<PAGE>
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________
FORM 10-K
(Mark One)
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF
1934 (NO FEE REQUIRED)
For the Transition period from _________ to _________
Commission file number 1-8951
_________________________
M.D.C. HOLDINGS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 84-0622967
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
3600 SOUTH YOSEMITE STREET, SUITE 900 80237
DENVER, COLORADO (Zip code)
(Address of principal executive offices)
(303) 773-1100
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK, NEW YORK STOCK EXCHANGE, INC.
$.01 PAR VALUE THE PACIFIC STOCK EXCHANGE
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
REGISTERED
Securities registered pursuant to Section 12(g) of the Act:
NONE
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
------- -------
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K 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. /x/
As of March 6, 1995, 19,280,827 shares of M.D.C. Holdings, Inc. Common
Stock were outstanding, and the aggregate market value of the shares (based upon
the closing price on that date of the shares on the New York Stock Exchange,
Inc. as reported on the Composite Tape) held by non-affiliates was approximately
$74,810,000.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Form 10-K is incorporated by reference from the
Registrant's 1995 definitive proxy statement to be filed with the Securities and
Exchange Commission no later than 120 days after the end of the Registrant's
fiscal year.
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
<PAGE>
M.D.C. HOLDINGS, INC.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1994
TABLE OF CONTENTS
PAGE
NO.
----
ITEMS 1.
AND 2. BUSINESS AND PROPERTIES. . . . . . . . . . . . . . . . . . .
(a) General Development of Business. . . . . . . . . . . . . 1
(b) Financial Information About Industry Segments. . . . . . 2
(c) Narrative Description of Business. . . . . . . . . . . . 2
ITEM 3. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . . 12
ITEM 5. MARKET PRICE OF COMMON STOCK AND RELATED SECURITY HOLDER MATTERS 12
ITEM 6. SELECTED FINANCIAL AND OTHER DATA. . . . . . . . . . . . . . 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . 15
ITEM 8. FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . F-1
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . . . . . 36
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT . . . . . . . . . . . . . . . . . . . . . . . . . 36
ITEM 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . 36
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT . . . . . . . . . . . . . . . . . 36
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . 36
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . 37
(i)
<PAGE>
M.D.C. HOLDINGS, INC.
FORM 10-K
PART I
ITEMS 1 AND 2. BUSINESS AND PROPERTIES.
(a) GENERAL DEVELOPMENT OF BUSINESS
OVERVIEW.
M.D.C. Holdings, Inc. (the "Company" or "MDC", which, unless otherwise
indicated, refers to M.D.C. Holdings, Inc., a Delaware corporation originally
incorporated in Colorado in 1972, and its subsidiaries) is a national home
builder with operations in (i) metropolitan Denver and Colorado Springs,
Colorado (collectively, "Colorado"); (ii) northern Virginia and suburban
Maryland (collectively, "Mid-Atlantic"); (iii) Northern and Southern California
(collectively, "California"); (iv) Phoenix and Tucson, Arizona (collectively,
"Arizona"); and (v) Las Vegas, Nevada ("Nevada").
In its home building operations, the Company is engaged in the construction
and sale of residential housing (collectively, the "home building segment"). In
its mortgage origination, purchase and sale activities (collectively, the
"mortgage lending segment") HomeAmerican Mortgage Corporation (a wholly owned
subsidiary of M.D.C. Holdings, Inc., "HomeAmerican") provides mortgage loans to
the Company's home buyers and to others.
In its asset management operations (collectively, the "asset management
segment"), Financial Asset Management Corporation (an indirect, wholly owned
subsidiary of M.D.C. Holdings, Inc., "FAMC") manages, by contract, the
operations of two publicly-traded real estate investment trusts (each, a
"REIT").
1994 RICHMOND COMMON STOCK ACQUISITION.
In December 1993, the Company completed an offering (the "1993 Offering")
of $190,000,000 principal amount of 11 1/8% Senior Notes due 2003 (the "Senior
Notes") and $28,000,000 principal amount of 8 3/4% Convertible Subordinated
Notes due 2005 (the "Convertible Subordinated Notes"). Based on, among other
things, advice of the Company's financial advisor, the Company believed the
success of the 1993 Offering was dependent on MDC's ability to acquire the 54.9%
of the common stock of Richmond Homes, Inc. I (the "Richmond Common Stock") that
it did not own. Richmond Homes, Inc. I and its subsidiaries (collectively,
"Richmond Homes") conduct the Company's Colorado home building operations. A
portion of the net proceeds of the 1993 Offering was used to acquire 19.9% of
the Richmond Common Stock from an unaffiliated liquidating trust.
