and land sales. (2) Average selling prices and total construction revenues for France and Canada have been translated into U.S. dollars using weighted average exchange rates for each period. 3 5 LOCAL EXPERTISE Management believes that its business requires in-depth knowledge of local markets in order to acquire land in desirable locations and on favorable terms, to engage subcontractors, to plan communities keyed to local demand, to anticipate customer tastes in specific markets and to assess the regulatory environment. The Company's divisional structure is designed to utilize local market expertise. The Company has experienced management teams in each of its regional submarkets. Although the Company has increasingly centralized certain functions, such as marketing, materials purchasing and product development, during the last three years to benefit from economies of scale, local management continues to exercise considerable autonomy in identifying land acquisition opportunities, developing sales strategies, conducting production operations and controlling costs. In France, the Company has assembled a management team which is highly experienced in the financing, development, construction and rehabilitation of commercial and high-density residential projects, as well as single-family housing. This expertise includes knowledge of local markets and the regulatory environment. INNOVATIVE DESIGN AND MARKETING STRATEGY The Company believes that it has been and continues to be an innovator in the design of entry-level homes for the first-time buyer. The Company's in-house architectural services group has been successful in creating distinctive design features that are not typically found in comparably priced homes. The Company is typically able to offer as standard features vaulted ceilings, floor-to-ceiling windows, fireplaces, wall-to-wall carpeting and front-yard landscaping. In France, the Company created a village concept through the elimination of front-yard walls and the extensive use of landscaping. It also introduced to the French market the American concept of a master bedroom suite, as well as walk-in closets, built-in kitchen cabinetry and two-car garages. The Company believes that in each of its residential markets, its value engineering enables it to offer appealing and well-designed homes without increasing construction costs. In all of its residential markets, the sale of homes is carried out by the Company's in-house sales force. The Company markets its homes principally through the use of fully furnished and landscaped model homes which are decorated to emphasize the distinctive design features. The Company also markets its homes through various types of media, including newspaper advertisements, highway signs and direct mail. In addition, the Company extends its marketing programs beyond these traditional real estate avenues through the use of television advertising, off-site telemarketing, and large-scale promotions. Since 1985, the Company's California divisions have utilized an umbrella marketing concept, The California Series(R). This concept seeks to increase brand identification by incorporating certain common features in the marketing programs of its different development communities and by using "California" in the names of these communities. The Company has registered this trademark name and features The California Series(R) designs in its sales brochures and other promotional material. COMMUNITY DEVELOPMENT The community development process generally consists of three phases: land acquisition; land development; and home construction and sale. The normal development cycle for a community has in the past ranged from six to 20 months in California and from 12 to 30 months in France. The development cycle varies depending on the extent of government approvals required, the size of the development, the site preparation necessary and marketing results. The Company attempts to acquire finished lots within its pricing parameters, where available, enabling it to deliver completed homes shortly after acquisition. The total number of lots in the Company's domestic new home communities vary significantly, but typically are comprised of 50 to 250 lots. These domestic developments usually include three different home designs, and in 1994 offered average lot sizes of approximately 6,000 square feet. In France, typical single-family developments are smaller, consisting of approximately 50 lots, with lot sizes of about 4,500 square feet. Land Acquisition and Development. The Company utilizes an in-house staff of land acquisition specialists at each division who carry out extensive site selection research and analysis in order to identify properties in desirable locations consistent with the Company's market strategy. In acquiring land, the Company considers such factors as: current market 4 6 conditions, with an emphasis on the prices of comparable homes in the particular market; proximity to metropolitan areas; population, industrial and commercial growth patterns; estimated costs of completed lot development; customer preferences; and environmental matters. Senior corporate management controls the commitment of the Company's resources for land acquisition and utilizes a series of specific financial and budgetary controls in approving acquisition opportunities identified by division land acquisition personnel. The following table shows the number of lots owned by the Company in various stages of development and under option contract in its principal markets as of November 30, 1994. The following table does not include acreage which has not yet been approved for subdivision into lots. This excluded acreage includes 926 acres owned in the United States and 223 acres owned in other areas.
TOTAL LOTS HOMES/LOTS IN LAND UNDER LOTS UNDER OWNED OR PRODUCTION DEVELOPMENT OPTION UNDER OPTION ------------- ----------- ---------- ------------ United States................. 10,963 12,203 14,304 37,470 France........................ 836 83 241 1,160 Canada and other.............. 415 -- -- 415 ------ ------ ------ ------ Total............... 12,214 12,286 14,545 39,045 ====== ====== ====== ======
The Company has focused its domestic efforts on acquiring finished or partially improved lots, usually under options which are exercised as the lots are needed. The purchase of finished lots generally allows the Company to begin delivery of finished homes within six months of the purchase of such lots and reduces the risks of unforeseen improvement costs and volatile market conditions. During the early 1990s, the Company made a number of advantageous purchases of finished lots in California, as many builders were unable to proceed with projects due to the tight restrictions on the availability of capital imposed by financial institutions. Although such opportunities were not as prevalent in the Company's domestic markets in 1994, the Company expects to continue this strategy into the immediate future to the extent such opportunities remain available. While the Company has significantly reduced the proportion of unentitled and unimproved land purchases, when all acquired property is considered, the Company has and expects to continue to purchase raw land under options which require little or no initial payments, or pursuant to purchase agreements in which the Company's obligations are contingent upon the Company being satisfied with the feasibility of developing and selling homes. During the option period of its acquisition agreements, the Company performs technical, environmental, engineering and entitlement feasibility studies and seeks to obtain necessary government approvals. The use of option arrangements allows the Company to evaluate and obtain regulatory approvals for a project, to reduce its financial commitments, including interest and other carrying costs, and to minimize land inventories. It also improves the Company's capacity to estimate costs accurately, an important element in planning communities and pricing homes. Generally, the Company purchases only amounts sufficient for its expected production needs and does not purchase land for speculative investment. In France, as a result of the continued uncertainty in the French real estate market, the Company is employing a number of recession-conscious strategies, including a greater emphasis on the entry-level market segment, the consolidation of its two principal home building divisions and generally more restrictive policies regarding new land acquisition. Home Construction and Sale. Following the purchase of land and, if necessary, the completion of the entitlement process, the Company typically begins marketing the homes and constructing several model homes. The construction of production homes is generally contingent upon customer orders to minimize the costs and risks of standing inventory. However, due to persistent increases in mortgage interest rates triggered by actions of the Federal Reserve in 1994 and greater competition during the year, the Company experienced higher levels of standing inventory than in previous years. The Company acts as the general contractor for its communities and hires subcontractors for all production. The use of subcontractors enables the Company to reduce its investment in direct employee labor costs, equipment and facilities. Where practical, the Company uses mass production techniques, construction on contiguous lots, and prepackaged, standardized components and materials to streamline the on-site production phase. During the early 1990s, the Company developed a system of national purchasing of certain building materials, appliances and other items to take advantage of 5 7 economies of scale and to reduce costs. At all stages of production, the Company's own administrative and on-site supervisory personnel coordinate the activities of subcontractors and subject their work to quality and cost controls. The Company generally prices its homes only after it has entered into contracts for the construction of such homes with subcontractors, an approach which improves its ability to estimate costs accurately. The Company provides customers with a warranty program operated by the personnel in each of its divisions to give customers prompt and efficient post-delivery service. The warranty program covers certain repairs which may be necessary following new home construction. In the aggregate, the costs associated with the Company's warranty program are not material to its operations. CYCLICALITY The Company's business, and the housing industry in general, are cyclical. The Company's operations and markets are affected by local and regional factors such as local economies, demographic demand for housing, population growth, property taxes and energy costs, and by national factors such as short and long-term interest rates, federal mortgage financing programs, federal income tax provisions and general economic trends. Net orders often vary on a seasonal basis, with the lowest sales activity typically occurring in the winter months. While it is difficult to determine the precise impact of higher mortgage interest rates on sales activity, the Company believes that in 1994 the trends in net orders and unit deliveries were adversely affected as the Federal Reserve increased interest rates several times, resulting in mortgage interest rates rising by more than two percentage points during the year. BACKLOG Sales of the Company's homes are made pursuant to standard sales contracts, which generally require a customer deposit at the time of execution and an additional payment upon mortgage approval. The Company generally permits customers to cancel their obligations and obtain refunds of their deposits in the event mortgage financing is unobtainable within a specified period of time. Backlog consists of homes for which the Company has entered into a sales contract but which it has not yet delivered. Ending backlog represents the number of units in backlog from the previous period plus the number of net orders (sales made less cancellations) taken during the current period minus unit deliveries made during the current period. The backlog at any given time will be affected by cancellations which most commonly result from the inability of a prospective purchaser to obtain financing. Historically, the Company's cancellation rates have increased during difficult economic periods. In addition, as demonstrated by the table below, deliveries of new homes have typically increased from the first to the fourth quarter in any year. Accordingly, the Company usually experiences a relatively low backlog of orders at year end. 6 8 The following table sets forth net orders, unit deliveries and ending backlog relating to sales of homes and homes under contract for each quarter during the three-year period ended November 30, 1994.
NET UNIT ENDING ORDERS DELIVERIES BACKLOG ------ ---------- ------- Fiscal 1994: First Quarter.......................... 1,684 1,539 1,204 Second Quarter......................... 2,035 1,954 1,285 Third Quarter.......................... 2,078 2,082 1,281 Fourth Quarter......................... 1,984 2,249 1,016 Fiscal 1993: First Quarter.......................... 1,387 1,067 1,451 Second Quarter......................... 1,752 1,558 1,645 Third Quarter.......................... 1,717 1,885 1,477 Fourth Quarter......................... 1,836 2,254 1,059 Fiscal 1992: First Quarter.......................... 1,084 846 1,091 Second Quarter......................... 1,422 1,140 1,373 Third Quarter.......................... 1,468 1,309 1,532 Fourth Quarter......................... 1,257 1,658 1,131
LAND AND RAW MATERIALS Management believes that the Company's current supply of land is sufficient for its reasonably anticipated needs, and that it will be able to acquire land on acceptable terms for future housing developments. The principal raw materials used in the construction of homes are concrete and forest products. In addition, the Company uses a variety of other construction materials, including sheetrock and glass. The Company attempts to maintain efficient operations by utilizing standardized materials which are commercially available on competitive terms from a variety of sources. Since 1992, the Company has increasingly utilized centralized purchasing of certain building materials, appliances and fixtures, enabling it to benefit from large quantity purchase discounts for its domestic operations. The Company makes bulk purchases of such products at favorable prices from suppliers and instructs subcontractors to submit bids based on such prices. The principal materials used in the construction of French commercial buildings are steel, concrete and glass. LAND SALES In the normal course of its business, the Company sells land which does not meet its marketing needs. This property usually consists of land zoned for multi-family or commercial use which is part of a larger parcel being developed for single-family homes or land in areas where the Company may consider its inventory to be greater than can be absorbed in a desirable amount of time. CUSTOMER FINANCING -- KAUFMAN AND BROAD MORTGAGE COMPANY At the Company's communities in the United States, on-site personnel facilitate sales by offering to arrange financing for prospective customers through KBMC. Management believes that the ability to offer customers financing on firm, competitive terms as a part of the sales process is an important factor in completing sales. The Company typically assists customers in arranging for guaranteed maximum interest rates at the time of sale even though delivery may take place in the future. KBMC's business consists of providing the Company's domestic customers with competitive financing and coordinating and expediting the loan origination transaction through the steps of loan application, loan approval and closing. KBMC has its headquarters in Los Angeles and operates branch offices in Anaheim, Dublin, Fremont, Fresno, Los 7 9 Angeles, Modesto, Newport Beach, Palmdale, Sacramento, Salinas, San Diego and Santa Rosa, California; Las Vegas, Nevada; Phoenix, Arizona; and Denver, Colorado. Offices are also expected to be opened in Salt Lake City, Utah and Albuquerque, New Mexico in 1995. KBMC's principal sources of revenues are: (i) interest income earned on mortgage loans during the period they are held by KBMC prior to their sale to investors; (ii) net gains from the sale of loans; (iii) loan servicing fees; and (iv) revenues from the sale of the rights to service loans. KBMC is approved by the Government National Mortgage Association ("GNMA") as a seller-servicer of Federal Housing Administration ("FHA") and Veterans Administration ("VA") loans. A portion of the conventional loans originated by KBMC (i.e., loans other than those insured by FHA or guaranteed by VA) qualify for inclusion in loan guarantee programs sponsored by the Federal National Mortgage Association ("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC"). KBMC arranges for fixed and adjustable rate, conventional, privately insured mortgages, FHA-insured or VA-guaranteed mortgages, and mortgages funded by revenue bond programs of states and municipalities. In fiscal 1994, approximately 42% of the mortgages originated for the Company's customers were FHA-insured or VA-guaranteed, 28% were conventional (most of which conformed to FNMA and FHLMC guidelines), 17% were adjustable rate mortgages ("ARMs") primarily provided through commitments from institutional investors and 13% were funded by mortgage revenue bond programs. The percentages set forth above change from year to year reflecting then-current fixed interest rates, introductory rates for ARMs, housing prices and other economic conditions. In 1994, KBMC originated loans for 80% of the Company's domestic home deliveries. Generally, KBMC receives an origination fee of approximately 1% of the principal amount of the loan. KBMC is a delegated underwriter under the FHA Direct Endorsement and VA Automatic programs in accordance with criteria established by such agencies. Additionally, KBMC has delegated underwriting authority from FNMA and FHLMC. As a delegated underwriter, KBMC may underwrite and close mortgage loans under programs sponsored by these agencies without their prior approval, which expedites the loan origination process. KBMC, like other mortgage bankers, customarily sells nearly all of the loans that it originates. Loans are sold either individually or in pools to GNMA, FNMA or FHLMC or against forward commitments to institutional investors, including banks and savings and loan associations. In some cases, KBMC retains the rights to service the mortgages that it originates. Servicing includes collecting and remitting loan payments, accounting for principal and interest, making inspections of mortgaged premises as required, monitoring delinquent mortgages and generally administering the loans. KBMC receives fees for servicing mortgage loans, generally ranging from .20% per annum to .50% per annum on the declining principal balances of the loans. KBMC sells the majority of such servicing rights on a regular basis. The Company also assists its customers in France by arranging financing through third party lenders, primarily major French banks with which the Company has established relationships. In some cases, French customers qualify for certain government-assisted, home financing programs. A second mortgage is usually handled through a government agency. A home buyer in France may also have a third mortgage provided through credit unions or other employee groups. EMPLOYEES The Company employs a trained staff of land acquisition specialists, architects, planners, engineers, construction supervisors, marketing and sales personnel and finance and accounting personnel, supplemented as necessary by outside consultants, who guide the development of communities from their conception through the marketing and sale of completed homes. At January 31, 1995, the Company had approximately 1,330 full-time employees in its operations, including approximately 150 in KBMC's operations. COMPETITION AND OTHER FACTORS The Company's business is highly competitive. It competes primarily on the basis of price, location, financing, design, reputation, quality and amenities with numerous housing producers ranging from regional and national firms to 8 10 small builders. Resales of housing provide additional competition. In certain markets and at times when housing demand is high, the Company also competes with other builders to hire subcontractors. KBMC competes with other mortgage lenders, including mortgage bankers, savings and loan associations and other financial institutions, in the origination, sale and servicing of mortgage loans. During 1994, the Company was faced with the additional challenge of six interest rate hikes by the Federal Reserve, raising mortgage interest rates by more than two percentage points. Further increases in interest rates could have a negative impact on the Company's operations in that such increases adversely affect the availability of home financing to, or qualification for such financing by, the Company's customers. Conversely, significant reductions in interest rates will likely have a generally positive effect on the Company's operations. The Company does not generally finance the development of its domestic communities with proceeds of loans specifically obtained for, or secured by, particular communities, i.e., project financing. Instead, the financing of the Company's domestic operations has been primarily generated from results of operations, public debt and equity financing and borrowings under its $500 million unsecured revolving credit facility with a consortium of domestic and foreign banks. During 1994, this revolving credit facility was increased from $350 million to its current $500 million capacity, with a $200 million sublimit for the Company's mortgage banking operations. Financing of its French operations has been primarily generated from results of operations and borrowings from its aggregate $159 million unsecured committed credit lines from a series of foreign banks. As a result of these diverse external sources of financing, the Company was not adversely affected by the tight credit conditions that much of the home building industry experienced during the recent recession, both domestically and in France. REGULATION AND ENVIRONMENTAL MATTERS The housing industry is subject to extensive and complex regulations. The Company and its subcontractors must comply with various federal, state and local laws, ordinances, rules and regulations concerning zoning, building design, construction and similar matters. The operations of the Company are affected by environmental laws and regulations, including regulations pertaining to availability of water, municipal sewage treatment capacity, land use, protection of endangered species, population density and preservation of the natural terrain and coastlines. These and other requirements could become more restrictive in the future, resulting in additional time and expense to obtain approvals for the development of communities. The Company is also subject to regulations and restrictions by the governments of France, Canada and Mexico concerning investments in business operations in those countries by United States companies, none of which has to date had a material adverse effect on the Company's consolidated operations. The Company's foreign operations are subject to exchange rate fluctuations, which affect the Company's financial statements and the reporting of profits and payment of dividends from foreign subsidiaries, to restrictive foreign government regulations which may be in effect from time to time and to the terms of the Foreign Corrupt Practices Act with which it is the strict policy of the Company to comply. The Company has engaged in the past in hedging transactions to mitigate the effect of exchange rate fluctuations on its French subsidiaries' profits. In addition, the Company has received dividends from its French and Canadian operations without burdensome restrictions, although tax considerations have limited the amount of such dividends. KBMC is subject to numerous federal, state and local laws, ordinances, rules and regulations concerning loans to purchasers of homes as well as Company eligibility for participation in programs of the VA, FHA, GNMA, FNMA and FHLMC. The Company entered into a consent order with the Federal Trade Commission ("FTC") in 1979 pursuant to which the Company agreed to provide explicit warranties on the quality and workmanship of its new homes, follow certain guidelines in advertising and provide certain disclosures to any prospective purchaser who visits Company sales offices or model homes. In 1991, the Company reached a monetary settlement with the FTC, covering alleged violations of the Company's consent order. The FTC acknowledged that the Company did not admit any of the allegations and did not impose any additional requirements on the Company. The Company currently has policies of using outside environmental specialists to investigate land considered for acquisition for environmental risks and requiring disclosure from land sellers of known environmental risks. Despite these activities, there can be no assurance that the Company will avoid material liabilities relating to the removal of toxic wastes, site restoration, monitoring or other environmental matters affecting properties currently or previously owned by 9 11 the Company. Costs associated with the use of environmental consultants are not material to the Company's results of operations. No estimate of such potential liabilities can be made although the Company may, from time to time, purchase property which requires modest environmental clean-up costs after appropriate due diligence. In such instances, the Company takes steps prior to acquisition to assure itself as to the precise scope of work required and costs associated with removal, site restoration and/or monitoring, using detailed investigations by environmental consultants. To the extent such costs have occurred in the past, the Company believes it may be able to recover such costs from third parties, including, but not limited to, the generators of hazardous waste, land sellers or others in the prior chain of title and/or insurers. Utilizing such policies, the Company anticipates that it is not likely that environmental clean-up costs will have a material effect on future results of operations or the Company's financial position. The Company has not been notified by any governmental agency of any claim that any of the properties owned or formerly owned by the Company are identified by the Environmental Protection Agency as being a "Superfund" clean-up site requiring clean-up costs, which could have a material effect on future results of operations or the Company's financial position. ITEM 2. PROPERTIES The Company's executive offices are in leased premises at 10990 Wilshire Boulevard, Los Angeles, California. The Company's housing operations are principally conducted from leased premises located in Anaheim, Bakersfield, Dublin, Fremont, Fresno, Los Angeles, Modesto, Newport Beach, Palmdale, Pleasanton, Sacramento, Salinas, San Diego and Santa Rosa, California; Las Vegas, Nevada; Phoenix, Arizona; Denver, Colorado; Salt Lake City, Utah; Paris, France; Toronto, Canada; and Mexico City, Mexico. The Company began operating in New Mexico in January 1995 with the acquisition of Oppel Jenkins. The Company's mortgage banking subsidiaries lease executive offices in Los Angeles, California and branch offices in Anaheim, Dublin, Fremont, Fresno, Los Angeles, Modesto, Newport Beach, Palmdale, Sacramento, Salinas, San Diego and Santa Rosa, California; Las Vegas, Nevada; Phoenix, Arizona; and Denver, Colorado. Offices are also expected to be opened in Salt Lake City, Utah and Albuquerque, New Mexico in 1995. The Company believes that such properties, including the equipment located therein, are suitable and adequate to meet the requirements of its businesses. ITEM 3. LEGAL PROCEEDINGS In late August 1992, the Company and certain past and present officers of the Company were named as defendants in two actions filed in the United States District Court, Central District of California on behalf of certain shareholders alleging violations of certain federal securities laws. In February 1993, the actions were consolidated and maintained under the title of In Re Kaufman and Broad Home Corporation Securities Litigation, Case No. 92-5049-WJR (Shx). Although the Company and the individual defendants denied allegations and vigorously defended the litigation, the defendants, in consultation with the Company's primary directors and officers' liability insurer, considered that continuing the litigation to trial would be protracted and expensive and concluded that it was desirable to settle the litigation in order to limit further expense, inconvenience and distraction. As a result, in 1994, the defendants together with their insurer, executed a formal agreement to settle the litigation; the Company's share of the settlement payment was $1,600,000. Although final consummation of this settlement is conditioned upon approval by the United States District Court, the Company expects the settlement to proceed in due course. Under the terms of the settlement, the Company and the individual defendants expressly denied any liability related to the plaintiffs' allegations. In August 1992, homeowners from the Company's California Meadows community in Riverside County filed a lawsuit against the Company in Riverside County Superior Court seeking compensatory and punitive damages and alleging, among other things, defective construction, breach of warranty, negligence and fraud. The owners of approximately 120 homes are currently involved in the litigation. In February 1994 the Company filed cross-complaints against all relevant subcontractors and certain other third parties. The Company believes that it has acted fairly and responsibly toward all homeowners at that community. Based upon its thorough investigation of the site, the Company believes that the allegations in this lawsuit are substantially without merit and intends to vigorously contest the claims. 10 12 The Company is involved in other litigation incidental to its business. These cases are in various stages of development and, based on reports of counsel, it is management's opinion that provisions made for potential losses are adequate and any further liabilities and costs arising out of currently pending litigation will not have a materially adverse effect upon the Company's financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during the fourth quarter of 1994 to a vote of security holders, through the solicitation of proxies or otherwise. EXECUTIVE OFFICERS OF THE COMPANY The following sets forth certain information regarding the executive officers of the Company as of January 31, 1995:
YEAR ASSUMED OTHER POSITIONS AND OTHER PRESENT POSITION AT PRESENT BUSINESS EXPERIENCE WITHIN NAME AGE JANUARY 31, 1995 POSITION THE LAST FIVE YEARS(1) FROM - TO - ---------------------- --- ------------------------------ -------- ----------------------------------------- --------------- Bruce Karatz 49 Chairman, President and 1993 President and Chief Executive Officer 1986 - 1993 Chief Executive Officer Roger B. Menard 53 Executive Vice President 1993 Executive Vice President and President 1992 - 1993 and President of United of California Operations States Operations President of Kaufman and Broad-South Bay, 1985 - 1992 Inc. Guy Nafilyan 50 Executive Vice President 1992 President and Chief Executive Officer 1983 - Present and President of European of Kaufman and Broad France Operations Senior Vice President 1987 - 1992 Michael F. Henn 46 Senior Vice President and 1994 Executive Vice President, Chief Financial 1986 - 1994 Chief Financial Officer and Administrative Officer, The Vons Companies, Inc. Barton P. Pachino 35 Senior Vice President 1993 Vice President and Corporate Counsel 1991 - 1993 and General Counsel Associate Corporate Counsel 1987 - 1991 Albert Z. Praw 46 Senior Vice President, 1994 Partner in law firm of Sidley & Austin 1992 - 1994 Real Estate Senior Vice President, General 1989 - 1992 Counsel and Secretary Michael L. Woodley 37 Senior Vice President, 1992 Vice President, Architecture 1989 - 1992 Architecture Marc I. Chasman 31 Vice President 1993 Treasurer 1991 - 1993 and Treasurer Manager, Strategic Planning 1991 Manager, Corporate Finance 1990 - 1991 William R. Hollinger 36 Vice President 1992 Director of Accounting 1988 - 1992 and Controller Alan Kaye 41 Vice President, 1991 Senior Vice President for 1988 - 1991 Human Resources and Human Resources and Corporate Services, Organizational Planning Columbia Savings & Loan Association
- --------------- (1) All positions described were with the Company, unless otherwise indicated. 11 13 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS As of January 31, 1995, there were 2,342 holders of record of the Company's common stock. Information as to the Company's quarterly stock prices is included on the inside back cover of the Company's 1994 Annual Report to Shareholders, which is included as part of Exhibit 13 and is incorporated in this Annual Report on Form 10-K. Information as to the principal markets on which the Company's common stock is being traded and quarterly cash dividends is included on the inside back cover of the Company's 1994 Annual Report to Shareholders, which is included as part of Exhibit 13 and is incorporated in this Annual Report on Form 10-K. ITEM 6. SELECTED FINANCIAL DATA The Five Year Summary of Kaufman and Broad Home Corporation and its consolidated subsidiaries for the five-year period ended November 30, 1994 is included on page 24 in the Company's 1994 Annual Report to Shareholders, which is included as part of Exhibit 13 and is incorporated in this Annual Report on Form 10-K. It should be read in conjunction with the consolidated financial statements included in the Company's 1994 Annual Report to Shareholders which are also included as part of Exhibit 13. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations of Kaufman and Broad Home Corporation is included on pages 25 through 32 in the Company's 1994 Annual Report to Shareholders, which are included as part of Exhibit 13 and are incorporated in this Annual Report on Form 10-K. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements of Kaufman and Broad Home Corporation are included on pages 33 through 45 in the Company's 1994 Annual Report to Shareholders, which are included as part of Exhibit 13 and are incorporated in this Annual Report on Form 10-K. Reference is made to the Index to Financial Statements on page F-1 herein. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III The Notice of 1995 Annual Meeting of Stockholders and Proxy Statement, filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, incorporated by reference in this Annual Report on Form 10-K pursuant to General Instruction G(3) of Form 10-K, provides the information required under Part III (Items 10, 11, 12 and 13) except for the information regarding the executive officers of the Company, which is included in Part I on page 11 herein. 12 14 PART IV ITEM 14. FINANCIAL STATEMENTS, EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K FINANCIAL STATEMENTS Reference is made to the index set forth on page F-1 of this Annual Report on Form 10-K. EXHIBITS
EXHIBIT NO. DESCRIPTION ------- ----------- 3.1 Amended Certificate of Incorporation, filed as an exhibit to the Company's Registration Statement No. 33-6471 on Form S-1, is incorporated by reference herein. 3.2 Amendment to Certificate of Incorporation, filed as an exhibit to the Company's Registration Statement No. 33-30140 on Form S-1, is incorporated by reference herein. 3.3 Certificate of Designation of Series A Participating Cumulative Preferred Stock, filed as an exhibit to the Company's Registration Statement No. 33-30140 on Form S-1, is incorporated by reference herein. 3.4 Certificate of Designation of Series B Mandatory Conversion Premium Dividend Preferred Stock, filed as an exhibit to the Company's Registration Statement No. 33-59516 on Form S-3, is incorporated by reference herein. 3.5 Amended Certificate of Designation of Series B Mandatory Conversion Premium Dividend Preferred Stock, filed as an exhibit to the Company's Registration Statement No. 33-59516 on Form S-3, is incorporated by reference herein. 3.6 By-Laws, filed as an exhibit to the Company's Registration Statement No. 33-30140 on Form S-1, is incorporated by reference herein. 4.1 Amended Certificate of Incorporation, filed as an exhibit to the Company's Registration Statement No. 33-6471 on Form S-1, is incorporated by reference herein. 4.2 Amendment to Certificate of Incorporation, filed as an exhibit to the Company's Registration Statement No. 33-30140 on Form S-1, is incorporated by reference herein. 4.3 By-Laws, filed as an exhibit to the Company's Registration Statement No. 33-30140 on Form S-1, is incorporated by reference herein. 4.4 Rights Agreement between the Company and Bank of America National Trust and Savings Association, successor-by-merger to Security Pacific National Bank, as Rights Agent, dated February 21, 1989, filed as an exhibit to the Company's 1989 Annual Report on Form 10-K, is incorporated by reference herein. 4.5 Indenture relating to 10 3/8% Senior Notes due 1999 between the Company and NBD Bank, N.A., dated September 1, 1992, filed as an exhibit to the Company's Registration Statement No. 33-50732 on Form S-3, is incorporated by reference herein. 4.6 Specimen of 10 3/8% Senior Notes filed as an exhibit to the Company's Current Report on Form 8-K, reporting certain exhibits in connection with the Company's Registration Statement No. 33-50732 on Form S-3 filed by the Company relating to the registration of 10 3/8% Senior Notes due 1999, is incorporated by reference herein. 4.7 Indenture relating to 9 3/8% Senior Subordinated Notes due 2003 between the Company and First National Bank of Boston, dated May 1, 1993, filed as an exhibit to the Company's Registration Statement No. 33-59516 on Form S-3, is incorporated by reference herein.
13 15
EXHIBIT NO. DESCRIPTION ------- ----------- 4.8 Specimen of 9 3/8% Senior Subordinated Notes filed as an exhibit to the Registration Statement No. 33-59516 on Form S-3 filed by the Company relating to the registration of 9 3/8% Senior Subordinated Notes due 2003, is incorporated by reference herein. 10.1 Employment Contract of Bruce Karatz, dated January 4, 1988, filed as an exhibit to the Company's 1987 Annual Report on Form 10-K, is incorporated by reference herein. 10.2 1986 Stock Option Plan, filed as an exhibit to the Company's Registration Statement No. 33-6471 on Form S-1, is incorporated by reference herein. 10.3 1988 Employee Stock Plan, filed as an exhibit to the definitive Joint Proxy Statement for the Company's 1989 Special Meeting of Shareholders, is incorporated by reference herein. 10.4 Consent Order, Federal Trade Commission Docket No. C-2954, dated February 12, 1979, filed as an exhibit to the Company's Registration Statement No. 33-6471 on Form S-1, is incorporated by reference herein. 10.5 SunAmerica Inc. Executive Deferred Compensation Plan, approved September 25, 1985, filed as an exhibit to SunAmerica Inc.'s 1985 Annual Report on Form 10-K, is incorporated by reference herein. 10.6 Directors' Deferred Compensation Plan established effective July 27, 1989, filed as an exhibit to the Company's 1989 Annual Report on Form 10-K, is incorporated by reference herein. 10.7 Settlement with Federal Trade Commission of June 27, 1991, filed as an exhibit to the Company's Current Report on Form 8-K, dated June 28, 1991, is incorporated by reference herein. 10.8 Indenture relating to 10 3/8% Senior Notes due 1999 between the Company and NBD Bank, N.A., dated September 1, 1992, filed as an exhibit to the Company's Registration Statement No. 33-50732 on Form S-3, is incorporated by reference herein. 10.9 Indenture relating to 9 3/8% Senior Subordinated Notes due 2003 between the Company and First National Bank of Boston, dated May 1, 1993, filed as an exhibit to the Company's Registration Statement No. 33-59516 on Form S-3, is incorporated by reference herein. 10.10 Employment Contract of Roger B. Menard, dated April 6, 1992, filed as an exhibit to the Company's 1992 Annual Report on Form 10-K, is incorporated by reference herein. 10.11 1993 Directors' Stock Plan, approved April 1, 1993, filed as an exhibit to the definitive Proxy Statement for the Company's 1993 Annual Meeting of Shareholders, is incorporated by reference herein. 10.12 Amendments to the Kaufman and Broad Home Corporation 1988 Employee Stock Plan dated January 27, 1994, filed as an exhibit to the Company's 1994 Annual Report on Form 10-K. 10.13 Employment Agreement of Albert Z. Praw, dated February 20, 1994, filed as an exhibit to the Company's 1994 Annual Report on Form 10-K. 10.14 Employment Agreement of Michael F. Henn, dated June 7, 1994, filed as an exhibit to the Company's 1994 Annual Report on Form 10-K. 10.15 Third Amended and Restated Loan Agreement among the Company, Bank of America National Trust and Savings Association, and the First National Bank of Chicago, as managing agents, and the banks listed therein, dated November 21, 1994, filed as an exhibit to the Company's 1994 Annual Report on Form 10-K. 10.16 Letter dated February 16, 1995 amending Employment Contract of Bruce Karatz, filed as an exhibit to the Company's 1994 Annual Report on Form 10-K. 10.17 Letter dated February 27, 1995 amending Employment Contract of Roger B. Menard, filed as an exhibit to the Company's 1994 Annual Report on Form 10-K. 11 Statement of Computation of Per Share Earnings.
14 16
EXHIBIT NO. DESCRIPTION ------- ----------- 13 Pages 24 through 45 and the inside back cover of the Company's 1994 Annual Report to Shareholders. 22 Subsidiaries of the Company. 24 Consent of Independent Auditors.
FINANCIAL STATEMENT SCHEDULES Financial statement schedules have been omitted because they are not applicable or the required information is shown in the consolidated financial statements and notes thereto. REPORTS ON FORM 8-K No reports on Form 8-K were filed during the fourth quarter of 1994. 15 17 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. KAUFMAN AND BROAD HOME CORPORATION By: MICHAEL F. HENN ------------------------------ Michael F. Henn Senior Vice President and Chief Financial Officer Dated: February 27, 1995 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant in the capacities and on the dates indicated:
SIGNATURE TITLE DATE --------- ----- ---- BRUCE KARATZ Chairman, President February 27, 1995 ------------------------------------ and Chief Executive Bruce Karatz Officer MICHAEL F. HENN Senior Vice President February 27, 1995 ------------------------------------ and Chief Financial Officer Michael F. Henn ELI BROAD Founder-Chairman February 27, 1995 ------------------------------------ Eli Broad JANE EVANS Director February 27, 1995 ------------------------------------ Jane Evans DR. RAY R. IRANI Director February 27, 1995 ------------------------------------ Dr. Ray R. Irani ANTOINE JEANCOURT-GALIGNANI Director February 27, 1995 ------------------------------------ Antoine Jeancourt-Galignani JAMES A. JOHNSON Director February 27, 1995 ------------------------------------ James A. Johnson DAVID O. MAXWELL Director February 27, 1995 ------------------------------------ David O. Maxwell GUY NAFILYAN Director February 27, 1995 ------------------------------------ Guy Nafilyan LESTER POLLACK Director February 27, 1995 ------------------------------------ Lester Pollack SANFORD C. SIGOLOFF Director February 27, 1995 ------------------------------------ Sanford C. Sigoloff
16 18 KAUFMAN AND BROAD HOME CORPORATION AND CONSOLIDATED SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS The consolidated financial statements, together with the report thereon of Ernst & Young LLP, dated January 5, 1995, all appearing on pages 33 through 45 in the 1994 Annual Report to Shareholders, are incorporated in this Annual Report on Form 10-K between page F-1 and the List of Exhibits Filed. With the exception of the aforementioned information and the information incorporated in Items 5, 6 and 7, the 1994 Annual Report to Shareholders is not to be deemed filed as part of this Annual Report on Form 10-K. Separate combined financial statements of the Company's unconsolidated joint venture activities have been omitted because, if considered in the aggregate, they would not constitute a significant subsidiary as defined by Rule 3-09 of Regulation S-X. ------------------------
PAGE NO. IN ANNUAL REPORT TO SHAREHOLDERS ----------------- KAUFMAN AND BROAD HOME CORPORATION Report of Independent Auditors............................................ 45 Consolidated Statements of Income for the years ended November 30, 1994, 1993 and 1992.......................................................... 33 Consolidated Balance Sheets as of November 30, 1994 and 1993.............. 34 Consolidated Statements of Shareholders' Equity for the years ended November 30, 1994, 1993 and 1992....................................... 35 Consolidated Statements of Cash Flows for the years ended November 30, 1994, 1993 and 1992.................................................... 36 Notes to Consolidated Financial Statements................................ 37 through 44
The following pages represent pages 24 through 45 and the inside back cover of the 1994 Annual Report to Shareholders of Kaufman and Broad Home Corporation, and include the Five Year Summary, Management's Discussion and Analysis of Financial Condition and Results of Operations, the Consolidated Financial Statements and related notes thereto, the Report of Independent Auditors, Shareholder Information and Quarterly Stock Prices. These pages were filed with the Securities and Exchange Commission as Exhibit 13 to this Annual Report on Form 10-K. F-1 19 SELECTED FINANCIAL INFORMATION
YEARS ENDED NOVEMBER 30, ------------------------------------------------------------------ In thousands, except per share amounts 1994 1993 1992 1991 1990 ----------- ---------- ---------- ---------- ---------- Construction: Revenues $1,307,570 $1,199,776 $1,052,525 $1,176,386 $1,315,259 Operating income 88,323 86,609 58,897 76,037 108,325 Total assets 1,167,136 983,442 987,104 916,002 1,067,758 Mortgages and notes payable 565,020 313,357 258,147 230,580 390,040 ========== ========== ========== ========== ========== Mortgage banking: Revenues $ 28,701 $ 38,078 $ 41,643 $ 44,609 $ 51,005 Operating income 6,003 7,534 4,556 4,436 5,218 Total assets 287,324 355,936 444,656 457,021 476,372 Notes payable 125,000 138,500 143,700 84,000 61,573 Collateralized mortgage obligations 96,731 144,143 222,948 300,894 348,724 ========== ========== ========== ========== ========== Consolidated: Revenues $1,336,271 $1,237,854 $1,094,168 $1,220,995 $1,366,264 Operating income 94,326 94,143 63,453 80,473 113,543 Net income 46,550 39,921 28,198 26,520 39,943 Total assets 1,454,460 1,339,378 1,431,760 1,373,023 1,544,130 Mortgages and notes payable 690,020 451,857 401,847 314,580 451,613 Collateralized mortgage obligations 96,731 144,143 222,948 300,894 348,724 Convertible subordinated notes 162,022 149,798 138,497 Shareholders' equity 404,747 444,340 318,433 258,106 234,351 ========== ========== ========== ========== ========== Earnings per share $ 1.16 $ .96 $ .78 $ .80 $ 1.25 Cash dividends per common and special common share .30 .30 .30 .30 .30 ========== ========== ========== ========== ==========
24 20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Overview Revenues are generated from the Company's housing operations in the western United States, France and Canada; commercial development activities in France; and domestic mortgage banking operations. Operating results in 1994 benefited from the Company's continued expansion of its domestic housing operations, including recently established divisions in Phoenix, Arizona and Denver, Colorado, both of which delivered their first homes in 1994. These expansion efforts gained momentum as the Company initiated operations in Salt Lake City, Utah in the second half of 1994 and acquired Oppel Jenkins, a regional builder of single-family homes in Albuquerque, New Mexico and El Paso, Texas in January 1995. Total revenues increased to $1.34 billion in 1994, up 8% from $1.24 billion in 1993, which had increased 13% from revenues of $1.09 billion in 1992. The improvement in 1994 revenues reflected higher housing revenues, partially offset by a decline in French commercial development revenues. In 1993, revenues rose, largely due to higher California housing revenues which more than offset a decrease in revenues from French residential and commercial development activities. Included in total revenues were mortgage banking revenues of $28.7 million in 1994, $38.1 million in 1993 and $41.6 million in 1992. Net income increased 17% in 1994 to $46.6 million from $39.9 million in 1993, which had increased 42% from the prior year's $28.2 million. Net income rose in 1994 due to increased housing volume in the United States and improved results from French housing operations. In 1993, the increase in net income reflected higher earnings from California residential operations, partially offset by lower earnings from French commercial development activities, as French operations posted their first overall loss in 24 years. Earnings per share increased to $1.16 in 1994, reflecting higher net income and a lower average number of shares outstanding. The Company's buyback of special common stock and warrants in December 1993 and its exchange and cancellation of the remaining shares of special common stock on various dates throughout 1994 reduced the number of shares outstanding for the year. Earnings per share rose to $.96 in 1993 from $.78 in 1992 on substantially higher earnings, despite an increase in the average number of shares outstanding resulting from the issuance of Series B convertible preferred shares. Construction Revenues. Construction revenues rose in 1994 to $1.31 billion from $1.20 billion in 1993, which had increased from $1.05 billion in 1992. The improvement in 1994 primarily reflected higher domestic housing revenues, including revenues from the Company's first deliveries in Arizona and Colorado, partially offset by a reduction in French commercial revenues. In 1993, revenues increased largely due to higher housing revenues in California and Nevada, while commercial and residential revenues in France decreased from the prior year. Housing revenues totaled $1.26 billion in 1994, $1.10 billion in 1993 and $849.2 million in 1992. California housing operations accounted for 82% of these revenues in 1994 down from 85% in 1993, mainly due to the expansion into Nevada, Arizona and Colorado which served to diversify the Company's domestic housing business. Reflecting a weakened French housing market, the Company's operations in California as a percent of housing revenues increased in 1993, up from 76% in 1992. The Company's housing revenues increased in 1994 and 1993 on higher unit volume, as average selling prices decreased slightly in both years. Housing deliveries increased to a new Company-wide record of 7,824 units in 1994, surpassing the previous record of 6,764 units set in 1993. Deliveries in the United States rose 19%, while deliveries in France rose 4%. The improvement in domestic unit volume reflected the Company's continued expansion in the western United States. In France, higher unit volume resulted from increased market demand for the Company's entry-level products in a modestly improved, but still relatively weak, French economy. Housing deliveries increased in 1993 from 4,953 units in 1992, reflecting a 46% increase in California deliveries and a 22% decline in French deliveries. The Company's weak housing deliveries in France during 1993 reflected severely constrained market conditions resulting from high interest rates, high unemployment levels and low consumer confidence. The improvement in California unit volume in 1993 underscored the Company's success in penetrating new regional markets and expanding its market share among the state's first-time home buyers. The Company's average new home price decreased to $161,300 in 1994 from $162,100 in 1993, which had decreased from $171,300 in 1992. The average selling price fell slightly in 1994, primarily due to a reduction in domestic 25 21 RESIDENTIAL QUARTERLY UNIT AND BACKLOG DATA
Unit Deliveries United States France Canada Total ------------- --------- -------- -------- 1994 First 1,417 110 12 1,539 Second 1,805 139 10 1,954 Third 1,888 176 18 2,082 Fourth 1,962 260 27 2,249 ------------- --------- -------- -------- Total 7,072 685 67 7,824 ============= ========= ======== ======== 1993 First 952 111 4 1,067 Second 1,393 149 16 1,558 Third 1,677 135 73 1,885 Fourth 1,930 262 62 2,254 ------------- --------- -------- -------- Total 5,952 657 155 6,764 ============= ========= ======== ========
Net Orders United States France Canada Total ------------- --------- -------- -------- 1994 First 1,504 171 9 1,684 Second 1,822 194 19 2,035 Third 1,924 137 17 2,078 Fourth 1,742 215 27 1,984 ------------- --------- -------- -------- Total 6,992 717 72 7,781 ============= ========= ======== ======== 1993 First 1,255 121 11 1,387 Second 1,570 157 25 1,752 Third 1,570 128 19 1,717 Fourth 1,645 176 15 1,836 ------------- --------- -------- -------- Total 6,040 582 70 6,692 ============= ========= ======== ========
Ending Backlog--Units United States France Canada Total ------------- --------- -------- -------- 1994 First 994 198 12 1,204 Second 1,011 253 21 1,285 Third 1,047 214 20 1,281 Fourth 827 169 20 1,016 ============= ========= ======== ======== 1993 First 1,122 222 107 1,451 Second 1,299 230 116 1,645 Third 1,192 223 62 1,477 Fourth 907 137 15 1,059 ============= ========= ======== ========
Ending Backlog--Value United States France Canada Total ------------- --------- -------- -------- In Thousands 1994 First $147,749 $32,875 $ 948 $181,572 Second 151,345 45,113 2,079 198,537 Third 164,837 41,546 2,000 208,383 Fourth 131,454 30,075 2,060 163,589 ============= ========= ======== ======== 1993 First $184,131 $41,181 $13,161 $238,473 Second 203,991 46,976 16,588 267,555 Third 190,796 38,959 5,208 234,963 Fourth 141,167 23,974 1,155 166,296 ============= ========= ======== ========
average selling price, as a greater proportion of the Company's deliveries originated from lower-priced domestic markets outside of California. In 1993, the decrease in average selling price was primarily due to the introduction of a smaller, more affordable product line in California aimed at strengthening the Company's position within the strongest segment of the state's housing market -- the entry-level segment. In California, the Company's average selling price improved in 1994, primarily reflecting a change in mix toward higher-priced homes. Selling prices in California rose to $165,900 in 1994 from $163,100 in 1993 and $164,100 in 1992. The decrease in 1993 from 1992 reflected the liquidation of higher-priced homes in response to a persistently weak market. Average selling prices in France have decreased during the past two years, as the Company continued to aggressively focus on entry-level product there. The Company's average selling price in France decreased to $182,300 in 1994 from $187,800 in 1993, which had decreased from $217,400 in 1992. Revenues from the development of commercial buildings, all of which are located in metropolitan Paris, totaled $17.4 million in 1994, $94.2 million in 1993 and $191.1 million in 1992. The decrease in revenues from the development of commercial buildings reflects the completion of large projects in prior years. With few opportunities to replace these large projects in the current French real estate market, the Company expects consolidated commercial revenues to remain at reduced levels in 1995. Land sale revenues totaled $27.2 million in 1994, $8.0 million in 1993 and $12.2 million in 1992. Fluctuations in land sale revenues over the three-year period reflected the availability of land within the Company's housing divisions, as well as prevailing economies and market conditions. The increase in land sale revenues in 1994 reflected greater opportunities available to the Company to sell land as more developers returned to an increasingly competitive market. In contrast, the reduction in land sale revenues in 1993 reflected a substantial increase in the availability of land throughout the Company's markets from third parties as large numbers of developers and banks attempted to liquidate their inventories in a less-competitive environment. 26 22 Operating Income. Operating income increased slightly by $1.7 million to $88.3 million in 1994 from $86.6 million in 1993. Operating income, net of minority interests in pretax income of consolidated joint ventures, increased by $11.0 million to $87.4 million in 1994 from $76.5 million in 1993. The Company believes net operating income provides a more complete view of the operating results given the significant decrease in minority interests in 1994. This improvement reflected higher gross profits from housing and land sales, partially offset by higher selling, general and administrative expenses. Gross profits (excluding profits from land sales) improved by $22.6 million to $250.7 million from $228.1 million in 1993 mainly due to higher housing unit volume in the United States, partially offset by a decline in commercial development gross profits. As a percentage of related revenues, the Company's gross profit margin (excluding profits from land sales) was 19.6% in 1994, up from 19.1% in the prior year, on a higher residential gross margin and, to a lesser extent, a higher commercial gross margin. The Company's housing gross margin increased to 19.0% in 1994 from 18.4% in the prior year, primarily reflecting gross margin improvement in France. The French housing gross margin improved largely due to a lower land-cost basis and a modest strengthening of the French economy. Company-wide profits from land sales increased by $7.4 million to $8.5 million in 1994 from $1.1 million in 1993. Selling, general and administrative expenses increased by $28.4 million in 1994. As a percentage of construction revenues, selling, general and administrative expenses increased to 13.1% from 11.9% in the prior year. As a percentage of housing revenues, to which these expenses are more closely correlated, selling, general and administrative expenses increased to 13.5% in 1994 from 13.0% in 1993. Selling, general and administrative expenses increased as the Company expanded its operations in the western United States and entered Mexico. In addition, higher marketing and advertising costs, and sales incentives were required in the latter half of 1994 to maintain sales momentum in the face of persistent mortgage rate increases triggered by actions of the Federal Reserve. These actions caused the average thirty-year fixed rate mortgage to increase by more than two percentage points during the year. In France, the Company continued to reduce selling, general and administrative expenses to a level commensurate with its current operations. In 1993, operating income increased by $27.7 million to $86.6 million from $58.9 million in 1992. This increase was largely due to higher gross profits from California and Nevada housing sales, while gross profits from French commercial activities and residential sales declined, and overall selling, general and administrative expenses increased. French operations generated $8.1 million in operating income in 1993; however, deductions for interest expense, minority interests, and losses from unconsolidated joint ventures produced a pretax loss. Gross profits (excluding profits from land sales) rose by $44.7 million to $228.1 million in 1993 from $183.4 million in 1992, primarily on higher unit volume in California and Nevada, partially offset by lower French residential unit volume and gross margins combined with reduced profits from commercial development. As a percentage of related revenues, the Company's gross profit margin (excluding profits from land sales) was 19.1% in 1993, up from 17.6% a year earlier on a higher residential gross margin and, to a lesser extent, a higher commercial gross margin. The increase in the Company's housing gross margin to 18.4% in 1993 from 17.2% in 1992 reflected improved gross margins on California deliveries as well as a greater proportion of higher-margin California deliveries in the Company's overall unit deliveries. The French residential gross margin declined in 1993 from the year-earlier level, reflecting the negative impact of that country's severe recession. Company-wide profits from land sales decreased in 1993 to $1.1 million from $3.0 million in 1992. Selling, general and administrative expenses increased by $15.0 million in 1993, reflecting the Company's ongoing extensive marketing initiatives in California (including the increased use of television advertising, large-scale promotions and offsite telemarketing) and the expansion of its operations into new domestic markets and Mexico. This increase was substantially offset by lower selling, general and administrative expenses in France, where the Company reduced operating costs and staff in response to the lower level of operating activity. As a percentage of construction revenues, selling, general and administrative expenses decreased to 11.9% from 12.1% in the prior year. As a percentage of housing revenues, to which these expenses are more closely correlated, selling, general and administrative expenses decreased to 13.0% in 1993 from 15.0% in 1992. 27 23 Interest Income and Expense. Interest income is generated from mortgages receivable, principally from land sales, and from short-term investments. Interest income amounted to $2.0 million in 1994, $3.5 million in 1993 and $4.4 million in 1992. These reductions reflect lower average balances of short-term investments and mortgages receivable, and the fluctuation in interest rates. Interest expense results principally from borrowings to finance land purchases and housing inventory, as well as other operating and capital needs. In 1994, interest expense, net of amounts capitalized, increased to $17.8 million from $16.8 million in 1993, reflecting higher average indebtedness and a higher overall effective interest rate. The Company's average debt level increased as inventory levels rose in conjunction with continued expansion. The Company's buyback of special common stock and warrants in December 1993 also contributed to a higher average indebtedness in 1994. The Company's effective borrowing rate increased in 1994 as market interest rates rose throughout the year in response to the actions of the Federal Reserve, impacting the Company's various credit facilities. In 1993, interest expense, net of amounts capitalized, decreased to $16.8 million from $17.6 million in the prior year, reflecting lower average indebtedness partially offset by a higher overall effective interest rate. The Company's average debt level dropped as a result of the issuance of Series B convertible preferred shares in the second quarter of 1993, producing net proceeds of $109.2 million, most of which was used to repay outstanding debt. The Company's effective interest rate increased on the issuance of $175 million in 9-3/8% ten-year senior subordinated notes in April 1993, the proceeds of which were used to redeem the Company's 8% convertible subordinated notes in June 1993. In addition, the Company issued $100 million in 10-3/8% seven-year senior notes in September 1992. This longer-term financing instrument effectively replaced certain shorter-term borrowings bearing lower interest rates under the Company's domestic revolving credit facility, reducing the Company's sensitivity to short-term fluctuations in interest rates. Minority Interests in Pretax Income of Consolidated Joint Ventures. The Company conducts a portion of both its residential and commercial development activities through majority-owned partnerships, primarily in France, which are fully consolidated in the accompanying financial statements. As a result, operating income has been reduced by minority interests in the pretax income of these partnerships of $.9 million in 1994, $10.2 million in 1993 and $11.7 million in 1992. Minority interests decreased in each year on declining profit contributions from the Company's consolidated commercial development projects. Minority interests are expected to remain low in 1995, consistent with the Company's reduced level of commercial development activities. Equity in Pretax Income (Loss) of Unconsolidated Joint Ventures. The Company's unconsolidated joint-venture activities, located in the Paris, Los Angeles and Toronto metropolitan areas, posted combined revenues of $82.7 million in 1994, $6.4 million in 1993 and $99.6 million in 1992. Revenues from unconsolidated commercial joint ventures in France were $34.0 million in 1994, $2.6 million in 1993 and $90.2 million in 1992. Overall, the Company's share of pretax losses from unconsolidated joint ventures totaled $3.7 million in 1994 and $6.3 million in 1993; its share of pretax income from these activities totaled $6.9 million in 1992. The losses in 1994 primarily reflected the results of a French multi-family residential project, where revenues failed to offset the costs of the venture, which included selling, general, administrative and interest expenses. Losses in 1993 resulted from substantially lower profit contributions from two large commercial projects completed during the year, as well as selling, general, administrative and interest expenses incurred on a third large project under construction prior to the recognition of related revenues. Mortgage Banking Interest Income and Expense. The Company's mortgage banking operations principally consist of providing financing to purchasers of homes sold by the Company's domestic housing operations through the origination of residential mortgages. The mortgage banking operations also realize revenues from the sale of such mortgages and related servicing rights to outside financial institutions. Prior to 1989, substantially all such mortgages were pledged for collateralized mortgage obligations. Accordingly, interest income is earned primarily from mortgage-backed securities held for long-term investment as collateral, while interest expense results mainly from the associated collateralized mortgage obligations. Interest income decreased to $17.0 million in 1994 from $24.2 million in 1993, and $32.5 million in 1992, while interest expense decreased to $17.2 million in 1994 from $25.1 28 24 million in 1993, and $32.8 million in 1992. These amounts decreased primarily due to the declining balances of outstanding mortgage-backed securities and related collateralized mortgage obligations, a result of both regularly scheduled, monthly principal amortization and prepayment activity of mortgage collateral. These balances, and the related interest income and expense, will continue to decline in the future, as the Company's practice of participating in collateralized mortgage financings was discontinued in 1988 due to market conditions and tax law changes. Combined interest income and expense resulted in net interest expense of $.2 million in 1994, $.9 million in 1993 and $.3 million in 1992. These differences reflect variations in mortgage production mix; movements in short-term versus long-term interest rates; and the amount, timing and rates of return on interim reinvestments of monthly principal amortization and prepayments. Other Mortgage Banking Revenues. Other mortgage banking revenues, principally gains on sales of mortgages and servicing rights and, to a lesser extent, mortgage servicing fees, totaled $11.7 million in 1994, $13.9 million in 1993 and $9.1 million in 1992. The slight reduction in these revenues in 1994 reflected lower gains on the sale of mortgages and servicing rights. In 1993, the improvement in other mortgage banking revenues primarily reflected higher gains on the sales of both servicing rights and mortgages due to higher mortgage origination volume. General and Administrative Expenses. General and administrative expenses amounted to $5.5 million in 1994, $5.4 million in 1993 and $4.3 million in 1992. General and administrative expenses increased in 1994 and 1993 largely due to higher mortgage production levels, which rose in line with domestic unit deliveries, and the opening of new branch offices in California, Nevada, Arizona and Colorado. Income Taxes The Company's income tax expense totaled $27.3 million in 1994, $24.4 million in 1993 and $17.3 million in 1992. These amounts represented effective income tax rates of approximately 37% in 1994, and 38% in 1993 and 1992. The effective tax rate declined in 1994 as a result of a greater utilization of low income housing investment credits. The Company's effective tax rate remained unchanged in 1993 as a result of low income housing investment credits, despite adverse tax law changes. Pretax income for financial reporting purposes and taxable income for income tax purposes have historically differed, primarily due to the impact of state income taxes, foreign tax rate differences, intercompany dividends and the use of low income housing investment credits. In 1993, the Company adopted the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." The impact of the adoption on the Company's financial position and results of operations was not significant. Liquidity and Capital Resources The Company assesses its liquidity in terms of its ability to generate cash to fund its operating and investing activities. Historically, the Company has funded its construction and mortgage banking concerns with internally generated cash flows and external sources of debt and equity financing. In 1994, operating, investing and financing activities used net cash of $20.3 million; in 1993, these activities provided net cash of $9.2 million. Operating activities in 1994 used $111.1 million, while 1993 operating activities provided $56.9 million. The Company used cash in 1994 to fund a net investment of $137.6 million in inventories (excluding $27.1 million of inventories acquired through seller financing) and to pay down $26.3 million in accounts payable, accrued expenses and other liabilities. The use of cash was partially offset by earnings of $46.6 million and various noncash items deducted from net income. Inventories increased primarily in the United States, where they rose to $807.5 million at November 30, 1994 from $633.0 million at year-end 1993, as the Company continued its expansion and sales rates slowed in the latter half of 1994. The 1993 sources of operating cash were the year's earnings of $39.9 million; a $63.9 million reduction in receivables; a $15.7 million increase in accounts payable, accrued expenses and other liabilities; and various noncash items deducted from net income, including depreciation and amortization, and minority interests in pretax income of consolidated joint ventures. These cash sources were partially offset by a $42.1 million reduction in deferred tax liabilities and a net investment of $44.2 million in inventories (excluding $8.9 million of inventories acquired through seller financing). Inventories increased principally in the United States, rising to $633.0 million at November 30, 1993 from $522.4 million at year-end 1992, as 29 25 the Company marketed homes from nearly twice the number of active communities at the end of 1993 compared to the prior year-end. Receivables declined on lower receivables from investors in commercial development projects due to reduced commercial development activities. Cash provided by investing activities totaled $37.5 million in 1994 and $78.8 million in 1993, primarily from $49.7 million and $84.0 million, respectively, in proceeds from mortgage-backed securities paid off during the year within the mortgage banking operations. These proceeds were used largely to pay down the collateralized mortgage obligations for which the mortgage-backed securities had served as collateral. Financing activities in 1994 and 1993 resulted in a net cash inflow of $53.3 million and a net cash outlay of $126.5 million, respectively. In 1994, cash was provided by $211.0 million in net proceeds from borrowings, partially offset by the purchase of the Company's special common stock and warrants for $73.7 million; payments on collateralized mortgage obligations of $49.3 million, the funds for which were provided by receipts on mortgage-backed securities; and $19.6 million of cash dividend payments. The purchase of special common stock and warrants was largely responsible for the Company's debt-to-capital ratio increasing to 58% in 1994 from 41% in 1993. Financing activities in 1993 used cash for the redemption of the Company's convertible subordinated notes of $168.8 million; payments on collateralized mortgage obligations of $81.4 million; net payments of $132.5 million under other borrowings; and dividend payments of $15.3 million. These outflows were partially offset by $109.2 million in proceeds from the issuance of Series B convertible preferred shares and $173.6 million from the issuance of 9-3/8% senior subordinated notes. In 1993, the Company improved its debt-to-capital ratio to 41% from 57% in 1992 reflecting an increase in equity from 1993 earnings and the issuance of the Series B convertible preferred shares. External sources of financing for the Company's construction activities include its domestic unsecured revolving credit facility, other domestic and foreign bank lines, third-party secured financings, and the public debt and equity markets. Substantial unused lines of credit remain available for the Company's future use, if required, and are centered mainly in its domestic unsecured revolving credit facility. Terms under this facility originally provided for a $350 million commitment and a 1995 expiration. On November 21, 1994, the revolving credit facility was amended, increasing the available credit to $500 million with a $200 million sublimit for the Company's mortgage banking operations and extending the terms of this facility through December 31, 1997. As of November 30, 1994, there was $268.9 million available under the revolving credit facility for the Company's future use. In addition, under the Company's French unsecured financing agreements $113.2 million was available in the aggregate at November 30, 1994. Depending upon available terms, the Company also finances certain land acquisitions with borrowings from land sellers and other third parties. At November 30, 1994, the Company had outstanding seller-financed notes payable of $35.6 million secured primarily by the underlying property which had a carrying value of $64.8 million. The Company uses capital resources primarily for land purchases, land development and housing construction. The Company typically manages its investments in land by purchasing property under options and other types of conditional contracts whenever possible, and similarly controls its investment in housing inventories by carefully managing the timing of the production process. The Company's inventories are geographically diverse and primarily located in desirable areas within targeted growth markets principally oriented toward entry-level purchasers. Reflecting its expanding operations in the United States, the Company increased its investment in domestic inventories by 28% during 1994. On November 8, 1993, in order to simplify its capital structure, the Company commenced a tender offer to purchase all of the 5.1 million outstanding shares of its special common stock at a price of $19 per share. The offer expired on December 7, 1993 with 2.3 million shares tendered. In addition, on December 23, 1993, the Company purchased the remaining 2.4 million warrants to purchase shares of special common stock at a price equal to the tender offer price per share less the $6.96 per warrant exercise price. The total consideration paid for these transactions was $73.7 million, including related costs. Subsequent to the expiration of the tender offer, the remaining 2.8 million outstanding shares of special common stock were exchanged by the Company at a ratio of .95 shares of common stock for each share of special common stock on various dates in 1994. There were no outstanding shares of special common stock at November 30, 1994. The principal sources of liquidity for the Company's mortgage banking operations are internally generated funds from the sales of mortgages and related servicing rights. Mortgages originated by the mortgage banking operations are generally sold in the secondary market within 60 days of origination. 30 26 External sources of financing for these operations include a $200 million sublimit under the Company's amended revolving credit facility and a $120 million asset-backed commercial paper facility. The $200 million sublimit on the amended revolving credit facility is available to fund mortgage banking operations only to the extent that borrowings under the agreement for construction operations do not exceed $300 million. Debt service on the Company's collateralized mortgage obligations is funded by receipts from mortgage-backed securities. Such funds are expected to be adequate to meet future debt-payment schedules for the collateralized mortgage obligations and therefore these securities have virtually no impact on the capital resources and liquidity of the mortgage banking operations. The Company believes it has adequate resources and sufficient credit line facilities to satisfy its current and reasonably anticipated future requirements for funds to acquire capital assets and land, to construct homes, to fund its mortgage banking operations and to meet other needs of its business, both on a short and long-term basis. Outlook The Company expects in 1995 to continue its expansion within current markets of its worldwide operations, intending to capitalize on the Company's strong financial position and excellent growth prospects in selected housing markets, particularly in anticipation of gradually improving economic conditions in both California and France. Domestic operations should benefit further from the maturation of recently established divisions. Provided French economic conditions continue to improve, the Company's French housing operations, which returned to profitability in 1994, are anticipated to generate higher earnings in 1995. Although the Company previously expected to begin delivering houses in its start-up operations in Mexico in 1994, it is now seeking its first sales orders and deliveries in 1995. Domestic operating results in 1994 included the Company's first housing deliveries from new divisions in Phoenix, Arizona and Denver, Colorado. In 1995, the Company is expected to benefit from the maturation of these divisions, as well as the recently established home building operations in Salt Lake City, Utah and the January 1995 purchase of a regional single-family home builder with operations in Albuquerque, New Mexico and El Paso, Texas. Overall, the Company believes domestic operating results will continue to improve in 1995 as its new divisions develop market positions and existing divisions further penetrate their markets. The Company will also face several significant challenges within its domestic operations in 1995, particularly in the first half of the year. These include, among other market conditions, a still relatively weak housing recovery in California, the location of 80% of the Company's deliveries in 1994; higher mortgage interest rates, which have made it more difficult to qualify new home buyers for loans, particularly in the entry-level market segment; and the negative effects of severe and prolonged winter rain storms in California in early 1995, which have reduced sales volumes and slowed production. Responding to these challenges, the Company is implementing a series of initiatives intended to improve gross margins and reduce overhead expenses over time. These gross margin initiatives include simplifying house designs to lower construction costs, efforts to even out quarterly production cycles, and emphasizing the sale of higher-margin amenities. In addition, the Company began implementing an extensive program intended to reduce its overhead cost structure and staffing levels in the final months of calendar 1994. As a result, domestic staff levels were cut by approximately 10% and divisional overhead expenses will be reduced and more closely tied to expected sales volumes. The impact of these gross margin initiatives and overhead adjustments are expected to be gradually realized beginning in the second quarter of 1995 and to progressively benefit operating income and margins over the remainder of 1995 and into 1996. While there can be no assurance as to the successful implementation of these initiatives, the Company anticipates that achievement of greater operating efficiencies, coupled with continuing improvement in California's economy and continued development of markets in other western states, will produce improvement in its financial results over time. In 1994, modest growth and recovery in the French economy and strong market demand for the Company's expanded entry-level product line generally offset obstacles created by continued high unemployment levels and interest rates. The Company believes that continued improvement in French sales volumes and higher profits from its repositioned residential operations can be achieved. French commercial activities will likely remain at reduced levels as the market continues to absorb existing properties. Notwithstanding the Company's 1994 31 27 French improvement and a more favorable view of 1995, generally weak economic conditions may persist in France and the Company remains cautious in its business outlook. In Mexico, the Company was unable to deliver homes in 1994. The Company's start-up operation continues with the entitlement process for its first community of homes. Moreover, recent economic events, particularly the series of sharp devaluations of the peso in early fiscal 1995, have slowed an already complex regulatory process and heightened market uncertainties for new home sales. These events have caused the Company to reassess its plans for its Mexican operations. Although the Company believes that demand for housing in Mexico is substantial and that market opportunities remain attractive, the Company cannot accurately predict at this time the timing and amount of sales or deliveries, if any, in 1995. At November 30, 1994, the Company had outstanding sales contracts of 1,016 units in residential backlog, representing aggregate future revenues of approximately $163.6 million. The number of units in backlog decreased slightly from 1,059 units at fiscal year-end 1993. Substantially all homes included in the backlog are expected to be delivered during 1995. However, cancellations could occur, particularly if market conditions deteriorate or interest rates continue to rise, thereby decreasing backlog and related future revenues. In the United States, the Company's residential backlog at November 30, 1994 totaled 827 units, down 9% from 907 units at year-end 1993. This decrease was primarily attributable to California, where residential unit backlog was down 18% to 628 units at November 30, 1994 from 770 units at November 30, 1993. Higher interest rates, weak selling conditions in selected California markets, and greater competition all contributed to the decline. California net sales in the fourth quarter of 1994 decreased 3% to 1,494 units from 1,543 units in the year-earlier quarter. Furthermore, poor weather conditions throughout the state in early 1995 have also affected California sales rates. Net sales declined 8% in the first two months of fiscal 1995 compared to the same period of 1994. In France, the residential backlog at November 30, 1994 totaled 169 orders, up 23% from 137 orders at fiscal year-end 1993. Net sales in the fourth quarter of 1994 increased 22% to 215 units from 176 units in the year-earlier quarter. For the year, net sales increased 23% to 717 units from 582 units in 1993. This trend has continued into fiscal 1995, with net sales up 15% in the first two months of 1995 compared to the same period a year ago. Given the decreased level of its commercial development activities, the Company's backlog associated with these operations declined to a value of approximately $31.1 million at November 30, 1994. Based upon the backlog declines and severe weather in California, the Company currently anticipates reduced delivery volumes in the first quarter of 1995. In view of the current adverse interest rate environment, the soft sales in the latter half of 1994 and early 1995, and the delayed benefit of the gross margin and overhead initiatives, operating income and earnings per share are likely to decline materially in the first quarter of 1995. Nevertheless, the Company remains optimistic that the second half of the year will yield improving sales volumes and operating results through domestic expansion efforts within its current housing markets and the anticipated impact of its gross margin and overhead initiatives. The Company continues to benefit in all of its operations from the strength of its capital position, which has allowed it to finance expansion, re-engineer product lines, and diversify into strong new home building markets. While successfully adapting its popular line of well-designed, competitively-priced homes across a growing geographic area, the Company has maintained a capital advantage which has enabled it to establish and expand strong market positions. The Company believes it is particularly well positioned to capitalize on any sustained improvement in the economies of California and France, where recent severe recessions have inhibited demand for affordable new housing. Impact of Inflation The Company's business is significantly affected by general economic conditions, particularly by the impact of inflation and the generally associated adverse effect on interest rates. Although inflation rates have been low in recent years, rising inflation would likely have a long-term impact on the Company's revenues and earning power by reducing demand for homes as a result of correspondingly higher interest rates. In periods of high inflation, the rising costs of land, construction, labor, interest and administrative expenses have often been recoverable through increased selling prices, although this has not always been possible because of high mortgage interest rates and competitive factors in the marketplace. In recent years, however, inflation has had no significant adverse impact on the Company, as cost increases have not exceeded the average rate of inflation. 32 28 CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED NOVEMBER 30, --------------------------------------------------- 1994 1993 1992 -------------- -------------- -------------- Total revenues $1,336,271,000 $1,237,854,000 $1,094,168,000 ============== ============== ============== Construction: Revenues $1,307,570,000 $1,199,776,000 $1,052,525,000 Construction and land costs (1,048,323,000) (970,595,000) (866,070,000) Selling, general and administrative expenses (170,924,000) (142,572,000) (127,558,000) -------------- -------------- -------------- Operating income 88,323,000 86,609,000 58,897,000 Interest income 2,026,000 3,477,000 4,440,000 Interest expense, net of amounts capitalized (17,849,000) (16,840,000) (17,589,000) Minority interests in pretax income of consolidated joint ventures (917,000) (10,156,000) (11,746,000) Equity in pretax income (loss) of unconsolidated joint ventures (3,736,000) (6,303,000) 6,940,000 -------------- -------------- -------------- Construction pretax income 67,847,000 56,787,000 40,942,000 -------------- -------------- -------------- Mortgage banking: Revenues: Interest income 16,978,000 24,188,000 32,510,000 Other 11,723,000 13,890,000 9,133,000 -------------- -------------- -------------- 28,701,000 38,078,000 41,643,000 Expenses: Interest (17,151,000) (25,147,000) (32,775,000) General and administrative (5,547,000) (5,397,000) (4,312,000) -------------- -------------- -------------- Mortgage banking pretax income 6,003,000 7,534,000 4,556,000 -------------- -------------- -------------- Total pretax income 73,850,000 64,321,000 45,498,000 Income taxes (27,300,000) (24,400,000) (17,300,000) -------------- -------------- -------------- Net income $ 46,550,000 $ 39,921,000 $ 28,198,000 ============== ============== ============== Earnings per share $1.16 $.96 $.78 ============== ============== ==============
See accompanying notes. 33 29 CONSOLIDATED BALANCE SHEETS
November 30, ------------------------------ Assets 1994 1993 -------------- -------------- Construction: Cash and cash equivalents $ 49,497,000 $ 72,804,000 Trade and other receivables 114,921,000 80,294,000 Inventories 942,713,000 778,065,000 Investments in unconsolidated joint ventures 25,314,000 23,721,000 Other assets 34,691,000 28,558,000 -------------- -------------- 1,167,136,000 983,442,000 -------------- -------------- Mortgage banking: Cash and cash equivalents 5,311,000 2,318,000 Receivables First mortgages and mortgage-backed securities 110,223,000 158,485,000 First mortgages held under commitment of sale and other receivables 164,365,000 185,723,000 Other assets 7,425,000 9,410,000 -------------- -------------- 287,324,000 355,936,000 -------------- -------------- Total assets $1,454,460,000 $1,339,378,000 ============== ============== Liabilities and Shareholders' Equity Construction: Accounts payable $ 146,179,000 $ 137,707,000 Accrued expenses and other liabilities 72,845,000 95,782,000 Mortgages and notes payable 565,020,000 313,357,000 -------------- -------------- 784,044,000 546,846,000 -------------- -------------- Mortgage banking: Accounts payable and accrued expenses 10,293,000 22,142,000 Notes payable 125,000,000 138,500,000 Collateralized mortgage obligations secured by mortgage-backed securities 96,731,000 144,143,000 -------------- -------------- 232,024,000 304,785,000 -------------- -------------- Deferred income taxes 31,373,000 26,875,000 -------------- -------------- Minority interests in consolidated joint ventures 2,272,000 16,532,000 -------------- -------------- Shareholders' equity: Preferred stock--$1.00 par value; authorized, 10,000,000 shares: Series A participating cumulative preferred stock; none outstanding Series B convertible preferred stock; 1,300,000 shares outstanding 1,300,000 1,300,000 Common stock--$1.00 par value; authorized, 100,000,000 shares; 32,378,217 and 29,600,515 shares outstanding at November 30, 1994 and 1993, respectively 32,378,000 29,601,000 Special common stock -- $1.00 par value; authorized, 25,000,000 shares; 5,123,000 shares outstanding at November 30, 1993 5,123,000 Paid-in capital 188,970,000 258,770,000 Retained earnings 181,282,000 154,338,000 Cumulative foreign currency translation adjustments 817,000 (4,792,000) -------------- -------------- Total shareholders' equity 404,747,000 444,340,000 -------------- -------------- Total liabilities and shareholders' equity $1,454,460,000 $1,339,378,000 ============== ==============
See accompanying notes. 34 30 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended November 30, 1994, 1993 and 1992 -------------------------------------------------------------------------------------------- Series B Convertible Special Foreign Total Preferred Common Common Paid-in Retained Currency Shareholders' Stock Stock Stock Capital Earnings Translation Equity ----------- ----------- ---------- ------------ ------------ ----------- ------------ Balance at November 30, 1991 $28,765,000 $114,856,000 $111,529,000 $2,956,000 $258,106,000 Net income 28,198,000 28,198,000 Dividends on common and special common stock (9,966,000) (9,966,000) Exercise of employee stock options 723,000 5,147,000 5,870,000 Issuance of special common stock through the exercise of warrants $5,123,000 30,533,000 35,656,000 Foreign currency translation adjustments 569,000 569,000 ---------- ----------- ---------- ------------ ------------ ---------- ------------ Balance at November 30, 1992 29,488,000 5,123,000 150,536,000 129,761,000 3,525,000 318,433,000 ---------- ----------- ---------- ------------ ------------ ---------- ------------ Net income 39,921,000 39,921,000 Dividends on Series B convertible preferred stock (4,940,000) (4,940,000) Dividends on common and special common stock (10,404,000) (10,404,000) Issuance of Series B convertible preferred stock $1,300,000 107,870,000 109,170,000 Exercise of employee stock options 223,000 1,669,000 1,892,000 Cancellation of restricted stock (110,000) (1,305,000) (1,415,000) Foreign currency translation adjustments (8,317,000) (8,317,000) ---------- ----------- ---------- ------------ ------------ ---------- ------------ Balance at November 30, 1993 1,300,000 29,601,000 5,123,000 258,770,000 154,338,000 (4,792,000) 444,340,000 ---------- ----------- ---------- ------------ ------------ ---------- ------------ Net income 46,550,000 46,550,000 Dividends on Series B convertible preferred stock (9,880,000) (9,880,000) Dividends on common and special common stock (9,726,000) (9,726,000) Exercise of employee stock options 125,000 1,406,000 1,531,000 Purchase of special common stock and warrants (2,332,000) (71,345,000) (73,677,000) Exchange of special common stock for common stock 2,652,000 (2,791,000) 139,000 Foreign currency translation adjustments 5,609,000 5,609,000 ---------- ----------- ---------- ------------ ------------ ---------- ------------ Balance at November 30, 1994 $1,300,000 $32,378,000 $ $188,970,000 $181,282,000 $ 817,000 $404,747,000 ========== =========== ========== ============ ============ ========== ============
See accompanying notes. 35 31 CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended November 30, --------------------------------------------------- 1994 1993 1992 ------------- ------------- ------------ Cash flows from operating activities: Net income $ 46,550,000 $ 39,921,000 $28,198,000 Adjustments to reconcile net income to net cash provided (used) by operating activities: Equity in pretax (income) loss of unconsolidated joint ventures 3,736,000 6,303,000 (6,940,000) Minority interests in pretax income of consolidated joint ventures 917,000 10,156,000 11,746,000 Amortization of discounts and issuance costs 2,276,000 9,680,000 15,221,000 Depreciation and amortization 3,408,000 2,617,000 3,449,000 Provision for deferred income taxes 4,498,000 (42,057,000) 11,845,000 Change in: Receivables (13,836,000) 63,874,000 (56,694,000) Inventories (137,594,000) (44,151,000) (41,215,000) Accounts payable, accrued expenses and other liabilities (26,314,000) 15,684,000 (103,000) Other, net 5,279,000 (5,099,000) 10,223,000 ------------- ------------- ------------ Net cash provided (used) by operating activities (111,080,000) 56,928,000 (24,270,000) ------------- ------------- ------------ Cash flows from investing activities: Investments in unconsolidated joint ventures (5,329,000) (1,233,000) (872,000) Net originations of mortgages held for long-term investment (442,000) (1,538,000) (969,000) Payments received on first mortgages and mortgage-backed securities 49,687,000 84,015,000 86,679,000 Other, net (6,447,000) (2,499,000) (1,403,000) ------------- ------------- ------------ Net cash provided by investing activities 37,469,000 78,745,000 83,435,000 ------------- ------------- ------------ Cash flows from financing activities: Net proceeds from (payments on) credit agreements and other short-term borrowings 215,476,000 (51,114,000) (27,360,000) Proceeds from issuance of senior notes 100,000,000 Proceeds from issuance of senior subordinated notes 173,603,000 Payments on collateralized mortgage obligations (49,259,000) (81,363,000) (80,969,000) Payments on mortgages, land contracts and other loans (4,460,000) (81,429,000) (14,831,000) Redemption of convertible subordinated notes (168,760,000) Payments to minority interests in consolidated joint ventures (15,177,000) (11,254,000) (46,623,000) Proceeds from issuance of Series B convertible preferred stock 109,170,000 Proceeds from exercise of warrants 35,656,000 Purchase of special common stock and warrants (73,677,000) Payments of cash dividends (19,606,000) (15,344,000) (9,966,000) ------------- ------------- ------------ Net cash provided (used) for financing activities 53,297,000 (126,491,000) (44,093,000) ------------- ------------- ------------ Net increase (decrease) in cash and cash equivalents (20,314,000) 9,182,000 15,072,000 Cash and cash equivalents at beginning of year 75,122,000 65,940,000 50,868,000 ------------- ------------- ------------ Cash and cash equivalents at end of year $ 54,808,000 $ 75,122,000 $ 65,940,000 ============= ============= ============ Supplemental disclosures of cash flow information: Interest paid, net of amounts capitalized $ 36,034,000 $ 39,319,000 $ 35,096,000 Income taxes paid 45,270,000 23,230,000 17,252,000 ============= ============= ============ Supplemental disclosures of noncash activities: Cost of inventories acquired through seller financing $ 27,054,000 $ 8,900,000 $ 29,458,000 ============= ============= ============
See accompanying notes. 36 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Summary of Significant Accounting Policies Operations. Kaufman and Broad Home Corporation (the Company) is a regional builder of single-family homes with domestic operations throughout the western United States, and international operations in France, Canada and Mexico. In France, the Company is also a developer of commercial and high-density residential projects. Through its mortgage banking subsidiary, Kaufman and Broad Mortgage Company, the Company provides mortgage banking services to its domestic home buyers. Basis of Presentation. The consolidated financial statements include the accounts of the Company and all significant majority-owned or controlled subsidiaries and joint ventures. All significant intercompany transactions have been eliminated. Investments in unconsolidated joint ventures in which the Company has less than a controlling interest are accounted for using the equity method. Cash and Cash Equivalents. The Company considers all highly liquid debt instruments and other short-term investments purchased with a maturity of three months or less to be cash equivalents. Cash and cash equivalents are stated at cost which approximates fair value. Construction Operations. Inventories are stated at the lower of cost or estimated net realizable value for each parcel or subdivision. Estimated net realizable value is based upon the net sales proceeds anticipated in the normal course of business, less estimated costs to complete or improve the property to the condition used in determining the estimated selling price. Housing and other real estate sales are recognized when all conditions precedent to closing have been fulfilled. In France, sales of apartments, condominiums and commercial buildings to investors are recognized using the percentage of completion method which is generally based on costs incurred as a percentage of estimated total costs of individual projects. Revenues recognized in excess of amounts billed are classified as receivables. Amounts received from investors in excess of revenues recognized, if any, are classified as other liabilities. Construction and land costs are comprised of direct and allocated costs including estimated future costs for warranties and amenities. Land, land improvements and other common costs are generally allocated equally to units within a parcel or subdivision. Land and land development costs generally include related interest and property taxes incurred until development is substantially completed or deliveries have begun within a subdivision. Mortgage Banking Operations. Principal and interest payments received on mortgage-backed securities are invested in short-term securities maturing on the next debt service date of the collateralized mortgage obligations for which the securities are held as collateral. Such payments are restricted to the payment of the debt service on the collateralized mortgage obligations. First mortgages and mortgage-backed securities consist of securities held for long-term investment and are valued at amortized cost. First mortgages held under commitment of sale are valued at the lower of aggregate cost or market. Market is principally based on public market quotations or outstanding commitments obtained from investors to purchase first mortgages receivable. The provisions of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" are effective for fiscal years beginning after December 15, 1993. The Company will adopt the provisions of this pronouncement effective December 1, 1994. The impact of the adoption on the Company's financial position and results of operations is not anticipated to be significant. Income Taxes. In 1993, the Company adopted the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." The impact of the adoption on the Company's financial position and results of operations was not significant. Income taxes are provided for at rates applicable in the countries in which the income is earned. Provision is made currently for United States federal income taxes on earnings of foreign subsidiaries which are not expected to be reinvested indefinitely. Earnings Per Share. The computation of earnings per share is based on the weighted average number of common shares, special common shares, equivalent Series B Convertible Preferred Shares and common share equivalents outstanding during each year. The Series B Convertible Preferred Shares are considered common stock due to their mandatory conversion into common stock, and the related dividends are not deducted from net income for purposes of calculating earnings per share. Common share equivalents include dilutive stock options and warrants using the treasury stock method. Earnings per share were based on the weighted average number of common shares, special common shares, equivalent Series B Convertible Preferred Shares and common share equivalents outstanding of 40,026,000 in 1994, 41,547,000 in 1993 and 36,372,000 in 1992. 37 33 If, for purposes of calculating earnings per share, the Series B Convertible Preferred Shares were excluded from the weighted average shares outstanding and the related dividends deducted from net income, the computation would have resulted in earnings per share of $1.09 in 1994 and $.93 in 1993. Reclassifications. Certain amounts in the consolidated financial statements of prior years have been reclassified to conform to the 1994 presentation. Note 2. Receivables Construction. Trade receivables amounted to $43,057,000 and $41,322,000 at November 30, 1994 and 1993, respectively. Included in these amounts are unbilled receivables due from investors on French apartment, condominium and commercial building sales accounted for using the percentage of completion method, totaling $14,267,000 at November 30, 1994 and $17,485,000 at November 30, 1993. The investors are contractually obligated to remit payments against their unbilled balances. Other receivables of $71,864,000 at November 30, 1994 and $38,972,000 at November 30, 1993 included mortgages receivable, escrow deposits and amounts due from municipalities and utility companies. At November 30, 1994 and 1993, receivables were net of allowances for doubtful accounts of $3,269,000 and $2,139,000, respectively. Mortgage Banking. First mortgages and mortgage-backed securities consisted of loans held for long-term investment of $6,934,000 at November 30, 1994 and $6,492,000 at November 30, 1993 and mortgage-backed securities held for long-term investment of $103,289,000 and $151,993,000 at November 30, 1994 and 1993, respectively. The mortgage-backed securities serve as collateral for related collateralized mortgage obligations. The property covered by the mortgages underlying the mortgage-backed securities are single-family residences. Issuers of the mortgage-backed securities are the Government National Mortgage Association and Federal National Mortgage Association. The first mortgages and mortgage-backed securities bore interest at an average rate of 8-7/8% at November 30, 1994 and 1993 (with rates ranging from 7% to 13% for both years). Mortgages were net of discounts of $6,243,000 at November 30, 1994 and $8,133,000 at November 30, 1993. These discounts, which primarily represent loan origination discount points and acquisition price discounts, are deferred as an adjustment to the carrying value of the related first mortgages and mortgage-backed securities and amortized into interest income using the interest method. The fair market values of the first mortgages and mortgage-backed securities at November 30, 1994 and 1993 were $111,083,000 and $170,838,000, respectively. These values were based on quoted market prices for the same or similar issues. The fair market values of the first mortgages held under commitment of sale approximated their recorded values at November 30, 1994 and 1993. Note 3. Inventories Inventories consist of the following:
November 30, -------------------------------- 1994 1993 ------------ ------------ Homes, lots and improvements in production $712,563,000 $577,582,000 Land under development 230,150,000 200,483,000 ------------ ------------ Total inventories $942,713,000 $778,065,000 ============ ============
Land under development primarily consists of parcels on which 50% or less of estimated development costs have been incurred. The impact of capitalizing interest costs on consolidated pretax income is as follows:
Years ended November 30, --------------------------------- In thousands 1994 1993 1992 ------- ------- ------- Interest capitalized $27,561 $24,432 $23,419 Previously capitalized interest amortized to cost of sales (16,156) (17,617) (19,094) ------- ------- ------- Net impact on consolidated pretax income $11,405 $ 6,815 $ 4,325 ======= ======= =======
38 34 Note 4. Investments In Unconsolidated Joint Ventures The Company participates in a number of joint ventures in which it has less than a controlling interest. These joint ventures are based primarily in France and Canada and are engaged in the development, construction and sale of residential properties and commercial projects. Combined condensed financial information concerning the Company's unconsolidated joint venture activities follows:
November 30, ------------------------------ 1994 1993 ------------ ------------ Cash $ 5,530,000 $ 10,261,000 Receivables 16,987,000 16,906,000 Inventories 856,239,000 743,827,000 Other assets 5,955,000 6,319,000 ------------ ------------ Total assets $884,711,000 $777,313,000 ============ ============ Mortgages and notes payable $631,353,000 $578,211,000 Other liabilities 142,619,000 105,904,000 Equity of: The Company 25,314,000 23,721,000 Others 85,425,000 69,477,000 ------------ ------------ Total liabilities and equity $884,711,000 $777,313,000 ============ ============
The joint ventures finance land and inventory investments primarily through a variety of borrowing arrangements. The Company typically does not guarantee these financing arrangements.