1
<PAGE>
In connection with an agreement entered into as part of the 1993 Offering
and in furtherance of the Company's desire to own all of the outstanding
Richmond Common Stock, in December 1993, a special committee of the Board of
Directors of the Company (the "Special Committee") negotiated on behalf of the
Company terms of an option agreement with Larry A. Mizel (Chairman of the Board
and Chief Executive Officer of the Company) and David D. Mandarich (Executive
Vice President - Real Estate, Co-Chief Operating Officer and a director of the
Company) to acquire the shares of Richmond Common Stock owned by them (a total
of 35% of the Richmond Common Stock) in exchange for MDC Common Stock with a
value of up to $3,500,000 in the aggregate. For purposes of the exchange, the
shares of MDC Common Stock were valued at $5.75 per share, the closing price of
MDC Common Stock on the date of the option agreement. The Special Committee
engaged a financial advisor to perform a business enterprise valuation of
Richmond Homes. In February 1994, based on the results of the valuation, the
maximum value of $3,500,000 of MDC Common Stock (an aggregate of 608,695 shares)
was issued to Messrs. Mizel and Mandarich in exchange for their shares of
Richmond Homes Common Stock. As of February 2, 1994, MDC owns 100% of the
equity of Richmond Homes.
The Company believes increasing to 100% its ownership of Richmond Homes
(which, among other things, generated 46% of MDC's revenues on a consolidated
basis in 1993) increased MDC's financial flexibility and simplified its
corporate structure.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
See Notes A and B to the Consolidated Financial Statements for information
regarding the Company's business segments for each of the three years ended
December 31, 1994, 1993 and 1992.
(c) NARRATIVE DESCRIPTION OF BUSINESS
2
<PAGE>
HOME BUILDING SEGMENT.
GENERAL. In its home building segment, the Company (i) principally
acquires finished lots and, to a lesser extent, acquires land and develops it
for use in its home building activities; and (ii) designs, constructs and sells
single-family residential homes.
The Company is the seventh largest publicly-traded home builder in the
United States. In addition, the Company is the largest home builder in
Colorado, ranks among the top five home builders in its Mid-Atlantic and
Sacramento, California markets and ranks among the top ten home builders in
Tucson, Arizona.
In its home building segment, the Company's strategy is to create value by
building quality homes at affordable prices. The Company, as the general
contractor, supervises the development and construction of all of its projects
and employs subcontractors for site development and home construction. The
Company primarily builds single-family detached homes generally for the first-
time and move-up buyer. The Company has not built condominiums for over 15
years. Homes are constructed according to basic designs based on customer
preferences in the location in which they are built.
Homes are built and sold by the Company's subsidiaries using the names
"Richmond American Homes" and "Richmond Homes". The base price for homes sold
by the Company generally ranges from approximately $90,000 to $400,000, although
the Company builds homes in certain of its markets with prices as high as
$700,000. Sales prices averaged $186,800 for the year ended December 31, 1994.
Both the national and regional housing markets are cyclical and are
sensitive to many economic conditions, particularly the strength or weakness of
local economies, changes in interest rates, the number of qualified home
purchasers in the market and the ability of these purchasers to resell their
existing homes.
Other factors affecting the demand for housing include changes in costs
associated with home ownership, such as property taxes and energy costs,
demographic trends and the availability of federally-sponsored and other
mortgage loan financing programs.
HOUSING. MDC builds homes in a number of basic series, each designed to
appeal to a different segment of the home buyer market. Substantially all of
the Company's homes are detached except in its Mid-Atlantic market. In its Mid-
Atlantic market, an area where historically approximately 50% of all new
construction is attached housing, MDC sells a significant number of townhomes in
addition to detached homes. Additionally, MDC builds a limited number of
attached homes in Colorado.
3
<PAGE>
Within each basic series of homes, MDC builds numerous models, each with
different floor plans, elevations and standard and optional features. The
differences in the sales prices of similar models in any series depend primarily
upon location and product specifications. The series of homes selected to be
offered at a location is based on customer preference and the area's
demographics.
LAND ACQUISITION AND DEVELOPMENT. MDC purchases platted, raw and finished
lots from others. A significant portion of the lots purchased are finished lots
which require minimal additional development prior to the construction of homes.
During 1994, MDC acquired 3,459 finished or substantially finished lots and 821
unfinished lots for development. In making land purchases, MDC considers a
number of factors, including population and employment growth patterns,
proximity to developed areas, estimated costs of development, demographic
trends and the availability, on acceptable terms, of financing for the
acquisition and development of land and the construction of homes. MDC acquires
finished building sites and land for development only in areas which will have,
among other things, the availability of building permits and utilities and the
zoning of land is suitable for its intended use.
Currently, MDC purchases a portion of the land it will require in future
periods utilizing "rolling" options. Generally, in a rolling option contract,
the Company is able to obtain the right to purchase lots in consideration for an
option deposit. In the event the Company elects not to purchase the required
number of lots within a specified period of time (generally, 10 to 20 lots per
calendar quarter), the option agreement limits the Company's loss to the option
deposit. This limits the Company's risk while preserving its liquidity. At
December 31, 1994, the Company had $6,833,000 in option deposits which enabled
it to control a total of 8,196 lots.
The land not optioned is financed primarily with bank lines of credit,
internally-generated funds and, to a lesser extent, promissory notes and project
loans.
MDC owns various developed and undeveloped parcels of real estate in
certain of its markets. MDC intends to develop most of its undeveloped lots
into finished lots. Substantially all of MDC's land is "cured" (i.e., building
permits and utilities are available and zoning is suitable for its current
intended use). These developed lots will then be used in its home building
activities or will be sold to others. A number of the undeveloped lots also
may be sold to others in their present state.
The table below shows the number of home sites owned and under option in
each of the Company's home building markets (including undeveloped land based on
the number of acres multiplied by the number of home sites permitted per acre
4
<PAGE>
according to allowable zoning and the Company's current development plans).
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
Home sites owned
Colorado . . . . . . . . . . . . . . 11,299 13,111 14,037
Mid-Atlantic. . . . . . . . . . . . 675 771 1,057
California. . . . . . . . . . . . . 886 835 546
Arizona . . . . . . . . . . . . . . 1,400 1,330 1,359
Nevada. . . . . . . . . . . . . . . 248 206 97
------ ------ ------
Total. . . . . . . . . . . . . .. 14,508 16,253 17,096
------ ------ ------
------ ------ ------
Home sites under option
Colorado . . . . . . . . . . . . . . 4,250 4,921 1,924
Mid-Atlantic . . . . . . . . . . . . 3,092 2,480 1,038
California . . . . . . . . . . . . . 110 325 172
Arizona. . . . . . . . . . . . . . . 744 499 243
Nevada . . . . . . . . . . . . . . . -- 135 --
------ ------ ------
Total. . . . . . . . . . . . . . . 8,196 8,360 3,377
------ ------ ------
------ ------ ------
</TABLE>
The Company owns a number of lots which are currently inactive,
substantially all of which are unfinished. The table below shows the number of
inactive lots included in the table above owned by MDC at December 31, 1994,
segregated by the period such properties were acquired.
<TABLE>
<CAPTION>
DIVISION 1992 1991 PRE-1991 TOTAL
-------- ------ ------ -------- ------
<S> <C> <C> <C> <C>
Colorado. . . . . . 266 74 9,304 9,644
California. . . . . -- -- 195 195
Arizona . . . . . . -- -- 293 293
------ ----- ------- ------
Totals. . . . . . 266 74 9,792 10,132
------ ----- ------- ------
------ ----- ------- ------
</TABLE>
RAW MATERIALS. Generally, all of the raw materials and most of the
components used in MDC's business readily are available in the United States,
and most are standard items carried by major suppliers. Shortages in lumber
supplies due to increased home building activity throughout the nation and to
logging limits imposed by environmental protection laws (i) have increased
significantly the cost of lumber, which has resulted, and could result in the
future, in reduced profits from home sales; and (ii) has led, and could lead in
the future, to delays in the delivery of homes under construction. The Company
generally takes orders only for homes that already are under construction or for
which the Company can contract for materials and labor at a fixed price during
the anticipated construction period. This allows the Company to minimize the
risks associated with increases in material and labor costs between the time a
home is under construction and the time it is closed and delivered. Although
the Company did not experience any significant shortages in the availability of
other raw materials or labor in 1994, the Company could experience shortages and
delays in the future which
5
<PAGE>
could result in delays in the delivery of homes under construction.
SEASONAL NATURE OF BUSINESS. MDC's business is seasonal to the extent that
its Colorado and Mid-Atlantic operations encounter weather-related slowdowns
during the winter months, and its California operations are affected by heavy
seasonal rains. Delays in development and construction activities resulting
from these adverse weather conditions increase the Company's risk of cost
increases in, among other things, materials and labor for the Company's projects
in the affected areas. During each of the three years ended December 31, 1994,
approximately 33% of the total homes sold and approximately 20% of the total
homes closed by the Company occurred in the first three months of the year.
WORKING CAPITAL ITEMS. The Company maintains varying levels of inventories
of unimproved land and land held for development or sale, finished home sites
and unsold homes in each of the locations in which it operates. Unsold homes in
various stages of completion aid the Company in meeting the immediate and near-
term demands of its home buyers. In addition, MDC attempts to maintain a supply
of finished home sites sufficient to enable MDC to start homes as soon as
practical once a contract for sale is executed. This tends to minimize the
Company's risk with respect to, among other things, cost increases in labor and
materials.
A portion of MDC's finished home sites are developed by the Company. MDC
develops its land in small parcels (generally less than 100 lots at a time per
given product per subdivision) to limit the Company's risk with regard to a
particular project and to maximize the efficient use of available liquidity.
The Company has entered into option contracts to purchase both finished home
sites and, to a lesser extent, unimproved land to assist in assuring that there
will be an adequate supply of home sites to meet foreseeable future demand and
to better use its available liquidity.
BACKLOG. As of December 31, 1994, MDC's units sold under a contract but
not yet delivered ("Backlog") was 1,334 homes with a sales value of
$241,900,000. MDC expects approximately 70% of its December 31, 1994 Backlog to
settle under existing sales contracts during the first six months of 1995.
Based on its past experience, the Company expects that the remaining 30% of the
homes in Backlog will not close due to cancellations.