Years ended November 30, ------------------------------------------- In thousands 1994 1993 1992 ---------- --------- -------- Revenues $ 82,734 $ 6,404 $ 99,630 Cost of sales (102,981) (16,160) (103,183) Other expenses, net (15,434) (20,992) (12,567) ---------- -------- --------- Total pretax loss $ (35,681) $(30,748) $ (16,120) ========== ======== ========= The Company's share of pretax income (loss) $ (3,736) $(6,303) $ 6,940 ========= ======= =========
The Company's share of pretax income (loss) includes management fees earned from the unconsolidated joint ventures. Note 5. Mortgages and Notes Payable Construction. Mortgages and notes payable consist of the following (interest rates are as of November 30):
NOVEMBER 30, --------------------------- 1994 1993 ------------ ----------- Unsecured domestic borrowings with banks under a revolving credit agreement (6-4/5% in 1994) $100,000,000 Other unsecured domestic borrowings with banks due within one year (6-1/8% to 6-5/8% in 1994) 110,100,000 Unsecured French borrowings (6% to 7% in 1994 and 7-1/2% to 8-3/8% in 1993) 45,553,000 $26,677,000 Mortgages and land contracts due to land sellers and other loans (6% to 26-3/10% in 1994 and 6% to 12% in 1993) 35,621,000 13,027,000 Senior notes due 1999 at 10-3/8% 100,000,000 100,000,000 Senior subordinated notes due 2003 at 9-3/8% 173,746,000 173,653,000 ------------ ------------ Total mortgages and notes payable $565,020,000 $313,357,000 ============ ============
Terms under the domestic unsecured revolving credit agreement with various banks dated December 24, 1992 and scheduled to expire in 1995 provided for a $350,000,000 commitment. On November 21, 1994, the agreement was amended, increasing the revolving credit facility to $500,000,000 with a $200,000,000 sublimit for the Company's mortgage banking operations. This facility has a three-year term expiring on December 31, 1997. As of November 30, 1994, the entire amount of the revolving credit facility was committed and $268,900,000 was available for the Company's future use. The agreement provides for interest on borrowings at either the applicable bank reference rate or the London Interbank Offered Rate plus 1-1/5% and an annual commitment fee of 3/10% of the unused portion of the commitment. The fair market value of borrowings under the revolving credit facility approximated their recorded values at November 30, 1994 as their respective interest rates approximated currently available rates. Under the terms of the revolving credit agreement, the Company is required, among other things, to maintain certain financial statement ratios and a minimum net worth and is subject to limitations on acquisitions, inventories, indebtedness, dividend payments and repurchases of stock. Under the conditions of the agreement, retained earnings of $79,748,000 39 35 were available for payment of cash dividends or stock repurchases at November 30, 1994. The Company's French subsidiaries have lines of credit with various banks which totaled $158,713,000 at November 30, 1994, of which $158,686,000 has various committed expiration dates through November 1996. These lines of credit provide for interest on borrowings at either the French Federal Funds Rate plus 3/4% to 1-1/2% or the Paris Interbank Offered Rate plus 1-3/8%. The fair market values of borrowings under the French lines of credit approximated their recorded values at November 30, 1994 and 1993 as their respective interest rates approximated currently available rates. The weighted average interest rate on aggregate unsecured borrowings, excluding the senior and senior subordinated notes, was 6-1/2% and 7-5/8% at November 30, 1994 and 1993, respectively. On August 11, 1992, the Company filed a registration statement with the Securities and Exchange Commission under which the Company could offer for sale from time to time up to $200,000,000 of unsecured debt securities. On September 8, 1992, the Company, pursuant to this registration statement, issued $100,000,000 of 10-3/8% senior notes, due September 1, 1999, with interest payable semi-annually. The Company may redeem, in whole or in part, at any time on or after September 1, 1997, 100% of the principal amount of the notes. The senior notes were valued at $99,000,000 and $107,750,000 at November 30, 1994 and 1993, respectively, based on quoted market prices. On April 26, 1993, the Company issued $175,000,000 principal amount of 9-3/8% senior subordinated notes at 99.202%. The notes are due May 1, 2003 with interest payable semi-annually. The notes represent unsecured obligations of the Company and are subordinated to all existing and future senior indebtedness of the Company. The Company may redeem the notes, in whole or in part, at any time on or after May 1, 2000 at 100% of their principal amount. As of November 30, 1994 and 1993, the senior subordinated notes were valued at $155,094,000 and $182,875,000, respectively, based on quoted market prices. The 10-3/8% senior notes and 9-3/8% senior subordinated notes contain certain restrictive covenants that, among other things, limit the ability of the Company to incur additional indebtedness, pay dividends, make certain investments, create certain liens, engage in mergers, consolidations, or sales of assets, or engage in certain transactions with officers, directors and employees. Principal payments on senior and senior subordinated notes, mortgages, land contracts and other loans are due as follows: 1995, $28,212,000; 1996, $608,000; 1997, $658,000; 1998, $712,000; 1999, $100,770,000; and thereafter, $178,407,000. Assets (primarily inventories) having a carrying value of approximately $64,800,000 are pledged to collateralize mortgages, land contracts and other secured loans. Mortgage Banking. Notes payable include the following (interest rates are as of November 30):
November 30, ----------------------------- 1994 1993 ------------ ------------ Notes payable secured by trust deed notes (6-4/5% in 1994 and 6-1/4% in 1993) $ 21,000,000 $ 18,500,000 Advances under asset-backed commercial paper facility (5-3/4% in 1994 and 3-1/8% in 1993) 104,000,000 120,000,000 ------------ ------------ Total notes payable $125,000,000 $138,500,000 ============ ============
First mortgages receivable have historically been financed through a $230,000,000 collateralized revolving warehouse credit facility and a $120,000,000 asset-backed commercial paper facility (the Commercial Paper Facility). On November 21, 1994, the collateralized revolving warehouse credit facility was replaced with the amended revolving credit agreement which contains a $200,000,000 sublimit (the Revolving Warehouse Facility) for financing the mortgage banking operations. This Revolving Warehouse Facility provides for interest on borrowings at either the federal funds rate plus 1-1/10% or at the applicable bank reference rate and an annual commitment fee of 3/10% of the unused portion of the commitment. The Commercial Paper Facility expires on September 15, 1996 and provides for an annual commitment fee of 3/8% on the unused portion of the commitment. Interest rates charged under the Commercial Paper Facility reflect those available in commercial paper markets plus 5/8% on amounts borrowed. 40 36 There are no compensating balance requirements under either facility. These facilities are collateralized by first mortgages held under commitment of sale and are repayable from proceeds on the sales of first mortgages. The terms of these facilities include financial covenants which, among other things, require the maintenance of certain financial statement ratios and a minimum tangible net worth and limit indebtedness of the mortgage banking operations (excluding indebtedness to the Company) to a maximum of $320,000,000. This maximum may be further limited as the $200,000,000 sublimit on the Revolving Warehouse Facility is available to fund mortgage banking operations only to the extent that borrowings under the amended revolving credit agreement for construction operations do not exceed $300,000,000. Collateralized mortgage obligations represent bonds issued to third parties which are collateralized by mortgage-backed securities with substantially the same terms. At November 30, 1994, the collateralized mortgage obligations bore interest at rates ranging from 8% to 12-1/4% with stated principal maturities ranging from 3 to 30 years. Actual maturities are dependent on the rate at which the underlying mortgage-backed securities are repaid. No collateralized mortgage obligations have been issued since 1988. The fair market values of borrowings under the Revolving Warehouse Facility and the Commercial Paper Facility approximated their recorded values at November 30, 1994 and 1993 as their respective interest rates approximated currently available rates. The collateralized mortgage obligations were valued at $97,395,000 and $162,140,000 at November 30, 1994 and 1993, respectively, based on quoted market prices for the same or similar issues. Note 6. Commitments and Contingencies Commitments and contingencies include the usual obligations of housing producers for the completion of contracts and those incurred in the ordinary course of business. The Company is also involved in litigation incidental to its business, the disposition of which should have no material effect on the Company's financial position or results of operations. Note 7. Shareholders' Equity Preferred Stock. On January 11, 1989, the Company adopted a Shareholder Rights Plan and declared a dividend distribution of one preferred share purchase right for each outstanding share of common stock. Under certain circumstances, each right entitles the holder to purchase 1/100th of a share of a new Series A Participating Cumulative Preferred Stock at a price of $30.00, subject to certain antidilution provisions. The rights are not exercisable until the earlier to occur of (i) 10 days following a public announcement that a person or group has acquired 20% or more of the aggregate votes entitled from all shares of common stock and special common stock or (ii) 10 days following the commencement of a tender offer for 20% or more of the aggregate votes entitled from all shares of common stock and special common stock. In the event the Company is acquired in a merger or other business combination transaction, or 50% or more of the Company's assets or earning power is sold, each right will entitle its holder to receive, upon exercise, common stock of the acquiring company having a market value of twice the exercisable price of the right. At the option of the Company, the rights are redeemable prior to becoming exercisable at $.01 per right. Unless previously redeemed, the rights will expire on March 7, 1999. Until a right is exercised, the holder will have no rights as a shareholder of the Company, including the right to vote or receive dividends. In 1993, the Company issued 6,500,000 depositary shares, each representing a one-fifth ownership interest in a share of Series B Mandatory Conversion Premium Dividend Preferred Stock (the Series B Convertible Preferred Shares). Dividends are cumulative and payable quarterly in arrears at an annual dividend rate of $1.52 per depositary share. On the mandatory conversion date of April 1, 1996, each of the outstanding depositary shares will convert, upon the automatic conversion of the Series B Convertible Preferred Shares, into one share of the Company's common stock, subject to adjustment in certain events. The Company may call any or all of the outstanding depositary shares prior to the mandatory conversion date at a call price initially equal to $27.12, declining to $23.66 by February 1, 1996, and equal to $23.46 thereafter, payable in shares of common stock having a market price equal to the applicable call price, plus an amount in cash equal to all accrued and unpaid dividends. The depositary shares are not convertible into common stock at the holders' option. The depositary shares were issued at $17.375 per share and have a liquidation preference price per depositary share equal to the issuance price. 41 37 Special Common Stock. In connection with its restructuring in 1989, the Company issued warrants (the Warrants) to certain subsidiaries of SunAmerica Inc., the Company's former parent. The Warrants give the holder the right to purchase, at any time prior to March 1, 1999, up to 7,500,000 shares of special common stock at an exercise price of $6.96 per share. The rights of the special common stock are generally identical to the rights of the common stock except that the holder of special common stock is entitled to one-tenth of a vote per share on all matters to be voted on by shareholders. In 1992, the Company issued in a public offering 5,123,000 shares of the special common stock in connection with the exercise of the Warrants. On November 8, 1993, the Company commenced a tender offer to purchase all of the outstanding shares of its special common stock at a price of $19 per share. The offer expired on December 7, 1993 with 2,331,785 shares of special common stock tendered. In addition, on December 23, 1993, the Company purchased the remaining 2,377,000 Warrants at a price equal to the tender offer price per share less the $6.96 per Warrant exercise price. The total consideration paid for these transactions was $73,677,000, including related costs. The remaining 2,791,215 outstanding shares of special common stock were exchanged by the Company at a ratio of .95 shares of common stock for each share of special common stock on various dates throughout 1994. There were no outstanding shares of special common stock at November 30, 1994. Note 8. Employee Benefit and Stock Plans Benefits are provided to most employees under the Company's 401(k) Savings Plan under which contributions by employees are partially matched by the Company. The aggregate cost of this plan to the Company was $1,734,000 in 1994, $1,135,000 in 1993 and $819,000 in 1992. On July 25, 1988, the Company's Board of Directors adopted the Kaufman and Broad Home Corporation 1988 Employee Stock Plan (the 1988 Plan) under which options to purchase 2,000,000 shares of common stock were granted and 1,000,000 shares were reserved for future grants. On April 1, 1993, the shareholders approved for future issuance an additional 1,700,000 shares of common stock. Under the 1988 Plan, stock options, associated limited stock appreciation rights, restricted shares of the Company's common stock and stock units may be awarded to eligible individuals for periods of up to 15 years. The 1988 Plan replaced all existing employee stock plans. Stock option transactions are summarized as follows:
Years ended November 30, --------------------------------------------------- 1994 1993 1992 ------------ ------------ ------------ Options outstanding at beginning of year 2,191,268 2,154,568 2,646,750 Granted 52,000 331,000 272,500 Exercised (125,000) (223,000) (723,000) Cancelled (73,550) (71,300) (41,682) ------------ ------------ ------------ Options outstanding at end of year 2,044,718 2,191,268 2,154,568 ============ ============ ============ Options exercisable at end of year 1,614,068 1,604,418 1,352,718 Options available for grant at end of year 954,100 1,443,600 3,500 Price range of options exercised $3.50-$16.13 $3.50-$16.13 $3.50-$17.50 Price range of options outstanding $3.50-$22.94 $3.50-$19.06 $3.50-$17.50 ============ ============ ============
The Company records proceeds from the exercise of stock options as additions to common stock and paid-in capital. The tax benefit, if any, is recorded as additional paid-in capital. In 1991, the Board of Directors approved the issuance of restricted stock awards under the 1988 Plan of up to an aggregate 600,000 shares of common stock to certain officers and key employees. Restrictions lapse each year through May 10, 2005 on specified portions of the shares awarded to each participant so long as the participant has remained in the continuous employ of the Company. Restricted stock awards issued in 1991 totaled 575,000 shares with 110,000 of these shares being cancelled in 1993. 42 38 Effective December 1, 1993, the Board of Directors approved the establishment of a stock performance plan to benefit certain officers and key employees of the Company who directly contribute to financial results. Under the plan, 510,000 shares of common stock are reserved for future issuance based upon the attainment of certain financial goals over a three-year period ending November 30, 1996. Any compensation earned during the performance period will be paid one-third in cash or common stock at the end of the third year with the remaining two-thirds payable in common stock at the end of the fourth year. The cost of the stock performance plan will be charged to compensation expense over the four-year period based upon the market value of the common stock and achievement of financial goals over the performance period. Note 9. Income Taxes The components of pretax income are as follows:
Years ended November 30, ----------------------------------------- In thousands 1994 1993 1992 ------- ------- ------- Domestic $72,352 $72,295 $35,973 Foreign 1,498 (7,974) 9,525 ------- ------- ------- Total pretax income $73,850 $64,321 $45,498 ======= ======= =======
The components of the provisions for income taxes are as follows:
In thousands Total Federal State Foreign -------- ------- ------ -------- 1994 -- Liability Method Currently payable $ 30,835 $24,931 $5,000 $ 904 Deferred (3,535) (3,603) 68 -------- ------- ------ -------- Total income tax expense $ 27,300 $21,328 $5,000 $ 972 ======== ======= ====== ======== 1993 -- Liability Method Currently payable $ 45,078 $22,789 $4,084 $ 18,205 Deferred (20,678) 171 (20,849) -------- ------- ------ -------- Total income tax expense $ 24,400 $22,960 $4,084 $ (2,644) ======== ======= ====== ======== 1992 -- Deferred Method Currently payable $ 9,512 $ 7,159 $2,200 $ 153 Deferred 7,788 3,484 4,304 -------- ------- ------ -------- Total income tax expense $ 17,300 $10,643 $2,200 $ 4,457 ======== ======= ====== ========
Deferred income taxes result from temporary differences in the financial and tax bases of assets and liabilities. Significant components of the Company's deferred tax liabilities and assets are as follows:
November 30, ------------------------ In thousands 1994 1993 -------- -------- Deferred tax liabilities: Installment sales $ 2,678 $ 2,759 Bad debt and other reserves 4,046 1,111 Depreciation and amortization 6,273 7,480 Capitalized expenses 22,460 18,015 Partnerships and joint ventures 4,041 3,375 Computer equipment leases 10,040 10,853 Repatriation of foreign subsidiaries 30,638 30,931 Other 4,643 5,732 -------- -------- Total deferred tax liabilities 84,819 80,256 -------- -------- Deferred tax assets: Installment sales 127 1,346 Warranty, legal and other accruals 6,772 5,009 Capitalized expenses 6,723 5,316 Low income housing credits 2,111 2,111 Foreign tax credits 43,345 42,915 Other 7,570 8,668 Valuation allowance (13,202) (11,984) -------- -------- Total deferred tax assets 53,446 53,381 -------- -------- Net deferred tax liabilities $ 31,373 $ 26,875 ======== ========
The components of deferred income tax expense are as follows:
Year ended November 30, ------------ In thousands 1992 ------------ Installment sales treatment of commercial building sales and land sales $10,247 Capitalized expenses (1,940) Accelerated depreciation 1,666 Deferred income and expenses (7,250) Intercompany dividends 5,595 Other, net (530) ------- Total deferred income tax expense $ 7,788 =======
43 39 Income taxes computed at the statutory United States federal income tax rate and income tax expense provided in the financial statements differ as follows:
Years ended November 30, ------------------------------------ In thousands 1994 1993 1992 ------- ------- ------- Amount computed at statutory rate $25,848 $22,461 $15,469 Increase (decrease) resulting from: California franchise taxes, net of federal income tax benefit 3,250 2,658 1,452 Differences in foreign tax rates 550 430 828 Intercompany dividends 391 139 672 Low income housing credits (1,179) (1,005) (1,096) Other, net (1,560) (283) (25) ------- ------- ------- Total income tax expense $27,300 $24,400 $17,300 ======= ======= =======
The Company has commitments to invest $14,500,000 over four years in low income housing partnerships which are scheduled to provide tax credits. The Company had foreign tax credit carryforwards at November 30, 1994 of $5,463,000 for United States federal income tax purposes which expire in 1995 through 1998. The undistributed earnings of foreign subsidiaries, which the Company plans to invest indefinitely and for which no United States federal income taxes have been provided, totaled $46,112,000 at November 30, 1994. If these earnings were currently distributed, the resulting withholding taxes payable would be $3,253,000. Note 10. Geographical Information Geographical information follows:
Operating Identifiable In thousands Revenues Income Assets ---------- --------- ------------ 1994 United States $1,177,880 $91,297 $1,193,555 France 143,422 5,019 210,686 Other 14,969 (1,990) 50,219 ---------- ------- ---------- Total $1,336,271 $94,326 $1,454,460 ========== ======= ========== 1993 United States $999,262 $86,484 $1,092,823 France 219,802 8,082 210,328 Other 18,790 (423) 36,227 ---------- ------- ---------- Total $1,237,854 $94,143 $1,339,378 ========== ======= ========== 1992 United States $ 691,696 $48,164 $1,054,961 France 374,962 12,304 323,047 Other 27,510 2,985 53,752 ---------- ------- ---------- Total $1,094,168 $63,453 $1,431,760 ========== ======= ==========
A director of the Company served between 1981 and 1993 as chairman and chief executive officer of a French bank, which in 1989 formed a joint venture controlled by the Company. The joint venture acquired and subsequently sold, to a group of international investors, a commercial building in Paris, France, under a five-year redevelopment agreement, with the bank financing the acquisition and redevelopment of the property. The project, completed in 1993, generated commercial revenues of $63,141,000 in 1993 and $68,338,000 in 1992, representing 5% and 6% of total revenues, respectively. Note 11. Quarterly Results (unaudited) Quarterly results for the years ended November 30, 1994 and 1993 follow:
In thousands, except per share amounts First Second Third Fourth -------- -------- -------- -------- 1994 Revenues $256,879 $326,021 $348,850 $404,521 Operating income 17,819 23,005 22,954 30,548 Pretax income 14,054 17,847 17,084 24,865 Net income 8,854 11,247 10,784 15,665 Earnings per share .22 .28 .27 .39 ======== ======== ======== ======== 1993 Revenues $224,895 $320,030 $319,881 $373,048 Operating income 13,858 25,175 25,782 29,328 Pretax income 7,069 14,603 18,456 24,193 Net income 4,369 9,103 11,456 14,993 Earnings per share .12 .22 .26 .34 ======== ======== ======== ========
Quarterly and year-to-date computations of per share amounts are made independently. Therefore, the sum of per share amounts for the quarters may not agree with per share amounts for the year. Note 12. Acquisition of Business Effective January 3, 1995, the Company acquired substantially all of the assets and liabilities of Oppel Jenkins and its affiliated businesses. The acquisition will be accounted for as a purchase and the results of Oppel Jenkins' operations will be included in the Company's consolidated financial statements from the date of acquisition. The cost of the acquisition will be allocated based on the estimated fair market value of the assets acquired and liabilities assumed. Any excess of the purchase price over the net assets will be allocated to goodwill. Oppel Jenkins is a regional builder of single family homes in Albuquerque, New Mexico and El Paso, Texas. 44 40 REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Shareholders of Kaufman and Broad Home Corporation We have audited the accompanying consolidated balance sheets of Kaufman and Broad Home Corporation as of November 30, 1994 and 1993, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended November 30, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Kaufman and Broad Home Corporation at November 30, 1994 and 1993, and the consolidated results of its operations and its cash flows for each of the three years in the period ended November 30, 1994, in conformity with generally accepted accounting principles. Ernst & Young LLP Los Angeles, California January 5, 1995 REPORT ON FINANCIAL STATEMENTS The accompanying consolidated financial statements are the responsibility of management. The statements have been prepared in conformity with generally accepted accounting principles. Estimates and judgments of management based on its current knowledge of anticipated transactions and events are made to prepare the financial statements as required by generally accepted accounting principles. Management relies on internal accounting controls, among other things, to produce records suitable for the preparation of financial statements. The responsibility of our external auditors for the financial statements is limited to their expressed opinion on the fairness of the consolidated financial statements taken as a whole. Their examination is performed in accordance with generally accepted auditing standards which include tests of our accounting records and internal accounting controls and evaluation of estimates and judgments used to prepare the financial statements. The Company employs a staff of internal auditors whose work includes evaluating and testing internal accounting controls. An audit committee of outside members of the Board of Directors periodically meets with management, the external auditors and the internal auditors to evaluate the scope of auditing activities and review results. Both the external and internal auditors have the unrestricted opportunity to communicate privately with the audit committee. Michael F. Henn Senior Vice President and Chief Financial Officer January 5, 1995 45 41 STOCKHOLDER INFORMATION
Special Common Stock Common Stock ------------------------- ------------------------- Stock Prices High Low High Low ------- ------- ------- ------- 1994 First Quarter $25-1/2 $20 $22-1/4 $18-1/2 Second Quarter 24-5/8 16-1/4 21-3/4 14 Third Quarter 16-1/4 13 * * Fourth Quarter 16-1/2 12-1/4 1993 First Quarter $18-7/8 $15-1/4 $16-3/4 $13-1/4 Second Quarter 21 16-1/4 18-1/4 14 Third Quarter 22-1/4 17-1/8 19-3/4 14-7/8 Fourth Quarter 21 17-3/4 19 16-1/4
* Following the suspension of trading on the New York Stock Exchange on May 31, 1994, the special common stock was de-listed by the New York Stock Exchange and de-registered by the Securities and Exchange Commission on August 9, 1994. Subsequently, the Company completed the exchange for all remaining outstanding shares. Dividend Data Kaufman and Broad Home Corporation paid a quarterly cash dividend of $.075 per common share in 1994 and 1993. Annual Shareholders' Meeting The annual shareholders' meeting will be held in the Marquis Room at the Westwood Marquis Hotel in Los Angeles, California, at 9:00 a.m. on Thursday, March 23, 1995. Stock Exchange Listings The common stock (ticker symbol: KBH) is listed on the New York Stock Exchange and traded on the Boston, Cincinnati, Midwest, Pacific and Philadelphia Exchanges. Transfer Agent Chemical Trust Company of California Los Angeles, California Form 10-K The Company's Form 10-K filed with the Securities and Exchange Commission may be obtained without charge by writing to the Investor Relations Department, Kaufman and Broad Home Corporation. Headquarters Kaufman and Broad Home Corporation 10990 Wilshire Boulevard Los Angeles, California 90024 (310) 231-4000 Fax (310) 231-4222 42 LIST OF EXHIBITS FILED
SEQUENTIAL EXHIBIT PAGE NUMBER DESCRIPTION NUMBER - ------- ----------- ---------- 10.12 Amendments to the Kaufman and Broad Home Corporation 1988 Employee Stock Plan dated January 27, 1994................................. 10.13 Employment Agreement of Albert Z. Praw, dated February 20, 1994... 10.14 Employment Agreement of Michael F. Henn, dated June 7, 1994....... 10.15 Third Amended and Restated Loan Agreement among the Company, Bank of America National Trust and Savings Association, and the First National Bank of Chicago, as managing agents, and the banks listed therein, dated November 21, 1994.................................. 10.16 Letter dated February 16, 1995 amending Employment Contract of Bruce Karatz...................................................... 10.17 Letter dated February 27, 1995 amending Employment Contract of Roger B. Menard................................................... 11 Statement of Computation of Per Share Earnings.................... 13 Pages 24 through 45 and the inside back cover of the Company's 1994 Annual Report to Shareholders................................ 22 Subsidiaries of the Company....................................... 24 Consent of Independent Auditors................................... 27 Financial Data Schedule...........................................
EX-10.12 2 AMENDMENTS TO 1988 EMPLOYEE STOCK OPTION PLAN 1 EXHIBIT 10.12 AMENDMENTS TO THE KAUFMAN AND BROAD HOME CORPORATION 1988 EMPLOYEE STOCK 1994 PLAN RESOLVED, that the amendments to the Company's 1988 Employee Stock 1994 Program respectively set forth below are hereby approved and adopted in their entirety: 1. Section 6(c)(1) is amended by substituting "100%" for "50%" each place it appears. 2. Section 6(c)(2) is deleted and Section 6(c)(3) is re-labelled as Section 6(c)(2). 3. Section 7(b) is amended by substituting for the last sentence thereof the following language: "Notwithstanding anything else in this 1994 Program to the contrary, the restrictions set forth in Section 7(e) shall not lapse with respect to a Restricted Stock Award prior to the third anniversary of the date of grant of such Award; provided, however, that the Committee may determine to have the restrictions set forth in Section 7(e) lapse after the first anniversary of the date of grant of an Award if the Committee has established Performance Objectives for such Award. Subject to the preceding sentence, once established, Performance Objectives and Lapsing Formulas may be changed, adjusted or amended during the term of a Performance Period or thereafter." 4. Section 11(c)(2) is amended by deleting from the second sentence thereof the words "(i) may not be made within six months of the date of the grant of the Option of the Award under this 1994 Program (except that this limitation shall not apply in the event of the Participant's death prior to the expiration of the six month period) and (ii)". EX-10.13 3 EMPLOYMENT AGREEMENT OF ALBERT Z. PRAW 1 EXHIBIT 10.13 [KAUFMAN-BROAD LETTERHEAD] February 20, 1994 Mr. Albert Z. Praw 3350 Scadlock Lane Sherman Oaks, CA 91403 Re: Employment Agreement Dear Albert: This letter agreement (the "Agreement") will confirm our understanding concerning the terms and conditions of your employment with Kaufman and Broad Home Corporation (the "Company") as follows: 1. Employment. The Company hereby employs you and you hereby accept employment by the Company in accordance with the terms and provisions of this Agreement. You shall be an employee exclusively of the Company and shall serve the Company to the best of your abilities, devoting your full productive time, energies and abilities, to your obligations hereunder. All improvements, discoveries, business relationships, corporate opportunities, management procedures and goodwill, conceived, divested, established, developed or perfected by you during the period of your employment and related in any way to the business of the Company or any of its affiliates shall be the exclusive property of the Company. You may engage in personal and philanthropic activities if these activities do not interfere or conflict with your duties and responsibilities to the Company. 2. Term. The term of this Agreement shall commence on March 1, 1994, and, subject to earlier termination as provided herein, shall continue through January 31, 1999, provided that either party gives prior written notice of termination of the Agreement at least 60 days prior to January 31, 1999. In the event that no written notice is given by that date, this Agreement shall continue in full force and effect until 60 days after written notice of termination is given by either party, or the date specified in such notice, whichever is later. 3. Duties and Responsibilities. You shall be employed as the Senior Vice President, Real Estate, of the Company and as such shall have the duties and responsibilities as may be reasonably be assigned to you by the Board of Directors or the Chief Executive Officer of the Company. You shall perform such duties to the best of your abilities and with the skill and judgement expected of an executive intrusted with the management of a comparable business enterprise. You shall act in the best interests of the Company and its shareholders, subject to such policies and directives as are promulgated by the Board of Directors or the Chief Executive Officer. 2 Albert Z. Praw February 20, 1994 Page two 4. Compensation. For all services rendered by you to the Company hereunder, you shall be compensated as follows: (a) Base salary and Opportunity to Defer. You shall receive a fixed base salary which shall be payable in semi-monthly installments in accordance with the common payroll practices of the Company. Your base salary shall begin at an annual rate of $300,000, and, commencing January 1, 1995, and annually thereafter, your salary shall be reviewed for an increase. You shall be entitled to defer receipt of all or part of your salary and bonus to the maximum extent authorized and allowed by federal and state tax laws and Company policy. (b) Incentive Compensation. For fiscal year 1994 (ending November 30, 1994), you will be eligible for a Discretionary Incentive Award based on profits and the degree of success achieved in meeting specific mutually agreed upon goals. At achievement of business plan and with expected performance by you, your award will range from 0-to-60% of your base salary. You are guaranteed to receive a minimum Incentive Award of $150,000 for fiscal year 1994. Your individual performance shall be judged based on annual performance achievements and is the sole discretion of company management. Receipt of any Incentive Award is contingent upon your continuous employment through the payment date (normally occurring the following January). (c) Employee Benefits. You shall also be entitled to receive during the term of this Agreement all other executive benefits and similar plans as may be offered by the Company to its key executive personnel from time to time. A car allowance of $500 per month plus a gasoline credit card for business use will be provided. You shall be entitled to receive proper reimbursement by the Company for all reasonable out-of-pocket expenses incurred by you (in accordance with the policies and procedures established by the Company for its senior executives) in performing services under this Agreement. You shall be entitled to participate in all employee benefits programs of the Company now or hereafter made available to the Company's executives or salaried employees generally, as such programs may be in effect, modified or eliminated from time to time, including and without limitation to stock option plans, stock purchase plans, restricted stock plans, pension and other retirement plans, profit sharing plans, group life insurance, accidental death and dismemberment insurance, hospitalization, surgical, major medical and dental coverage, sick leave (including salary continuation arrangement), long-term disability, vacations, holidays and any other employee benefit programs sponsored by the Company. A summary of executive benefits is attached for your information. 3 Albert Z. Praw February 20, 1994 Page three (d) Performance Share Plan. Mr. Karatz will recommend to the Personnel, Compensation, and Stock Plan Committee of the Board of Directors at its next meeting a grant of 10,000 units of the 1994 Performance Share Program. 5. Termination. (a) Death. In the event of your death, this Agreement and all your unearned rights hereunder shall terminate immediately. In such event, the Company shall promptly pay your estate all earned but unpaid incentive compensation, and any amounts you have deferred under Section 4(a). In addition, the Company shall pay your estate the current year incentive compensation as if you survived until November 30. (b) Disability. In the event you shall become unable to perform the services contemplated by this Agreement due to a physical or mental disability for a continuous period of 8 weeks or an aggregate of more than 90 days in any 120 day period, the Company may terminate this Agreement by giving written notice of the termination to you. In the event of any such termination by the Company, the Company shall promptly pay to you all earned but unpaid incentive compensation, and any amounts you have deferred under Section 4(a). In addition, the Company shall pay you the current year incentive compensation as if the disability did not occur until November 30. (c) Cause. The Company may terminate your employment for "Cause". "Cause" shall mean: (i) you are grossly negligent in the performance of your duties, or (ii) you commit a willful material breach of this Agreement. If your employment is terminated for Cause you shall be entitled to (i) any unpaid salary due you pursuant to Section 4(a), above, for the period ending on the date of termination, (ii) reimbursement by the Company pursuant to Section 4(c), above, in respect of certain expenses incurred prior to your termination. Your rights, if any, in the current year's incentive compensation shall be extinguished. With respect to deferred amounts as provided in Section 4(a), above, such deferred amounts shall be paid to you within 60 days of the termination date. (d) Without Cause. The Company may terminate this Agreement and your employment hereunder without Cause by giving 60 days prior written notice or pay in lieu of any part of that notice. In that event, the Company shall pay you the equivalent of one year's base salary plus 50% of the previous year's incentive compensation. The foregoing amount will be paid in 12 monthly payments commencing in the next month following the date of termination. All medical, dental, life and long term disability benefits will remain in force for the 12 months that severance payments are made. 4 Albert Z. Praw February 20, 1994 Page four 6. Exclusive Benefit. As long as you are receiving compensation under this Agreement you will not, as a director, officer, agent, employee, partner, owner, 5 or more percent shareholder, or otherwise, enter into or conduct any business or venture which may be competitive, directly or indirectly, with that of the Company or any affiliate. A business or activity shall be deemed to be competitive if it is substantially similar to one engaged in or conducted by the Company or an affiliate. It is understood that passive investments in income producing properties are permitted by this paragraph. Furthermore, you have agreed that after the term of the Agreement or for a period of one year thereafter you will not seek to employ any person employed by the Company or any of its affiliates in connection with any business activity deemed competitive. During the performance of your duties on behalf of the Company, you shall receive and be entrusted with certain confidential and/or secret information of a proprietary nature. You shall not disclose or use, during the term of this Agreement or any time thereafter, any such information which is not otherwise publicly available. The Company is entitled to seek equitable relief if you improperly disclose trade secrets to a competitor directly or indirectly. 7. Effect of Waiver of Breach. The waiver by either party hereto of a breach of any provision of this Agreement by the other party shall not operate or be construed to operate as a waiver of any subsequent breach by the other party. 8. Entire Agreement; Amendments. This Agreement contains the entire Agreement between you and the Company concerning your employment. It supersedes and replaces all prior agreements, whether expressed or implied, written or oral. This Agreement can not be changed orally, but only by an agreement in writing, signed by you and a representative of the Board of Directors. Recently, new compensation legislation has been enacted (OBRA) which may contain consequences for the structural make-up of this agreement. In that case, appropriate changes will be made after agreement by both parties. 9. Severability. If any provisions of this Agreement shall be unlawful, void, or for any reasons unenforceable, they shall be deemed separated from and in no way affect the validity or enforceability of the remaining provisions of the Agreement. 10. Governing Law. This Agreement is entered into in Los Angeles, California and shall be construed and enforced under the laws of the State of California. 11. Arbitration. In the event that any controversy or dispute between you and the Company arising out of or relating to the employment relationship, including, but not limited to any disputes in connection with the validity, construction, application or enforcement of the terms of this Agreement, occurs, any such controversy or dispute shall be submitted to final and binding arbitration pursuant to the then-current Commercial Rules of the American Arbitration Association and the parties hereto expressly waive their rights, if any, to have such matters heard by a jury or a judge, whether in state or federal court. 5 Albert Z. Praw February 20, 1994 Page five The cost of the arbitration including, but not limited to, any reasonable legal fees or other expenses incident thereto incurred in connection with such arbitration, shall be determined by the arbitrator(s) and shall be borne by the prevailing party. During the pendency of the arbitration and up to the date of the arbitrator's award, you shall participate in all employee benefits programs of the Company (other than 401(k)) as provided in Section 4(c) above. The Company agrees to pay interest on any amounts payable to you under this Agreement which are not paid within sixty (60) days after the date when due and on any money judgement which is awarded to you following a proceeding to enforce any portion of the date that payments should have been made under this Agreement. Such interest shall be calculated at 6% from the date that payments should have been made under this Agreement to the time of actual payment. In any arbitration concerning an alleged breach of section 5(c) the remedy available to the arbitrator shall be limited to the payments and benefits available under section 5(d). 12. Assignability; Binding Nature. This Agreement shall bind and benefit the Company, its successors and assigns and shall inure to the benefit and be binding on you, your heirs, executors and administrators, provided that your duties and responsibilities hereunder may not be assigned or delegated by you. No rights or obligations of the Company under this Agreement may be assigned or transferred except that such rights or obligations may be assigned or transferred by operations of law in the event of a merger or consolidation in which the Company is not the continuing entity, or the sale or liquidation of all or substantially all of the assets of the Company provided that the assignee or transferee is the successor to all or substantially all of the assets of the Company and such assignee or transferee assumes the liabilities, obligations and duties of the Company, as contained in this Agreement, either contractually or as a matter of law. The Company further agrees that in the event of a merger, consolidation, sale of assets, or liquidation as described in the preceding sentence, it shall use its best efforts to cause such assignee or transferee to assume the liabilities, obligations, and duties of the Company hereunder. If not, the provisions of Section 5(d), above, will be deemed applicable. 13. Notices. Any notice required or permitted to be given under the Agreement shall be in writing and shall be deemed to have been given when delivered personally or sent by courier, duly addressed to the party concerned at the address indicated below or to such changed address as the party may subsequently give like notice of: 6 Albert Z. Praw February 20, 1994 Page six If to the Company: Kaufman and Broad Home Corporation 10877 Wilshire Boulevard, 12th Floor Los Angeles, California 90024 Attn: Vice President of Human Resources To you: Mr. Albert Z. Praw 3350 Scadlock Avenue Sherman Oaks, California 91403 Any notice delivered personally under this Section 13 shall be deemed given on the date delivered and any notice sent by courier shall be deemed given on the date delivery is recorded by the courier. 14. Withholding on Payment. All payments made by the Company under this Agreement shall be subject to normal deductions and withholding. Please confirm the terms and conditions of this Agreement by executing the enclosed copy of this Agreement below and returning it to me. Very truly yours, /s/ Bruce Karatz ----------------------- Bruce Karatz Chairman and Chief Executive Officer Agreed this 28th day of February, 1994. /s/ Albert Z. Praw - --------------------------------------- Albert Z. Praw EX-10.14 4 EMPLOYMENT AGREEMENT OF MICHAEL F. HENN 1 EXHIBIT 10.14 [KAUFMAN-BROAD LETTERHEAD] June 7, 1994 Michael F. Henn 527 East Palm Drive Glendora, CA 91741 Dear Mike: I am pleased to confirm the following offer for you to join Kaufman and Broad Home Corporation. Title/Position: Senior Vice President, Chief Financial Officer - Kaufman and Broad Home Corporation. Start Date: July 11, 1994. Base Salary: $300,000 per annum payable semi-monthly. Auto Allowance: $500 per month and gasoline credit card for business use. Auto Insurance: Up to $1,000 reimbursement per year for your primary business vehicle. Fiscal Year 1994 Incentive Compensation: For fiscal year 1994 (ending November 30, 1994), you will receive an Incentive Award of $150,000. Receipt of any Incentive Award is contingent upon your continuous employment through the payment date (normally occurring the following January). Fiscal Year 1995 Incentive Compensation: You will be a participant in the Corporate Incentive Compensation pool. This pool is created by 3.5% of the pre-tax profit of Kaufman and Broad. Your share of the Incentive Compensation pool for fiscal year 1995, ending November 30, 1995, will be 5%. (This formula can be altered at the discretion of the Board's Compensation Committee, but will remain constant in its intent at providing similar compensation.) In addition, for fiscal year 1995, you will be eligible for a Discretionary Incentive Award based on the degree of success achieved in meeting specific mutually agreed upon goals. Your award will range from 0-to-25% of your base salary. Your individual performance shall be judged based on annual performance achievements and is the sole discretion of company management. Receipt of any Incentive Award is contingent upon your continuous employment through the payment date (normally occurring the following January). 2 Page Two - ------------------------------------------------------------------------------- Performance Share Plan and Stock Options: I will recommend to the Personnel, Compensation and Stock Plan Committee of the Board of Directors at its next meeting after your effective date of employment that you be promptly granted 10,000 units of our Performance Share Plan. This is a new Plan which has been instituted to provide a tangible, performance-driven stake in the long term success of our Company. This Plan, which is further explained in the attached Plan overview, was created to directly link executive performance and reward with shareholder value creation. The 10,000 units that will be granted under this plan is a target number which corresponds to 100% Plan achievement. Based on the performance factors of the Plan, the final payout can range from 0 to 150% of the target number. If we maximize our results and the stock price reaches $45.00 per share at the end of the performance period (three years), the value of your award would be $675,000. We believe the Performance Share Plan rewards our senior management for superior performance as a team. In addition, the Committee will also be asked to approve the prompt grant of 20,000 options under our 1988 Employee Stock Plan. Market value will be determined on the date of grant. It is the Company's policy, although not a commitment, to grant stock options each year to our Senior Officers. In your role as Senior Vice President, Chief Financial Officer, you would be a member of the Senior Management Committee. This committee is comprised of the Chief Financial Officer, the Executive Vice Presidents of United States and European Operations, the Senior Vice President of Real Estate and myself and therefore, you would be considered at the highest level when these grants are determined. Executive Benefits Program: - - Executive Medical Coverage - Plan pays 100% of "Covered" Medical Expenses. Participants pay $400 deductible per calendar year or $800 per family per year for out-of-network charges (Non-PPO usage only). Individuals and family members who are covered and use the PPO Alliance Network will only need to meet the $200/$400 deductible annually. In addition the participant pays the separate one calendar year $100 deductible for hospital stays. Contributions for employee and Dependent coverage apply. - The Executive Medical Plan does not include coverage of dental expenses at 100%. "Preventive care", i.e., cleaning and x-rays are normally paid at 80%, "Major work", i.e., crowns at 50%. - - Executive Financial and Tax Planning Service - The purpose of the plan is to assist in maximizing the opportunity to build a personal estate, define and implement personal financial planning objectives and assist with the annual tax planning and return preparation. 3 Page Three - -------------------------------------------------------------------------------- - During the first year ONLY of participation in the Executive Benefits Program, participants will be allowed up to $5,500 in reimbursed expenses for financial/estate planning through the consulting firm of their choice. - A maximum of $1,250 is reimbursable for tax consulting and return preparation each year. - $1,500 reimbursement is available for audit research and preparation. - - Executive Life Insurance You are covered under the executive life insurance plan in the amount of $600,000. The Company's employee benefits program to include Executive Benefits is subject to future changes at the discretion of Company management. Executive Commitment: a. During the performance of your duties on behalf of the Company, you will receive and be entrusted with certain confidential and/or secret information of a proprietary nature. You agree not to disclose or use, during your employment or anytime thereafter, any such information which is not otherwise publicly available. b. Accordingly, you will not make any public statements concerning Kaufman and Broad Home Corporation or any of their affiliates or subsidiaries regarding your employment, unless previously approved by the Company. c. You agree that in the event of your termination, you will not for a period of one year thereafter employ nor seek to employ any person employed by Kaufman and Broad Home Corporation or any of their affiliates or subsidiaries. d. You agree that during the term of your employment you will not engage, as owner, part owner, stockholder (other than passive), director, joint venturer, or otherwise, in any business competitive with Kaufman and Broad Home Corporation or any of their affiliates or subsidiaries. Nothing in this paragraph d. shall prevent you from obtaining normal employment (after the termination of your employment with the Company), in general industry, or housing industry as long as you comply with the provisions of this letter. Employment at Will; Termination: Nothing in this letter shall be construed as an employment contract obligating the Company (expressly or implicitly) to employ you for any specified period of time. Either party has the right to terminate the employment relationship at any time with or without cause. If the Company should terminate your employment for reasons other than cause at any time prior to December 1, 1995, the Company will pay, in twelve equal monthly payments, (commencing the day of termination), a sum equal to your base compensation plus the greater of your pro-rated year-to-date bonus in the current fiscal year or $150,000. 4 Page Four - ------------------------------------------------------------------------------- Limitation: The compensation described in the preceding paragraphs represents our entire obligation to you during the term of your employment. Kaufman and Broad shall have no obligation to pay any compensation (in any form or any kind) to you in excess of the above described compensation unless our Human Resources Department has verified such increased compensation and processed a personnel change notice reflecting such increase. Employment References: This offer of employment is extended to you contingent upon satisfactory references. Citizenship Documentation: The Federal Immigration Control and Reform Act of 1986 requires all employers to verify that employees hired since November 6, 1986 have the legal right to work in the United States. Accordingly, we ask that on your first day you bring with you documentation to prove this. A list of acceptable documentation is attached. Entire Agreement: This letter together with the documents referenced herein contain all of the agreements and understandings regarding your employment and the obligations of Kaufman and Broad in connection with employment. Kaufman and Broad has not made, nor are you relying upon any oral or written promises or statements made by Kaufman and Broad or any agent of Kaufman and Broad except as expressly set forth herein. This letter supersedes any and all prior agreements and understandings between you and Kaufman and Broad and alone expresses the agreement of the parties. This letter containing all of the agreements and understandings regarding your employment cannot be amended other than in writing by Kaufman and Broad. Mike, I am very happy to confirm this offer and I am sure you will make outstanding contributions to the Kaufman and Broad team. Please sign and return this letter to my attention in the enclosed Federal Express envelope. Sincerely, Agreed to and Acknowledged by: /s/ Bruce E. Karatz - ----------------------- /s/ Michael F. Henn Bruce E. Karatz -------------------- Chairman and Michael F. Henn Chief Executive Officer 6/15/94 -------------------- Date EX-10.15 5 THIRD AMENDED AND RESTATED LOAN AGREEMENT 1 EXHIBIT 10.15 __________________________________________ THIRD AMENDED AND RESTATED LOAN AGREEMENT Dated as of November 21, 1994 among KAUFMAN AND BROAD HOME CORPORATION, THE BANKS PARTY HERETO, BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION and THE FIRST NATIONAL BANK OF CHICAGO, as Managing Agents BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Administrative Agent, THE FIRST NATIONAL BANK OF CHICAGO, as Documentation Agent and CREDIT LYONNAIS LOS ANGELES BRANCH, NATIONSBANK OF TEXAS, N.A., and NBD BANK, N.A. as Co-Agents __________________________________________ 2 TABLE OF CONTENTS
Page ---- RECITALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE 1 DEFINITIONS AND ACCOUNTING TERMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.1 Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.2 Use of Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 1.3 Accounting Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 1.4 Rounding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 1.5 Miscellaneous Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 1.6 Exhibits and Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 1.7 References to "Borrower and its Subsidiaries" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 ARTICLE 2 LOANS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 2.1 Loans-General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 2.2 Alternate Base Rate Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 2.3 LIBOR Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 2.4 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 2.5 Letters of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 2.6 Reduction of Commitment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 2.7 Administrative Agent's Right to Assume Funds Available . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 ARTICLE 3 PAYMENTS; FEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 3.1 Principal and Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 3.2 Commitment Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 3.3 Facility/Extension Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 3.4 Agency Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 3.5 Capital Adequacy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 3.6 LIBOR Fees and Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 3.7 Late Payments/Default Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 3.8 Computation of Interest and Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 3.9 Holidays . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 3.10 Payment Free of Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 3.11 Funding Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 3.12 Failure to Charge or Making of Payment Not Subsequent Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 3.13 Pro Rata Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 3.14 Time and Place of Payments; Evidence of Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 3.15 Administrative Agent's Right to Assume Payments Will be Made . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 3.16 Survivability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 3.17 Bank Calculation Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
-i- 3 ARTICLE 4 REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 4.1 Existence and Qualification; Power; Compliance with Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 4.2 Authority; Compliance with Other Instruments and Government Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 4.3 No Governmental Approvals Required . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 4.4 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 4.5 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 4.6 No Other Liabilities; No Material Adverse Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 4.7 Title to Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 4.8 Intangible Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 4.9 Existing Indebtedness and Contingent Guaranty Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 4.10 Governmental Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 4.11 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 4.12 Binding Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 4.13 No Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 4.14 Pension Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 4.15 Tax Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 4.16 Regulation U . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 4.17 Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 4.18 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 4.19 Projections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 ARTICLE 5 AFFIRMATIVE COVENANTS (OTHER THAN INFORMATION AND REPORTING REQUIREMENTS) . . . . . . . . . . . . . . . . . 57 5.1 Payment of Taxes and Other Potential Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 5.2 Preservation of Existence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 5.3 Maintenance of Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 5.4 Maintenance of Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 5.5 Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 5.6 Inspection Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 5.7 Keeping of Records and Books of Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 5.8 Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 5.9 Subsidiary Guaranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 ARTICLE 6 NEGATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 6.1 Payment or Prepayment of Subordinated Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 6.2 Dispositions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 6.3 Mergers and Sale of Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 6.4 Investments and Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 6.5 ERISA Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 6.6 Change in Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 6.7 Liens and Negative Pledges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 6.8 Indebtedness and Contingent Guaranty Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 6.9 Non-Recourse Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
-ii- 4 6.10 Subsidiary Indebtedness and Contingent Guaranty Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 6.11 Money Market Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 6.12 Transactions with Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 6.13 Minimum Consolidated Tangible Net Worth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 6.14 Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 6.15 Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 6.16 Hostile Tender Offers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 6.17 Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 6.18 Domestic Standing Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 6.19 Investments in Certain Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 6.20 Land Fund Joint Venture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 ARTICLE 7 INFORMATION AND REPORTING REQUIREMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 7.1 Financial and Business Information of Borrower and Its Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 7.2 Compliance Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 ARTICLE 8 CONDITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 8.1 Initial Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 8.2 Any Increasing Advance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 8.3 Any Advance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 8.4 Any Letter of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 ARTICLE 9 EVENTS OF DEFAULT AND REMEDIES UPON EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 9.1 Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 9.2 Remedies Upon Event of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 ARTICLE 10 THE ADMINISTRATIVE AGENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 10.1 Appointment and Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 10.2 Administrative Agent and Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 10.3 Banks' Credit Decisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 10.4 Action by Administrative Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 10.5 Liability of Administrative Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 10.6 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 10.7 Successor Administrative Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 10.8 No Obligations of Borrower . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 ARTICLE 11 MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 11.1 Cumulative Remedies; No Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 11.2 Amendments; Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 11.3 Costs, Expenses and Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 11.4 Nature of Banks' Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 11.5 Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 11.6 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 11.7 Execution in Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
-iii- 5 11.8 Binding Effect; Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 11.9 Sharing of Setoffs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 11.10 Indemnity by Borrower . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 11.11 Nonliability of Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 11.12 Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 11.13 No Third Parties Benefited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 11.14 Other Dealings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 11.15 Right of Setoff - Deposit Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 11.16 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 11.17 Integration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 11.18 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94 11.19 Severability of Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94 11.20 Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94 11.21 Conflict in Loan Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94 11.22 Waiver Of Jury Trial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94 11.23 Purported Oral Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94 11.24 Hazardous Materials Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 Exhibits A - Compliance Certificate B - Revolving Note C - Request for Letter of Credit D - Request for Loan E - Request for Redesignation F - Subsidiary Guaranty Schedules 4.4 Subsidiaries 4.7 Existing Liens and Rights of Others 4.9 Existing Indebtedness and Contingent Obligations 6.4 Investments 6.8 Application of Section 6.8
-iv- 6 THIRD AMENDED AND RESTATED LOAN AGREEMENT Dated as of November 21, 1994 This Third Amended and Restated Loan Agreement ("Agreement") is entered into by and among Kaufman and Broad Home Corporation, a Delaware corporation ("Borrower"), each bank set forth on the signature pages of this Agreement or which from time to time becomes party hereto (collectively, the "Banks" and individually, a "Bank"), Bank of America National Trust and Savings Association and The First National Bank of Chicago, as Managing Agents, Bank of America National Trust and Savings Association, as Administrative Agent, The First National Bank of Chicago, as Documentation Agent, and each of Credit Lyonnais Los Angeles Branch, NationsBank of Texas, N.A., and NBD Bank, N.A. as Co-Agents. RECITALS This Agreement is an amendment and restatement in full of that certain Second Amended and Restated Loan Agreement, dated as of December 24, 1992, by and among Borrower, the Banks named therein and Bank of America National Trust and Savings Association, as Agent (as heretofore amended, the "Prior Loan Agreement"). Concurrently herewith, the parties hereto, and Kaufman and Broad Mortgage Company, are entering that certain Override Agreement of even date herewith (the "Override Agreement") respecting allocations of credit availability between this Agreement and the Mortgage Warehousing Agreement hereinafter described, and certain related matters. Pursuant to the Override Agreement, the Banks party to the Prior Loan Agreement have assigned their interests thereunder to the Banks party to this Agreement. The Prior Loan Agreement, as amended and restated by this Agreement including all loans made thereunder, continues in full force and effect from the date thereof to the Closing Date and, at all times on and after the Closing Date. WHEREFORE, in consideration of the mutual covenants and agreements herein contained, the parties hereto covenant and agree as follows: ARTICLE 1 DEFINITIONS AND ACCOUNTING TERMS 1.1 Defined Terms. As used in this Agreement, the following terms shall have the meanings set forth below: -1- 7 "Acquisition" means any transaction, or any series of related transactions, consummated after the Closing Date, by which Borrower and/or any of its Subsidiaries directly or indirectly (a) acquires any ongoing business or all or substantially all of the assets of any firm, corporation or division thereof, whether through purchase of assets, merger or otherwise, (b) acquires control of securities of a corporation representing 50% or more of the ordinary voting power for the election of directors or (c) acquires control of a 50% or more ownership interest in any partnership, joint venture or other business entity. "Administrative Agent" means Bank of America or any successor administrative agent. "Administrative Agent's Office" means Bank of America National Trust and Savings Association, Agency Management Services, 1455 Market Street, San Francisco, California 94103, or such other office as the Administrative Agent may designate in writing to Borrower and the Banks. "Advance" means an advance made or to be made to Borrower by a Bank pursuant to Article 2. "Affiliate" means, with respect to any Person, any other Person which directly or indirectly controls, or is under common control with, or is controlled by, such Person. As used in this definition, "control" (including its correlative meanings, "controlled by" and "under common control with") shall mean possession, directly or indirectly, of power to direct or cause the direction of management or policies (whether through ownership of securities or partnership or other ownership interests, by contract or otherwise); provided that, in any event, any Person which owns directly or indirectly 10% or more of the securities having ordinary voting power for the election of directors or other governing body of a corporation that has more than 100 record holders of such securities or 10% or more of the partnership or other ownership interests of any other Person that has more than 100 record holders of such interests will be deemed to control such corporation or other Person. "Agent" means any of the Administrative Agent, the Managing Agents, the Co-Agents, the Documentation Agent, or any successor agent. "Agreement" means this Third Amended and Restated Loan Agreement, either as originally executed or as it may from time to time be supplemented, modified, amended, renewed, extended or supplanted. -2- 8 "Alternate Base Rate" means, as of any date of determination, the rate per annum which is the greater of (a) the Reference Rate and (b) the Federal Funds Rate plus one half percent (1/2%). "Alternate Base Rate Advance" means an Advance made by a Bank to fund its Pro Rata Share of an Alternate Base Rate Loan. "Alternate Base Rate Loan" means a Loan made hereunder and designated or redesignated as an Alternate Base Rate Loan in accordance with Article 2, or converted to an Alternate Base Rate Loan in accordance with Section 3.6. "Applicable Commitment Fee Rate" means, as of any date of determination, the commitment fee rate set forth below opposite the Credit Rating Level as of such date:
Credit Rating Applicable Commitment ------------- --------------------- Level Fee Rate ----- -------- I .25% (25 basis points) II .30% (30 basis points) III .35% (35 basis points)
"Applicable LIBOR Spread" means, as of any date of determination, the interest rate spread set forth below opposite the Credit Rating Level as of such date:
Credit Rating Applicable LIBOR ------------- ---------------- Level Spread ----- ------ I 1.05% II 1.20% III 1.35%
"Applicable Letter of Credit Fee" means, as of any date of determination, the letter of credit fee set forth below under the caption "Financial L/C's" (in the case of Financial Letters of Credit) and under the caption "Performance L/C's" (in the case of Performance Letters of Credit), in each case opposite the Credit Rating Level as of such date:
Credit Rating Financial Performance ------------- --------- ----------- Level L/C's L/C's ----- ----- ----- I 0.9875% 0.8625% II 1.1375% 1.0125% III 1.2875% 1.1625%
-3- 9 "Authorizations" has the meaning set forth for that term in Section 4.1. "Bank" means any of the banks signatory to this Agreement, their successors and permitted assigns. "Bank of America" means Bank of America National Trust and Savings Association, a national banking association. "Banking Day" means any Monday, Tuesday, Wednesday, Thursday, or Friday other than a day on which banks are authorized or required to be closed in California or New York. "Bond Facility" means any bond facility pursuant to which a municipality, or a community facilities district formed by a municipality, at the request of Borrower or one of its Subsidiaries, will issue bonds to finance a portion of the costs of acquisition of and improvements to real property located in such municipality (or district) by Borrower or one of its Subsidiaries (or to pay development or "impact" fees in lieu thereof), and with respect to which Borrower or one of its Subsidiaries will provide a letter of credit or other reimbursement support. The real property that is the subject of any such bond facility will be subject to a Lien for special taxes to repay the Indebtedness evidenced by such bonds. "Borrower" means Kaufman and Broad Home Corporation, a Delaware corporation, and its successors and permitted assigns. "Capital Lease" means, with respect to any Person, a lease of any Property by that Person as lessee that is, or should be in accordance with Financial Accounting Standards Board Statement No. 13, recorded as a "capital lease" on a balance sheet of that Person prepared in accordance with Generally Accepted Accounting Principles. "Cash" means all monetary items (including currency, coin and bank demand deposits) that are treated as cash under Generally Accepted Accounting Principles. "Cash Equivalents" means, with respect to any Person, that Person's Investments in: (a) Government Securities due within one year of the making of the Investment; (b) certificates of deposit issued by, deposits in, bankers' acceptances of, and repurchase -4- 10 agreements covering Government Securities executed by, (i) any Bank or (ii) any bank and/or savings and loan association doing business in and incorporated under the Laws of the United States of America or any state thereof and having on the date of such Investment combined capital, surplus and undivided profits of at least $500,000,000 and which carries on the date of such Investment a credit rating of P-1 or higher by Moody's Investors Service, Inc. or A-1 or higher by Standard & Poor's Corporation, in each case due within one year after the date of the making of the Investment; and (c) readily marketable commercial paper of (i) any Bank that is a Bank as of the Closing Date or (ii) corporations doing business in and incorporated under the Laws of the United States of America or any state thereof given on the date of such Investment a credit rating of P-1 or higher by Moody's Investors Service, Inc., of A-1 or higher by Standard & Poor's Corporation, or F-1 or higher by Fitch Investor Services, Inc., in each case due within one year of the making of the Investment. "Change in Control" has the meaning set forth for such term in Section 3.1(f). "Closing Date" means the time and Banking Day on which the conditions set forth in Section 8.1 are satisfied or waived pursuant to Section 11.2. "Co-Agent" means any of Credit Lyonnais Los Angeles Branch, NationsBank of Texas, N.A. or NBD Bank, N.A. or any successor or additional co-agent. The Co-Agents, in their capacity as such, shall have no duties under the Loan Documents beyond those of a Bank. "Code" means the Internal Revenue Code of 1986, as amended or replaced and as in effect from time to time. "Commission" means the Securities and Exchange Commission and any successor commission. "Commitment" means, as of any date of determination, the amount of the "KBHC Commitment" then in effect pursuant to the Override Agreement. "Commitment Assignment and Acceptance" means a commitment assignment and acceptance prescribed by the Override Agreement. -5- 11 "Common Stock" means the $1.00 par value common stock and special common stock of Borrower. "Compliance Certificate" means a compliance certificate in the form of Exhibit A signed, on behalf of Borrower, by a Senior Officer of Borrower. "Consolidated Subsidiary" means, with respect to any Person and as of any date of determination, a Subsidiary of that Person whose financial statements should be consolidated with the financial statements of the Person in accordance with Generally Accepted Accounting Principles. "Consolidated Tangible Net Worth" means, as of any date of determination, the Tangible Net Worth of Borrower and its Consolidated Subsidiaries on a consolidated basis; provided that any positive or negative adjustment to such Tangible Net Worth attributable to foreign currency translations shall be ignored. "Contingent Guaranty Obligation" means, as to any Person, any (a) direct or indirect guarantee of Indebtedness of, or other obligation performable by, any other Person (other than a performance obligation undertaken in the ordinary and usual course of business), including any endorsement (other than for collection or deposit in the ordinary course of business), co-making or sale with recourse of the obligations of any other Person or (b) assurance given to an obligee with respect to the performance of an obligation (other than a performance obligation undertaken in the ordinary and usual course of business) by, or the financial condition of, any other Person, whether direct, indirect or contingent, including any purchase or repurchase agreement covering such obligation or any collateral security therefor, any agreement to provide funds (by means of loans, capital contributions or otherwise) to such other Person, any agreement to support the solvency or level of any balance sheet item of such other Person, or any "keep-well", "take-or- pay", "through put" or other arrangement of whatever nature having the effect of assuring or holding harmless any obligee against loss with respect to any obligation of such other Person. The amount of any Contingent Guaranty Obligation shall be deemed to be an amount equal to the stated or determinable amount of the related primary obligation (unless the Contingent Guaranty Obligation is limited by its terms to a lesser amount, in which case to the extent of such amount) or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof as determined by the Person in good faith. -6- 12 "Contractual Obligation" means, as to any Person, any provision of any outstanding Securities issued by that Person or of any material agreement, instrument or undertaking to which that Person is a party or by which it or any of its Property is bound, other than, in the case of Borrower and its Subsidiaries, any of the Loan Documents. "Credit Rating Level" means, as of any date of determination, the credit rating level set forth below opposite the specified credit ratings of Borrower's senior unsecured debt then in effect:
Credit Rating Credit Ratings ------------- -------------- Level ----- I Any two of the following credit ratings: S&P: BBB- or better Moody's: Baa3 or better Duff: BBB- or better II Level I does not apply and any two of the following credit ratings: S&P: BB+ or better Moody's: Ba2 or better Duff: BBB- or better III Neither Level I nor Level II applies.
For purposes of the foregoing, "S&P" means Standard & Poor's Rating Group, a division of McGraw Hill, Inc., "Moody's" means Moody's Investors Service, Inc. and "Duff" means Duff & Phelps Credit Rating Co. The Credit Rating Levels in effect as of any date shall be as set forth in the then most recent Officer's Certificate delivered to the Administrative Agent, attaching such evidence of the Credit Ratings, as may be reasonably required by the Administrative Agent. "Curable KBMC Default" means a Material KBMC Default or a Material KBMC Event of Default that can be cured by the payment of money, including those arising under the following Sections of the Mortgage Warehousing Agreement: 10.1, 10.2, 10.3, 10.4, 10.5, 10.21, 11.1(a), 11.1(e), 11.1(g), 11.1(h), 11.1(m), 11.1(o) and 11.1(q). -7- 13 "Debtor Relief Laws" means the Bankruptcy Code of the United States of America, as amended from time to time, and all other applicable liquidation, conservatorship, insolvency, reorganization, or similar debtor relief Laws from time to time in effect affecting the rights of creditors generally. "Default" means any event that, with the giving of notice or passage of time or both, would be an Event of Default. "Default Rate" means the interest rate described in Section 3.7. "Designated Deposit Account" means a demand deposit account to be maintained by Borrower with Bank of America, as from time to time designated by Borrower by written notification to the Administrative Agent. "Disposition" means the sale, transfer or other disposition of any of the capital stock of any Significant Subsidiary or of all or substantially all of the assets of any Significant Subsidiary. "Distribution" means, with respect to any shares of capital stock or any warrant or right to acquire shares of capital stock or any other equity security issued by a Person, (a) the retirement, redemption, purchase, or other acquisition for value (other than for common stock of such Person) by such Person of any such security, (b) the declaration or payment by such Person of any dividend in Cash or in Property (other than in common stock of such Person) on or with respect to any such security, and (c) any Investment by such Person in any holder of 5% or more of the capital stock (or other equity securities) of such Person, if a purpose of such Investment is to avoid the characterization of the transaction between such Person and such holder as a Distribution under clause (a) or (b) above. In addition, to the extent any loan or advance by Borrower to one of its Subsidiaries is deemed to be an "Investment" for purposes of this Agreement, then any principal payment made by such Subsidiary in respect of such loan or advance shall be considered a Distribution for purposes of Section 6.19(a)(ii). "Documentation Agent" means The First National Bank of Chicago. The Documentation Agent shall have no duties under the Loan Documents beyond those of a Bank. "Dollars" means the national currency of the United States of America. -8- 14 "Domestic Adjusted Interest Expense" means, with respect to any fiscal period of Borrower and its Consolidated Subsidiaries (other than any Financial Subsidiary or Foreign Subsidiary), the aggregate amount of interest, fees, charges and related expenses paid or payable to a lender in connection with borrowed money that is treated as interest (including without limitation accretion of original issue discount on long-term debt existing during such fiscal period) and the interest portion of any capitalized lease payment of Borrower and such Consolidated Subsidiaries. "Domestic Adjusted Operating Income" means, with respect to any fiscal period of Borrower and its Consolidated Subsidiaries (other than any Financial Subsidiary), (a) the consolidated gross revenues of Borrower and its Consolidated Subsidiaries (other than any Financial Subsidiary) for that fiscal period, minus (b) construction and land costs for that fiscal period, minus (c) selling, general and administrative expenses for that fiscal period, minus (d) with respect to Foreign Subsidiaries, on a consolidated basis, consolidated gross revenues during that fiscal period, minus (i) construction and land costs for that fiscal period, minus (ii) selling, general and administrative expenses for that fiscal period, plus (e) interest income earned by Borrower and its Consolidated Subsidiaries (other than any Foreign Subsidiary) during that fiscal period, plus (f) dividend and royalty payments paid in Cash by a Foreign Subsidiary or a Financial Subsidiary to Borrower or any of its Guarantor Subsidiaries, plus (g) Domestic Adjusted Interest Expense which had previously been capitalized and has been amortized during that fiscal period to the aggregate cost of sales of Borrower and its Domestic Subsidiaries, plus (h) non-Cash losses and gains incurred or earned by Borrower and its Consolidated Subsidiaries (other than any Financial Subsidiary or any Foreign Subsidiary) in connection with the abandonment of options to purchase Property, plus (i) non-Cash Net Realizable Value Adjustments to Inventory located in the United States of America, plus (j) depreciation expense for that fiscal period, minus (k) Cash Investments made by Borrower during such fiscal period in Financial Subsidiaries and Foreign Subsidiaries, all as reported on the financial statements of Borrower and its Consolidated Subsidiaries delivered to the Banks pursuant to Section 7.1. "Domestic Adjusted Tangible Net Worth" means, as of any date of determination, Consolidated Tangible Net Worth on that date minus (a) an amount equal to 100% of the aggregate Tangible Net Worth of Foreign Subsidiaries of Borrower and its Subsidiaries on that date, minus (b) the -9- 15 amount by which the aggregate Investments of Borrower on that date in Domestic Joint Ventures exceed 10% times the difference between Consolidated Tangible Net Worth and the aggregate Tangible Net Worth of Foreign Subsidiaries as of that date, and minus (c) the aggregate amount of intercompany receivables owed to Borrower and its Domestic Subsidiaries by any Foreign Subsidiary as of that date. "Domestic Indebtedness" means, as of any date of determination, the total outstanding Indebtedness of Borrower and its Domestic Subsidiaries (other than Financial Subsidiaries) as of the last day of the most recently ended Fiscal Quarter. "Domestic Interest Coverage Ratio" means, with respect to any Fiscal Quarter of Borrower and its Consolidated Subsidiaries (other than any Financial Subsidiary), the ratio of (a) Domestic Adjusted Operating Income for the twelve month period ending on the last day of such Fiscal Quarter to (b) Domestic Adjusted Interest Expense (without including accretion of original issue discount on long-term debt existing during such fiscal period) for the twelve month period ending on the last day of such Fiscal Quarter. "Domestic Joint Venture" means a Joint Venture (a) that is organized under the laws of the United States of America or any state thereof and (b) the majority of the assets of which (as reflected on a balance sheet of such Joint Venture prepared in accordance with Generally Accepted Accounting Principles) is located in the United States of America. "Domestic Lending Office" means, with respect to each Bank, its office, branch or affiliate identified on the signature pages hereof as its Domestic Lending Office or such other office, branch or affiliate as such Bank may hereafter designate as its Domestic Lending Office by notice to the Borrower and the Administrative Agent. "Domestic Standing Inventory" means, as of any date of determination, all items of unsold housing inventory (other than Model Homes) of Borrower and its Domestic Subsidiaries, and with respect to which either (a) 90% of the direct construction costs has been incurred on such date or (b) at least ten months has elapsed from the date its construction was commenced through and including such date. Construction for purposes of this definition shall be deemed to have commenced upon the pouring of foundation concrete. -10- 16 "Domestic Subsidiary" means, with respect to any Person and as of any date of determination, a Subsidiary of such Person (a) that is organized under the Laws of the United States of America or any state thereof and (b) the majority of the assets of which (as reflected on a balance sheet of such Subsidiary prepared in accordance with Generally Accepted Accounting Principles) is located in the United States of America; provided that in no event shall Kaufman and Broad International or KBMHG be considered a Domestic Subsidiary of Borrower. "Domestic Unimproved Land" means, as of any date of determination, real Property located in the United States of America (including real Property owned by the Land Fund Joint Venture for at least four years) (a) owned by Borrower or any of its Subsidiaries if on that date there has been expended by Borrower and its Subsidiaries less than 50% of the physical construction costs reasonably estimated by Borrower (in accordance with its past practices as of the Closing Date) to bring such real Property to "finished lot" status and (b) owned by other Persons but which, if owned by Borrower or any of its Subsidiaries on that date, would have satisfied the requirement set forth in clause (a), if on that date Borrower or any of its Domestic Subsidiaries holds an option to purchase such real Property for which it has paid an amount equal to 20% or more of the purchase price provided for in such option to purchase. The "book value" with respect to Domestic Unimproved Land referred to in Section 6.17 shall be calculated as if the option to purchase had been exercised as of the date of determination, and otherwise in accordance with Generally Accepted Accounting Principles, consistently applied. "Domestic Unimproved Unmapped Land" means, as of any date of determination, Domestic Unimproved Land that is not then covered by a "tentative" or "final" subdivision map in compliance with applicable Laws respecting subdivision maps or, in the opinion of the Administrative Agent, an equivalent entitlement that authorizes the development of real Property. "ERISA" means, at any date, the Employee Retirement Income Security Act of 1974 and the regulations thereunder, all as the same shall be in effect at such date. "ERISA Affiliate" means, with respect to any Person, any other Person (or any trade or business, whether or not incorporated) that is under common control with that Person within the meaning of Section 414 of the Code. -11- 17 "Event of Default" has the meaning set forth for that term in Section 9.1. "Federal Funds Rate" means the rate per annum equal to the weighted average (rounded upwards, if necessary, to the nearest 1/100th of one percent) of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers as published for such day (or, if such day is not a Banking Day, for the next preceding Banking Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Banking Day, the average, the average (rounded upwards, if necessary, to the nearest 1/100th of one percent) of the quotations for such day on transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by the Administrative Agent. "Financial Letter of Credit" means any standby letter of credit issued pursuant to this Agreement, other than a Performance Letter of Credit. "Financial Subsidiary" means (a) the Mortgage Company, so long as it continues to engage in the mortgage banking business, and its Subsidiaries and (b) any other Subsidiary of Borrower that (i) is engaged primarily in the business of origination, marketing, and servicing of residential mortgage loans, the sale of servicing rights, or the financing of long term residential mortgage loans, (ii) holds not less than 95% of its total assets in the form of Cash, Cash Equivalents, notes and mortgages receivable, Cash held by a trustee for the benefit of such Subsidiary or other financial instruments and (iii) is the subject of an Officer's Certificate of Borrower delivered to the Administrative Agent stating that such Subsidiary is a Financial Subsidiary within the meaning hereof. "Fiscal Quarter" means each of the fiscal quarters of Borrower ending on each February 28 (or 29, if a leap year), May 31, August 31 and November 30. "Fiscal Year" means each of the fiscal years of Borrower ending on each November 30. "Foreign Subsidiary" means, with respect to any Person, a Subsidiary of that Person which is not a Domestic Subsidiary and with respect to Borrower,includes Kaufman and Broad International, a California corporation, but excludes KBMHG. "Generally Accepted Accounting Principles" means, as of any date of determination, accounting principles set -12- 18 forth as "generally accepted" in then currently effective Statements of the Auditing Standards Board of the American Institute of Certified Public Accountants, or, if such Statements are not then in effect, accounting principles that are then approved by a significant segment of the accounting profession in the United States of America. The term "consistently applied," as used in connection therewith, means that the accounting principles applied to financial statements of a Person as of any date or for any period are consistent in all material respects (subject to Section 1.3) to those applied to financial statements of that Person as of prior dates and for prior periods. "Governmental Agency" means (a) any federal, state, county or municipal government, or political subdivision thereof, (b) any governmental or quasi-governmental agency, authority, board, bureau, commission, department, instrumentality, or public body, (c) any court or administrative tribunal, or (d) any arbitration tribunal or other non-governmental authority to whose jurisdiction a Person has consented, in each case whether of the United States of America or any other nation. "Government Securities" means (a) readily marketable direct full faith and credit obligations of the United States of America or obligations unconditionally guaranteed by the full faith and credit of the United States of America and (b) obligations of an agency or instrumentality of, or corporation owned, controlled or sponsored by, the United States of America that are generally considered in the securities industry to be implicit obligations of the United States of America. "Guarantor Subsidiary" means any Domestic Subsidiary which is a Significant Subsidiary, other than the Financial Subsidiaries. "Indebtedness" means, with respect to any Person, (a) all indebtedness of such Person for borrowed money, (b) that portion of the obligations of such Person under Capital Leases which should properly be recorded as a liability on a balance sheet of that Person prepared in accordance with Generally Accepted Accounting Principles, (c) any obligation of such Person that is evidenced by a promissory note or other instrument representing an extension of credit to such Person, whether or not for borrowed money, (d) any obligation of such Person for the deferred purchase price of Property or services (other than trade or other accounts payable in the ordinary course of business in accordance with customary industry terms), (e) any obligation of the types referred to in clauses (a) through (d) above that is secured by a Lien -13- 19 (other than a Permitted Encumbrance) on assets of such Person, whether or not that Person has assumed such obligation or whether or not such obligation is non-recourse to the credit of such Person, but only to the extent of the fair market value of the assets so subject to the Lien, (f) obligations of such Person arising under acceptance facilities or under facilities for the discount of accounts receivable of such Person, (g) any obligation of such Person under letters of credit issued for the account of such Person and that is not otherwise a Contingent Guaranty Obligation and (h) any obligation of such Person under a Swap Agreement. "Intangible Assets" means assets that are considered intangible assets under Generally Accepted Accounting Principles, including (a) customer lists, goodwill, computer software, unamortized deferred charges, unamortized debt discount, capitalized research and development costs and other intangible assets and (b) any write-up in book value of any asset subsequent to its acquisition, but excluding any existing write-up in book value of any asset acquired by Borrower or any of its Subsidiaries prior to the Closing Date, as such write-up may decrease (but not increase) from time to time. "Interest Period" means, as to each LIBOR Loan, a period of one, two, three or six months (and, to the extent funding is available therefor to the Administrative Agent, nine or twelve months), as designated by Borrower; provided that (a) the first day of each Interest Period must be a LIBOR Market Day, (b) any Interest Period that would otherwise end on a day that is not a LIBOR Market Day shall be extended to the next succeeding LIBOR Market Day, unless such LIBOR Market Day falls in the next calendar month, in which case the LIBOR Period shall end on the next preceding LIBOR Market Day, and (c) no Interest Period may extend beyond the Maturity Date. "Investment" means, with respect to any Person, any investment by that Person, whether by means of purchase or other acquisition of capital stock or other Securities of any other Person or by means of loan, advance, capital contribution, guarantee, or other debt or equity participation or interest in any other Person, including any partnership or joint venture interest in any other Person; provided that an Investment of a Person shall not include any trade or account receivable arising in the ordinary course of the business of such Person. The amount of any Investment shall be the amount actually invested, without adjustment for subsequent increases or decreases in the market value of such Investment. -14- 20 "Issuing Bank" means Bank of America and, with the consent of the subject Bank and the approval of the Administrative Agent, any other Bank as may be designated by Borrower from time to time. "Joint Venture" means any joint venture or limited partnership (i) in which Borrower or any Domestic Subsidiary of Borrower is, with respect to any joint venture, a partner or, with respect to any limited partnership, the general partner, and (ii) which has at least one partner that is not an Affiliate of Borrower or any Subsidiary of Borrower. "Joint Venturers" means, collectively, Borrower and certain pension funds or a joint venture comprised of such pension funds which are parties to the Land Fund Joint Venture. "KBMHG" means Kaufman and Broad Multi-Housing Group, Inc., a Subsidiary of Borrower. "Land Fund Joint Venture" means that certain land fund created by the Joint Venturers on or about August 30, 1989 for the purpose of acquiring unimproved real Property and processing it into legally sub-divided lots. "Laws" means, collectively, all foreign, federal, state and local statutes, treaties, codes, ordinances, rules, regulations and controlling precedents of any Governmental Agency. "Letter of Credit" means a Financial Letter of Credit or a Performance Letter of Credit. "Letter of Credit Usage" means, as of any date of determination, the aggregate undrawn face amount of outstanding Letters of Credit plus the aggregate amount of unreimbursed draws under Letters of Credit (that is, draws for which no Alternate Base Rate Loan was made pursuant to Section 2.5). "LIBOR" means, for each LIBOR Loan, that rate per annum, determined solely by the Administrative Agent, pursuant to the following formula (with each component expressed as a decimal and rounded upward to the nearest 1/100 of 1%): London Interbank Offered Rate for that LIBOR Loan 1.00 - Reserve Percentage "LIBOR Advance" means an Advance made by a Bank to fund its Pro Rata Share of a LIBOR Loan. -15- 21 "LIBOR Lending Office" means, with respect to each Bank, its office, branch or affiliate identified on the signature page hereof as its LIBOR Lending Office or such other office, branch or affiliate as such Bank may hereafter designate as its LIBOR Lending Office by notice to Borrower and the Administrative Agent. "LIBOR Loan" means a Loan made hereunder and designated or redesignated as a LIBOR Loan in accordance with Article 2. "LIBOR Market" means the London, England market established by and among banks for the solicitation, offer and acceptance of Dollar deposits in such banks. "LIBOR Market Day" means any Banking Day on which commercial banks are open for international business (including dealing in Dollar deposits) in London, England. "Lien" means any mortgage, deed of trust, pledge, hypothecation, assignment for security, security interest, encumbrance, lien or charge of any kind, whether voluntarily incurred or arising by operation of Law or otherwise, affecting any Property,including any agreement to grant any of the foregoing other than an agreement which gives to a Person the right to become equally and ratably secured with any other Person other than the Administrative Agent and the Banks with respect to the Obligations) to whom a Lien is granted on any item of Property) any conditional sale or other title retention agreement, any lease in the nature of a security interest, and/or the filing of or agreement to give any financing statement other than a precautionary financing statement with respect to a lease that is not in the nature of a security interest) under the Uniform Commercial Code or comparable Law of any jurisdiction with respect to any Property. "Loan" means any of the groups of Advances made at any one time by the Banks. "Loan Documents" means, collectively, this Agreement, the Notes, the Subsidiary Guaranty, the Override Agreement and any other agreement or instrument that may hereafter be executed and delivered by Borrower or a Subsidiary of Borrower in favor of the Banks relating to or in furtherance of this Agreement. "London Interbank Offered Rate" means, for each LIBOR Loan, the per annum rate (rounded upward to the nearest 1/100 of 1%), determined solely by the Administrative Agent, at which Bank of America's branch in London, -16- 22 England would offer deposits of Dollars in the LIBOR Market at or about 11:00 a.m., London time, on the day two LIBOR Market Days preceding the first day of the applicable Interest Period for approximately the same time period as the applicable Interest Period and in an amount approximately equal to Bank of America's Pro Rata Share of that LIBOR Loan. "Majority Banks" means, as of any date of determination, Banks holding in the aggregate at least 51% of the principal Indebtedness then evidenced by the Notes or, if there is then no such outstanding Indebtedness, Banks having in the aggregate at least a 51% Pro Rata Share of the Commitment. "Managing Agent" means either of Bank of America National Trust and Savings Association or The First National Bank of Chicago. Except as set forth in the Override Agreement, the Managing Agents shall have no duties under the Loan Documents beyond those of a Bank. "Material Adverse Effect" means any circumstance or event, or any set of circumstances or events which, individually or when aggregated with any other circumstances or events, (a) has or probably will have any material adverse effect upon the validity or enforceability of any Loan Document, (b) is or probably will be material and adverse to the condition (financial or otherwise) or operations of Borrower and its Subsidiaries, taken as a whole, (c) materially impairs or probably will materially impair the ability of Borrower and its Subsidiaries, taken as a whole, to perform the Obligations or (d) were initiated or approved by Borrower or any of its Subsidiaries and which materially impairs or probably will materially impair the ability of the Banks to enforce any material legal remedy pursuant to the Loan Documents. "Material KBMC Default" means an event which, with the giving of notice or passage of time or both, would become a Material KBMC Event of Default. "Material KBMC Event of Default" means any "Event of Default" described in Section 11.1(a), 11.1(b) (but only to the extent the same relates to failure to comply with a covenant contained in Sections 10.1 through 10.23, inclusive, of the Mortgage Warehousing Agreement and, in the case of Sections 10.16, 10.19, 10.20 and 10.22, only to the extent the failure to comply has a Material Adverse Effect), 11.1(d) (but only to the extent that the misrepresentation therein described has a Material Adverse -17- 23 Effect) and11.1(e) through 11.1(q), inclusive, of the Mortgage Warehousing Agreement. "Maturity Date" means December 31, 1997. "Model Homes" means housing units which have been completed, furnished and landscaped and are used in the marketing efforts with respect to a residential home project, provided that up to twenty percent (20%) of the total number of residential home projects may each have up to six units that may be considered Model Homes, and in all other residential home projects no more than four units shall be considered Model Homes. "Mortgage Company" means Kaufman and Broad Mortgage Company, an Illinois corporation and a wholly owned Financial Subsidiary of Borrower. "Mortgage Warehousing Agreement" means that certain Loan Agreement dated as of September 15, 1993 among Mortgage Company, the banks party thereto and Credit Lyonnais Los Angeles Branch, as agent for the banks, as heretofore amended and as further amended as of the Closing Date and as the same may from time to time be amended or modified. "Mortgage Warehousing Guaranty" means Borrower's Guaranty dated September 15, 1993, as amended or modified from time to time, of up to $30,000,000 of the obligations of Mortgage Company under the Mortgage Warehousing Agreement in the event of a "Delivery Failure", as defined in such Guaranty. "Multiemployer Plan" means any employee benefit plan of a type