MARKETING AND SALES. MDC's homes are sold under various commission
arrangements by its own sales personnel, independent sales agents and through
the realtor community by cooperative broker sales and referrals. In marketing
homes, MDC uses, among other things, on-site model homes, advertisements in
local newspapers, billboards and other signage, magazines and illustrated
brochures. All of MDC's homes are sold with a ten-year limited warranty
provided by independent entities.
6
<PAGE>
COMPETITION. The real estate industry is fragmented and highly
competitive. In each of its markets, MDC competes with numerous home builders
(a number of which build nationwide), subdivision developers and land
development companies. Home builders not only compete for customers, but also
for, among other things, desirable financing, land, raw materials and skilled
labor. In its markets, MDC competes with home builders that are substantially
larger and have greater financial resources than the Company. Competition is
based, among other factors, upon price, style, financing provided to prospective
purchasers, location of property, quality of homes built, warranty service and
general reputation in the community.
REGULATION. The Company is subject to continuing compliance requirements
mandated by applicable federal, state and local statutes, ordinances, rules and
regulations, including, among others, zoning and land use ordinances, building,
plumbing and electrical codes, contractors' licensing laws and health and safety
regulations and laws (including, but not limited to, those of the Occupational
Safety and Health Administration). Various localities in which the Company
operates have imposed (or may impose in the future) fees on developers to fund,
among other things, schools, road improvements and low and moderate income
housing.
From time to time, various municipalities in which the Company operates
restrict or place moratoriums on the availability of utilities, including water
and sewer taps. Additionally, certain jurisdictions in which the Company
operates have proposed or enacted growth initiatives which will restrict the
number of building permits available in any given year. Although no assurance
can be given as to future conditions or future governmental action, in general,
MDC believes that it has, or under existing agreements and regulations
ultimately can obtain, an adequate number of water and sewer taps and building
permits for its land inventory and land held for development.
The home building operations of the Company also are affected by
environmental considerations pertaining to, among other things, availability of
water, municipal sewage treatment capacity, land use, hazardous waste disposal,
naturally occurring radioactive materials, building materials, population
density and preservation of the natural terrain and vegetation (collectively,
"Environmental Laws"). The particular Environmental Laws which apply to any
given home building project vary greatly according to the site's location, the
site's environmental conditions and the present and former uses of the site.
These Environmental Laws may result in delays, may cause the Company to incur
substantial compliance and other costs and may prohibit or severely restrict
home building activity in certain environmentally-sensitive regions or areas.
7
<PAGE>
MORTGAGE LENDING SEGMENT.
GENERAL. HomeAmerican is a full-service mortgage lender originating
mortgage loans for MDC's home buyers and for others on a "spot" basis through
offices located in each of MDC's markets (except Southern California and
Nevada). As HomeAmerican is the principal originator of mortgage loans for
MDC's home buyers, it is an integral part of MDC's home building operations.
MDC sells its homes to customers who generally finance their purchases through
Federal Housing Administration ("FHA")-insured mortgage loans, Veterans
Administration ("VA")-guaranteed mortgage loans and conventional mortgage loans.
HomeAmerican is a FHA, VA, Federal National Mortgage Association ("FNMA")
and Federal Home Loan Mortgage Corporation ("FHLMC") authorized mortgage loan
originator. HomeAmerican is also an authorized loan servicer for FNMA, FHLMC
and the Government National Mortgage Association ("GNMA") and, as such, is
subject to the rules and regulations of such organizations. HomeAmerican also
purchases loans originated by unaffiliated loan correspondents; the origination
fees for these loans are retained by the correspondents. By purchasing these
loans, HomeAmerican acquires the related servicing rights.
Substantially all of the mortgage loans originated or purchased by
HomeAmerican are sold to private investors within 45 days of origination or
purchase. HomeAmerican uses its secured warehouse line of credit (which is
collateralized by the mortgage loans it originates or purchases), other
collateralized borrowings and internally-generated funds to finance these
mortgage loans until they are sold.
Mortgage loan origination volume is dependent on factors such as the
economy and interest rates. Lower interest rates allows additional first-time
home buyers to enter the market and existing home owners to "move up" to larger
new homes.
PORTFOLIO OF MORTGAGE LOAN SERVICING. HomeAmerican has sold, and intends
to sell in the future, mortgage loan servicing. Servicing involves the
collection of principal, interest, taxes and insurance premiums from the
borrower and the remittance of such funds to the mortgage loan investor, local
taxing authorities and insurance companies, for which the servicer is paid a
fee. HomeAmerican initially retains the servicing rights related to the
mortgage loans it and its correspondents originate. Some of the mortgage loan
servicing is sold "servicing released" (included with the sale of the
corresponding mortgage loans). The servicing on mortgage loans not sold
"servicing released" generally is sold in bulk at a later date.