described in Section 4001(a)(3) of ERISA. "Net Orders" means, as of any date of determination, the number of items of housing inventory that are in the process of being sold and with respect to which a purchase contract has been signed, as reported in Borrower's filings with the Securities Exchange Commission. "Net Realizable Value Adjustment" means the reporting adjustment required pursuant to Generally Accepted Accounting Principles to reflect a decrease in the book value of inventory below its historical cost. "Non-Recourse Indebtedness" means Indebtedness incurred in connection with the purchase or improvement of Property (a) that is secured solely by the Property purchased or improved, (b) with respect to which the holder of such Indebtedness has recourse only to such -18- 24 Property, and (c) that is otherwise non-recourse (whether by contract or under applicable Law) to any Person. "Note" means any of the promissory notes issued by Borrower to each Bank evidencing Advances by that Bank of its Pro Rata Share under the Commitment substantially in the form of Exhibit B, either as originally executed or the same may from time to time be supplemented, modified, amended, renewed, extended or supplanted. "Obligations" means all present and future obligations of every kind or nature of Borrower or any Party at any time and from time to time owed to the Administrative Agent or the Banks or any one or more of them under any one or more of the Loan Documents, whether due or to become due, matured or unmatured, liquidated or unliquidated, or contingent or noncontingent,including obligations of performance as well as obligations of payment, andincluding interest that accrues to the extent permitted by applicable Law after the commencement of any proceeding under any Debtor Relief Law by or against Borrower. "Officer's Certificate" means, when used with reference to any Person, a certificate signed by a Senior Officer of such Person. "Opinions of Counsel" means the favorable written legal opinions of Sidley & Austin, special counsel to Borrower, and Barton P. Pachino, General Counsel of Borrower to be delivered pursuant to the Override Agreement. "Override Agreement" means that certain Override Agreement of even date herewith among Borrower, Mortgage Company, the Agents and the Banks, as the same may from time to time be amended or modified. "Party" means any Person other than the Banks or the Agents which now or hereafter is a party to any of the Loan Documents. "PBGC" means the Pension Benefit Guaranty Corporation or any successor thereto established under ERISA. "Pension Plan" means any "employee pension benefit plan" (as such term is defined in ERISA) which is subject to Title IV of ERISA and which is maintained for employees of Borrower or any of its ERISA Affiliates. "Performance Letter of Credit" means any standby letter of credit issued pursuant to this Agreement to -19- 25 assure completion of performance of a nonfinancial or commercial obligation of Borrower or any of its Subsidiaries. "Permitted Encumbrances" means: (a) inchoate Liens incident to construction or maintenance of real property; or Liens incident to construction or maintenance of real property now or hereafter filed of record for which adequate reserves have been set aside and which are being contested in good faith by appropriate proceedings and have not proceeded to judgment, provided that, by reason of nonpayment of the obligations secured by such Liens, no material property is subject to a material risk of loss or forfeiture; (b) Liens for taxes and assessments on real property which are not yet past due; or Liens for taxes and assessments on real property for which adequate reserves have been set aside and are being contested in good faith by appropriate proceedings and have not proceeded to judgment, provided that, by reason of nonpayment of the obligations secured by such Liens, no material property is subject to a material risk of loss or forfeiture; (c) minor defects and irregularities in title to any real property which in the aggregate do not materially impair the fair market value or use of the real property for the purposes for which it is or may reasonably be expected to be held; (d) easements, exceptions, reservations, or other agreements for the purpose of pipelines, conduits, cables, wire communication lines, power lines and substations, streets, trails, walkways, drainage, irrigation, water, utilities, and sewerage purposes, dikes, canals, ditches, the removal of oil, gas, coal, or other minerals, and other like purposes affecting real property, facilities, or equipment which in the aggregate do not materially burden or impair the fair market value or use of such property for the purposes for which it is or may reasonably be expected to be held; (e) easements, exceptions, reservations, or other agreements for the purpose of facilitating the joint or common use of property in a shopping center or similar real property project affecting real property which in the aggregate do not materially burden or impair the fair market value or use of such -20- 26 property for the purposes for which it is or may reasonably be expected to be held; (f) rights reserved to or vested in any Governmental Agency to control or regulate the use of any real property; (g) any obligations or duties affecting any real property to any Governmental Agency with respect to any right, power, franchise, grant, license, or permit; (h) present or future zoning laws and ordinances or other laws and ordinances restricting the occupancy, use, or enjoyment of real property; (i) statutory Liens, including warehouseman's liens, other than those described in clauses (a) or (b) above, arising in the ordinary course of business with respect to obligations which are not delinquent or are being contested in good faith, provided that, if delinquent, adequate reserves have been set aside with respect thereto and, by reason of nonpayment, no material property is subject to a material risk of loss or forfeiture; (j) covenants, conditions, and restrictions affecting the use of real property which in the aggregate do not materially impair the fair market value or use of the real property for the purposes for which it is or may reasonably be expected to be held; (k) rights of tenants under leases and rental agreements covering real property entered into in the ordinary course of business of the Person owning such real property; (l) Liens consisting of pledges or deposits to secure obligations under workers' compensation laws or similar legislation, including Liens of judgments thereunder which are not currently dischargeable; (m) Liens consisting of pledges or deposits of property to secure performance in connection with operating leases made in the ordinary course of business to which the Borrower or a Subsidiary is a party as lessee, provided the aggregate value of all such pledges and deposits in connection with any such lease does not at any time exceed 25% of the annual fixed rentals payable under such lease; -21- 27 (n) Liens consisting of deposits of property to secure statutory obligations of the Borrower or a Subsidiary of Borrower in the ordinary course of its business; and (o) Liens consisting of deposits of property to secure (or in lieu of) surety, appeal or customs bonds in proceedings to which Borrower or a Subsidiary of Borrower is a party in the ordinary course of its business. "Permitted Right of Others" means a Right of Others consisting of (a) an interest (other than a legal or equitable co-ownership interest, an option or right to acquire a legal or equitable co-ownership interest and any interest of a ground lessor under a ground lease), that does not materially impair the value or use of property for the purposes for which it is or may reasonably be expected to be held, (b) an option or right to acquire a Lien that would be a Permitted Encumbrance or (c) the reversionary interest of a landlord under a lease of Property. "Person" means an individual, trustee, corporation, general partnership, limited partnership, joint stock company, trust, estate, unincorporated organization, union, tribe, business association or firm, joint venture, Governmental Agency, or other entity. "Prior Loan Agreement" has the meaning set forth for that term in the Recitals hereto. "Projections" means the financial projections of Borrower dated October 5, 1994. "Property" means any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible. "Pro-Rata Share" means, with respect to each Bank, the percentage set forth opposite the name of that Bank on Schedule 1.1 to the Override Agreement. "Quarterly Payment Date" means December 31, 1994 and each March 31, June 30, September 30 and December 31 thereafter through and including the Maturity Date. "Reference Rate" means the per annum rate of interest publicly announced from time to time by Bank of America at San Francisco, California, as its Reference Rate. The Reference Rate is set by Bank of America based on various factors, including Bank of America's costs and -22- 28 desired return, general economic conditions and other factors, and is used as a reference point for pricing loans. Bank of America may price loans at, above or below the Reference Rate. Any change in the Reference Rate shall take effect on the day specified in the public announcement of such change. "Regulation D" means Regulation D, as at any time amended, of the Board of Governors of the Federal Reserve System or any other regulation in substance substituted therefor. "Regulatory Development" means (a) any change in the Laws, (b) change in the application of any existing Laws or the interpretation thereof by any Governmental Agency or central bank or comparable authority (whether or not having the force of Law), or (c) compliance by any Bank with any request or directive (whether or not having the force of Law) of any Governmental Agency or central bank or comparable authority. "Request for Letter of Credit" means a written request for the issuance of a Letter of Credit signed by a Responsible Official of Borrower, substantially in the form of Exhibit C. "Request for Loan" means a request for a Loan signed by a Responsible Official of Borrower, substantially in the form of Exhibit D. "Request for Redesignation of Loans" means a written request for redesignation of Loans signed by a Responsible Official of Borrower, substantially in the form of Exhibit E. "Requirement of Law" means, as to any Person, the articles or certificate of incorporation and by-laws or other organizational or governing documents of such Person, any Law or any judgment, award, decree, writ or determination of, or any consent or similar agreement with, a Governmental Agency, in each case applicable to or binding upon such Person or any of its Property or to which such Person or any of its Property is subject. "Reserve Percentage" means, for each LIBOR Loan, the total of the maximum reserve percentages for determining the reserves to be maintained by member banks of the Federal Reserve System for Eurocurrency Liabilities, as defined in Regulation D. The Reserve Percentage shall be expressed in decimal form and rounded upward, if necessary, to the nearest 1/100th of one percent, and shall include marginal, emergency, supplemental, special and -23- 29 other reserve percentages. The Reserve Percentage shall be determined solely by the Administrative Agent, which determination shall be conclusive absent manifest error. "Responsible Official" means (a) when used with reference to a Person other than an individual, any corporate officer of such Person, general partner of such Person, corporate officer of a corporate general partner of such Person, or corporate officer of a corporate general partner of a partnership that is a general partner of such Person, or any other responsible official thereof duly acting on behalf thereof, and (b) when used with reference to a Person who is an individual, such Person. Any document or certificate hereunder that is signed or executed by a Responsible Official of a Person shall be conclusively presumed to have been authorized by all necessary corporate, partnership and/or other action on the part of that Person. "Right of Others" means, with respect to any Property in which a Person has an interest, (a) any legal or equitable claim or other interest other than a Lien) in or with respect to that Property held by any other Person, and (b) any option or right held by any other Person to acquire any such claim or other interest including a Lien). "Securities" means any capital stock, share, voting trust certificate, bonds, debentures, notes or other evidences of indebtedness, limited partnership interests, or any warrant, option or other right to purchase or acquire any of the foregoing. "Senior Officer" means the (a) chief executive officer, (b) chief operating officer, (c) chief financial officer, or (d) treasurer, in each case whatever the title nomenclature may be, of the Person designated. "Shareholders' Equity" means, as of any date of determination, shareholders' equity as of that date determined in accordance with Generally Accepted Accounting Principles; provided that there shall be excluded from Shareholders' Equity any amount attributable to capital stock that is, directly or indirectly, required to be redeemed or repurchased by the issuer thereof prior to the date which is one year after the Maturity Date or upon the occurrence of specified events or at the election of the holder thereof. "Significant Subsidiary" means, as of any date of determination, any Subsidiary of Borrower (other than a -24- 30 Joint Venture) with respect to which any of the following conditions is met: (a) the aggregate book value of all Investments of Borrower and its Subsidiaries in such Subsidiary exceeds five percent of the consolidated total assets (other than assets of Financial Subsidiaries) of Borrower and its Subsidiaries as of such date; or (b) the proportionate share of Borrower and its Subsidiaries in the total assets of such Subsidiary (after intercompany eliminations) exceeds five percent of the consolidated total assets (other than assets of Financial Subsidiaries) of Borrower and its Subsidiaries as of such date; or (c) the equity of Borrower and its Subsidiaries in the net income of such Subsidiary (before income taxes, extraordinary items and cumulative effect of a change in accounting principles) as of the end of the most recently ended fiscal year or years of such Subsidiary exceeds the greater of (i) an amount equal to five percent of the consolidated net income of Borrower and its Subsidiaries (computed as aforesaid) as of the end of the most recent Fiscal Year ended prior to such date or (ii) $3,000,000. "Subordinated Obligations" means, collectively, all obligations of Borrower or any of its Subsidiaries that (a) do not provide for any payment of principal, any sinking fund payment or any mandatory redemption prior to the Maturity Date, (b) are expressly subordinated to the Obligations by a written instrument containing subordination and related provisions (including interest payment blockage, standstill and related provisions) not less favorable to the Banks in any respect whatsoever from those applicable to Borrower's 9-3/8% Senior Subordinated Notes due 2003 (the "Subordinated Notes") (or such other subordination and related provisions as may be approved in writing by the Majority Banks), (c) are subject to financial covenants not more burdensome to Borrower in any respect than those applicable to the Subordinated Notes, except such covenants as may be approved in writing by the Majority Banks and (d) are subject to other covenants (other than the covenant to pay interest) and events of default which in the aggregate are not more burdensome to Borrower than those applicable to the Subordinated Notes,except such covenants or events of default as may be approved in writing by the Majority Banks. "Subsidiary" means, with respect to any Person, any corporation, limited liability company, partnership or -25- 31 joint venture whether now existing or hereafter organized or acquired: (a) in the case of a corporation or limited liability company, of which securities having a majority of the ordinary voting power for the election of the board of directors (other than securities having such power only by reason of the happening of a contingency) are at the time owned by such Person and/or one or more Subsidiaries of such Person or (b) in the case of a partnership, joint venture or other business entity, in which such Person or a Subsidiary of such Person is a general partner, or (c) in the case of a partnership, joint venture or other business entity which would qualify as a Foreign Subsidiary, in which such Person or a Subsidiary of such Person owns an equity interest of more than 50%, provided thatthe Land Fund Joint Venture shall not be a Subsidiary so long as each of the following conditions remains satisfied: (1) all real Property purchased by the Land Fund Joint Venture shall be located within the state of California, (2) the aggregate amount of Borrower's Investment in the Land Fund Joint Venture shall not exceed the lesser of $15,000,000 or 10% of the total capitalization of the Land Fund Joint Venture, (3) the Land Fund Joint Venture shall not create, incur, assume or suffer to exist any Indebtedness other than Non-Recourse Indebtedness, (4) the aggregate outstanding principal amount of Non-Recourse Indebtedness of the Land Fund Joint Venture (other than to Joint Venturers as defined below) shall not exceed an amount equal to 50% of its total capitalization, and (5) Borrower shall not be liable in any capacity for any amount in excess of its Investment in the Land Fund Joint Venture. "Subsidiary Guaranty" means the guaranty of the Obligations executed by each Guarantor Subsidiary of Borrower substantially in the form ofExhibit F, either as originally executed or as the same may from time to time be supplemented, modified, amended, renewed, extended or supplanted. "Swap Agreement" means one or more written agreements between Borrower and one or more financial institutions providing for "swap", "cap", "collar" or other interest rate protection with respect to any Indebtedness. "Tangible Net Worth" means, with respect to any Person and as of any date of determination, the Shareholders' Equity of that Person on that dateminus all Intangible Assets of that Person on that date. "Termination Event" means (a) a "reportable event" as defined in Section 4043 of ERISA (other than a "reportable event" that is not subject to the provision for 30 day -26- 32 notice to the PBGC), (b) the withdrawal of Borrower or any of its ERISA Affiliates from a Pension Plan during any plan year in which it was a "substantial employer" as defined in Section 4001(a)(2) of ERISA, (c) the filing of a notice of intent to terminate a Pension Plan or the treatment of an amendment to a Pension Plan as a termination thereof pursuant to Section 4041 of ERISA,other than pursuant to Section 4041(b) of ERISA, (d) the institution of proceedings to terminate a Pension Plan by the PBGC or (e) any other event or condition which might reasonably be expected to constitute grounds under ERISA for the termination of, or the apportionment of a trustee to administer, any Pension Plan. "to the best knowledge of" means, when modifying a representation, warranty or other statement of any Person, that such representation, warranty or statement is a representation, warranty or statement that (a) the Person making it has no actual knowledge of the inaccuracy of the matters therein stated and (b) assuming the exercise by the Person making it of reasonable due diligence under the circumstances (in accordance with the standard of what a reasonable Person would have done under similar circumstances), the Person making it would have no actual knowledge of the inaccuracy of the matters therein stated. Where the Person making the representation, warranty or statement is not a natural Person, the aforesaid actual or constructive knowledge shall be that of any Senior Officer of that Person. "Underwriting Bank" means any of Bank of America, Credit Lyonnais Los Angeles Branch, The First National Bank of Chicago, NBD Bank, N.A. and NationsBank of Texas, N.A. 1.2 Use of Defined Terms. Any defined term used in the plural preceded by the definite article shall be taken to encompass all members of the relevant class. Any defined term used in the singular preceded by "any" shall be taken to indicate any number of the members of the relevant class. 1.3 Accounting Terms. All accounting terms not specifically defined in this Agreement shall be construed in conformity with, and all financial data required to be submitted by this Agreement shall be prepared in conformity with, Generally Accepted Accounting Principles, consistently applied, except as otherwise specifically prescribed herein. In the event that Generally Accepted Accounting Principles change during the term of this Agreement such that the financial covenants contained in Sections 6.4, 6.7, 6.8, 6.9, 6.10, 6.11, 6.13, 6.17, 6.18 and 6.19 would then be calculated in a different manner or with different components or would render -27- 33 the same not meaningful criteria for evaluating Borrower's financial condition, (a) Borrower and the Banks agree to amend this Agreement in such respects as are necessary to conform those covenants as criteria for evaluating Borrower's financial condition to substantially the same criteria as were effective prior to such change in Generally Accepted Accounting Principles and (b) Borrower shall be deemed to be in compliance with the financial covenants contained in such Sections during the 90 day period following such change in Generally Accepted Accounting Principles if and to the extent that Borrower would have been in compliance therewith under Generally Accepted Accounting Principles as in effect immediately prior to such change. 1.4 Rounding. Any financial ratios required to be maintained by Borrower pursuant to this Agreement shall be calculated by dividing the appropriate component by the other component, carrying the result to one place more than the number of places by which such ratio is expressed in this Agreement and rounding the result up or down to the nearest number (with a round-up if there is no nearest number) to the number of places by which such ratio is expressed in this Agreement. 1.5 Miscellaneous Terms. The term "or" is disjunctive; the term "and" is conjunctive. The term "shall" is mandatory; the term "may" is permissive. Masculine terms also apply to females; feminine terms also apply to males. The term "including" is by way of example and not limitation. 1.6 Exhibits and Schedules. All Exhibits and Schedules to this Agreement, either as originally existing or as the same may from time to time be supplemented, modified, or amended, are incorporated herein by reference. A matter disclosed on any Schedule shall be deemed disclosed on all Schedules. 1.7 References to "Borrower and its Subsidiaries". Any reference herein to "Borrower and its Subsidiaries" or the like shall refer solely to Borrower during such times, if any, as Borrower shall have no Subsidiaries. ARTICLE 2 LOANS 2.1 Loans-General. (a) Subject to the terms and conditions set forth in this Agreement (including Section 8.2) and the Override Agreement, at any time and from time to time from the Closing Date through the Banking Day immediately preceding the Maturity Date, each Bank shall, pro rata according to -28- 34 that Bank's Pro Rata Share of the Commitment then in effect, make Advances to Borrower under the Commitment in such amounts as Borrower may request;provided that, after giving effect to such Advance, the aggregate outstanding principal of the Loans evidenced by that Bank's Noteplus that Bank's Pro Rata Share of the Letter of Credit Usage shall not exceed that Bank's Pro Rata Share of the Commitment. Subject to the limitations set forth herein, Borrower may borrow, repay and reborrow under this Section 2.1 without premium or penalty. (b) Subject to the next sentence and to Section 2.5(d), each Loan shall be made pursuant to a Request for Loan which shall specify the requested (i) date of such Loan, (ii) type of Loan, (iii) amount of such Loan, and (iv) in the case of an LIBOR Loan, Interest Period for such Loan. Unless the Administrative Agent, in its sole and absolute discretion, has notified Borrower to the contrary, each Loan shall be requested by telephone (promptly confirmed in writing) or telecopier by a Responsible Official of Borrower, and Borrower shall confirm such request by promptly mailing a Request for Loan conforming to the preceding sentence to the Administrative Agent. (c) Promptly following receipt of a Request for Loan, the Administrative Agent shall notify each Bank by telephone, telecopier or telex of the date and type of the Loan, the applicable Interest Period in the case of an LIBOR Loan, and that Bank's Pro Rata Share of the Loan. Not later than 11:00 a.m., San Francisco time, on the date specified for any Loan, each Bank shall make its Pro-Rata Share of the Loan in immediately available funds available to the Administrative Agent at the Administrative Agent's Office. Upon fulfillment of the applicable conditions set forth inArticle 8, all Advances shall be credited in immediately available funds to the Designated Deposit Account. (d) The principal amount of each Loan shall be an integral multiple of $1,000,000 and shall be in an amount not less than (i) $1,000,000 if such Loan is an Alternate Base Rate Loan, and (ii) $10,000,000 if such Loan is a LIBOR Loan. (e) A Request for Loan shall be irrevocable upon the Administrative Agent's first notification thereof. The obligation of each Bank to make any Advance is several, and not joint or joint and several, and is not conditioned upon the performance by any other Bank of its obligation to make Advances. The failure by any Bank to perform its -29- 35 obligation to make any Advance will not increase the obligation of any other Bank to make Advances. (f) Borrower may redesignate an Alternate Base Rate Loan as a LIBOR Loan, or a LIBOR Loan as an Alternate Base Rate Loan or a LIBOR Loan with a new Interest Period, by delivering a Request for Redesignation to the Administrative Agent, within the time periods and pursuant to the conditions set forth in Section2.1(b), 2.2 or 2.3, as applicable, and elsewhere in this Agreement (including Section 8.3). If no Request for Redesignation (or telephonic or other request referred to in the second sentence of Section 2.1(b), if applicable) has been made prior to the last day of the Interest Period for an outstanding LIBOR Loan within the requisite notice periods set forth in Section2.3 in connection with a Loan which, if made, would not increase the outstanding principal indebtedness evidenced by the Notes, then Borrower shall be deemed to have requested an Alternate Base Rate Loan in an amount equal to the amount necessary to cause the outstanding principal Indebtedness evidenced by the Notes to remain the same and, subject to Section 8.3, the Banks shall make the Advances necessary to make such Loan notwithstanding Sections 2.1(b) and 2.2. 2.2 Alternate Base Rate Loans. Each request by Borrower for an Alternate Base Rate Loan shall be made pursuant to a Request for Loan (or telephonic or other request for loan referred to in the second sentence of Section 2.1(b), if applicable) received by the Administrative Agent, at the Administrative Agent's Office, not later than 9:00 a.m., San Francisco time, on the Banking Day on which the requested Alternate Base Rate Loan is to be made. The Administrative Agent shall notify each Bank of a request for an Alternate Base Rate Loan as soon as practicable after receipt of the same. All Loans shall constitute Alternate Base Rate Loans unless properly designated as LIBOR Loans pursuant to Section 2.3. 2.3 LIBOR Loans. (a) Each request by Borrower for a LIBOR Loan shall be made pursuant to a Request for Loan (or telephonic or other request for loan referred to in the second sentence of Section2.1(b), if applicable) received by the Administrative Agent, at the Administrative Agent's Office, not later than 9:00 a.m., San Francisco time, at least three (3) LIBOR Market Days before the first day of the applicable Interest Period. The Administrative Agent shall notify each Bank of a request for a LIBOR Loan as soon as practicable after receipt of the same. -30- 36 (b) At or about 10:00 a.m., San Francisco time, two (2) LIBOR Market Days before the first day of the applicable Interest Period, the Administrative Agent shall determine the applicable LIBOR (which determination shall be conclusive in the absence of manifest error) and promptly shall give notice of the same to Borrower and the Banks by telephone, telecopier or telex. (c) No more than six (6) LIBOR Loans may be outstanding at any particular time. (d) Unless the Majority Banks otherwise consent, no LIBOR Loan may be requested during the continuance of an Event of Default. 2.4 Notes. The Advances made by each Bank under the Commitment shall be evidenced by that Bank's Note. 2.5 Letters of Credit. (a) Subject to the terms and conditions of this Agreement (including Section 8.4) and the Override Agreement, Borrower may request from time to time during the period from the Closing Date through the day prior to the Maturity Date that an Issuing Bank issue Letters of Credit for the account of Borrower, and each Issuing Bank agrees to issue for the account of Borrower one or more Letters of Credit, provided that (i) Borrower shall not request that an Issuing Bank issue any Letter of Credit if, after giving effect to such issuance, the aggregate outstanding principal of the Loans evidenced by the Notesplus the Letter of Credit Usage exceeds the Commitment, (ii) Borrower shall not request that an Issuing Bank issue any Letter of Credit if Borrower would not be in compliance with Section6.8, (iii) in no event shall an Issuing Bank issue any Letter of Credit having an expiration date after the Maturity Date, (iv) the Borrower shall not request any Financial Letter of Credit or Performance Letter of Credit if, after giving effect to such issuance, the Letter of Credit Usage with respect to Financial Letters of Credit and Performance Letters of Credit would exceed $50,000,000 or any limit established by Law after the Closing Date on that Issuing Bank's ability to issue the requested Letter of Credit at any time, and (v) prior to the issuance of any Letter of Credit the Issuing Bank shall request confirmation by telephone from the Administrative Agent that such Letter of Credit may be issued. Notwithstanding the foregoing, the Issuing Bank shall not be obligated to issue a Letter of Credit if, on or prior to the Banking Day immediately preceding the issuance thereof any Bank has notified the Issuing Bank in writing that the conditions set forth in -31- 37 Section 8.4 have not been satisfied with respect to the issuance of such Letter of Credit. (b) Whenever Borrower requests that an Issuing Bank issue a Letter of Credit it shall deliver to such Issuing Bank (with a copy to the Administrative Agent) (i) an executed application for such Letter of Credit in the form customarily required by the Issuing Bank and a Request for Letter of Credit by 10:00 a.m., San Francisco time, at least three (3) Banking Days prior to the proposed date of issuance,provided that the Issuing Bank shall use its best efforts to issue the proposed Letter of Credit within two Banking Days after receipt of such request, and (ii) the form of the Letter of Credit requested, together with such other information or materials as the Issuing Bank may reasonably request with respect to such Letter of Credit. The Administrative Agent shall promptly thereafter notify each of the Banks of the contents of such Request for Letter of Credit and proposed form of Letter of Credit. Prior to the issuance of any Letter of Credit, the Issuing Bank shall confirm by telephone with the Administrative Agent that, giving effect to the issuance of such Letter of Credit, the limitations set forth in Section2.5(a) have been satisfied. (c) Each Issuing Bank shall notify the Administrative Agent and Borrower of each issuance or amendment of any Letter of Credit issued by it on the Banking Day upon which such issuance or amendment occurs. Such notice shall indicate whether such Letter of Credit is, in the reasonable determination of the Issuing Bank (which determination shall be conclusive absent manifest error), a Financial Letter of Credit or a Performance Letter of Credit. Upon the issuance of a Letter of Credit, each Bank other than the respective Issuing Bank and any Bank that has notified the Issuing Bank pursuant to the last sentence of Section2.5(a) with respect to such Letter of Credit) shall be deemed to have purchased a pro rata participation from the Issuing Bank in an amount equal to that Bank's Pro Rata Share, of the face amount of such Letter of Credit. Without limiting the scope and nature of each such Bank's participation in any Letter of Credit, to the extent that the Issuing Bank has not been reimbursed for any payment required to be made by the Issuing Bank under any Letter of Credit by the Banks through the making of an Alternative Base Rate Loan in accordance with Section 2.5(d) or by the Borrower in accordance with Section 2.5(e), each such Bank shall, according to its Pro Rata Share, immediately reimburse the Issuing Bank upon demand for the amount of such payment. If any Bank fails to reimburse the Issuing Bank in the manner required by this Section on the same day upon which the related -32- 38 payment has been made by the Issuing Bank, that Bank shall also pay interest to the Issuing Bank on the amount of such reimbursement obligations at the Federal Funds Rate for the first two days after payment has been made by the Issuing Bank and at a rate equal to the sum of the Federal Funds Rate plus 2% from and after the third day after the date such payment was made (which interest shall not be for the account of or otherwise reimbursable by Borrower). The obligation of each such Bank to so reimburse the Issuing Bank shall be absolute and unconditional and shall not be affected by (i) the occurrence of an Event of Default or a Default, (ii) any set-off, counterclaim, defense or other right that such Bank or Borrower may have against the Issuing Bank, Borrower or any other Person, (iii) any adverse change in the condition (financial or otherwise) of Borrower or (iv) any other occurrence or event. Any such reimbursement shall not relieve or otherwise impair the obligation of Borrower to reimburse the Issuing Bank under any Letter of Credit together with interest as hereinafter provided. (d) The Issuing Bank shall provide notice to Borrower and the Administrative Agent of the amount of each demand for a draw under any Letter of Credit and, where practicable, such notice may be provided on the Banking Day immediately preceding the Banking Day of an expected payment. If all of the limitations and requirements set forth in this Agreement with respect to the making of an Alternate Base Rate Loan except the requirement that a Request for Loan be made as and when specified herein) have been satisfied then the Banks shall be obligated to make an Alternate Base Rate Loan to Borrower (without notice to or the consent of the Borrower) in an aggregate amount equal to the amount paid by the Issuing Bank on the related Letter of Credit. The Administrative Agent shall thereupon promptly provide notice of such payment under the Letter of Credit to the Banks, and within one Banking Day after such notice from the Administrative Agent, each Bank shall make its Pro Rata Share of the Alternate Base Rate Loan made by the Issuing Bank (plus interest at the Federal Funds Rate for the first two days after the date payment has been made by the Issuing Bank and at a rate equal to thesum of the Federal Funds Rate plus 2% from and after the third day after the date such payment has been made by he Issuing Bank, which interest shall not be for the account of or otherwise reimbursable by Borrower) available to the Administrative Agent for the account of the Issuing Bank in immediately available funds, and such funds shall collectively constitute the aforementioned Alternate Base Rate Loan, the proceeds of which shall be paid to the -33- 39 Issuing Bank to reimburse it for the payment made by it under the Letter of Credit. (e) In the event that not all of the limitations and requirements set forth in this Agreement with respect to the making of an Alternative Base Rate Loan other than the requirement that a Request for Loan be made as and when specified herein) have been satisfied, then Borrower agrees to pay to the Issuing Bank an amount equal to the amount of the applicable demand for a draw under a Letter of Credit (i) on the same Banking Day any payment is made, if the Issuing Bank notifies Borrower of such payment prior to 12:00 p.m., San Francisco time, on the Banking Day immediately preceding the Banking Day upon which such payment is to be made or (ii) on the Banking Day immediately following the Banking Day of the payment, if later notice is given. The principal amount of any such payment made by Borrower to the Issuing Bank shall be used to reimburse the Issuing Bank for the payment made by it under the Letter of Credit. In the event that Borrower does not make such payment when due, Borrower shall also pay interest to the Administrative Agent for the account of the Banks on such amount from the date of any payment to, but not including, the date of payment by Borrower at the rate provided for in Section 3.7; provided that not less than one day's interest shall be due. Each Bank that has reimbursed the Issuing Bank pursuant to this Section 2.5(e) in accordance with its Pro Rata Share of any payment made by the Issuing Bank under a Letter of Credit shall thereupon acquire a pro rata participation, to the extent of such reimbursement, in the claim of the Issuing Bank against Borrower under this Section 2.5(e). (f) Borrower agrees to pay to the Administrative Agent (which shall promptly pay the same to the Banks or the respective Issuing Bank, as the case may be), (i) for the account of the Banks other than a Bank that has notified the Issuing Bank pursuant to the last sentence of Section2.5(a) with respect to such Letter of Credit) with respect to each Letter of Credit (whether a Financial Letter of Credit or a Performance Letter of Credit), a per annum letter of credit fee in an amount equal to the Applicable Letter of Credit Feetimes the face amount of such Letter of Credit (including increases in the undrawn face amount thereof) for the term of such -34- 40 Letter of Credit, and (ii) for the account of the applicable Issuing Bank with respect to each Letter of Credit (whether a Financial Letter of Credit or a Performance Letter of Credit), an issuance fee in an amount equal to the greater of $500 or one eighth percent (1/8%) per annum times the face amount of such Letter of Credit (including increases in the undrawn face amount thereof) for the term of such Letter of Credit, together with such Issuing Bank's standard charges and out-of-pocket costs in connection with such issuance. The letter of credit fees for each Letter of Credit are payable in advance for each six month period (or portion thereof) during the term of the applicable Letter of Credit, on the issuance date and on each six month anniversary thereof during the term the applicable Letter of Credit is outstanding. In the event a Letter of Credit is cancelled or terminated prior to its original expiration date, the fee provided for in clause (i) above shall be refundable by the Banks on a pro rata basis over the period such Letter of Credit will no longer be outstanding, and one-half of the issuance fee referred to in clause (ii) shall be refundable by the Issuing Bank over the period such Letter of Credit will no longer be outstanding (and the balance will be non-refundable). (g) The obligation of Borrower to reimburse each Issuing Bank for drawings or payments made under each Letter of Credit shall be unconditional and irrevocable. Without limiting the foregoing, such obligation of Borrower shall not be affected by any of the following circumstances: (A) any lack of validity or enforceability of the Letter of Credit, this Agreement, or any letter of credit application or other agreement or instrument relating thereto; (B) compliance by the Issuing Bank with any amendment or waiver of or any consent to departure from the Letter of Credit, this Agreement or any letter of credit application or other agreement or instrument relating thereto previously approved by Borrower pursuant to Section2.5(b); (C) the existence of any claim, setoff, defense, or other rights which Borrower may have at any time against any Bank, any beneficiary of the Letter of Credit (or any Persons for whom any such beneficiary may be acting) or any other Person, whether in connection with the Letter of Credit, this Agreement, or any letter of credit application or other agreement or instrument relating thereto, or any unrelated transactions; (D) any demand, statement, or any other document presented under a Letter of Credit proving to be forged, fraudulent, invalid, or insufficient in any respect or any statement therein being untrue or inaccurate in any respect whatsoever so long as any such docu- -35- 41 ment appeared to comply with the terms of the Letter of Credit; (E) the solvency or financial responsibility of any party issuing any documents in connection with a Letter of Credit; (F) any failure or delay in notice of shipments or arrival of any property; (G) any error in the transmission of any message relating to a Letter of Credit not caused by the Issuing Bank, or any delay or interruption in any such message; (H) any error, neglect or default of any correspondent of any Bank in connection with a Letter of Credit; (I) any consequence arising from acts of God, war, insurrection, disturbances, labor disputes, emergency conditions or other causes beyond the control of the Banks; (J) the form, accuracy, genuineness or legal effect of any contract or document referred to in any document submitted to the Issuing Bank in connection with a Letter of Credit so long as the Issuing Bank in good faith determines that the draft or document appears to comply with the terms of the Letter of Credit; and (K) where the Issuing Bank has acted in good faith and without gross negligence and observed general banking usage, any other circumstance whatsoever. IN DETERMINING WHETHER TO PAY UNDER ANY LETTER OF CREDIT, THE ISSUING BANK SHALL BE RESPONSIBLE ONLY TO DETERMINE THAT THE DOCUMENTS AND CERTIFICATES REQUIRED TO BE DELIVERED UNDER THAT LETTER OF CREDIT HAVE BEEN DELIVERED AND THAT THEY COMPLY ON THEIR FACE WITH THE REQUIREMENTS OF THAT LETTER OF CREDIT AND THE ISSUING BANK SHALL OBTAIN THE CONSENT OF THE BORROWER PRIOR TO MAKING ANY PAYMENT WITH RESPECT TO ANY DOCUMENT OR CERTIFICATE WHICH DOES NOT SO COMPLY ON ITS FACE. (h) Each Issuing Bank shall be entitled to the protections accorded to the Administrative Agent pursuant to Article 10, mutatis mutandis. 2.6 Reduction of Commitment. Borrower shall have the right, at any time and from time to time, without penalty or charge, voluntarily to reduce or terminate all or a portion of any of the unused Commitment, on the terms and conditions set -36- 42 forth in Section 2.4 of the Override Agreement. Borrower shall pay to the Administrative Agent on the date of such termination all commitment fees which have accrued to such date in respect of the terminated portion of the Commitment. 2.7 Administrative Agent's Right to Assume Funds Available. Unless the Administrative Agent shall have been notified by any Bank at least two hours prior to the funding by the Administrative Agent of any Loan that such Bank does not intend to make available to the Administrative Agent such Bank's Pro Rata Share of such Loan, the Administrative Agent may assume that such Bank has made such amount available to the Administrative Agent on the date of the Loan and the Administrative Agent may, in reliance upon such assumption, make available to Borrower a corresponding amount. If such corresponding amount is not in fact made available to the Administrative Agent by such Bank, the Administrative Agent shall be entitled to recover such corresponding amount on demand from such Bank, which demand shall be made in a reasonably prompt manner. If such Bank does not pay such corresponding amount forthwith upon the Administrative Agent's demand therefor, the Administrative Agent promptly shall notify Borrower and Borrower shall pay such corresponding amount to the Administrative Agent. The Administrative Agent shall also be entitled to recover from such Bank interest on such corresponding amount in respect of each day from the date such corresponding amount was made available by the Administrative Agent to Borrower to the date such corresponding amount is recovered by the Administrative Agent, at a rate per annum equal to the Federal Funds Rate as notified by the Administrative Agent to such Bank or the Borrower, as the case may be. Nothing herein shall be deemed to relieve any Bank from its obligation to fulfill its Pro Rata Share of the Commitment hereunder or to prejudice any rights which the Administrative Agent or Borrower may have against any Bank as a result of any default by such Bank hereunder. ARTICLE 3 PAYMENTS; FEES 3.1 Principal and Interest (a) Interest shall be payable on the outstanding daily unpaid principal amount of each Loan from the date thereof until payment in full and shall accrue and be payable at the rates set forth herein, to the extent permitted by applicable Laws, before and after default, before and after maturity, before and after any judgment, and before and after the commencement of any proceeding under any Debtor Relief Law, with interest on overdue interest to bear interest at the Default Rate. -37- 43 (b) Interest accrued on each Alternate Base Rate Loan shall be due and payable on the last day of each calendar month. Except as otherwise provided in Section 3.7, the unpaid principal amount of any Alternate Base Rate Loan shall bear interest at a fluctuating rate per annum equal to the Alternate Base Rate. Each change in the interest rate hereunder shall take effect simultaneously with the corresponding change in the Alternate Base Rate. Each change in the Alternate Base Rate shall be effective as of the Banking Day on which change in the Alternate Base Rate is announced, unless otherwise specified in such announcement, in which case the change shall be effective as so specified. (c) Interest accrued on each LIBOR Loan which has an Interest Period of three months or less shall be due and payable on the last day of the related Interest Period. Interest accrued on each other LIBOR Loan shall be due and payable on the date which is three months after the date such LIBOR Loan was made, every three months thereafter and on last day of the related Interest Period. Except as otherwise provided in Section 3.7, the unpaid principal amount of any LIBOR Loan shall bear interest at a rate per annum equal to LIBOR for that LIBOR Loanplus the Applicable LIBOR Spread in effect from time to time. (d) If not sooner paid, the principal Indebtedness evidenced by the Notes shall be payable as follows: (i) the principal amount of each Alternate Base Rate Loan shall be due and payable on the Maturity date; (ii) subject to Section 2.1(f), the principal amount of each LIBOR Loan shall be payable on the last day of the Interest Period for such LIBOR Loan; (iii) the principal Indebtedness evidenced by the Notes shall be immediately payable in Cash, to the extent that such Indebtedness exceeds at any time the Commitment as then in effect; and (iv) the principal indebtedness evidenced by the Notes shall be immediately payable in Cash on the Maturity Date. (e) The Notes may, at any time and from time to time, voluntarily be prepaid at the election of Borrower in whole or in part without premium or penalty;provided that: (i) any partial prepayment shall be in integral multiples of $1,000,000, (ii) any partial prepayment shall be in an amount not less than $1,000,000 on a Alternate -38- 44 Base Rate Loan, and not less than $5,000,000 on a LIBOR Loan, (iii) the Administrative Agent must have received written notice (or telecopied notice confirmed promptly in writing) of any prepayment at least three Banking Days before the date of prepayment in the case of a LIBOR Loan and by 10:00 a.m., San Francisco time, on the date of prepayment in the case of an Alternate Base Rate Loan, (iv) each prepayment of principal, except for partial prepayments on Alternate Base Rate Loans, shall be accompanied by prepayment of interest accrued to the date of payment on the amount of principal paid, and (v) in the case of any prepayment of any LIBOR Loan, Borrower shall promptly upon demand reimburse each Bank for any loss or cost directly or indirectly resulting from the prepayment, determined as set forth in Section 3.6. (f) (i) If a Change in Control (as defined below) shall have occurred, at the option of the Majority Banks, Borrower shall repay in Cash the entire principal Indebtedness evidenced by the Notes, together with Interest thereon and all other amounts due in connection with the Notes and this Agreement, and deliver to the Administrative Agent an amount equal to the Letter of Credit Usage then outstanding, to be held as cash collateral as provided in Section 9.2(c) (the "Change in Control Repayment"), on the date that is 27 Banking Days after the occurrence of the Change of Control (the "Change of Control Payment Date"), subject to receipt by Borrower of Change in Control Payment Notice as set forth in Section 3.1(f)(iii). On the Change in Control Payment Date, the Commitment shall automatically terminate. A "Change in Control" shall be deemed to have occurred at such time as any of the following events shall occur: (A) There shall be consummated any consolidation or merger of Borrower in which Borrower is not the continuing or surviving corporation or pursuant to which the Voting Stock (as defined below) would be converted into Cash, securities or other property, other than a merger of Borrower in which the holders of Voting Stock immediately prior to the merger have the same or greater proportionate ownership, directly or indirectly, of the Voting Stock of the surviving corporation immediately after such merger as they had of the Voting Stock immediately prior to such merger; or (B) There is a report filed by any person, including its Affiliates and Associates, on Schedule 13D or 14D-1 (or any successor schedule, -39- 45 form or report) pursuant to the Securities Exchange Act of 1934 (the "Exchange Act"), disclosing that such person (for the purposes of this Section 3.1(f) only, the term "person" is used as defined in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act or any successor provision to either of the foregoing) has become the beneficial owner (as the term "beneficial owner" is defined under Rule 13d-3 or any successor rule or regulation promulgated under the Exchange Act) of 50% or more of the voting power of Borrower's Voting Stock then outstanding; provided, however, that a person shall not be deemed beneficial owner of, or to own beneficially (1) any Securities tendered pursuant to a tender or exchange offer made by or on behalf of such person or any of such person's Affiliates or Associates (as defined below) until such tendered Securities are accepted for purchase or exchange thereunder, or (2) any Securities if such beneficial ownership (a) arises solely as a result of a revocable proxy delivered in response to a proxy or consent solicitation made pursuant to, and in accordance with, the applicable rules and regulations under the Exchange Act, and (b) is not also then reportable on Schedule 13D (or any successor schedule) under the Exchange Act; or (C) A "Change in Control" (or analogous term) as defined in an indenture or agreement governing any Subordinated Obligation occurs. Notwithstanding the foregoing provisions of this Section3.1(f), a Change in Control shall not be deemed to have occurred if at any time Borrower, any Subsidiary of Borrower, any employee stock ownership plan or any other employee benefit plan, including any Pension Plan of Borrower or any Subsidiary of Borrower, or any person holding Voting Stock for or pursuant to the terms of such employee benefit plan, files or becomes obligated to file a report under or in response to Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report) under the Exchange Act disclosing beneficial ownership by it of shares of Voting Stock, whether in excess of 50% or otherwise. "Voting Stock" means, with respect to any Person, the capital stock of such Person having general voting power under ordinary circumstances to elect at least a majority of the board of directors, managers or trustees of such Person (irrespective of whether or not at the time capital stock of any other -40- 46 class or classes shall have or might have voting power by reason of the happening of any contingency). "Associate" shall have the meaning ascribed to such term in Rule 12b-2 of the General Rules and Regulations under the Exchange Act, as in effect on the date hereof. (ii) Within 15 Banking Days after the occurrence of a Change in Control, Borrower shall provide written notice of the Change in Control to the Administrative Agent and each Bank. The notice shall state: (a) the events causing a Change in Control and the date of such Change in Control; (b) the date by which the Change in Control Payment Notice (as defined in Section 3.1(f)(iii)) must be given; and (c) the Change in Control Payment Date. (iii) At the direction of the Majority Banks, the Administrative Agent shall, on behalf of the Banks, exercise the rights specified in Section 3.1(f)(i) by delivery of a written notice (a "Change in Control Payment Notice") to Borrower at any time prior to or on the Change in Control Payment Date, stating that the Notes shall be prepaid and cash collateral shall be provided for the Letter of Credit Usage on the Change in Control Payment Date. On the Change in Control Payment Date, Borrower shall make the Change in Control Repayment to the Administrative Agent for the benefit of the Banks, and the Commitment shall terminate. 