As a mortgage loan servicer, HomeAmerican generally is required to advance
to the owner of the mortgage, mortgage payments on loans that are delinquent or
in foreclosure. To the extent that these and other advances by HomeAmerican are
not
8
<PAGE>
collected or reimbursed by the mortgage loan insurer or guarantor, HomeAmerican
incurs losses, which in the past have not been material.
HomeAmerican's portfolio of mortgage loan servicing at December 31, 1994
consisted of 5,161 single-family loans, 4,774 of which are less than two years
old. These loans are secured by mortgages on properties in eight states across
the country, with interest rates ranging from approximately 4.75% to 11.38% and
averaging 7.7%.
PIPELINE. HomeAmerican's mortgage loans in process which had not closed
("Pipeline") at December 31, 1994 had aggregate principal balances of
$115,058,000. Approximately 75% of the Pipeline at December 31, 1994 is
anticipated to close during the first three months of 1995. If mortgage
interest rates fall, a smaller percentage of these loans will close.
FORWARD SALES COMMITMENTS. HomeAmerican's operations are affected by,
among other things, changes in mortgage interest rates. HomeAmerican utilizes
forward mortgage securities contracts to manage the interest rate risk on its
fixed-rate mortgage loans owned and rate-locked mortgage loans in the Pipeline.
Such contracts are the only significant financial derivative instrument utilized
by HomeAmerican.
COMPETITION. The mortgage industry is fragmented and highly competitive.
In each of the areas in which it originates loans, HomeAmerican competes with
numerous banks, thrifts and other mortgage bankers, many of which are larger and
have greater financial resources than HomeAmerican. Competition is based, among
other factors, on pricing, loan terms and underwriting criteria.
ASSET MANAGEMENT SEGMENT.
GENERAL. In its asset management segment, FAMC advises, for a fee pursuant
to management agreements, Asset Investors Corporation ("Asset Investors") and
Commercial Assets, Inc. ("Commercial Assets") on various facets of each
company's business and manages their day-to-day operations. MDC also owns other
residential mortgage-related assets acquired prior to 1989. The Company
currently does not anticipate acquiring additional mortgage-related investments
in the future. As a result, future income from the asset management segment
substantially will be dependent on management fees.
MANAGEMENT OF ASSET INVESTORS. FAMC advises Asset Investors on various
facets of Asset Investors' business. Asset Investors generates income from: (i)
unrated subordinated bond classes in residential mortgage securitizations
collateralized by pools of non-conforming (non-agency guaranteed) single-family
mortgage loans; (ii) its ownership of shares of Commercial Assets; and
9
<PAGE>
(iii) its residual interests in residential mortgage loan and mortgage
certificate securitizations.
FAMC has a management agreement (the "Asset Investors Management
Agreement") with Asset Investors through 1995. The current Asset Investors
Management Agreement (which has been renewed for one year each year since Asset
Investors' inception in 1986) may be terminated by FAMC or by Asset Investors
with or without cause at any time upon 60 days' written notice. FAMC, pursuant
to the Asset Investors Management Agreement, receives compensation for CMO
administration and other management services. FAMC also is entitled to receive
an incentive fee which is based primarily on the level of Asset Investors' cash
distributions to its shareowners.
MANAGEMENT OF COMMERCIAL ASSETS. In August 1993, Asset Investors formed
Commercial Assets to acquire and manage subordinated credit support bond
interests in commercial mortgage loan securitizations. In October 1993, Asset
Investors distributed approximately 70% of the shares of Commercial Assets to
its shareowners as a dividend. Commercial Assets began its operations on October
12, 1993.
FAMC has a management agreement (the "Commercial Assets Management
Agreement") with Commercial Assets through 1995. Pursuant to the Commercial
Assets Management Agreement, FAMC receives (i) compensation which is based on
the level of Commercial Assets' income, as determined under applicable
provisions of the Internal Revenue Code of 1986, as amended ; (ii) acquisition
fees; (iii) administration fees; and (iv) fees for other management services.
The Commercial Assets Management Agreement may be terminated by FAMC or by
Commercial Assets with or without cause at any time upon 60 days' written
notice.
LIMITED-PURPOSE SUBSIDIARIES AND EQUITY CMO INTERESTS. In the past, the
Company utilized limited-purpose subsidiaries to facilitate the financing of
mortgage loans through the issuance of mortgage-backed bonds. Under the
provisions of applicable trust indentures, the bonds are collateralized fully by
mortgage loans and mortgage-backed securities (collectively, "Mortgage
Collateral") and certain funds held by trustees. These bonds represent
obligations solely of the limited-purpose subsidiaries and are not guaranteed by
the Company.
The Company also owns 49.999% ownership interests in seven trusts which
previously issued collateralized mortgage obligations ("CMOs") (hereinafter,
these seven interests are referred to as "Equity CMO Interests"). The Equity
CMO Interests entitle MDC to receive its proportionate share of the excess cash
flow from these seven interests which results from the difference between (i)
the principal and interest received from the mortgage loans or mortgage
certificates which serve as collateral for the
10
<PAGE>
CMOs ; and (ii) the principal and interest paid to the CMO bond holders plus
related expenses.
The operations of the limited-purpose subsidiaries and the Equity CMO
Interests are not anticipated to have a material effect on the results of
operations, liquidity or financial position of the Company in the future.
EMPLOYEES.
At December 31, 1994, MDC employed 1,124 persons. MDC considers its
employee relations to be satisfactory.
ITEM 3. LEGAL PROCEEDINGS
SETTLEMENT OF WESTERN SAVINGS CIVIL MATTERS.
In December 1994, the Company and the Resolution Trust Corporation (the
"RTC"), acting in its corporate capacity as receiver for Western Savings and
Loan Association ("Western"), executed a final settlement agreement providing
for the mutual release of all potential claims between the parties and certain
related persons insofar as such claims relate to any of the Company's past
transactions with Western.
Under the terms of the settlement, MDC paid to the RTC $3,912,000, which
MDC reserved (and set aside the cash) for as of December 31, 1992 when an
agreement in principle for the settlement was executed by the parties. MDC
believes that consummation of the settlement agreement will not result in any
material adverse effect on the Company's operations or financial position. The
settlement remains subject to the entry of a court order determining that the
settlement precludes the filing of cross-claims against MDC by various third
parties, a condition which can be waived or extended by the Company.
EXPANSIVE SOILS CASES.
On October 21, 1994, a complaint was served on several of the Company's
subsidiaries in an action initiated by six homeowners in Highlands Ranch,
Colorado. On January 26, 1995, counsel for the Company accepted service of two
additional complaints by a homeowner in the Stonegate subdivision in Douglas
County, Colorado and by a homeowner in the Rock Creek development located in
Boulder County, Colorado. The complaints, each of which seek certification of a
class action, purport to allege substantially identical claims relating to the
construction of homes on lots with expansive soils, including negligence, breach
of express and implied warranties, violation of the Colorado Consumer Protection
Act, non-disclosure and a claim for exemplary damages. The homeowners in each
complaint seek, individually and on behalf of the alleged class, recovery in
unspecified amounts including actual damages, statutory damages, exemplary
damages
11
<PAGE>
and treble damages. The Company has not as yet been required to file a response
to any of the complaints or to any discovery in these cases. While the ultimate
outcome of these matters is uncertain, management does not believe that the
outcome of these matters will have a material adverse effect on the financial
condition or results of operations of the Company.
The Company has notified its insurance carriers of these complaints and
currently is reviewing with the carriers how the Company will proceed. The
insurance carriers providing primary coverage have (i) agreed to defend the
Company in the Highlands Ranch case subject to reservations of rights; and
(ii) not responded, as yet, to the request to defend the Company with respect to
the matters alleged in the two other complaints.
OTHER.
The Company and certain of its subsidiaries and affiliates have been named
as defendants in various other claims, complaints and legal actions arising in
the normal course of business. In the opinion of management, the outcome of
these matters will not have a material adverse effect upon the financial
condition or results of operations of the Company.
The Company is not aware of any litigation, matter or pending claim against
the Company which would result in material contingent liabilities related to
environmental hazards or asbestos.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No meetings of the Company's shareowners were held during the fourth
quarter of 1994.
ITEM 5. MARKET PRICE OF COMMON STOCK AND RELATED SECURITY HOLDER MATTERS.
The shares of MDC Common Stock are traded on the New York and the Pacific
Stock Exchanges. The following table sets forth, for the quarterly periods
indicated, the high and low sale prices of the shares of MDC Common Stock as
reported on the Composite Tape.
<TABLE>
<CAPTION>
1993 HIGH LOW
----- -----
<S> <C> <C>
First quarter. . . . . . $5.50 $3.75
Second quarter . . . . . 6.25 4.38
Third quarter. . . . . . 7.00 5.38
Fourth quarter . . . . . 6.88 5.38
<CAPTION>
1994 HIGH LOW
----- -----
<S> <C> <C>
First quarter. . . . . . $7.88 $5.38
Second quarter . . . . . 6.00 5.00
Third quarter. . . . . . 6.63 5.00
Fourth quarter . . . . . 5.38 4.50
</TABLE>
12
<PAGE>
The Company has declared dividends of two cents per share for each quarter
in the year ended December 31, 1994. Prior to 1994, no dividends had been
declared on the MDC Common Stock since 1988.
In connection with the declaration and payment of dividends, as well as the
purchase, redemption or other acquisition of shares of MDC Common Stock, the
Company is required to comply with certain covenants contained in the Senior
Notes indenture (the "Senior Notes Indenture"). The Senior Notes Indenture
allows the Company to pay dividends on its Common Stock in an amount, on a
cumulative basis, not to exceed 50% of its Consolidated Net Income, as defined,
after December 31, 1993, subject to certain other adjustments such as the value
of MDC Common Stock issued after such date. Pursuant to the Senior Notes
Indenture, the Company had approximately $12,000,000 available for the payment
of dividends at December 31, 1994.
On March 6, 1995, MDC had approximately 1,900 shareowners of record.
ITEM 6. SELECTED FINANCIAL AND OTHER DATA.