3.2 Commitment Fees. From the Closing Date to the Maturity Date, Borrower shall pay to the Administrative Agent, for the account of each Bank pro rata according to that Bank's Pro Rata Share of the Commitment, a commitment fee equal to the Applicable Commitment Fee Rate per annum in effect from time to time times the average daily amount by which the Commitment exceeds the aggregate outstanding principal of the Loans evidenced by the Notes plus the Letter of Credit Usage. The commitment fee shall accrue daily and be payable in arrears with respect to each calendar quarter on the Quarterly Payment Date falling at the end of such calendar quarter, commencing December 31, 1994. The Administrative Agent shall calculate the commitment fee and the amount thereof allocable to each Bank according to that Bank's Pro Rata Share of the Commitment and shall notify Borrower in writing of such amounts. -41- 47 3.3 Facility/Extension Fee. [Intentionally omitted] 3.4 Agency Fees. Borrower shall pay to the Administrative Agent and the Managing Agents, respectively, for the account solely of each respective Agent, such agency fees as are referred to in the Override Agreement. 3.5 Capital Adequacy. (a) If any Bank (an "Affected Bank") determines that compliance with any Law or regulation or with any guideline or request from any central bank or other Governmental Agency (whether or not having the force of Law) enacted or issued after the Closing Date relating to the capital adequacy of banks or corporations in control of banks has or would have the effect of reducing the rate of return on the capital of such Affected Bank or any corporation controlling such Affected Bank as a consequence of, or with reference to, such Affected Bank's Pro Rata Share of the Commitment below the rate which the Bank or such other corporation could have achieved but for such compliance (taking into account the policies of such Bank or corporation with regard to capital adequacy), then Borrower shall from time to time, upon demand by such Affected Bank in accordance with this Section3.5 (with a copy of such demand to the Administrative Agent), within 15 days after demand pay to such Affected Bank additional amounts sufficient to compensate such Affected Bank or other corporation for such reduction. (b) An Affected Bank may not seek compensation under Section 3.5(a) unless the demand for such compensation is delivered to Borrower within six months following the date of enactment or issuance of the Law, regulation, guideline or request giving rise to such demand for compensation. (c) A certificate as to any amounts for which an Affected Bank is seeking compensation under Section 3.5(a), submitted to Borrower and the Administrative Agent by such Affected Bank, shall be conclusive and binding for all purposes, absent manifest error. Each Affected Bank shall calculate such amounts in a manner which is consistent with the manner in which it makes calculations for comparable claims with respect to similarly situated borrowers from such Affected Bank, will not allocate to Borrower a proportionately greater amount of such compensation than it allocates to each of its other commitments to lend or other loans with respect to which it is entitled to demand comparable compensation, and will not include amounts already factored into the rates of interest or fees already provided for herein. Each Bank agrees promptly to notify Borrower and the -42- 48 Administrative Agent of any circumstances that would cause Borrower to pay additional amounts pursuant to this Section, provided that the failure to give such notice shall not affect Borrower's obligation to pay such additional amounts hereunder. (d) Without limiting its obligation to reimburse an Affected Bank for compensation theretofore claimed by an Affected Bank pursuant to Section 3.5(a), Borrower may, within 60 days following any demand by an Affected Bank, request that one or more Persons that constitute "Eligible Assignees" under the Override Agreement and that are acceptable to Borrower and approved by the Managing Agents (which approval shall not be unreasonably withheld) purchase all (but not part) of the Affected Bank's then outstanding Advances, its Note and its participation interest in outstanding Letters of Credit, and assume its Pro Rata Share of the Commitment and its obligations hereunder. Borrower shall have the same right as to any Bank which has claimed compensation for a capital adequacy charge pursuant to Section 4.4 of the Mortgage Warehousing Agreement, and such a Bank shall be an "Affected Bank" for purposes of this Section 3.5(d). If one or more such Banks or banks so agree in writing (each, an "Assuming Bank" and collectively, the "Assuming Banks"), the Affected Bank shall assign its Pro Rata Share of the Commitment, together with the Indebtedness then evidenced by its Note and its participation interest in outstanding Letters of Credit, to the Assuming Bank or Assuming Banks in accordance with Section5.1 of the Override Agreement. On the date of any such assignment, the Affected Bank which is being so replaced shall cease to be a "Bank" for all purposes of this Agreement and shall receive (x) from the Assuming Bank or Assuming Banks the principal amount of its Advances then outstanding and (y) from Borrower all interest and fees accrued and then unpaid with respect to such Advances, together with any other amounts then payable to such Bank by Borrower. In the event the Affected Bank is also an Issuing Bank, then the Assuming Bank shall also become an Issuing Bank for all purposes of this Agreement and shall either (at the Affected Bank's election, subject to the approval of Borrower, the Administrative Agent and the Assuming Bank (which approvals shall not be unreasonably withheld) and the approval of the applicable Letter of Credit beneficiary) (i) issue new Letters to Credit to replace the outstanding Letters of Credit issued by the Affected Bank, or (ii) issue new Letters of Credit in support of the outstanding Letters of Credit issued by the Affected Bank, whereupon such outstanding letters shall no longer be considered "Letters of Credit" under this Agreement, and such new Letters of Credit shall be considered Letters of Credit -43- 49 for all purposes of this Agreement (including the participation therein by the other Banks pursuant to Section 2.5). The Affected Bank shall be obligated to reimburse to Borrower a portion of the issuance fees referred to in Section 2.5(f)(iii) based on the period during which each new Letter of Credit issued by the Assuming Bank will be outstanding in replacement or support of a Letter of Credit issued by the Affected Bank. Notwithstanding the foregoing, Borrower may not cause the replacement of an Affected Bank under this Section 3.5 unless the Affected Bank is also concurrently replaced as a Bank under Section 14.4 of the Mortgage Warehousing Agreement. 3.6 LIBOR Fees and Costs. (a) If the occurrence of any Regulatory Development after the Closing Date: (1) shall subject any Bank or its LIBOR Lending Office to any tax, duty or other charge or cost with respect to any LIBOR Advance or its obligation to make LIBOR Advances, or shall change the basis of taxation of payments to any Bank of the principal of or interest on any LIBOR Advance or any other amounts due under this Agreement in respect of any LIBOR Advance or its obligation to make LIBOR Advances (except for changes in any tax on the overall net income, gross income or gross receipts of such Bank or its LIBOR Lending Office); (2) shall impose, modify or deem applicable any reserve (including, without limitation, any reserve imposed by the Board of Governors of the Federal Reserve System), special deposit or similar requirements (excluding any such requirement included in any applicable Reserve Percentage) against assets of, deposits with or for the account of, or credit extended by, any Bank or its LIBOR Lending Office; or (3) shall impose on any Bank or its LIBOR Lending Office or the LIBOR Market any other condition affecting any LIBOR Advance or its obligation to make LIBOR Advances, or shall otherwise affect any of the same; and the result of any of the foregoing, as determined by such Bank, increases the cost to such Bank or its LIBOR Lending Office of making or maintaining any LIBOR Advance or in respect of any LIBOR Advance or its obligation to make LIBOR Advances or reduces the amount of any sum received or receivable by such Bank or its LIBOR Lending -44- 50 Office with respect to any LIBOR Advance or its obligation to make LIBOR Advances (assuming such Bank's LIBOR Lending Office had funded 100% of its LIBOR Advance in the LIBOR Market), then, within 15 days after demand by such Bank (with a copy to the Administrative Agent), Borrower shall pay to such Bank such additional amount or amounts as will compensate such Bank for such increased cost or reduction (determined as though such Bank's LIBOR Lending Office had funded 100% of its LIBOR Advance in the LIBOR Market); provided that Borrower shall not be liable to any Bank for any such increased cost or reduction pursuant to this Section 3.6 in respect of any period which is more than six months prior to such Bank's demand for such compensation. A statement of any Bank claiming compensation under this subsection and setting forth the additional amount or amounts to be paid to it hereunder shall be conclusive in the absence of manifest error. Each Bank agrees to endeavor promptly to notify Borrower of any event of which it has actual knowledge which will entitle such Bank to compensation pursuant to this Section, and agrees to designate a different LIBOR Lending Office if such designation will avoid the need for or reduce the amount of such compensation and will not, in the judgment of such Bank, otherwise be disadvantageous to such Bank. If any Bank claims compensation under this Section, Borrower may at any time, upon at least four (4) LIBOR Market Days' prior notice to the Administrative Agent and such Bank and upon payment in full of the amounts provided for in this Section through the date of such paymentplus any prepayment fee required by Section 3.6(d), pay in full the affected LIBOR Advances of such Bank or request that such LIBOR Advances be converted to Alternate Base Rate Advances. (b) If after the Closing Date the occurrence of any Regulatory Development shall, in the opinion of any Bank, make it unlawful or impossible for such Bank or its LIBOR Lending Office to make, maintain or fund its portion of any LIBOR Loan, or to take deposits of, dollars in the LIBOR Market, or to determine or charge interest rates based upon the LIBOR, and such Bank shall so notify the Administrative Agent, then such Bank's obligation to make LIBOR Advances shall be suspended for the duration of such illegality or impossibility and the Administrative Agent forthwith shall give notice thereof to the other Banks and Borrower. Before giving any notice to the Administrative Agent pursuant to this Section, such Bank shall designate a different Lending Office if such designation will avoid the need for giving such notice and will not, in the judgment of such Bank, be otherwise disadvantageous to such Bank. Upon receipt of such notice, the outstanding principal amount of such Bank's LIBOR Advances, together -45- 51 with accrued interest thereon, automatically shall be converted to Alternate Base Rate Advances with Interest Periods corresponding to the LIBOR Loans of which such LIBOR Advances were a part on either (1) the last day of the Interest Period(s) applicable to such LIBOR Advances if such Bank may lawfully continue to maintain and fund such LIBOR Advances to such day(s) or (2) immediately if such Bank may not lawfully continue to fund and maintain such LIBOR Advances to such day(s), provided that in such event the conversion shall not be subject to payment of a prepayment fee under Section3.6(d). In the event that any Bank is unable, for the reasons set forth above, to make, maintain or fund its portion of any LIBOR Loan, such Bank shall fund such amount as an Alternate Base Rate Advance for the same period of time, and such amount shall be treated in all respects as an Alternate Base Rate Advance. (c) If, with respect to any proposed LIBOR Loan: (1) the Administrative Agent reasonably determines that, by reason of circumstances affecting the LIBOR Market generally that are beyond the reasonable control of the Banks, deposits in dollars (in the applicable amounts) are not being offered to each of the Banks in the LIBOR Market for the applicable Interest Period; or (2) the Majority Banks advise the Administrative Agent that the LIBOR as determined by the Administrative Agent will not adequately and fairly reflect the cost to such Banks of making the applicable LIBOR Advances; then the Administrative Agent forthwith shall give notice thereof to Borrower and the Banks, whereupon until the Administrative Agent notifies Borrower that the circumstances giving rise to such suspension no longer exist, the obligation of the Banks to make any future LIBOR Advances shall be suspended. If at the time of such notice there is then pending a Request for Loan that specifies a LIBOR Loan, such Request for Loan shall be deemed to specify an Alternate Base Rate Loan. (d) Upon payment or prepayment of any LIBOR Advance (other than as the result of a conversion required under Section 3.6(b)) on a day other than the last day in the applicable Interest Period (whether voluntarily, involuntarily, by reason of acceleration, or otherwise), or upon the failure of Borrower to borrow on the date or in the amount specified for a LIBOR Loan in any Request -46- 52 for Loan, Borrower shall pay to each Bank an amount equal to the sum of (1) $250; plus (2) the amount, if any, by which (x) the additional interest that would have accrued (without any Applicable LIBOR Spread) on the principal amount prepaid on account of the LIBOR Advance had it remained outstanding until the last day of the applicable Interest Period, exceeds (y) the interest that Bank could recover by placing funds in the amount of the prepayment on deposit in the LIBOR Market selected by that Bank for a period beginning on the date of the prepayment and ending on the last day of the applicable Interest Period, or for a comparable period for which an appropriate rate quote may be obtained; plus (3) an amount equal to all costs and expenses which that Bank incurred or reasonably expects to incur in liquidating and reinvesting the prepayment. Each Bank's determination of the amount of any prepayment fee or failure to borrow fee payable under this Section 3.6(d) shall be conclusive in the absence of manifest error. (e) Any statement or certificate given by a Bank under this Section 3.6 shall satisfy the requirements set forth in Section 3.5(c) with respect to requests for reimbursement under Section 3.5(a) 3.7 Late Payments/Default Interest. If any installment of principal or interest under the Notes or any other amount payable under any Loan Document is not paid when due, it shall thereafter bear interest at a fluctuating interest rate per annum at all times equal to the sum of the Alternate Base Rate plus 2%, to the extent permitted by applicable Law, until paid in full (whether before or after judgment). Upon and during the continuance of any Event of Default, the Indebtedness evidenced by the Notes shall, at the election of the Majority Banks and upon notice to Borrower (and in lieu of interest provided for in the preceding sentence), bear interest at a fluctuating interest rate per annum at all times equal to the sum of the Alternate Base Rate plus 2%, to the extent permitted by applicable Law, until no Event of Default exists (whether before or after judgment). Notwithstanding the preceding sentence, after the occurrence of any Event of Default under Section 6.7, 6.11 or 6.18, the Indebtedness evidenced by the Notes may not bear interest at the increased rate provided for in the preceding sentence until such Event of Default has continued for at least 15 days, in the case of Section 6.7, or 30 days, in the case of Section 6.11 or 6.18. -47- 53 3.8 Computation of Interest and Fees. All computations of interest and fees hereunder shall be calculated on the basis of a year of 360 days and paid for the actual number of days elapsed (including the first day and excluding the last day), which results in greater interest than if a year of 365 days were used. Any Loan that is repaid on the same day on which it is made shall bear interest for one day. 3.9 Holidays. If any principal payment to be made by Borrower on an Alternate Base Rate Loan shall come due on a day other than a Banking Day, payment shall be made on the next succeeding Banking Day and the extension of time shall be reflected in computing interest. If any principal payment to be made by Borrower on a LIBOR Loan shall come due on a day other than a LIBOR Market Day, payment shall be made on the next preceding or succeeding LIBOR Market Day as determined by the Administrative Agent in accordance with the then current banking practice in the LIBOR Market and the adjustment shall be reflected in computing interest. 3.10 Payment Free of Taxes. (a) Any payments made by any Party under the Loan Documents shall be made free and clear of, and without reduction by reason of, any tax, assessment or other charge imposed by any Governmental Agency, central bank or comparable authority (other than taxes on income or gross receipts generally applicable to banks). To the extent that Borrower is obligated by applicable Laws to make any deduction or withholding on account of taxes, assessments or other charges imposed by any Governmental Agency from any amount payable to any Bank under this Agreement, Borrower shall (a) make such deduction or withholding and pay the same to the relevant Governmental Agency and (b) pay such additional amount to that Bank as is necessary to result in that Bank's receiving a net after-tax (or after-assessment or after-charge) amount equal to the amount to which that Bank would have been entitled under this Agreement absent such deduction or withholding. If and when receipt of such payment results in an excess payment or credit to that Bank on account of such taxes, assessments or other charges, that Bank shall refund such excess to Borrower. Each Bank that is incorporated under the Laws of a jurisdiction other than the United States of America or any state thereof shall deliver to Borrower, with a copy to the Administrative Agent, within twenty days after the Closing Date (or such later date on which such Bank becomes a "Bank" hereunder), a certificate signed by a Responsible Official of that Bank to the effect that such Bank is entitled to receive payments of interest and other amounts payable under this Agreement without deduction or withholding on account of United -48- 54 States of America federal income taxes, which certificate shall be accompanied by two copies of Internal Revenue Service Form 1001 or Form 4224, as applicable, also executed by a Responsible Official of that Bank. Each such Bank agrees (i) promptly to notify the Administrative Agent and Borrower if any fact set forth in such certificate ceases to be true and correct and (ii) to take such steps as may be reasonably necessary to avoid any requirement of applicable Laws that Borrower make any deduction or withholding for taxes from amounts payable to that Bank under this Agreement. (b) Without limiting its obligation to pay any additional amount to a Bank pursuant to Section 3.10(a), Borrower, may within 60 days following any such payment by that Bank, treat that Bank as an "Affected Bank" under Section3.5(d), and exercise the remedies set forth in such Section 3.5(d). 3.11 Funding Sources. Nothing in this Agreement shall be deemed to obligate any Bank to obtain the funds for its share of any Loan in any particular place or manner or to constitute a representation by any Bank that it has obtained or will obtain the funds for its share of any Loan in any particular place or manner. 3.12 Failure to Charge or Making of Payment Not Subsequent Waiver. Any decision by any Bank not to require payment of any fee or costs, or to reduce the amount of the payment required for any fee or costs, or to calculate any fee or any cost in any particular manner, shall not limit or be deemed a waiver of any Bank's right to require full payment of any fee or costs, or to calculate any fee or any costs in any other manner. Any decision by Borrower to pay any fee or costs shall not limit or be deemed a waiver of any right of Borrower to protest or dispute the payment amount of such fee or costs. 3.13 Pro Rata Treatment. Except as otherwise provided herein, each payment on account of the Obligations shall be made pro rata according to each Bank's Pro Rata Share. 3.14 Time and Place of Payments; Evidence of Payments. The amount of each payment hereunder, under the Notes or under any Loan Document shall be made to the Administrative Agent at the Administrative Agent's Office, for the account of each of the Banks or the Administrative Agent, as the case may be, in lawful money of the United States of America and in immediately available funds on the day of payment (which must be a Banking Day). All payments of principal received after 10:00 a.m., San Francisco time, on any Banking Day, shall be deemed received on the next succeeding Banking Day for purposes of calculating interest thereon. The amount of all payments received by the -49- 55 Administrative Agent for the account of a Bank shall be promptly paid by the Administrative Agent to that Bank in immediately available funds. Each Bank shall keep a record of Advances made by it and payments of principal with respect to each Note, and such record shall be presumptive evidence of the principal amount owing under such Note; provided that failure to keep such record shall in no way affect the Obligations of Borrower hereunder. 3.15 Administrative Agent's Right to Assume Payments Will be Made. Unless the Administrative Agent shall have been notified by Borrower prior to the date on which any payment to be made by Borrower hereunder is due that Borrower does not intend to remit such payment, the Administrative Agent may, in its discretion, assume that Borrower has remitted such payment when so due and the Administrative Agent may, in its discretion and in reliance upon such assumption, make available to each Bank on such payment date an amount equal to such Bank's Pro Rata Share of such assumed payment. If Borrower has not in fact remitted such payment to the Administrative Agent, each Bank shall forthwith on demand repay to the Administrative Agent the amount of such assumed payment made available to such Bank, together with interest thereon in respect of each day from and including the date such amount was made available by the Administrative Agent to such Bank to but excluding the date such amount is repaid to the Administrative Agent at a rate per annum equal to the actual cost to the Administrative Agent of funding such amount as notified by the Administrative Agent to such Bank. In furtherance of the foregoing, Borrower hereby authorizes the Administrative Agent, through Bank of America, to automatically debit the Designated Deposit Account (or, upon notice to Borrower, any other deposit account maintained by Borrower with Bank of America) for payments as and when due hereunder. 3.16 Survivability. All of Borrower's obligations under this Article 3 shall survive for six months following the date on which all Loans hereunder were fully paid. 3.17 Bank Calculation Certificate. Any request for compensation pursuant to Section 3.5 or 3.6 shall be accompanied by a statement of an officer of the Bank requesting such compensation and describing the methodology used by such Bank in calculating the amount of such compensation, which methodology (i) may consist of any reasonable averaging and attribution methods and (ii) in the case of Section 3.5 hereof shall be consistent with the methodology used by such Bank in making similar calculations in respect of loans or commitments to other borrowers. -50- 56 ARTICLE 4 REPRESENTATIONS AND WARRANTIES Borrower represents and warrants to the Banks that: 4.1 Existence and Qualification; Power; Compliance with Law. Borrower is a corporation duly organized, validly existing and in good standing under the Laws of Delaware, and its certificate of incorporation does not provide for the termination of its existence. Borrower is duly qualified or registered to transact business as a foreign corporation in the State of California, and in each other jurisdiction in which the conduct of its business or the ownership of its properties makes such qualification or registration necessary, except where the failure so to qualify or register would not constitute a Material Adverse Effect. Borrower has all requisite corporate power and authority to conduct its business, to own and lease its Properties and to execute, deliver and perform all of its obligations under the Loan Documents. All outstanding shares of capital stock of Borrower are duly authorized, validly issued, fully paid, non-assessable, and were issued in compliance with all applicable state and federal securities Laws, except where the failure to so comply would not constitute a Material Adverse Effect. Borrower is in substantial compliance with all Laws and other legal requirements applicable to its business, has obtained all authorizations, consents, approvals, orders, licenses and permits (collectively, "Authorizations") from, and has accomplished all filings, registrations and qualifications with, or obtained exemptions from any of the foregoing from, any Governmental Agency that are necessary for the transaction of its business, except where the failure so to obtain Authorizations, comply, file, register, qualify or obtain exemptions does not constitute a Material Adverse Effect. 4.2 Authority; Compliance with Other Instruments and Government Regulations. The execution, delivery, and performance by Borrower, and by each Guarantor Subsidiary of Borrower, of the Loan Documents to which it is a Party, and by the Mortgage Company of the Override Agreement, have been duly authorized by all necessary corporate action, and do not: (a) require any consent or approval not heretofore obtained of any stockholder, partner, security holder, or creditor of such Party; (b) violate or conflict with any provision of such Party's charter, certificate or articles of incorporation or bylaws; (c) result in or require the creation or imposition of any Lien or Right of Others upon or with respect to any -51- 57 Property now owned or leased or hereafter acquired by such Party; (d) constitute a "transfer of an interest" or an "obligation incurred" that is avoidable by a trustee under Section 548 of the Bankruptcy Code of 1978, as amended, or constitute a "fraudulent transfer" or "fraudulent obligation" within the meaning of the Uniform Fraudulent Transfer Act as enacted in any jurisdiction or any analogous Law; (e) violate any Requirement of Law applicable to such Party; or (f) result in a breach of or constitute a default under, or cause or permit the acceleration of any obligation owed under, any indenture or loan or credit agreement or any other Contractual Obligation to which such Party or any of its Property is bound or affected; and neither Borrower nor any Subsidiary of Borrower is in violation of, or default under, any Requirement of Law or Contractual Obligation, or any indenture, loan or credit agreement described in Section 4.2(f) in any respect that would constitute a Material Adverse Effect. 4.3 No Governmental Approvals Required. Except such as have heretofore been obtained, no authorization, consent, approval, order, license or permit from, or filing, registration, or qualification with, or exemption from any of the foregoing from, any Governmental Agency is or will be required to authorize or permit the execution, delivery and performance by Borrower or any Significant Subsidiary of Borrower of the Loan Documents to which it is a Party. 4.4 Subsidiaries. (a) Schedule 4.4 correctly sets forth the names, the form of legal entity and jurisdictions of organization of all Subsidiaries of Borrower as of the Closing Date and identifies each such Subsidiary that is a Consolidated Subsidiary, a Significant Subsidiary, a Guarantor Subsidiary, a Foreign Subsidiary and a Financial Subsidiary. Unless otherwise indicated in Schedule 4.4, all of the outstanding shares of capital stock, or all of the units of equity interest, as the case may be, of each Subsidiary indicated thereon are owned of record and beneficially by Borrower, and all such shares or equity interests so owned were issued in compliance with all state and federal securities Laws and are duly authorized, validly issued, fully paid and non-assessable (other than with respect to required capital contributions to any -52- 58 joint venture in accordance with customary terms and provisions of the related joint venture agreement), except where the failure to so comply would not constitute a Material Adverse Effect, and are free and clear of all Liens and Rights of Others, except for Permitted Encumbrances and Permitted Rights of Others. (b) Each Significant Subsidiary is as of the date of this Agreement, and will be as of the Closing Date, a legal entity of the form described for that Subsidiary in Schedule 4.4, and is duly organized, validly existing and in good standing under the Laws of its jurisdiction of organization, is duly qualified to do business as a foreign organization and is in good standing as such in each jurisdiction in which the conduct of its business or the ownership or leasing of its Properties makes such qualification necessary (except where the failure to be so duly qualified and in good standing does not constitute a Material Adverse Effect) and has all requisite power and authority to conduct its business, to own and lease its Properties and to execute, deliver and perform the Loan Documents to which it is a Party. (c) Each Significant Subsidiary is in substantial compliance with all Laws and other requirements applicable to its business and has obtained all Authorizations from, and each such Significant Subsidiary has accomplished all filings, registrations, and qualifications with, or obtained exemptions from any of the foregoing from, any Governmental Agency that are necessary for the transaction of its business,except where the failure so to obtain Authorizations, comply, file, register, qualify or obtain exemptions does not constitute a Material Adverse Effect. 4.5 Financial Statements. Borrower has furnished to each Bank the following financial statements: (a) the audited consolidated financial statements of Borrower and its Consolidated Subsidiaries as at November 30, 1993 and for the Fiscal Year then ended; (b) the unaudited consolidating financial statements of Borrower and its Consolidated Subsidiaries as at August 31, 1994 for the Fiscal Quarter then ended and for the portion of the Fiscal Year ended with such Fiscal Quarter; and (c) the unaudited combined financial statements of the Financial Subsidiaries as at August 31, 1994 for the Fiscal Quarter then ended and for the portion of the Fiscal Year ended with such Fiscal Quarter. -53- 59 The audited financial statements described in clause (a) are in accordance with the books and records of Borrower and its Consolidated Subsidiaries, were prepared in accordance with Generally Accepted Accounting Principles and fairly present in accordance with Generally Accepted Accounting Principles consistently applied the consolidated financial condition and results of operations of Borrower and its Consolidated Subsidiaries as at the date and for the period covered thereby. The unaudited financial statements described in clause (b), are in accordance with the books and records of Borrower and its Consolidated Subsidiaries, were prepared in accordance with Generally Accepted Accounting Principles and fairly present in accordance with Generally Accepted Accounting Principles consistently applied the consolidating financial condition and results of operation of Borrower and its Consolidated Subsidiaries as at the date and for the period covered thereby. The unaudited financial statements described in clause (c) are in accordance with the books and records of the respective Subsidiaries of Borrower named, were prepared in accordance with Generally Accepted Accounting Principles and fairly present in accordance with Generally Accepted Accounting Principles consistently applied the financial condition and results of operation of such Subsidiaries of Borrower as at the date and for the period covered thereby. 4.6 No Other Liabilities; No Material Adverse Effect. Borrower and its Consolidated Subsidiaries do not have any material liability or material contingent liability not reflected or disclosed in the financial statements or in the notes to the financial statements described in Section 4.5, other than liabilities and contingent liabilities arising in the ordinary course of business subsequent to November 30, 1993 or August 31, 1994, as applicable. Since November 30, 1993, no event or circumstance has occurred that constitutes a Material Adverse Effect with respect to Borrower and its Subsidiaries. 4.7 Title to Assets. Borrower and its Consolidated Subsidiaries have good and valid title to all of the assets reflected in the financial statements described in Section 4.5 owned by them or any of them (other than assets disposed of in the ordinary course of business) and all other assets owned on the date of this Agreement, free and clear of all Liens and Rights of Others other than (a) those reflected or disclosed in the notes to the financial statements described in Section 4.5, (b) immaterial Liens or Rights of Others not required under Generally Accepted Accounting Principles to be so reflected or disclosed, (c) Liens permitted pursuant to Section 6.7, (d) Permitted Rights of Others, and (e) such existing Liens or Rights of Others as are described on Schedule 4.7 hereto. -54- 60 4.8 Intangible Assets. Borrower and its Subsidiaries own, or possess the unrestricted right to use, all trademarks, trade names, copyrights, patents, patent rights, licenses and other intangible assets that are necessary in the conduct of their businesses as now operated, and no such intangible asset, to the best knowledge of Borrower, conflicts with the valid trademark, trade name, copyright, patent, patent right or intangible asset of any other Person to the extent that such conflict would constitute a Material Adverse Effect. 4.9 Existing Indebtedness and Contingent Guaranty Obligations. Except as set forth in Schedule 4.9, neither Borrower nor any of its Subsidiaries has (a) any Indebtedness owed to any Person in an amount in excess of $5,000,000 or (b) outstanding any Contingent Guaranty Obligation with respect to obligations of another Person in excess of $5,000,000. 4.10 Governmental Regulation. Neither Borrower nor any of its Subsidiaries is subject to regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act, the Interstate Commerce Act or the Investment Company Act of 1940. 4.11 Litigation. There are no actions, suits, or proceedings pending or, to the best knowledge of Borrower, threatened against or affecting Borrower or any of its Subsidiaries or any Property of any of them before any Governmental Agency which would constitute a Material Adverse Effect. 4.12 Binding Obligations. Each of the Loan Documents to which Borrower or any Guarantor Subsidiary of Borrower is a Party will, when executed and delivered by Borrower or the Guarantor Subsidiary, as the case may be, constitute the legal, valid and binding obligation of Borrower or the Guarantor Subsidiary, as the case may be, enforceable against Borrower or the Guarantor Subsidiary, as the case may be, in accordance with its terms, except as enforcement may be limited by Debtor Relief Laws or by equitable principles relating to the granting of specific performance and other equitable remedies as a matter of judicial discretion. 4.13 No Default. No event has occurred and is continuing that is a Default or an Event of Default. 4.14 Pension Plans. As of the Closing Date, all contributions required to be made under any Pension Plan maintained by Borrower or any of its ERISA Affiliates (or to which Borrower or any ERISA Affiliate contributes or is required to contribute) have been made or have been reflected as a liability on the pro-forma consolidated balance sheet described in Section 4.5(d). There is no "accumulated funding deficiency" within the meaning of Section 302 of ERISA or any -55- 61 liability to the PBGC (other than for premiums) with respect to any such Pension Plan other than a Multiemployer Plan. 4.15 Tax Liability. Borrower and its Subsidiaries have filed all tax returns which are required to be filed, and have paid, or made provision for the payment of, all taxes which have become due pursuant to said returns or pursuant to any assessment received by Borrower or any Subsidiary, except (a) such taxes, if any, as are being contested in good faith by appropriate proceedings (and with respect to which Borrower or its Subsidiary has established adequate reserves for the payment of the same), and (b) such taxes the failure of which to pay will not constitute a Material Adverse Effect. 4.16 Regulation U. Neither Borrower nor any of its Subsidiaries is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of "purchasing" or "carrying" any "margin stock" within the meanings of Regulation U of the Board of Governors of the Federal Reserve System, and no Loan hereunder will be used to purchase or carry any such margin stock in violation of Regulation U. 4.17 Environmental Matters. To the best knowledge of Borrower, Borrower and its Subsidiaries are in substantial compliance with all applicable Laws relating to environmental protection where the failure to comply would constitute a Material Adverse Effect. To Borrower's best knowledge, neither Borrower nor any of its Subsidiaries has received any notice from any Governmental Agency respecting the alleged violation by Borrower or any Subsidiary of such Laws which would constitute a Material Adverse Effect and which has not been or is not being corrected. 4.18 Disclosure. The information provided by Borrower to the Banks in connection with this Agreement or any Loan, taken as a whole, has not contained any untrue statement of a material fact and has not omitted a material fact necessary to make the statements contained therein not misleading under the totality of the circumstances existing at the date such information was provided and in the context in which it was provided. 4.19 Projections. As of the Closing Date, the assumptions upon which the Projections are based are reasonable and consistent with each other assumption and with all facts known to Borrower and the Projections are reasonably based on those assumptions. Nothing in this Section 4.19 shall be construed as a representation or warranty as of any date other than the Closing Date or that the Projections will in fact be achieved by Borrower. -56- 62 ARTICLE 5 AFFIRMATIVE COVENANTS (OTHER THAN INFORMATION AND REPORTING REQUIREMENTS) As long as any Loan remains unpaid, or any other Obligation remains unpaid, or any portion of the Commitment remains outstanding, Borrower shall, and shall cause each of its Subsidiaries to, unless the Administrative Agent (with the approval of the Majority Banks) otherwise consents in writing: 5.1 Payment of Taxes and Other Potential Liens. Pay and discharge promptly, all taxes, assessments, and governmental charges or levies imposed upon Borrower or any of its Subsidiaries, upon their respective Property or any part thereof, upon their respective income or profits or any part thereof, except any tax, assessment, charge, or levy that is not yet past due, or is being contested in good faith by appropriate proceedings, as long as Borrower or its Subsidiary has established and maintains adequate reserves for the payment of the same and by reason of such nonpayment no material Property of Borrower or its Subsidiaries is subject to a risk of loss or forfeiture. 5.2 Preservation of Existence. Preserve and maintain their respective existence, licenses, rights, franchises, and privileges in the jurisdiction of their formation and all authorizations, consents, approvals, orders, licenses, permits, or exemptions from, or registrations with, any Governmental Agency that are necessary for the transaction of their respective business, and qualify and remain qualified to transact business in each jurisdiction in which such qualification is necessary in view of their respective business or the ownership or leasing of their respective Properties; provided that (a) the failure to preserve and maintain any particular right, franchise, privilege, authorization, consent, approval, order, license, permit, exemption, or registration, or to qualify or remain qualified in any jurisdiction, that does not constitute a Material Adverse Effect will not constitute a violation of this covenant, and (b) nothing in this Section 5.2 shall prevent any consolidation or merger or disposition of assets permitted by Sections 6.2 or 6.3 or shall prevent the termination of the business or existence (corporate or otherwise) of any Subsidiary of Borrower which in the reasonable judgment of the management of Borrower is no longer necessary or desirable. 5.3 Maintenance of Properties. Maintain, preserve and protect all of their respective Properties in good order and condition, subject to wear and tear in the ordinary course of business and damage caused by the natural elements, and not permit any waste of their respective Properties, except that -57- 63 the failure to so maintain, preserve or protect any particular Property, or the permitting of waste on any particular Property, where such failure or waste with respect to all Properties of Borrower and its Subsidiaries, in the aggregate, would not constitute a Material Adverse Effect will not constitute a violation of this covenant. 5.4 Maintenance of Insurance. Maintain insurance with responsible insurance companies in such amounts (subject to customary deductibles and retentions) and against such risks as is usually carried by responsible companies of similar size engaged in similar businesses and owning similar assets in the general areas in which Borrower and its Subsidiaries operate. 5.5 Compliance with Laws. Comply with all Requirements of Laws noncompliance with which would constitute a Material Adverse Effect, except that Borrower and its Subsidiaries need not comply with a Requirement of Law then being contested by any of them in good faith by appropriate procedures, so long as such contest (or a bond or surety posted in connection therewith) operates as a stay of enforcement of any penalty that would otherwise apply as a result of such failure to comply. 5.6 Inspection Rights. At any time during regular business hours and as often as requested, permit any Bank or any employee, agent or representative thereof at the expense of such Bank to examine, audit and make copies and abstracts from the records and books of account of, and to visit and inspect the Properties of Borrower and its Subsidiaries, and to discuss the affairs, finances and accounts of Borrower and its Subsidiaries with any of their officers or employees; provided that none of the foregoing unreasonably interferes with the normal business operations of Borrower or any of its Subsidiaries. 5.7 Keeping of Records and Books of Account. Keep adequate records and books of account fairly reflecting all financial transactions in conformity with Generally Accepted Accounting Principles applied on a consistent basis (except for changes concurred with by Borrower's independent certified public accountants) and all applicable requirements of any Governmental Agency having jurisdiction over Borrower or any of its Subsidiaries. 5.8 Use of Proceeds. Use the proceeds of all Loans solely for working capital and other general corporate purposes of Borrower and its Subsidiaries. 5.9 Subsidiary Guaranty. Cause each of its Guarantor Subsidiaries hereafter formed, acquired or qualifying as a Guarantor Subsidiary, to execute and deliver a joinder of the -58- 64 Subsidiary Guaranty promptly following such formation, acquisition or qualification. ARTICLE 6 NEGATIVE COVENANTS As long as any Loan remains unpaid, or any other Obligation remains unpaid, or any portion of the Commitment remains outstanding, Borrower shall not, and shall not permit any of its Subsidiaries to, unless the Administrative Agent (with the approval of the Majority Banks) otherwise consents in writing: 6.1 Payment or Prepayment of Subordinated Obligations. Make an optional or unscheduled payment or prepayment of any principal (including an optional or unscheduled sinking fund payment), interest or any other amount with respect to any Subordinated Obligation, or make a purchase or redemption of any Subordinated Obligation, or make any payment with respect to any Subordinated Obligation in violation of the subordination provisions in the instruments governing such Subordinated Obligation; provided that: (a) Borrower may prepay and refinance Subordinated Obligations of Borrower if through the issuance of new Subordinated Obligations (i) such new Subordinated Obligations satisfy all of the criteria set forth in the definition of "Subordinated Obligations," and (ii) the incurrence of such new Subordinated Obligations is permitted under Section 6.8 hereof; (b) Borrower may purchase or redeem any Subordinated Obligation solely in exchange for shares of capital stock of Borrower which are not subject to mandatory redemption provisions; and (c) Borrower may purchase or redeem any Subordinated Obligation to the extent obligated to do so upon the occurrence of a "Change in Control", as defined in the indenture governing such Subordinated Obligation, if (i) Borrower has provided to the Administrative Agent pro-forma calculations showing that, giving effect to such repurchase (both as to source and application of funds), Borrower would be in compliance with the covenants set forth herein on a pro-forma basis as of the end of the Fiscal Quarter then most recently ended, and (ii) there has not then occurred and is not then continuing any Default or Event of Default, provided that the requirements of clauses (i) and (ii) above need not be satisfied if concurrently with such repurchase Borrower prepays the Obligations in accordance with Section 3.1(f) and terminates the Commitment pursuant to Section 2.6. 6.2 Dispositions. Make any Disposition, except (a) a Disposition to Borrower or to a wholly-owned Subsidiary of Borrower and (b) a Disposition of a Foreign Subsidiary that does not hold a majority of its assets in the Republic of France. -59- 65 6.3 Mergers and Sale of Assets. Merge or consolidate with or into any Person, or sell all or substantially all of its assets to any Person, except; (a) a merger of Borrower into a wholly-owned Subsidiary of Borrower that has nominal assets and liabilities, the primary purpose of which is to effect the reincorporation of Borrower in another state; (b) mergers or consolidations of a Subsidiary of Borrower into Borrower (with Borrower as the surviving corporation) or into any other wholly-owned Subsidiary of Borrower; (c) liquidations of any Subsidiary of Borrower into Borrower or into a wholly-owned Subsidiary of Borrower; (d) a merger of Borrower or one of its Subsidiaries with another Person if (i) Borrower or such Subsidiary is the corporation surviving such merger, (ii) immediately after giving effect to such merger, no Default or Event of Default shall have occurred and be continuing, and (iii) immediately after giving effect to such merger, there shall have occurred no material diminution in Domestic Adjusted Tangible Net Worth, nor any material deterioration in the ratio of Indebtedness to Domestic Adjusted Tangible Net Worth, in each case from that existing immediately prior to the merger; or (e) Dispositions permitted under Section 6.2. 6.4 Investments and Acquisitions. Make any Acquisition, or enter into an agreement to make any Acquisition, or make or suffer to exist any Investment, other than: (a) Investments consisting of Cash or Cash Equivalents; (b) advances to employees of Borrower or its Subsidiaries for travel, housing expenses, stock option plans, or otherwise in connection with their employment or the business of Borrower or any of its Subsidiaries; (c) Investments of Borrower in any of its wholly-owned Subsidiaries and Investments of any Subsidiary of Borrower in Borrower or any of Borrower's wholly-owned Subsidiaries; (d) Acquisitions of or Investments in Persons engaged in the residential housing construction business and/or the residential land development business in the United States of America, Canada, Mexico and Europe, -60- 66 provided that (i) to the extent that any such Acquisition or Investment is made by a Foreign Subsidiary, after giving effect thereto Borrower shall be in compliance with Section 6.19, (ii) after giving effect to such Acquisition or Investment on a proforma basis, no Default or Event of Default then exists or would result therefrom and (iii) nothing in this clause (d) shall limit Investments permitted by clause (c) above; (e) Acquisitions or Investments in Persons engaged in the commercial construction business in the United States of America or Europe; provided that (i) to the extent that any such Acquisition or Investment is made by a Foreign Subsidiary, after giving effect thereto Borrower shall be in compliance with Section 6.19, (ii) the aggregate cost of such Acquisitions of or Investments in such Persons engaged in the commercial construction business in countries in Europe other than France), shall not exceed at any time $25,000,000, (iii) the aggregate cost of such Acquisitions of and Investments in such Persons engaged in the commercial construction business within the United States of America, when added to the aggregate cost of investments in such inventory within the United States of America made after the Closing Date, shall not exceed $15,000,000 in the aggregate and (iv) nothing in this clause e) shall limit Investments permitted by clause (c) above; (f) Investments by KBMHG in a Person owning one or more multi-unit affordable housing projects, provided that such Investment is made as a limited partner, or otherwise on a basis that will not result in liability or contingent liability to Borrower or any of its Subsidiaries for the obligations of such Person; (g) Investments by the Mortgage Company that are permitted under the Mortgage Warehousing Agreement; (h) Investments in existence on the Closing Date disclosed on Schedule 6.4; (i) Acquisitions of or Investments in Persons engaged primarily in businesses in addition to those permitted by Sections 6.4(d) through (f), provided that the aggregate cost of all such Acquisitions and Investments made after the Closing Date does not exceed at $5,000,000 in the aggregate. 6.5 ERISA Compliance. Permit any Pension Plan maintained by Borrower or any of its ERISA Affiliates (or to which Borrower or any ERISA Affiliate contributes or is required to contribute), other than a Multiemployer Plan, to incur any -61- 67 material "accumulated funding deficiency," as such term is defined in Section 302 of ERISA, unless waived, or permit any Pension Plan maintained by any of them to suffer a Termination Event or incur withdrawal liability under any Multiemployer Plan if any of such events would result in a liability of Borrower or any ERISA affiliate exceeding in the aggregate $5,000,000. 6.6 Change in Business. Engage in any business other than the businesses as now conducted by Borrower or any of its Subsidiaries. 6.7 Liens and Negative Pledges. Create, incur, assume, or suffer to exist, or cause or permit any Joint Venture to create, incur, assume or suffer to exist, any Lien of any nature upon or with respect to any of their respective Properties, whether now owned or hereafter acquired, or enter or suffer to exist any Contractual Obligation wherein Borrower, any of its Subsidiaries or any Joint Venture agrees not to grant any Lien on any of their Properties, except: (a) Liens and Contractual Obligations existing on the date hereof and described in Schedule 4.7, provided that the obligations secured by such Liens are not increased and that no such Lien extends to any Property of Borrower or any Subsidiary other than the Property subject to such Lien on the Closing Date; (b) Liens on Property of any Financial Subsidiary or Foreign Subsidiary securing Indebtedness of that Financial Subsidiary or Foreign Subsidiary; (c) Liens on real Property securing Non-Recourse Indebtedness; provided that any such Non-Recourse Indebtedness complies with the terms of Section6.9 ; (d) Liens consisting of a Capital Lease covering personal Property; (e) Permitted Encumbrances; (f) attachment, judgment and other similar Liens arising in connection with court proceedings; provided that the execution or enforcement of such Lien is effectively stayed and the claims secured thereby do not in the aggregate exceed $5,000,000 and are being contested in good faith by appropriate proceedings timely commenced and diligently prosecuted; (g) Liens existing on any asset of any corporation at the time such corporation becomes a Subsidiary and not created in contemplation of such event; -62- 68 (h) Liens on any asset of any corporation existing at the time such corporation is merged or consolidated with or into Borrower or any of its Subsidiaries and not created in contemplation of such event; (i) Liens existing on any asset prior to the acquisition thereof by Borrower or any of its Subsidiaries and not created in contemplation of such acquisition; (j) Liens arising out of the refinancing, extension, renewal or refunding of any Indebtedness secured by any Lien permitted by any of the foregoing clauses of this Section, provided that such Indebtedness is not increased and is not secured by additional assets; (k) Liens arising in the ordinary course of business which (i) do not secure Indebtedness, (ii) do not secure any obligation in an amount exceeding $200,000 individually, or $500,000 in the aggregate, and (iii) do not in the aggregate materially detract from the value of the assets covered by such Liens or materially impair the use thereof in the operation of Borrower's business; (l) Liens not otherwise permitted by the foregoing clauses of this Section which secure Indebtedness not exceeding $500,000 in the aggregate; (m) Liens securing Indebtedness permitted by Section 6.10(e) incurred in connection with the acquisition of Property; (n) Liens referred to in the last sentence of the definition of "Bond Facility" encumbering (i) real property owned by Borrower or one of its Subsidiaries on September 1, 1994 or (ii) other real property of Borrower or one of its Subsidiaries provided that the aggregate obligations secured by such Liens does not exceed $10,000,000; (o) a Contractual Obligation wherein Borrower or any of its Subsidiaries agrees not to a grant any Lien on any of their Properties, if such Contractual Obligation does not, by its terms, prohibit the grant of a Lien in favor of the Administrative Agent and the Banks with respect to the Obligations (and Borrower shall, as soon as reasonably possible, provide to the Banks a copy of such Contractual Obligation); (p) Liens on property of a Joint Venture referred to in Section 6.10(h) securing Indebtedness permitted by such Section; -63- 69 provided, however, in no event may Borrower or any of its Subsidiaries create, incur, assume or suffer to exist any Lien of any nature upon or with respect to any of their Investments in any Joint Venture, or enter or suffer to exist any Contractual Obligation wherein Borrower or any of its Subsidiaries agrees not to grant any Lien on any of their Investments in any Joint Venture, except in connection with customary joint venture agreements entered into in the ordinary course of business that restrict a joint venture partner from granting a Lien on or Contractual Obligation with respect to its ability to convey its interest in a Joint Venture and except that any such Joint Venture may, to secure Indebtedness permitted under this Agreement, grant a Lien on its Property which includes a provision that such Indebtedness will be accelerated and due in its entirety upon the sale or other transfer of such Property. 6.8 Indebtedness and Contingent Guaranty Obligations. Create, incur, assume or suffer to exist, directly or indirectly, any Indebtedness or Contingent Guaranty Obligation, unless after giving effect to such creation, incurrence, assumption or sufferance: (a) the Domestic Interest Coverage Ratio as of the last day of the most recent Fiscal Quarter is at least 1.50 to 1.00; or (b) Domestic Indebtedness as of the last day of the most recent Fiscal Quarter is less than the sum of (i) an amount equal to 2.60 times the lesser of $240,000,000 or the amount of the Domestic Adjusted Tangible Net Worth as of the last day of such Fiscal Quarter, plus (ii) 2.00 times the amount, if any, by which Domestic Adjusted Tangible Net Worth as of the last day of such Fiscal Quarter exceeded $240,000,000. As used herein, the multiplication factor for the Domestic Indebtedness requirement set forth in each of clauses (b)(i) and (b)(ii) above is referred to in this Section 6.8 as a "Multiplier." The foregoing covenant is subject to the following provisos: (A) For the first Fiscal Quarter, if any, for which the Domestic Interest Coverage Ratio does not satisfy the minimum requirements set forth in clause (a) above, each Multiplier shall be decreased for such Fiscal Quarter by ten one-hundredths (0.10). As used herein, the amount of any such change in the Multiplier (whether such change is an increase or a decrease) is referred to in this Section 6.8 as a "Delta"; -64- 70 (B) For each Fiscal Quarter for which the Domestic Interest Coverage Ratio does not satisfy the minimum requirement set forth in clause (a) above and which immediately follows a Fiscal Quarter in which such minimum requirement had not been satisfied, each Multiplier shall be decreased for such Fiscal Quarter by a Delta equal to the sum of (x) the Delta applicable to the most recent Fiscal Quarter for which the Multiplier was changed plus (y) five one-hundredths (0.05); (C) For each Fiscal Quarter (other than the Fiscal Quarter referred to in clause (A) above) for which the Domestic Interest Coverage Ratio does not satisfy the minimum requirement set forth in clause (a) above and which immediately follows a Fiscal Quarter in which such minimum requirement had been satisfied, each Multiplier shall be decreased for such Fiscal Quarter by a Delta equal to the Delta applicable to the most recent Fiscal Quarter for which the Multiplier was changed; (D) For each Fiscal Quarter for which the Domestic Interest Coverage Ratio satisfies the minimum requirement set forth in clause (a) above and which immediately follows a Fiscal Quarter in which such minimum requirement had not been satisfied, each Multiplier shall be increased for such Fiscal Quarter by a Delta equal to the Delta applicable to the most recent Fiscal Quarter for which the Multiplier was changed; (E) For each Fiscal Quarter for which the Domestic Interest Coverage Ratio satisfies the minimum requirement set forth in clause (a) above and which follows a Fiscal Quarter in which such minimum requirement had been satisfied, each Multiplier shall be increased for such Fiscal Quarter by a Delta equal to the sum of (x) the Delta applicable to the most recent Fiscal Quarter for which such Multiplier was changed minus (y) five one-hundredths (0.05); (F) In no event shall the Multiplier for any Fiscal Quarter be increased above 2.60 (in the case of clause (b)(i) above), and 2.00 (in the case of clause (b)(ii) above); and (G) examples of (but not limitations on) the application of the provisions of this Section 6.8 are set forth in Schedule 6.8. -65- 71 6.9 Non-Recourse Indebtedness. Create, incur, assume or suffer to exist, directly or indirectly, any Non-Recourse Indebtedness of Borrower, its Domestic Subsidiaries and Joint Ventures except Non-Recourse Indebtedness that (a) is incurred only in the connection with the purchase and improvement of Property, (b) constitutes Indebtedness owed to the seller of such Property for the purchase or improvement thereof, (c) as of the date of the incurrence, represents not less than 50% of the purchase price for such property and (d) when aggregated with (x) the amount of all other Non-Recourse Indebtedness of Borrower and its Domestic Subsidiaries plus (y) an amount equal to the aggregate with respect to each Joint Venture of the amount of all Non-Recourse Indebtedness of such Joint Venture times the percentage ownership interest of Borrower and its Subsidiaries in such Joint Venture, does not exceed $100,000,000. 6.10 Subsidiary Indebtedness and Contingent Guaranty Obligations. Permit any Domestic Subsidiary to create, incur, assume or suffer to exist any Indebtedness, or any Contingent Guaranty Obligation except: (a) the Subsidiary Guaranty; (b) Indebtedness of a Financial Subsidiary; (c) Indebtedness owed to Borrower or to a wholly-owned Subsidiary of Borrower; (d) Contingent Guaranty Obligations of Indebtedness owed to Borrower or to a wholly-owned Subsidiary of Borrower; (e) Indebtedness other than Non-Recourse Indebtedness, provided that the aggregate principal amount outstanding at any time does not exceed $5,000,000; (f) Indebtedness (including Indebtedness referred to in subsections (e) above and (h) below) the aggregate outstanding principal amount of which, when added to Indebtedness referred to in Section 6.9, does not exceed $100,000,000 at any time; (g) Indebtedness and Contingent Guaranty Obligations under any Bond Facility; and (h) Indebtedness incurred by an "Unimproved Land Joint Venture" (as defined in the following sentence), provided that the aggregate principal amount of all such Indebtedness outstanding at any time does not exceed $35,000,000. As used herein, "Unimproved Land Joint Venture" means a Joint Venture formed by a Subsidiary -66- 72 which does not qualify as a Significant Subsidiary, and to which such Subsidiary has contributed Domestic Unimproved Land. 6.11 Money Market Indebtedness. Create, incur or suffer to exist any short term Indebtedness under domestic money market credit lines available to Borrower and/or its Subsidiaries, if at any time (a) the sum of the aggregate outstanding principal amount of the Loans evidenced by the Notes plus the Letter of Credit Usage plus the aggregate principal amount of short term Indebtedness of Borrower and its Subsidiaries under domestic money market lines then outstanding would exceed the Commitment or (b) the aggregate principal amount of short term Indebtedness of Borrower and its Subsidiaries under domestic money market credit lines then outstanding plus the aggregate principal amount of Indebtedness of Borrower and its Subsidiaries under revolving lines of credit provided by any Bank would exceed that Bank's Pro-Rata Share of the Commitment (unless the applicable Bank otherwise elects). For purposes of this Section 6.11, "short term Indebtedness under domestic money market credit lines" shall be deemed to be Indebtedness that matures within one year of the date it is incurred. 6.12 Transactions with Affiliates. Enter into any transaction of any kind with any Affiliate of Borrower other than (a) a transaction that results in Subordinated Obligations, or (b) a transaction between or among Borrower and its wholly-owned Subsidiaries, or (c) a transaction that has been approved by a resolution adopted by the board of directors of Borrower with the favorable vote of a majority of the directors who have no financial or other interest in the transaction or by the vote of a majority of the outstanding shares of capital stock of Borrower, or (d) an arm's length transaction entered into on terms and under conditions not less favorable to Borrower or any of its Subsidiaries than could be obtained from a Person that is not an Affiliate of Borrower. 6.13 Minimum Consolidated Tangible Net Worth. Permit Consolidated Tangible Net Worth to be, at the end of each Fiscal Quarter, less than an amount equal to (a) $325,000,000, plus (b) an amount equal to 60% of the consolidated net income of Borrower and its Subsidiaries for the fiscal period commencing on December 1, 1994 and then ending, plus (c) an amount equal to 60% of the net proceeds received by Borrower from the issuance of capital stock since the Closing Date and minus (d) to the extent of any net proceeds received by Borrower from the issuance of capital stock since the Closing Date, an amount equal to the cost to Borrower of the repurchase of any capital stock since the Closing Date. -67- 73 6.14 Distributions. Make any Distribution if an Event of Default then exists or if an Event of Default or Default would result therefrom. 6.15 Amendments. Amend, waive or terminate any provision in any instrument or agreement governing Subordinated Obligations unless such amendment, waiver or termination would not be materially adverse to the interests of the Banks under this Agreement. 6.16 Hostile Tender Offers. Make any offer to the shareholders of a publicly held corporation or business entity to purchase or acquire, or consummate such a purchase or acquisition of, more than 5% of the shares of capital stock or analogous ownership interests in such a corporation or business entity if the board of directors or analogous body of such corporation or business entity has notified Borrower that it opposes such offer or purchase, except for consideration which consists solely of shares of capital stock or other equity securities of Borrower or any of its Subsidiaries. 6.17 Inventory. (a) Permit the book value of Domestic Unimproved Land to exceed an amount equal to 100% of Domestic Adjusted Tangible Net Worth as of the end of any two (2) consecutive Fiscal Quarters. (b) Permit the book value of Domestic Unimproved Unmapped Land to exceed an amount equal to 50% of Domestic Adjusted Tangible Net Worth as of the end of any two (2) consecutive Fiscal Quarters. (c) Purchase or acquire (i) any additional Domestic Unimproved Land or Domestic Unimproved Unmapped Land if Borrower fails to comply with the ratio set forth in clause a) above (even for a single Fiscal Quarter) or (ii) any additional Domestic Unimproved Unmapped Land if Borrower fails to comply with the ratio set forth in clause (b) above (even for a single Fiscal Quarter), until in either case Borrower is in compliance with such ratio for at least one Fiscal Quarter. 6.18 Domestic Standing Inventory. As of any date in any Fiscal Quarter, permit Domestic Standing Inventory to exceed an amount equal to 15% of Net Orders received during that Fiscal Quarter and the three immediately preceding Fiscal Quarters. -68- 74 6.19 Investments in Certain Subsidiaries. Make any Investment: (a) in any Foreign Subsidiary after the Closing Date if, after giving effect thereto, the aggregate amount of all such Investments made after the Closing Date exceeds the sum of (i) $30,000,000 plus (ii) the aggregate amount of Distributions declared and paid by all Foreign Subsidiaries to Borrower after the Closing Date plus (iii) the aggregate amount of capital of Foreign Subsidiaries returned to Borrower after the Closing Date. (b) in any Financial Subsidiary after the Closing Date if, after giving effect thereto, the aggregate amount of all such Investments made after the Closing Date exceeds the sum of (i) $40,000,000 plus (ii) the aggregate amount of Distributions declared and paid by all Financial Subsidiaries to Borrower after the Closing Date plus (iii) the aggregate amount of capital of Financial Subsidiaries returned to Borrower after the Closing Date. In calculating compliance with this Section 6.19(b), the amount of Borrower's Contingent Guaranty Obligations under the Mortgage Warehousing Guaranty shall be excluded from Investments; (c) in the Land Fund Joint Venture in excess of $6,000,000 plus the amount of Distributions to Borrower or any of its Subsidiaries paid by the Land Fund Joint Venture since the Closing Date; and (d) in KBMHG after the Closing Date if, giving effect thereto, the aggregate amount of all such Investments made after the Closing Date exceeds the sum of (i) $22,500,000 plus (ii) the aggregate amount of Distributions declared and paid by KBMHG to Borrower after the Closing Date plus (iii) the aggregate amount of capital of KBMHG returned to Borrower after the Closing Date. 6.20 Land Fund Joint Venture. Make or permit to be made any material amendment to the organization documents with respect to the Land Fund Joint Venture without the prior written consent of the Majority Banks. ARTICLE 7 INFORMATION AND REPORTING REQUIREMENTS 7.1 Financial and Business Information of Borrower and Its Subsidiaries. As long as any Loan remains unpaid or any other Obligation remains unpaid, or any portion of the Commitment remains outstanding, Borrower shall, unless the -69- 75 Administrative Agent (with the approval of the Majority Banks) otherwise consents in writing, deliver to each of the Banks (except as otherwise provided below) at its own expense: (a) As soon as reasonably possible, and in any event within 60 days after the close of each Fiscal Quarter of Borrower (other than the fourth Fiscal Quarter), (i) the consolidated and consolidating balance sheet of Borrower and its Consolidated Subsidiaries as of the end of such Fiscal Quarter, setting forth in comparative form the corresponding figures for the corresponding Fiscal Quarter of the preceding Fiscal Year, if available, and (ii) the consolidated and consolidating statements of profit and loss and the consolidated statements of cash flows of Borrower and its Consolidated Subsidiaries for such Fiscal Quarter and for the portion of the Fiscal Year ended with such Fiscal Quarter, setting forth in comparative form the corresponding periods of the preceding Fiscal Year. Such consolidated and consolidating balance sheets and statements shall be prepared in reasonable detail in accordance with Generally Accepted Accounting Principles (other than those which require footnote disclosure of certain matters) consistently applied, and shall be certified by the principal financial officer of Borrower, subject to normal year-end accruals and audit adjustments; (b) As soon as reasonably possible, and in any event within 90 days after the close of each Fiscal Year of Borrower, (i) the consolidated and consolidating balance sheets of Borrower and its Consolidated Subsidiaries as at the end of such Fiscal Year, setting forth in comparative form the corresponding figures at the end of the preceding Fiscal Year and (ii) the consolidated and consolidating statements of profit and loss and the consolidated statements of cash flows of Borrower and its Consolidated Subsidiaries for such Fiscal Year, setting forth in comparative form the corresponding figures for the previous Fiscal Year. Such consolidated and consolidating balance sheet and statements shall be prepared in reasonable detail in accordance with Generally Accepted Accounting Principles consistently applied. Such consolidated balance sheet and statements shall be accompanied by a report and opinion of Ernst & Young or other independent certified public accountants of recognized standing selected by Borrower (to which the Majority Banks have not reasonably objected), which report and opinion shall state that the examination of such consolidated financial statements by such accountants was made in accordance with generally accepted auditing standards and that such consolidated financial statements fairly present the financial condition, results of operations and of cash flows of Borrower and its Subsidiaries -70- 76 subject to no exceptions as to scope of audit and subject to no other exceptions or qualifications (other than changes in accounting principles in which the auditors concur) not approved by the Majority Banks in their reasonable discretion. Such accountants' report and opinion shall be accompanied by a certificate stating that, in conducting the audit examination of books and records necessary for the certification of such financial statements, such accountants have obtained no knowledge of any Default or Event of Default hereunder or, if in the opinion of such accountants, any such Default or Event of Default shall exist, stating the nature and status of such event, and setting forth the applicable calculations under Sections 6.4(e) and (i), 6.8, 6.9, 6.10(e) and (f), 6.13, 6.17 (a) and (b), 6.18 (without requiring any physical count of inventory) and 6.19, as of the date of the balance sheet. Such consolidating balance sheet and statements shall be certified by the principal financial officer of Borrower; (c) Promptly after the receipt thereof by Borrower, copies of any audit or management reports submitted to it by independent accountants in connection with any audit or interim audit submitted to the board of directors of Borrower or any of its Subsidiaries; (d) Promptly after the same are available, copies of each annual report, proxy or financial statement or other report or communication sent to its stockholders, and copies of all annual, regular, periodic and special reports and registration statements which Borrower may file or be required to file with the Commission or any similar or corresponding Governmental Agency or with any securities exchange; (e) Promptly upon a Senior Officer of Borrower becoming aware, and in any event within ten Banking Days after becoming aware, of the occurrence of any (i) "reportable event" (as such term is defined in Section 4043 of ERISA) other than any such event as to which the PBGC has by regulation waived the requirement of 30 days' notice or (ii) "prohibited transaction" (as such term is defined in Section 406 of ERISA or Section 4975 of the Code) in connection with any Pension Plan, other than a Multiemployer Plan, or any trust created thereunder, a written notice specifying the nature thereof, what action Borrower and any of its Subsidiaries is taking or proposes to take with respect thereto, and, when known, any action taken by the Internal Revenue Service with respect thereto; -71- 77 (f) Promptly upon a Senior Officer of Borrower becoming aware, and in any event within five Banking Days after becoming aware, of the existence of a Default or an Event of Default, a written notice specifying the nature and period of existence thereof and what action Borrower is taking or proposes to take with respect thereto; (g) Promptly upon a Senior Officer of Borrower becoming aware, and in any event within five Banking Days after becoming aware, that the holder of any evidence of Indebtedness for borrowed money or Security of Borrower or any of its Subsidiaries has given notice or taken any other action with respect to a default or event of default, a written notice specifying the notice given or action taken by such holder and the nature of such default or event of default and what action Borrower or its Subsidiary is taking or proposes to take with respect thereto; (h) Promptly upon a Senior Officer of Borrower becoming aware, and in any event within five Banking Days after becoming aware, of the existence of any pending or threatened litigation or any investigation by any Governmental Agency that would constitute a Material Adverse Effect (provided, that no failure of a Senior Officer to provide notice of any such event shall be the sole basis for any Default or Event of Default hereunder); (i) As soon as reasonably possible, and in any event within 60 days after the close of each Fiscal Quarter (except 90 days after the close of the Fiscal Year) of the Land Fund Joint Venture and each other Joint Venture, a report certified by a Senior Officer of Borrower setting forth (i) a complete list of all real Property held by the Land Fund Joint Venture and each other Joint Venture as of the end of such fiscal quarter, (ii) the aggregate outstanding principal amount of Non-Recourse Indebtedness of the Land Fund Joint Venture and each other Joint Venture as of the end of such fiscal quarter and (iii) the aggregate amount of Borrower's Investment in the Land Fund Joint Venture and each other Joint Venture as of the end of such fiscal quarter; (j) As soon as possible, and in any event within 60 days after the close of each Fiscal Quarter of Borrower (except 90 days after the close of the Fiscal Year of Borrower), (i) a sales report by geographical region, certified by a Senior Officer of Borrower, setting forth the number of homes or other units sold and delivered during such period and in backlog at the end of such period, (ii) an inventory report for such Fiscal Quarter summarizing such inventory by type and geographical region -72- 78 and otherwise in form and substance satisfactory to the Majority Banks, (iii) a quarterly report in form and substance satisfactory to the Majority Banks detailing intercompany borrowings and repayments between Borrower and its Domestic Subsidiaries during such Fiscal Quarter, and (iv) a report of any change, as of the last day of such Fiscal Quarter, in the listing of Financial Subsidiaries and Foreign Subsidiaries set forth in Schedule 4.4 (as the same may have been revised by previous reports under this clause (j)(iv)); (k) As soon as reasonably possible, and in any event prior to the date that is sixty (60) days after the commencement of each Fiscal Year, deliver to the Administrative Agent the business plan of Borrower and its Subsidiaries for that Fiscal Year, together with projections (in substantially the same format as the Projections) covering the next two (2) Fiscal Years; (l) Promptly following obtaining knowledge thereof by a Senior Officer of Borrower, written notice of any change in the Credit Rating Level; and (m) Such other data and information as from time to time may be reasonably requested by any of the Banks. 7.2 Compliance Certificate. Not later than 60 days after the close of each Fiscal Quarter and 90 days after the close of each Fiscal Year, a Compliance Certificate dated as of the last day of the Fiscal Quarter or Fiscal Year, as the case may be, (a) setting forth computations showing, in detail reasonably satisfactory to the Administrative Agent, whether Borrower and its Subsidiaries were in compliance with their obligations to the Banks pursuant to Sections 6.4(e) and (i), 6.8, 6.9, 6.10(e) and (f), 6.13, 6.17(a) and (b), 6.18 and 6.19; (b) either (i) stating that to the best knowledge of the certifying officer as of the date of such certificate there is no Default or Event of Default, or (ii) if there is a Default or Event of Default as of the date of such certificate, specifying all such Defaults or Events of Default and their nature and status and (c) stating, to the best knowledge of the certifying officer, whether any event or circumstance constituting a Material Adverse Effect (other than a Material Adverse Effect which is not particular to the Borrower and which is generally known) has occurred since the date of the most recent Compliance Certificate delivered under this Section and, if so, describing such Material Adverse Effect in reasonable detail. No failure of the certifying officer to describe the existence of an event or circumstance constituting a Material Adverse Effect shall be the sole basis for any Default or Event of Default hereunder. -73- 79 ARTICLE 8 CONDITIONS 8.1 Initial Advances. The effectiveness of this Agreement, and obligations of the Banks to make the initial Advances and of the Issuing Bank to issue the initial Letter of Credit are subject to the following conditions, each of which shall be satisfied prior to or concurrently with the making of the initial Advances: (a) The Administrative Agent shall have received all of the following, each dated as of the Closing Date (unless otherwise specified or unless the Administrative Agent otherwise agrees) and all in form and substance satisfactory to the Administrative Agent and legal counsel for the Administrative Agent: (1) executed counterparts of this Agreement, sufficient in number for distribution to the Banks and Borrower; (2) the Notes executed by Borrower in favor of each Bank, each in a principal amount equal to that Bank's Pro Rata Share of the Commitment; (3) the Subsidiary Guaranty executed by each Subsidiary which is a Guarantor Subsidiary as of the Closing Date; (4) with respect to Borrower and each Subsidiary which is a Guarantor Subsidiary as of the Closing Date, such documentation as the Administrative Agent may reasonably require to establish the due organization, valid existence and good standing of Borrower and each such Subsidiary, its qualification to engage in business in each jurisdiction in which it is required to be so qualified, its authority to execute, deliver and perform any Loan Documents to which it is a Party, and the identity, authority and capacity of each Responsible Official thereof authorized to act on its behalf, including, without limitation, certified copies of articles of incorporation and amendments thereto, bylaws and amendments thereto, certificates of good standing and/or qualification to engage in business, tax clearance certificates, certificates of corporate resolutions, incumbency certificates, and the like; (5) the Opinions of Counsel; (6) an Officer's Certificate of Borrower affirming, to the best knowledge of the certifying -74- 80 Senior Officer, that the conditions set forth in Sections 8.1(c) and 8.1(d) have been satisfied; (7) a Notice of Allocation (as such term is defined in the Override Agreement); and (8) such other assurances, certificates, documents, consents or opinions relevant hereto as the Administrative Agent may reasonably require. (b) The Administrative Agent shall have received satisfactory evidence that the Override Agreement and the KBMC Amendment referred to therein shall become effective concurrently with the effectiveness of this Agreement. (c) The representations and warranties of Borrower contained in Article 4 shall be true and correct in all material respects on and as of the Closing Date. (d) Borrower and its Subsidiaries and any other Parties shall be in compliance with all the terms and provisions of the Loan Documents. (e) The Banks shall have received the written legal opinion of Messrs. Sheppard, Mullin, Richter & Hampton, legal counsel to the Administrative Agent, to the effect that the Opinions of Counsel are acceptable and such other matters relating to the Loan Documents as the Administrative Agent may request. 8.2 Any Increasing Advance. The obligations of the Banks to make any Advance which would increase the aggregate principal Indebtedness evidenced by the Notes, are subject to the following conditions precedent: (a) the Administrative Agent shall have received a Request for Loan; (b) the representations and warranties contained in Article 4 (other than the representations and warranties contained in Sections 4.4(a), 4.5, 4.6, 4.7, 4.9, 4.14, and 4.19) shall be true and correct in all material respects on and as of the date of the Loan as though made on and as of that date and no event or circumstance that constitutes a Material Adverse Effect shall have occurred since the Closing Date; (c) no Material KBMC Default or Material KBMC Event of Default then exists under the Mortgage Warehousing Agreement; provided that this condition precedent shall not apply in respect of a Curable KBMC Default so long as -75- 81 the proceeds of any Loan made in reliance on this proviso are actually used to cure such Curable KBMC Default; and (d) the Administrative Agent shall have received such other information relating to any matters which are the subject of Section 8.2(b) or the compliance by Borrower with this Agreement as may reasonably be requested by the Administrative Agent on behalf of a Bank. 8.3 Any Advance. The obligations of the Banks to make any Advance are subject to the conditions precedent that the representations and warranties contained in Sections 4.12 and 4.18 shall be true and correct in all material respects on and as of the date of the Advance as though made on and as of that date, and that there has not occurred an Event of Default that is then continuing. 8.4 Any Letter of Credit. The obligation of any Issuing Bank to issue any Letter of Credit, and the obligation of the other Banks to participate therein, are subject to the conditions precedent that (a) the conditions set forth in Section 8.2 have been satisfied and (b) Borrower shall have certified that, giving effect to the issuance of the requested Letter of Credit, the Letter of Credit Usage shall not exceed any limitations set forth in this Agreement. ARTICLE 9 EVENTS OF DEFAULT AND REMEDIES UPON EVENTS OF DEFAULT 9.1 Events of Default. There will be a default hereunder if any one or more of the following events ("Events of Default") occurs and is continuing, whatever the reason therefor: (a) failure to pay any installment of principal on any of the Notes on the date, or any payment in respect of a Letter of Credit pursuant to Section 2.5(e), when due; or (b) failure to pay any installment of interest on any of the Notes, or to pay any fee or other amounts due the Administrative Agent or any Bank hereunder, within five Banking Days after the date when due; or (c) any failure to comply with Sections 5.8, 5.9, 6.1, 6.2, 6.3, 6.4, 6.7, 6.8, 6.9, 6.10, 6.13, 6.17, 6.18, 6.19 or 7.1(f); or (d) any failure to comply with Section 6.11 which shall remain unremedied for a period of three Banking Days -76- 82 after notice by the Administrative Agent of such Default; or (e) Borrower or any other Party fails to perform or observe any other term, covenant, or agreement contained in any Loan Document on its part to be performed or observed within thirty (30) calendar days after notice by the Administrative Agent of such Default; or (f) any representation or warranty in any Loan Document or in any certificate, agreement, instrument, or other document made or delivered, on or after the Closing Date, pursuant to or in connection with any Loan Document proves to have been incorrect when made in any respect material to the ability of the Borrower to duly and punctually perform all of the Obligations; or (g) Any failure to pay any principal when due (including upon acceleration thereof) under the Mortgage Warehousing Agreement; or (h) Borrower or any of its Significant Subsidiaries (i) fails to pay the principal, or any principal installment, of any present or future Indebtedness other than Non-Recourse Indebtedness, and in the case of the Mortgage Company, arising under the Mortgage Warehousing Agreement), or any guaranty of present or future Indebtedness other than Non-Recourse Indebtedness) on its part to be paid, when due (or within any stated grace period), whether at the stated maturity, upon acceleration, by reason of required prepayment or otherwise in excess of $10,000,000 individually or $25,000,000 in the aggregate or (ii) fails to perform or observe any other material term, covenant, or agreement on its part to be performed or observed, or suffers to exist any condition, in connection with any present or future Indebtedness (other than Non-Recourse Indebtedness, and in the case of the Mortgage Company, arising under the Mortgage Warehousing Agreement) or any guaranty of present or future Indebtedness other than Non-Recourse Indebtedness), in excess of $10,000,000 individually or $25,000,000 in the aggregate, if as a result of such failure or such condition any holder or holders thereof (or an agent or trustee on its or their behalf) has the right to declare it due before the date on which it otherwise would become due; or (i) any Loan Document, at any time after its execution and delivery and for any reason other than the agreement of all the Banks or satisfaction in full of all the Obligations, ceases to be in full force and effect or is declared by a court of competent jurisdiction to be null and void, invalid, or unenforceable in any respect -77- 83 which is, in the reasonable opinion of the Majority Banks, materially adverse to the interest of the Banks; (j) a final judgment (or judgments) against Borrower or any of its Significant Subsidiaries is entered for the payment of money in excess of $10,000,000 individually or $25,000,000 in the aggregate, and remains unsatisfied without procurement of a stay of execution within thirty (30) calendar days after the issuance of any writ of execution or similar legal process or the date of entry of judgment, whichever is earlier, or in any event at least five (5) calendar days prior to the sale of any assets pursuant to such legal process; or (k) Borrower or any Significant Subsidiary of Borrower institutes or consents to any proceeding under a Debtor Relief Law relating to it or to all or any part of its Property, or fails generally to pay its debts as they mature, or makes a general assignment for the benefit of creditors; or applies for or consents to the appointment of any receiver, trustee, custodian, conservator, liquidator, rehabilitator, or similar officer for it or for all or any part of its property; or any receiver, trustee, custodian, conservator, liquidator, rehabilitator, or similar officer is appointed without the application or consent of that Person and the appointment continues undischarged or unstayed for sixty (60) calendar days; or any proceeding under any Debtor Relief Law relating to any such Person or to all or any part of its Property is instituted without the consent of that Person, and continues undismissed or unstayed for sixty (60) calendar days; or (l) the occurrence of a Termination Event with respect to any Pension Plan if the aggregate liability of Borrower and its ERISA Affiliates under ERISA as a result thereof exceeds $10,000,000; or the complete or partial withdrawal by Borrower or any of its ERISA Affiliates from any Multiemployer Plan if the aggregate liability of Borrower and its ERISA Affiliates as a result thereof exceeds $10,000,000; or (m) any determination is made by a court of competent jurisdiction that payment of principal or interest or both is due to the holder of any Subordinated Obligations which would not be permitted by Section 6.1 or that any Subordinated Obligation is not subordinated in accordance with its terms to the Obligations. 9.2 Remedies Upon Event of Default. Without limiting any other rights or remedies of the Administrative Agent or the -78- 84 Banks provided for elsewhere in this Agreement or the Loan Documents, or by applicable Law or in equity, or otherwise: (a) Upon the occurrence of any Event of Default, and so long as any such Event of Default shall be continuing (other than an Event of Default described in Section 9.1(k) with respect to Borrower or a Guarantor Subsidiary): (i) all commitments to make Advances or issue Letters of Credit, and all other obligations of the Administrative Agent, the Issuing Bank or the Banks shall be suspended without notice to or demand upon Borrower, which are expressly waived by Borrower, except that the Majority Banks may waive the Event of Default or, without waiving, determine, upon terms and conditions satisfactory to the Majority Banks, to reinstate the Commitment and make further Advances or issue Letters of Credit, which waiver or determination shall apply equally to, and shall be binding upon, all the Banks; (ii) the Majority Banks may request the Administrative Agent to, and the Administrative Agent thereupon shall, declare the unpaid principal of all Obligations due to Banks hereunder and under the Notes, an amount equal to the Letter of Credit Usage, all interest accrued and unpaid thereon, and all other amounts payable under the Loan Documents to be forthwith due and payable, whereupon the same shall become and be forthwith due and payable, without protest, presentment, notice of dishonor, demand, or further notice of any kind, all of which are expressly waived by Borrower; provided that the Administrative Agent shall notify Borrower (by telecopy and, if practicable, by telephone) substantially concurrently with any such acceleration (but the failure of Borrower to receive such notice shall not affect such acceleration). (b) Upon the occurrence of any Event of Default described in Section 9.1(k) with respect to Borrower or a Guarantor Subsidiary: (i) all commitments to make Advances or issue Letters of Credit, and all other obligations of the Administrative Agent, the Issuing Bank(s) or the Banks under the Loan Documents shall terminate without notice to or demand upon Borrower, which are expressly waived by Borrower, except that all the Banks may waive the Event of Default or, without waiving, determine, upon terms and conditions -79- 85 satisfactory to all the Banks, to reinstate the Commitment and make further Advances; (ii) the unpaid principal of all Obligations due to the Banks hereunder and under the Notes, an amount equal to the Letter of Credit Usage and all interest accrued and unpaid on such Obligations, and all other amounts payable under the Loan Documents shall be forthwith due and payable, without protest, presentment, notice of dishonor, demand, or further notice of any kind, all of which are expressly waived by Borrower. (c) So long as any Letter of Credit shall remain outstanding, any amounts received by the Administrative Agent in respect of the Letter of Credit Usage pursuant to Section9.2.(a)(ii) or 9.2(b)(ii) may be held as cash collateral for the obligation of Borrower to reimburse the Issuing Bank in event of any drawing under any Letter of Credit (and Borrower hereby grants to the Administrative Agent a security interest in such cash collateral). In the event any Letter of Credit in respect of which Borrower has deposited cash collateral with the Administrative Agent is cancelled or expires, the cash collateral shall be appliedfirst to the reimbursement of the Issuing Bank (or all of the Banks, as the case may be) for any drawings thereunder, andsecond to the payment of any outstanding Obligations of Borrower hereunder or under any other Loan Document. (d) Upon the occurrence of an Event of Default, the Banks and the Administrative Agent, or any of them, may proceed to protect, exercise, and enforce their rights and remedies under the Loan Documents against Borrower or any other Party and such other rights and remedies as are provided by Law or equity, without notice to or demand upon Borrower (which are expressly waived by Borrower) except to the extent required by applicable Laws. The order and manner in which the rights and remedies of the Banks under the Loan Documents and otherwise are exercised shall be determined by the Majority Banks. (e) All payments received by the Administrative Agent and the Banks, or any of them, after the acceleration of the maturity of the Loans shall be applied first to the costs and expenses (including attorneys' fees and disbursements) of the Administrative Agent, acting as Administrative Agent, and of the Banks and thereafter paid pro rata to the Banks in the same proportion that the aggregate of the unpaid principal amount owing on the Obligations of Borrower to each Bank, plus accrued and unpaid interest thereon, bears to the aggregate of the -80- 86 unpaid principal amount owing on all the Obligations, plus accrued and unpaid interest thereon. Regardless of how each Bank may treat the payments for the purpose of its own accounting, for the purpose of computing Borrower's Obligations, the payments shall be applied first, to the costs and expenses of the Administrative Agent, acting as Administrative Agent, and the Banks as set forth above, second, to the payment of accrued and unpaid fees hereunder and interest on all Obligations to the Banks, to and including the date of such application (ratably according to the accrued and unpaid interest on the Loans), third, to the ratable payment of the unpaid principal of all Obligations to the Banks, and fourth, to the payment of all other amounts then owing to the Administrative Agent or the Banks under the Loan Documents. No application of the 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 the Banks hereunder or under applicable Law unless all amounts then due (whether by acceleration or otherwise) have been paid in full. ARTICLE 10 THE ADMINISTRATIVE AGENT 10.1 Appointment and Authorization. Subject to Section 10.7, each Bank hereby irrevocably appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under the Loan Documents as are delegated to the Administrative Agent by the terms thereof or are reasonably incidental, as determined by the Administrative Agent, thereto. This appointment and authorization does not constitute appointment of the Administrative Agent as trustee for any Bank and, except as specifically set forth herein to the contrary, the Administrative Agent shall take such action and exercise such powers only in an administrative and ministerial capacity. 10.2 Administrative Agent and Affiliates. Bank of America (and each successor Administrative Agent) has the same rights and powers under the Loan Documents as any other Bank and may exercise the same as though it were not the Administrative Agent; and the term "Bank" or "Banks" includes Bank of America in its individual capacity. Bank of America (and each successor Administrative Agent) and its respective Affiliates may accept deposits from, lend money to, and generally engage in any kind of banking, trust or other business with Borrower and any Affiliate of Borrower, as if it were not the Administrative Agent and without any duty to account therefor to the Banks. Bank of America (and each -81- 87 successor Administrative Agent) need not account to any other Bank for any monies received by it for reimbursement of its costs and expenses as Administrative Agent hereunder, or for any monies received by it in its capacity as a Bank hereunder, except as otherwise provided herein. 10.3 Banks' Credit Decisions. Each Bank agrees that it has, independently and without reliance upon the Administrative Agent, any other Bank, or the directors, officers, agents, or employees of the Administrative Agent or of any other Bank, and instead in reliance upon information supplied to it by or on behalf of Borrower and its Subsidiaries and upon such other information as it has deemed appropriate, made its own independent credit analysis and decision to enter into this Agreement. Each Bank also agrees that it shall, independently and without reliance upon the Administrative Agent, any other Bank, or the directors, officers, agents, or employees of the Administrative Agent or of any other Bank, continue to make its own independent credit analyses and decisions in acting or not acting under the Loan Documents. 10.4 Action by Administrative Agent. (a) The Administrative Agent may assume that no Default or Event of Default has occurred and is continuing, unless the Administrative Agent has actual knowledge of the Default or Event of Default, has received notice from Borrower stating the nature of the Default or Event of Default, or has received notice from a Bank stating the nature of the Default or Event of Default and that Bank considers the Default or Event of Default to have occurred and to be continuing. (b) The Administrative Agent has only those obligations under the Loan Documents that are expressly set forth therein. Without limitation on the foregoing, the Administrative Agent shall have no duty to inspect any property of Borrower or any of its Subsidiaries, although the Administrative Agent may in its discretion periodically inspect any property from time to time. (c) Except for any obligation expressly set forth in the Loan Documents and as long as the Administrative Agent may assume that no Event of Default has occurred and is continuing, the Administrative Agent may, but shall not be required to, exercise its discretion to act or not act, except that the Administrative Agent shall be required to act or not act upon the instructions of the Majority Banks (or of all the Banks, to the extent required by Section 11.2) and those instructions shall be binding upon the Administrative Agent and all the Banks, provided that the Administrative Agent shall not be required to act or not act if to do so would, in the reasonable judgment of the Administrative Agent, expose the Administrative -82- 88 Agent to significant liability or would be contrary to any Loan Document or to applicable law. (d) If the Administrative Agent has received a notice specified in clause (a), the Administrative Agent shall give notice thereof to the Banks and shall act or not act upon the instructions of the Majority Banks (or of all the Banks, to the extent required by Section 11.2), provided that the Administrative Agent shall not be required to act or not act if to do so would be contrary to any Loan Document or to applicable Law or would result, in the reasonable judgment of the Administrative Agent, in substantial risk of liability to the Administrative Agent, and except that if the Majority Banks (or all the Banks, if required under Section 11.2) fail, for three (3) Banking Days after the receipt of notice from the Administrative Agent, to instruct the Administrative Agent, then the Administrative Agent, in its sole discretion, may act or not act as it deems advisable for the protection of the interests of the Banks. (e) The Administrative Agent shall have no liability to any Bank for acting, or not acting, as instructed by the Majority Banks (or all the Banks, if required under Section 11.2), notwithstanding any other provision hereof. 