The data in this table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's Consolidated Financial Statements and the notes thereto presented
elsewhere herein (dollars in thousands, except per share amounts).
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
1994 1993 1992 1991 1990
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues . . . . . . . . . . . . . . . . . . $ 824,869 $ 652,076 $ 511,568 $ 422,232 $ 508,372
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Operating profit (loss)
Home building. . . . . . . . . . . . . . . $ 44,464 $ 22,496 $ 17,561 $ (434) $ 10,116
Mortgage lending . . . . . . . . . . . . . 6,951 7,508 9,230 2,695 2,325
Asset management . . . . . . . . . . . . . 2,796 8,996 8,700 12,860 8,594
Net corporate expenses(1). . . . . . . . . (23,229) (23,968) (28,971) (29,240) (33,600)
--------- --------- --------- --------- ---------
Income (loss) from continuing
operations before income taxes
and minority interest . . . . . . . . . . $ 30,982 $ 15,032 $ 6,520 $ (14,119) $ (12,565)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Income (loss) from continuing
operations . . . . . . . . . . . . . . . . $ 19,255 $ 10,056 $ 4,765 $ (12,903) $ (11,954)
Net income (2) . . . . . . . . . . . . . . . 19,255 25,879 3,852 1,906 6,845
Per common share (primary)
Income (loss) from continuing
operations . . . . . . . . . . . . . . . .94 .45 .22 (.62) (.63)
Net income . . . . . . . . . . . . . . . . .94 1.16 .18 .09 .36
Weighted-average shares
outstanding (primary). . . . . . . . . . . 20,406 22,340 21,850 20,985 19,065
Per common share (fully-diluted)
Income (loss) from continuing
operations . . . . . . . . . . . . . . . $ .87 $ .45 $ .22 $ (.62) $ (.63)
Net income . . . . . . . . . . . . . . . . .87 1.16 .18 .09 .36
Weighted-average shares
outstanding (fully-diluted). . . . . . . . 24,021 22,340 21,850 20,985 19,065
Dividends per share. . . . . . . . . . . . . $ .06 $ -- $ -- $ -- $ --
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------------
BALANCE SHEET DATA: 1994 1993 1992 1991 1990
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS:
Housing completed or under
construction . . . . . . . . . . . . . . $ 280,319 $ 201,023 $ 132,752 $ 105,736 $ 105,971
Land and land under development. . . . . . 183,838 192,881 206,583 234,610 269,774
Mortgage Collateral, net, and
related assets . . . . . . . . . . . . . 64,574 134,166 275,467 731,332 844,953
Total assets . . . . . . . . . . . . . 725,445 776,866 858,944 1,316,793 1,477,146
DEBT:
Home Building:
Lines of credit. . . . . . . . . . . . . 62,332 24,645 28,688 36,694 59,461
Notes payable. . . . . . . . . . . . . . 33,585 59,641 57,732 59,403 64,891
Restructured Notes Payable(3). . . . . . -- 2,854 131,681 133,149 129,970
Senior Notes(3). . . . . . . . . . . . . . 187,352 187,199 -- -- --
Subordinated notes(3). . . . . . . . . . . 38,217 38,213 62,958 62,695 83,225
Total debt(4). . . . . . . . . . . . . 348,280 345,676 325,835 350,776 411,291
STOCKHOLDERS' EQUITY . . . . . . . . . . . . 192,295 175,854 164,182 160,488 157,261
RATIO OF DEBT TO STOCKHOLDERS'
EQUITY(4). . . . . . . . . . . . . . . . . 1.81 1.97 1.98 2.19 2.62
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
OPERATING DATA: 1994 1993 1992 1991 1990
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
HOME BUILDING:
Revenues
Home sales . . . . . . . . . . . . . . . $ 784,453 $ 587,887 $ 417,190 $ 316,229 $ 377,644
Land sales . . . . . . . . . . . . . . . 8,296 7,441 5,800 2,584 18,441
Homes sales, net (units) . . . . . . . . . 4,177 3,875 2,703 1,933 1,601
Homes closed (units) . . . . . . . . . . . 4,200 3,344 2,414 1,782 2,031
Backlog
Units(5) . . . . . . . . . . . . . . . . 1,334 1,357 826 537 386
Sales value(5) . . . . . . . . . . . . . $ 241,900 $ 250,530 $ 142,800 $ 97,400 $ 69,800
Average selling price per
housing unit . . . . . . . . . . . . . . $ 186.8 $ 175.8 $ 172.8 $ 177.5 $ 185.9
Home gross margins . . . . . . . . . . . . 15.4% 14.2% 14.9% 15.6% 18.8%
Inventory valuation reserves . . . . . . . $ 4,000 $ -- $ -- $ 11,000 $ 12,000
MORTGAGE LENDING:
Total Revenues . . . . . . . . . . . . . . 15,850 19,725 19,344 10,343 9,639
Gains on sales of mortgage
servicing. . . . . . . . . . . . . . . 6,770 4,235 8,359 2,004 1,888
ASSET MANAGEMENT:
Total Revenues . . . . . . . . . . . . . . 13,869 33,162 66,597 89,526 96,901
Gains on sales of Mortgage Collateral. . 295 7,505 8,169 -- --
Management fees and other. . . . . . . . 5,509 5,073 3,399 9,334 5,299
Equity in earnings (losses) of
Equity CMO Interests, net. . . . . . . . -- (3,100) (4,166) 5,856 6,374
CORPORATE GENERAL AND
ADMINISTRATIVE EXPENSES. . . . . . . . . . 15,132 14,890 18,108 19,121 23,193
_______________
<FN>
(1) Net corporate expenses represent, among other items: (i) net gains and
losses on investments and marketable securities; (ii) interest and dividend
income; (iii) corporate general and administrative expense; and
(iv) corporate and home building interest expense.