10.5 Liability of Administrative Agent. Neither the Administrative Agent nor any of its respective directors, officers, agents, or employees shall be liable for any action taken or not taken by them under or in connection with the Loan Documents, except for their own gross negligence or willful misconduct. Without limitation on the foregoing, the Administrative Agent and its respective directors, officers, agents, and employees: (a) may treat the payee of any Note as the holder thereof until the Administrative Agent receives notice of the assignment or transfer thereof in form satisfactory to the Administrative Agent, signed by the payee and may treat each Bank as the owner of that Bank's interest in the obligations due to Banks for all purposes of this Agreement until the Administrative Agent receives notice of the assignment or transfer thereof, in form satisfactory to the Administrative Agent, signed by that Bank; (b) may consult with legal counsel, in-house legal counsel, independent public accountants, in-house accountants and other professionals, or other experts selected by it, or with legal counsel, independent public accountants, or other experts for Borrower, and shall not be liable for any action taken or not taken by it or them in good faith in accordance with the advice of such legal counsel, independent public accountants, or experts; -83- 89 (c) will not be responsible to any Bank for any statement, warranty, or representation made in any of the Loan Documents or in any notice, certificate, report, request, or other statement (written or oral) in connection with any of the Loan Documents; (d) except to the extent expressly set forth in the Loan Documents, will have no duty to ascertain or inquire as to the performance or observance by Borrower or any other Person of any of the terms, conditions, or covenants of any of the Loan Documents or to inspect the property, books, or records of Borrower or any of its Subsidiaries or other Person; (e) will not be responsible to any Bank for the due execution, legality, validity, enforceability, genuineness, effectiveness, sufficiency, or value of any Loan Document, any other instrument or writing furnished pursuant thereto or in connection therewith; (f) will not incur any liability by acting or not acting in reliance upon any Loan Document, notice, consent, certificate, statement, or other instrument or writing believed by it or them to be genuine and signed or sent by the proper party or parties; and (g) will not incur any liability for any arithmetical error in computing any amount payable to or receivable from any Bank hereunder, including without limitation payment of principal and interest on the Notes, payment of commitment fees, Loans, and other amounts; provided that promptly upon discovery of such an error in computation, the Administrative Agent, the Banks, and (to the extent applicable) Borrower shall make such adjustments as are necessary to correct such error and to restore the parties to the position that they would have occupied had the error not occurred. 10.6 Indemnification. Each Bank shall, ratably in accordance with the respective principal amount of its Commitment, indemnify and hold the Administrative Agent and its directors, officers, agents, and employees harmless against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses, or disbursements of any kind or nature whatsoever (including, without limitation, attorney's fees and disbursements) that may be imposed on, incurred by, or asserted against it or them in any way relating to or arising out of the Loan Documents (other than losses incurred by reason of the failure by Borrower to pay the obligations due to Banks hereunder or under the Notes) or any action taken or not taken by it as Administrative Agent thereunder, except for the Administrative Agent's gross negligence or willful misconduct. Without limitation on the -84- 90 foregoing, each Bank shall reimburse the Administrative Agent upon demand for that Bank's ratable share of any cost or expense incurred by the Administrative Agent in connection with the negotiation, preparation, execution, delivery, administration, amendment, waiver, refinancing, restructuring, reorganization (including a bankruptcy reorganization), or enforcement of the Loan Documents, to the extent that Borrower is required by Section 11.3 to pay that cost or expense but fails to do so upon demand. Any such reimbursement shall not relieve Borrower of its obligations under Section 11.3. 10.7 Successor Administrative Agent. The Administrative Agent may resign as such at any time by written notice to Borrower and the Banks, to be effective upon a successor's acceptance of appointment as Administrative Agent. The Majority Banks may at any time remove the Administrative Agent by written notice to that effect to be effective on such date as the Majority Banks designate. In either event, the Majority Banks shall appoint a successor Administrative Agent or Agents, who must be from among the Banks; provided, that the Administrative Agent shall be entitled to appoint a successor Administrative Agent from among the Banks, subject to acceptance of appointment by that successor Administrative Agent, if the Majority Banks have not appointed a successor Administrative Agent within thirty (30) days after the date the Administrative Agent gave notice of resignation or was removed. Upon a successor's acceptance of appointment as Administrative Agent, the successor will thereupon succeed to and become vested with all the rights, powers, privileges, and duties of the Administrative Agent under the Loan Documents, and the resigning or removed Administrative Agent will thereupon be discharged from its duties and obligations thereafter arising under the Loan Documents. After any retiring Administrative Agent's resignation or removal hereunder as Administrative Agent, the provisions of this Article 10 and Sections 11.3 and 11.10 shall inure to its benefit as to any action taken or omitted to be taken by it while it was Administrative Agent under this Agreement. 10.8 No Obligations of Borrower. Nothing contained in this Article 10 shall be deemed to impose upon Borrower any obligation in respect of the due and punctual performance by the Administrative Agent of its obligations to the Banks under any provision of this Agreement, and Borrower shall have no liability to the Administrative Agent or any of the Banks in respect of any failure by the Administrative Agent or any Bank to perform any of its obligations to the Administrative Agent or the Banks under this Agreement. Without limiting the generality of the foregoing, where any provision of this Agreement relating to the payment of any amounts due and owing under the Loan Documents provides that such payments shall be made by Borrower to the Administrative Agent for the account of -85- 91 the Banks, Borrower's obligations to the Banks in respect of such payments shall be deemed to be satisfied upon the making of such payments to the Administrative Agent in the manner provided by this Agreement. ARTICLE 11 MISCELLANEOUS 11.1 Cumulative Remedies; No Waiver. The rights, powers, and remedies of the Administrative Agent or any Bank provided herein or in any Note or other Loan Document are cumulative and not exclusive of any right, power, or remedy provided by law or equity. No failure or delay on the part of the Administrative Agent or any Bank in exercising any right, power, or remedy may be, or may be deemed to be, a waiver thereof; nor may any single or partial exercise of any right, power, or remedy preclude any other or further exercise of any other right, power, or remedy. The terms and conditions of Sections 8.1, 8.2, 8.3 and 8.4 hereof are inserted for the sole benefit of the Banks and the Administrative Agent may (with the approval of the Majority Banks) waive them in whole or in part with or without terms or conditions in respect of any Loan, without prejudicing the Banks' rights to assert them in whole or in part in respect of any other Loans. 11.2 Amendments; Consents. No amendment, modification, supplement, termination, or waiver of any provision of this Agreement or any other Loan Document, and no consent to any departure by Borrower or any other Party therefrom, may in any event be effective unless in writing signed by the Administrative Agent with the approval of the Majority Banks and by Borrower, and then only in the specific instance and for the specific purpose given; and without the approval in writing of all the Banks (or in the case of Section 11.2(d), Banks holding at least 66 2/3% of the Commitment), no amendment, modification, supplement, termination, waiver, or consent may be effective: (a) to amend or modify the principal of, or the amount of principal or principal prepayments, payable on any Obligation or the amount of the Commitment or to decrease the rate of any interest or fee payable to any Bank; (b) to postpone any date fixed for any payment of principal of, prepayment of principal of, or any installment of interest on, any Obligation or any installment of any fee or to extend the term of the Commitment; -86- 92 (c) to amend or modify the provisions of the definitions in Section 1.1 of "Majority Banks" or of Sections 11.2, 11.9, 11.10, or 11.11; (d) release any Guarantor Subsidiary from liability under any Subsidiary Guaranty; or (e) to amend or modify any provision of this Agreement or the Loan Documents that expressly requires the consent or approval of all the Banks. Any amendment, modification, supplement, termination, waiver, or consent pursuant to this Section 11.2 shall apply equally to, and shall be binding upon, all the Banks and the Agents. 11.3 Costs, Expenses and Taxes. Borrower shall pay within fifteen (15) days after demand the reasonable actual out-of-pocket costs and expenses of the Managing Agents and the Administrative Agent in connection with (a) the negotiation, preparation, execution, delivery, arrangement, syndication and closing of the Loan Documents, provided that such costs and expenses do not exceed the amounts set forth in a letter agreement between Borrower and the Managing Agents, (b) administration of the Loan Documents, provided that such costs and expenses do not exceed the amounts set forth in a letter agreement between Borrower and the Administrative Agent and (c) amendment, waiver or modification of the Loan Documents. Borrower shall pay within fifteen (15) days after demand the reasonable out-of-pocket costs and expenses of the Administrative Agent and each of the Banks in connection with the enforcement of any Loan Documents, including in connection with any refinancing, restructuring, reorganization (including a bankruptcy reorganization, if such payment is approved by the bankruptcy court or any similar proceeding). The costs and expenses referred to in the first sentence above (in the case of the Managing Agents and Administrative Agent only) and the second sentence above (in the case of the Administrative Agent and the Banks) shall include filing fees, recording fees, title insurance fees, appraisal fees, search fees, and other out-of-pocket expenses and the reasonable fees and out-of-pocket expenses of any legal counsel retained by the Managing Agents and Administrative Agent or any of the Banks (including the allocated costs of in-house counsel), as the case may be, or independent public accountants and other outside experts retained by the Managing Agents and Administrative Agent (provided that Borrower shall not be liable under this Section 11.3 for fees and expenses of more than one firm of independent public accountants, or more than one expert with respect to a specific subject matter, at any one time). Nothing herein shall obligate Borrower to pay any costs and expenses in connection with an assignment of or participation in a Bank's Pro-Rata Share of the Commitment. Borrower shall -87- 93 pay any and all documentary and transfer taxes, assessments or charges made by any Governmental Agency and all costs, expenses, fees, and charges payable or determined to be payable in connection with the execution, delivery, filing or recording of this Agreement, any other Loan Document, or any other instrument or writing to be delivered hereunder or thereunder, and shall reimburse, hold harmless, and indemnify the Administrative Agent and each Bank from and against any and all loss, liability, or legal or other expense with respect to or resulting from any delay in paying or failure to pay any such tax, cost, expense, fee, or charge or that any of them may suffer or incur by reason of the failure of Borrower to perform any of its Obligations. Any amount payable to the Administrative Agent or any Bank under this Section shall bear interest from the date of receipt of demand for payment at the rate then in effect for Alternate Base Rate Loans. 11.4 Nature of Banks' Obligations. Nothing contained in this Agreement or any other Loan Document and no action taken by the Administrative Agent or the Banks or any of them pursuant hereto or thereto may, or may be deemed to, make the Banks a partnership, an association, a joint venture, or other entity, either among themselves or with Borrower. Each Bank's obligation to make any Advance pursuant hereto is several and not joint or joint and several, and is not conditioned upon the performance by any other Bank of its obligation to make Advances. A default by any Bank will not increase the Commitment of any other Bank. Any Bank not in default may, if it desires, assume in such proportion as the nondefaulting Banks agree the obligations of any Bank in default, but is not obligated to do so. 11.5 Representations and Warranties. All representations and warranties of Borrower and any other Party contained herein or in any other Loan Document (including, for this purpose, all representations and warranties contained in any certificate or other writing required to be delivered by or on behalf of Borrower or such Party pursuant to any Loan Document) will survive the making of the loans hereunder and the execution and delivery of the Notes, and, in the absence of actual knowledge by the Administrative Agent or a Bank of the untruth of any representation or warranty, have been or will be relied upon by the Administrative Agent and that Bank, notwithstanding any investigation made by the Administrative Agent or that Bank or on their behalf. 11.6 Notices. Except as otherwise provided in any Loan Document, all notices, requests, demands, directions, and other communications provided for hereunder and under any other Loan Document must be in writing and must be mailed (provided that communications related to any Default or Event of Default or proposed action under Section 11.2 shall not be sent solely by -88- 94 mail), telegraphed, delivered, or sent by telex, telecopier or cable to the appropriate party at the address set forth on the signature pages of this Agreement or, as to any Party, at any other address as may be designated by it in the applicable Loan Document or in a written notice sent to the Administrative Agent and Borrower in accordance with this Section. Except as otherwise provided in any Loan Document if any notice, request, demand, direction, or other communication is given by mail it will be effective on the earlier of actual receipt or the third Banking Day after deposited in the United States mails with first class or airmail postage prepaid; if given by telegraph or cable, when delivered to the telegraph company with charges prepaid; if given by telecopier, when sent; if given by telex, when confirmed by answerback; or if given by personal delivery, when delivered. 11.7 Execution in Counterparts. This Agreement and any other Loan Document to which Borrower is a Party may be executed in any number of counterparts and any party hereto or thereto may execute any counterpart, each of which when executed and delivered will be deemed to be an original and all of which counterparts of this Agreement or any other Loan Document, as the case may be, taken together will be deemed to be but one and the same instrument. Such counterparts may be sent by telecopy, with the original counterparts to follow by mail or courier. The execution of this Agreement or any other Loan Document by any party hereto or thereto will not become effective until executed counterparts hereof or thereof (or other evidence of execution satisfactory to the Administrative Agent and Borrower) have been delivered to the Administrative Agent and Borrower. 11.8 Binding Effect; Assignment. (a) This Agreement and the other Loan Documents to which Borrower is a Party will be binding upon and inure to the benefit of Borrower, the Agents, each of the Banks, and their respective successors and assigns, except thatexcept as permitted in Section 6.3, Borrower may not assign its rights hereunder or thereunder or any interest herein or therein without the prior written consent of all the Banks. (b) From time to time subsequent to the Closing Date, each Bank may assign or grant a participation in a portion of its Pro Rata Share of the Commitment, its Advances and its participation in Letters of Credit, subject to all of the terms and conditions set forth in Sections 5.1 and 5.2 of the Override Agreement. 11.9 Sharing of Setoffs. Each Bank severally agrees that if it, through the exercise of the right of setoff, banker's -89- 95 lien, or counterclaim against Borrower or otherwise, receives payment of the Obligations due it hereunder and under the Notes that is ratably more than any other Bank, through any means, receives in payment of the Obligations held by that Bank, then: (a) the Bank exercising the right of setoff, banker's lien, or counterclaim or otherwise receiving such payment shall purchase, and shall be deemed to have simultaneously purchased, from the other Bank a participation in the Obligations held by the other Bank and shall pay to the other Bank a purchase price in an amount so that the share of the Obligations held by each Bank after the exercise of the right of setoff, banker's lien, or counterclaim or receipt of payment shall be in the same proportion that existed prior to the exercise of the right of setoff, banker's lien, or counterclaim or receipt of payment, and (b) such other adjustments and purchases of participations shall be made from time to time as shall be equitable to ensure that all of the Banks share any payment obtained in respect of the Obligations ratably in accordance with each Bank's share of the Obligations immediately prior to, and without taking into account, the payment, provided that, if all or any portion of a disproportionate payment obtained as a result of the exercise of the right of setoff, banker's lien, counterclaim or otherwise is thereafter recovered from the purchasing Bank by Borrower or any Person claiming through or succeeding to the rights of Borrower, the purchase of a participation shall be rescinded and the purchase price thereof shall be restored to the extent of the recovery, but without interest. Each Bank that purchases a participation in the Obligations pursuant to this Section shall from and after the purchase have the right to give all notices, requests, demands, directions and other communications under this Agreement with respect to the portion of the Obligations purchased to the same extent as though the purchasing Bank were the original owner of the Obligations purchased. Borrower expressly consents to the foregoing arrangements and agrees that, to the extent permitted by Law, any Bank holding a participation in an Obligation so purchased may exercise any and all rights of setoff, banker's lien or counterclaim with respect to the participation as fully as if the Bank were the original owner of the Obligation purchased. 11.10 Indemnity by Borrower. Borrower agrees to indemnify, save, and hold harmless the Agents and each Bank and their directors, officers, agents, attorneys, and employees (collectively, the "indemnitees") from and against: (i) any and all claims, demands, actions or causes of action that are asserted against any indemnitee (other than by Borrower or by any other indemnitee) if the claim, demand, action or cause of action arises out of or relates to the Commitment, the use of proceeds of any Loans, any transaction contemplated pursuant to this Agreement, or any relationship or alleged relationship of any indemnitee to Borrower related to this Agreement; (ii) any administrative or investigative proceeding by any Governmental -90- 96 Agency arising out of or related to a claim, demand, action or cause of action described in clause (i) above; and (iii) any and all liabilities, losses, costs, or expenses (including reasonable attorneys' fees and disbursements (including the allocated cost of in-house counsel)) that any indemnitee suffers or incurs as a result of any of the foregoing; provided, that Borrower shall have no obligation under this Section to any indemnitee with respect to any of the foregoing arising out of the gross negligence or willful misconduct of that indemnitee or the breach by the indemnitee of this Agreement or from the transfer or disposition of any Note by any Bank. If any claim, demand, action or cause of action is asserted against any indemnitee, such indemnitee shall promptly notify Borrower, but the failure to so promptly notify Borrower shall not affect Borrower's obligations under this Section unless such failure materially prejudices Borrower's right to participate in the contest of such claim, demand, action or cause of action, as hereinafter provided. If requested by Borrower in writing and so long as no Default or Event of Default shall have occurred and be continuing, such indemnitee shall in good faith contest the validity, applicability and amount of such claim, demand, action or cause of action, shall permit Borrower to participate in such contest and shall cooperate with Borrower to the extent their interests are aligned. Any indemnitee that proposes to settle or compromise any claim or proceeding for which Borrower may be liable for payment of indemnity hereunder shall give Borrower written notice of the terms of such proposed settlement or compromise reasonably in advance of settling or compromising such claim or proceeding and shall not so settle or compromise without Borrower's written approval thereof, which approval may be withheld in Borrower's sole discretion. Any voluntary settlement by an indemnitee of such a claim or proceeding without Borrower's written approval shall relieve Borrower of its obligation to indemnify that indemnitee with respect to such claim or proceeding. In any legal action involving more than one indemnitee, all indemnitees shall be represented by a single legal counsel unless such legal counsel determines that a defense or counterclaim is available to an indemnitee that is not available to all indemnitees and that to assert such a defense or counterclaim would create a conflict of interest, or a potential conflict of interest, in which case such indemnitee shall be entitled to separate legal counsel. Any obligation or liability of Borrower to any indemnitee under this Section shall survive the expiration or termination of this Agreement and the repayment of all Loans and all other Obligations owed to the Banks. 11.11 Nonliability of Banks. The relationship between Borrower and the Banks is, and shall at all times remain, solely that of borrower and lenders, and the Banks and the Agents neither undertake nor assume any responsibility or duty -91- 97 to Borrower to review, inspect, supervise, pass judgment upon, or inform Borrower of any matter in connection with any phase of Borrower's business, operations, or condition, financial or otherwise. Borrower shall rely entirely upon its own judgment with respect to such matters, and any review, inspection, supervision, exercise of judgment, or information supplied to Borrower by any Bank or the Agents in connection with any such matter is for the protection of the Banks and the Agents, and neither Borrower nor any third party is entitled to rely thereon. 11.12 Confidentiality. Each Bank agrees to use any confidential information that it may receive, directly or indirectly, from Borrower pursuant to this Agreement only for the purposes of this Agreement and to hold such confidential information in confidence, except for disclosure: (a) To Affiliates of the Bank; (b) To other Banks; (c) To legal counsel, accountants and other professional advisors to that Bank; (d) To regulatory officials having jurisdiction over that Bank; (e) As required by Law or legal process (provided that the Bank shall, to the extent possible give sufficient notice to Borrower of such legal process to enable Borrower to oppose such legal process, and in any event, give written notice to Borrower of such legal process as soon as practicable) or in connection with any legal proceeding to which that Bank and Borrower are adverse parties; and (f) To another financial institution in connection with a disposition or proposed disposition to that financial institution of all or part of that Bank's interests hereunder or a participation interest in its Note, provided that such disclosure is made subject to an appropriate confidentiality agreement by such institution on terms substantially similar to this Section. For purposes of the foregoing, "confidential information" shall mean any information respecting Borrower or its Subsidiaries reasonably considered by Borrower to be confidential, other than (i) information previously filed with any Governmental Agency and available to the public, (ii) information previously published in any public medium from a source other than, directly or indirectly, the Agents or any Bank, and (iii) information previously disclosed by Borrower to any Person not associated with Borrower without any reasonable expectation of confidentiality. Nothing in this Section shall be construed to create or give rise to any fiduciary duty on the part of the Agents or the Banks to Borrower. 11.13 No Third Parties Benefited. This Agreement is made for the purpose of defining and setting forth certain obligations, rights and duties of Borrower, the Agents and the Banks in connection with the Commitment, and is made for the sole benefit of Borrower, the Agents and the Banks, and the Agents' and the Banks' successors and assigns. Except as provided in -92- 98 Sections 11.8 and 11.10, no other Person shall have any rights of any nature hereunder or by reason hereof. 11.14 Other Dealings. Any Bank may, without liability to account to the other Banks, accept deposits from, lend money or provide credit facilities to and generally engage in any kind of banking or other business with Borrower and its Subsidiaries. 11.15 Right of Setoff - Deposit Accounts. Upon the occurrence of an Event of Default and the acceleration of maturity of the principal indebtedness under the Notes pursuant to Section 9.2, Borrower hereby specifically authorizes each Bank in which Borrower maintains a deposit account (whether a general or special deposit account, other than trust accounts) or a certificate of deposit to setoff any Obligations owed to the Banks against such deposit account or certificate of deposit without prior notice to Borrower (which notice is hereby waived) whether or not such deposit account or certificate of deposit has then matured. Nothing in this Section shall limit or restrict the exercise by a Bank of any right to setoff or banker's lien under applicable Law, subject to the approval of the Majority Banks. 11.16 Further Assurances. Borrower shall, at its expense and without expense to the Banks or the Agents, do, execute, and deliver such further acts and documents as any Bank or the Agents from time to time reasonably requires for the assuring and confirming unto the Banks or the Agents the rights hereby created or intended now or hereafter so to be, or for carrying out the intention or facilitating the performance of the terms of any Loan Document; provided that this Section 11.16 is not intended to create any affirmative obligation on the part of Borrower to provide collateral security, additional guarantors or other credit enhancement with respect to the Obligations. 11.17 Integration. This Agreement, together with the other Loan Documents and the Mortgage Warehousing Agreement, comprises the complete and integrated agreement of the parties on the subject matter hereof and supersedes all prior agreements, written or oral, on the subject matter hereof except as expressly provided herein to the contrary; provided that the foregoing is subject to Section 4.18 hereof. The Loan Documents were drafted with the joint participation of Borrower and the Banks and shall be construed neither against nor in favor of either, but rather in accordance with the fair meaning thereof. 11.18 Governing Law. The Loan Documents shall be governed by, and construed and enforced in accordance with, the Laws of California. -93- 99 11.19 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. 11.20 Headings. Article and section headings in this Agreement and the other Loan Documents are included for convenience of reference only and are not part of this Agreement or the other Loan Documents for any other purpose. 11.21 Conflict in Loan Documents. To the extent there is any actual irreconcilable conflict between the provisions of this Agreement and any other Loan Document (other than the Override Agreement), the provisions of this Agreement shall prevail. To the extent there is any actual irreconcilable conflict between the provisions of this Agreement and the Override Agreement, the provisions of the Override Agreement shall prevail. 11.22 Waiver Of Jury Trial. EACH OF THE PARTIES HERETO HEREBY EXPRESSLY WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS AGREEMENT, THE NOTES, ANY OTHER LOAN DOCUMENT OR UNDER ANY AMENDMENT, INSTRUMENT OR DOCUMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR ARISING FROM ANY BANKING OR OTHER RELATIONSHIP EXISTING IN CONNECTION WITH THIS AGREEMENT, THE NOTES OR ANY OTHER LOAN DOCUMENT AND AGREES THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY. ANY PARTY TO THIS AGREEMENT MAY FILE AN ORIGINAL COUNTERPART OR COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE SIGNATORIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY. 11.23 Purported Oral Amendments. BORROWER EXPRESSLY ACKNOWLEDGES THAT THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS MAY ONLY BE AMENDED OR MODIFIED, OR THE PROVISIONS HEREOF OR THEREOF WAIVED OR SUPPLEMENTED, BY AN INSTRUMENT IN WRITING THAT COMPLIES WITH SECTION 11.2. BORROWER AGREES THAT IT WILL NOT RELY ON ANY COURSE OF DEALING, COURSE OF PERFORMANCE, OR ORAL OR WRITTEN STATEMENTS BY ANY REPRESENTATIVE OF ANY AGENT OR ANY BANK THAT DOES NOT COMPLY WITH SECTION 11.2 TO EFFECT AN AMENDMENT, MODIFICATION, WAIVER OR SUPPLEMENT TO THE AGREEMENT OR THE OTHER LOAN DOCUMENTS. 11.24 Hazardous Materials Indemnity. Without limiting any other indemnity provided for in the Loan Documents, Borrower agrees to indemnify the Agents and each Bank and their directors, officers, agents, attorneys, and employees -94- 100 (collectively, the "indemnities") from any claim, liability, loss, cost or expense (including reasonable attorneys' fees (including the allocated cost of in-house counsel)) directly or indirectly arising out of the use, generation, manufacture, production, storage, release, threatened release, discharge, disposal or presence of any Hazardous Materials if such Hazardous Materials are on, under, about or relate to Borrower's Property or operations, so long as such claim, liability, loss, cost or expense arises out of or relates to the Commitment, the use of proceeds of any Loans, any transaction contemplated pursuant to this Agreement, or any relationship or alleged relationship of any indemnitee to Borrower related to this Agreement. -95- 101 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written. KAUFMAN AND BROAD HOME CORPORATION By /s/ Michael F. Henn ----------------------------------- Michael F. Henn Senior Vice President and Chief Financial Officer By /s/ Marc I. Chasman ----------------------------------- Marc I. Chasman Vice President 10877 Wilshire Boulevard Los Angeles, California 90024 Attn.: Marc I. Chasman Vice President Phone: (310) 443-8005 Fax: (310) 443-8098 -96- 102 BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Administrative Agent and Managing Agent By /s/ Peggy A. Fujimoto - -------------------------------------- Peggy A. Fujimoto Vice President Agency Management Services #5596 1455 Market Street San Francisco, California 94103 Attn.: Peggy A. Fujimoto Vice President Phone: (415) 622-4835 Fax: (415) 622-4894 BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as a Bank By /s/ Craig A. Moyer - -------------------------------------- Craig A. Moyer Vice President Domestic Lending Office Bank of America NT&SA yCRESG - National Accounts #1357 555 South Flower Street Los Angeles, California 90071 Attn.: Craig A. Moyer Vice President Phone: (213) 228-5238 Fax: (213) 228-5389 LIBOR Lending Office Bank of America NT&SA CRESG National Accounts #1357 555 South Flower Street Los Angeles, California 90071 Attn.: Marilyn Harvey or Mary Gamboa Phone: (213) 228-4013 (Harvey) (213) 228-4582 (Gamboa) Fax: (213) 228-5389 -97- 103 THE FIRST NATIONAL BANK OF CHICAGO, as a Managing Agent, Documentation Agent and as a Bank By /s/ Mark D. Zeisloft ---------------------------------- Mark D. Zeisloft Vice President Domestic and LIBOR Lending Office The First National Bank of Chicago One First National Plaza, Suite 0318 Chicago, Illinois 60670 Attn.: Michael Dowling Assistant Vice President Phone: (312) 732-2517 Fax: (312) 732-1582 -98- 104 CREDIT LYONNAIS LOS ANGELES BRANCH, as a Co-Agent and as a Bank By /s/ Thierry F. Vincent ----------------------------------- Thierry F. Vincent Vice President CREDIT LYONNAIS CAYMAN ISLAND BRANCH, as a Bank By /s/ Thierry F. Vincent ----------------------------------- Thierry F. Vincent Authorized Signatory Domestic Lending Office Credit Lyonnais Los Angeles Branch 515 South Flower Street Los Angeles, California 90071 Attn.: David L. Miller Vice President Phone: (213) 627-3200 Fax: (213) 623-3437 LIBOR Lending Office Credit Lyonnais Cayman Island Branch c/o Credit Lyonnais 515 South Flower Street Los Angeles, California 90071 Attn.: David L. Miller Vice President Phone: (213) 627-3200 Fax: (213) 623-3437 -99- 105 NBD BANK, N.A., as a Co-Agent and as a Bank By /s/ Andrew Heinecke ------------------------------------- Andrew Heinecke First Vice President Domestic and LIBOR Lending Office NBD Bank, N.A. Financial Services Division 3rd Floor 611 Woodward Avenue Detroit, Michigan 48226 Attn.: Richard J. Johnsen Vice President Phone: (313) 225-3181 Fax: (313) 225-3074 NATIONSBANK OF TEXAS, N.A., as a Co-Agent and as a Bank By /s/ Michele Shafroth ------------------------------------- Michele Shafroth Senior Vice President Domestic and LIBOR Lending Office NationsBank of Texas, N.A. 901 Main Street TX1-492-14-06 Dallas, Texas 75202 Attn.: Kay Hibbs Administrative Officer Phone: (214) 508-3089 Fax: (214) 508-0944 -100- 106 THE INDUSTRIAL BANK OF JAPAN, LIMITED, Los Angeles Agency, as a Bank By /s/ Toshinari Iyoda ---------------------------------- Toshinari Iyoda Senior Vice President Domestic and LIBOR Lending Office The Industrial Bank of Japan, Ltd., Los Angeles Agency 350 South Grand Avenue, Suite 1500 Los Angeles, California 90071 Attn.: Lori Roth Schnadig Assistant Vice President Phone: (213) 893-6444 Fax: (213) 488-9840 SOCIETE GENERALE, as a Bank By /s/ Maureen Kelly ---------------------------------- Maureen Kelly Vice President Domestic and LIBOR Lending Office Societe Generale 2029 Century Park East, Suite 2900 Los Angeles, California 90067 Attn.: Maureen Kelly Vice President Phone: (310) 788-7110 Fax: (310) 551-1537 -101- 107 TRUST COMPANY BANK, as a Bank By /s/ Frank O. Bennett ---------------------------------- Frank O. Bennett Vice President Domestic and LIBOR Lending Office Trust Company Bank 25 Park Place 24th Floor, Mail Code 124 Atlanta, Georgia 30303 Attn.: Ginny Dulaney Corporate Banking Assistant Phone: (404) 588-8481 Fax: (404) 827-6270 -102- 108 BANK ONE ARIZONA, NA, as a Bank By /s/ Rhonda R. Williams ----------------------------------- Rhonda R. Williams Assistant Vice President Domestic and LIBOR Lending Office Bank One Arizona, NA 241 North Central, 20th Floor Phoenix, Arizona 85004 Attn.: Rhonda R. Williams Assistant Vice President Phone: (602) 221-1783 Fax: (602) 221-1372 THE FIRST NATIONAL BANK OF BOSTON, as a Bank By /s/ Paul F. DiVito ----------------------------------- Paul F. DiVito Vice President Domestic and LIBOR Lending Office Bank of Boston 400 Perimiter Center Terrace Suite 745 Atlanta, Georgia 30346 Attn.: Cheryl Geoffrion Administrative Assistant Phone: (404) 390-6577 (404) 390-6581 Fax: (404) 391-9811 -103- 109 BANQUE INDOSUEZ, as a Bank By /s/ Jerome S. Sanzo ----------------------------------- Jerome S. Sanzo First Vice President By /s/ Sandra Galeos Piserchia ----------------------------------- Sandra Galeos Piserchia Vice President Domestic Lending Office Banque Indosuez 1211 Avenue of the Americas New York, New York 10036-8701 Attn.: Sandra Galeos Piserchia Vice President Phone: (212) 278-2754 Fax: (212) 278-2759 LIBOR Lending Office Banque Indosuez Grand Cayman Island Branch c/o 1211 Avenue of the Americas New York, New York 10036-8701 Attn.: Sandra Galeos Piserchia Vice President Phone: (212) 278-2754 Fax: (212) 278-2759 CHEMICAL BANK, as a Bank By /s/ Peter C. Haley ----------------------------------- Peter C. Haley Managing Director Domestic and LIBOR Lending Office Chemical Bank 380 Madison Avenue, 10th Floor New York, New York 10017 Attn.: Louise Ng Loan Administrator Phone: (212) 622-3340 Fax: (212) 622-3397 -104- 110 THE FUJI BANK, LIMITED, Los Angeles Agency, as a Bank By /s/ Yasuji Ikawa ----------------------------------- Yasuji Ikawa Joint General Manager Domestic and LIBOR Lending Office The Fuji Bank, Limited, Los Angeles 333 South Grand Avenue, 25th Floor Los Angeles, California 90071 Attn.: Ching L. Lim Assistant Vice President Phone: (213) 251-4179 Fax: (213) 253-4198 -105- EX-10.16 6 AMENDMENT OF EMPLOYMENT CONTRACT OF BRUCE KARATZ 1 EXHIBIT 10.16 Mr. David Maxwell 5335 Wisconsin Avenue, NW Suite 440 Washington, D.C. 20015 February 16, 1995 Mr. Bruce Karatz 1212 La Mesa Santa Monica, California 90402 RE: Amendments to Employment Agreement Dear Bruce: This letter is to confirm our understanding with regard to amending your existing employment agreement dated January 4, 1988 (the "Agreement") with Kaufman and Broad Home Corporation (the "Company") to comply with the requirements of Section 162(m) of the Internal Revenue Code ("Section 162(m)"). This year the Company is submitting for stockholder approval an incentive compensation plan entitled the "Performance-Based Incentive Compensation Plan for Senior Management" (the "Plan") in an effort to qualify the compensation paid to you, as well as certain other executives of the Company, for tax deductibility in accord with Section 162(m). The Compensation Committee has selected you to participate in the Plan, which specifies certain performance criteria, including the Company's pre-tax income, that the Compensation Committee will consider in making incentive compensation awards to you and other Plan participants. The Plan further provides that the Company's Chief Executive Officer may not earn annual incentive cash compensation in excess of $3 million and no participant may receive an annual stock-based award in excess of 100,000 shares. To qualify future compensation paid to you under the Agreement for tax deductibility, it is also necessary, and we have agreed to, amend the Agreement as of the date of this letter to provide that: (1) the Agreement will terminate immediately on March 23, 1995 if the Plan is not approved by stockholders at the Company's 1995 Annual Meeting of Stockholders and (2) if the Plan is approved by stockholders, all future incentive compensation awards made to you pursuant to the Agreement will be 2 made under, and will comply with the limits and requirements set forth in, the Plan, including the $3 million limit on annual incentive cash compensation and the 100,000 share annual limit on stock-based awards. No other terms in the Agreement, including the incentive compensation formula set forth in Section 4(b) thereof, are being amended by this letter. Sincerely, David O. Maxwell Chairman, Personnel, Compensation and Stock Plan Committee Agreed and acknowledged this 23 day of February, 1995: /s/ Bruce Karatz - ---------------------------- Bruce Karatz EX-10.17 7 AMENDMENT OF EMPLOYMENT CONTRACT OF ROGER MENARD 1 EXHIBIT 10.17 February 27, 1995 Mr. Roger Menard 23446 Toyonita Road Los Altos Hills, California 94022 Dear Roger: The intent of this letter is to amend your employment agreement dated April 6, 1992. The changes, as approved by the Personnel, Compensation and Stock Plan Committee of the Board of Directors on January 25, 1995, only effects sections 2, 3 and 4 of your agreement. The remaining provisions remain intact and in effect. The changes are as follows and become effective January 1, 1995. Section 2 Term: The term of your agreement has been extended for two years which will now continue through November 30, 1997. Section 3 Duties and Responsibilities: This section is being amended to reflect expanded responsibilities effective December 1, 1993. Your new title is Executive Vice President and President, U.S. Operations. Section 4 Compensation: (a) Base Salary: Your base salary, effective January 1, 1995, has been increased to $350,000. (b) Incentive Compensation: Your Incentive Compensation for 1995 shall be 8.5% of the "U.S. Operations Incentive Compensation Pool" created generally by the pretax profits and losses of all domestic operating divisions for which you have responsibility, including the Mortgage Company. As stated in you April 1992 Agreement: "As with division compensation pools, your Incentive Compensation Pool is determined in accordance with the formula adopted by the Board of Directors and may be adjusted from time to time. In addition, a minimum return on equity, in an amount to be determined by the Board of Directors, may be taken into consideration in computing future pretax earnings." 2 Mr. Roger Menard February 27, 1995 Page Two (c) The Deferral Point is eliminated from your agreement and all cash compensation will be paid during the month of January in the following year. All incentive compensation will be paid pursuant to the terms of the Performance-Based Incentive Plan for Senior Management. This plan will be sent to the shareholders for approval as part of our 1995 annual meeting. If the plan for any reason is not approved the agreement will be terminated. There will be a cap on annual cash incentive compensation of $2 million. These are the extent of changes made to your previous agreement. Please signify your acceptance of these changes by signing this letter addendum and returning it to Alan Kaye, Vice President, Human Resources at our corporate office. As always, Roger, I look forward to working with you for many more successful years. Sincerely, /s/ Bruce Karatz - -------------------------- Bruce Karatz Chairman and CEO Agreed to and Acknowledged by: /s/ Roger Menard - -------------------------- Roger Menard February 27, 1995 - -------------------------- Date EX-11 8 STATEMENT OF COMPUTATION OF PER SHARE EARNINGS 1 EXHIBIT 11 KAUFMAN AND BROAD HOME CORPORATION AND CONSOLIDATED SUBSIDIARIES STATEMENT OF COMPUTATION OF PER SHARE EARNINGS
YEARS ENDED NOVEMBER 30, --------------------------------------- 1994 1993 1992 ----------- ----------- ----------- PRIMARY: Net income.............................................. $46,550,000 $39,921,000 $28,198,000 =========== =========== =========== Weighted average common shares outstanding.............. 32,449,000 34,606,000 32,981,000 Weighted average Series B convertible preferred shares(1)............................................. 6,500,000 4,345,000 Common share equivalents: Stock options......................................... 1,077,000 1,234,000 1,319,000 Warrants.............................................. 1,362,000 2,072,000 ----------- ----------- ----------- 40,026,000 41,547,000 36,372,000 =========== =========== =========== PRIMARY EARNINGS PER SHARE(3)........................... $ 1.16 $ .96 $ .78 =========== =========== =========== FULLY DILUTED: Net income.............................................. $46,550,000 $39,921,000 $28,198,000 =========== =========== =========== Weighted average common shares outstanding.............. 32,449,000 34,606,000 32,981,000 Weighted average Series B convertible preferred shares(1)............................................. 6,500,000 4,345,000 Common share equivalents: Stock options......................................... 1,077,000 1,310,000 1,319,000 Warrants.............................................. 1,501,000 2,086,000 ----------- ----------- ----------- 40,026,000 41,762,000 36,386,000 =========== =========== =========== FULLY DILUTED EARNINGS PER SHARE(2)(3).................. $ 1.16 $ .96 $ .77 =========== =========== ===========
- ------------ (1) Each of the 1,300,000 Series B convertible preferred shares is convertible into five shares of common stock. The 6,500,000 equivalent shares of common stock are weighted for the period outstanding. (2) Fully diluted earnings per share is not disclosed in the Company's consolidated financial statements since the maximum dilutive effect is not material. (3) If, for purposes of calculating primary and fully diluted earnings per share, the Series B convertible preferred shares were excluded from the weighted average shares outstanding and the related dividends deducted from net income, the computations would have resulted in both primary and fully diluted earnings per share of $1.09 in 1994 and $.93 in 1993. EX-13 9 CERTAIN PAGES FROM 1994 ANNUAL REPORT 1 EXHIBIT 13 KAUFMAN AND BROAD HOME CORPORATION AND CONSOLIDATED SUBSIDIARIES PAGES 24 THROUGH 45 AND THE INSIDE BACK COVER OF THE COMPANY'S 1994 ANNUAL REPORT TO SHAREHOLDERS This exhibit is incorporated in this Annual Report on Form 10-K between page F-1 and the List of Exhibits Filed. EX-22 10 SUBSIDIARIES OF THE COMPANY 1 EXHIBIT 22 KAUFMAN AND BROAD HOME CORPORATION AND CONSOLIDATED SUBSIDIARIES SUBSIDIARIES OF THE COMPANY The following subsidiaries of the Company were included in the November 30, 1994 consolidated financial statements:
PERCENTAGE OF VOTING SECURITIES OWNED BY THE COMPANY OR A SUBSIDIARY NAME OF COMPANY OF THE COMPANY --------------- ----------------------- Arizona Corporations Kaufman and Broad of Arizona, Inc. .................. 100 Kaufman and Broad Home Sales of Arizona, Inc. ....... 100 California Corporations BKJ Construction Company, Inc. ...................... 100 Cable Associates, Inc. .............................. 100 Custom Decor, Inc. .................................. 100 First Northern Builders Servicing, Inc. ............. 100 Fullerton Affordable Housing, Inc. .................. 100 KBASW Mortgage Acceptance Corporation................ 100 KBI/Mortgage Acceptance Corporation.................. 100 KBRAC IV Mortgage Acceptance Corporation............. 100 Kaufman and Broad -- Central Valley, Inc. ........... 100 Kaufman and Broad -- Coastal Valleys, Inc. .......... 100 Kaufman and Broad Communities, Inc. ................. 100 Kaufman and Broad Development Group.................. 100 Kaufman and Broad Embarcadero, Inc. ................. 100 Kaufman and Broad of Fresno, Inc. ................... 100 Kaufman and Broad Home Sales, Inc. .................. 100 Kaufman and Broad Insurance Agency, Inc. ............ 100 Kaufman and Broad International, Inc. ............... 100 Kaufman and Broad Land Company....................... 100 Kaufman and Broad Land Development Venture, Inc. ..................................... 100 Kaufman and Broad -- Monterey Bay, Inc............... 100 Kaufman and Broad -- Moreno/Perris Valleys, Inc. .... 100 Kaufman and Broad Multi-Family, Inc. ................ 100 Kaufman and Broad Multi-Housing Group, Inc........... 100 Kaufman and Broad Multi-Housing Advisors, Inc........ 100 Kaufman and Broad of Northern California, Inc. ...... 100 Kaufman and Broad North Stockton, Inc. .............. 100 Kaufman and Broad Properties......................... 100 Kaufman and Broad of Sacramento, Inc. ............... 100 Kaufman and Broad of San Diego, Inc. ................ 100 Kaufman and Broad -- South Bay, Inc. ................ 100 Kaufman and Broad -- South Coast, Inc. .............. 100 Kaufman and Broad of Southern California, Inc. ...... 100 Kaufman and Broad -- Utah, Inc....................... 100
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PERCENTAGE OF VOTING SECURITIES OWNED BY THE COMPANY OR A SUBSIDIARY NAME OF COMPANY OF THE COMPANY --------------- ----------------------- Kent Land Company.................................... 100 Kingsbay Escrow Company.............................. 100 Colorado Corporation Kaufman and Broad of Colorado, Inc. ................. 100 Delaware Corporations International Mortgage Acceptance Corporation........ 100 Kaufman and Broad Development Company................ 100 Kaufman and Broad Limited............................ 100 Illinois Corporations Kaufman and Broad of Illinois, Inc. ................. 100 Kaufman and Broad Mortgage Company................... 100 Massachusetts Corporation Kaufman and Broad Homes, Inc. ....................... 100 Mexico Corporations Kaufman y Broad de Mexico............................ 100 Kaufman y Broad Asesoria Administrativa.............. 100 Michigan Corporation Keywick, Inc. ....................................... 100 Minnesota Corporation Kaufman and Broad Custom Homes, Inc.................. 100 Nevada Corporation Kaufman and Broad of Nevada, Inc. ................... 100 New York Corporation Kaufman and Broad Homes of Long Island, Inc. ........ 100 Canadian Corporations Davisville Investments Co., Ltd...................... 100 Heatherwoods Development Corporation ................ 100 Hillside Village Limited ............................ 100 Margreen Investments, Inc............................ 100 Meadowstream Development Limited .................... 100 Mississauga Management Ltd. ......................... 100 Victoria Wood Development Corporation, Inc. (Ontario) ......................................... 100 Victoria Wood Development Corporation, Inc. (York) ............................................ 100 Victoria Wood Development Corporation, Inc. (Milton) .......................................... 100 Victoria Wood Development Corporation, Inc. (Pickering)........................................ 100 Victoria Wood Limited ............................... 100 806628 Ontario, Inc.................................. 100
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PERCENTAGE OF VOTING SECURITIES OWNED BY THE COMPANY OR A SUBSIDIARY NAME OF COMPANY OF THE COMPANY --------------- ----------------------- French Corporations Bati Service Development S.A.R.L. ................... 100 Bati Service Promotion S.A. ......................... 100 GIE KB............................................... 100 Kaufman and Broad Developpement S.A. ................ 99.4 Kaufman and Broad France S.A......................... 100 Kaufman and Broad Investissements S.A.R.L............ 100 Kaufman and Broad Liberty S.A.R.L.................... 100 Kaufman and Broad Maisons Individuelles S.A.......... 99.94 Kaufman and Broad Rehabilitation S.A.R.L............. 99.94 Kaufman and Broad Renovation S.A..................... 99.4 Kaufman and Broad Residences S.A.R.L................. 100 Millet S.A........................................... 100 LMP Chancy S.A....................................... 100 German Corporation Kaufman and Broad GmbH............................... 100
The following subsidiary of the Company was not consolidated in the November 30, 1994 consolidated financial statements, but rather was carried on the equity method of accounting: Canadian Corporation Barchester Investments Limited....................... 50
EX-24 11 CONSENT OF INDEPENDENT AUDITORS 1 EXHIBIT 24 KAUFMAN AND BROAD HOME CORPORATION AND CONSOLIDATED SUBSIDIARIES CONSENT OF INDEPENDENT AUDITORS To the Board of Directors and Shareholders of Kaufman and Broad Home Corporation We consent to the incorporation by reference in the Registration Statements on Form S-8 pertaining to the 1986 Stock Option Plan (No. 33-11692) and the 1988 Employee Stock Plan (No. 33-28624) of Kaufman and Broad Home Corporation of our report dated January 5, 1995, with respect to the consolidated financial statements of Kaufman and Broad Home Corporation included in the Annual Report (Form 10-K) for the year ended November 30, 1994. ERNST & YOUNG LLP Los Angeles, California February 27, 1995 EX-27 12 FINANCIAL DATA SCHEDULE
5 1,000 YEAR NOV-30-1994 DEC-01-1993 NOV-30-1994 54,808 110,223 279,286 0 942,713 0 0 0 1,454,460 0 370,477 32,378 0 1,300 371,069 1,454,460 1,307,570 1,336,271 1,048,323 1,065,474 176,471 0 17,849 73,850 27,300 46,550 0 0 0 46,550 1.16 0 Marketable Securities are comprised of first mortgages and mortgage-backed securities which are held for long-term investment. The mortgage-backed securities serve as collateral for related collateralized mortgage obligations. Bonds are comprised of senior and senior subordinated notes and collateralized mortgage obligations. Total Costs include interest expense on the collateralized mortgage obligations, as the associated interest income generated from the mortgaged-backed securities is included in Total Revenues. Other Expenses are comprised of selling, general and administrative expenses. Fully diluted earnings per share is not disclosed in the Company's consolidated financial statements since the maximum dilutive effect is not material.
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