(2) Includes the effects of extraordinary after-tax gains on the early
extinguishment of debt resulting principally from: (i) the retirement and
repurchase of debt from use of a portion of the Net Proceeds (as
hereinafter defined) of the 1993 Offering, which increased net income by
$15,823,000 in
14
<PAGE>
1993; (ii) the repurchase by the Company of $21,850,000 and $53,235,000,
respectively, principal amount of the Company's senior subordinated and
subordinated notes in 1991 and 1990; (iii) the early extinguishment of
certain mortgage-backed bonds in 1992; and (iv) certain other debt
extinguishments in 1992, 1991 and 1990. Also includes in 1992 the
cumulative effect, to January 1, 1992, of the adoption of Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes."
(3) In December 1993, the Company completed the 1993 Offering. All of the
Company's notes which had been restructured in 1989 from senior
subordinated and subordinated notes (the "Restructured Notes Payable") were
retired for $100,701,000, with a portion of the Net Proceeds from the 1993
Offering. A portion of the Net Proceeds also was used in 1993 to redeem
$51,816,000 principal amount of the Company's 11 1/4% senior subordinated
notes at par.
(4) The Company's mortgage-backed bond indebtedness and related liabilities are
not included since they are non-recourse except to the Mortgage Collateral
and related assets. See Note E to the Company's Consolidated Financial
Statements presented elsewhere herein.
(5) At end of period.
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
Beginning in early 1992, demand for homes and the availability of capital
for the construction of homes increased in the areas where the Company has
operations as the economies of these areas improved and mortgage interest rates
declined, reaching a 25-year low in October 1993. During this period, the
Company, among other things, purchased and used "rolling options" to control
additional home sites in both new and existing developments to expand its home
building operations. Home sales and closings have increased in each of the
three years since 1991 due, in part, to these expanded operations, improved
economies and generally lower mortgage interest rates.
Since October 1993, interest rates have generally increased from a 25-year
low of 6.7% on a 30-year, fixed-rate mortgage to as high as 9.25% through
February 1995. While current mortgage interest rates are still low compared
with historical rates for the past 25 years, the general increase in mortgage
interest rates, particularly since April 1994 when rates moved above 8%, has
affected adversely the Company's home building and mortgage lending segments.
15
<PAGE>
The increases in mortgage interest rates have affected adversely and may
continue to affect adversely in the future (i) sales of new homes and the level
of Home Gross Margins (as hereinafter defined); and (ii) the Company's mortgage
lending operations by substantially decreasing mortgage loan origination
activity.
The Company is unable to predict the extent to which current or future
increases in mortgage interest rates will affect adversely the Company's
operating activities and results of operations.
CONSOLIDATED RESULTS.
1994 COMPARED WITH 1993. MDC's revenues increased 27% for 1994 compared
with 1993 primarily as a result of a 26% increase in home closings and an
$11,000 increase in the average selling price per housing unit. MDC's 1994
revenues of $824,869,000 represented the second highest level of revenues in the
Company's history and the highest revenue total since 1988.
The Company's income before income taxes and extraordinary gains increased
for 1994 compared with 1993 due principally to (i) increased home building
segment operating profits from significantly higher home closings, primarily
resulting from the opening of new subdivisions in each of the Company's markets,
and higher Home Gross Margins; and (ii) lower corporate and home building
interest expense.
These positive income effects partially were offset by lower operating
profit from the asset management segment primarily resulting from lower mortgage
interest rates in 1993 that enabled the Company to sell certain of its
mortgage-related assets at a profit in 1993.
During 1993, the Company recognized net extraordinary gains of $15,823,000,
net of income taxes of $9,967,000, substantially all of which resulted from the
early extinguishment of the Restructured Notes Payable with a portion of the Net
Proceeds received in the 1993 Offering. No extraordinary gains or losses were
recognized by the Company in 1994.
1993 COMPARED WITH 1992. MDC's revenues increased during 1993 compared
with 1992 primarily as a result of a 39% increase in home closings and a higher
average selling price per housing unit. This increase partially was offset by a
reduction in revenues of the asset management segment. From January 1, 1992
through December 31, 1993, prepayments on, and sales of, Mortgage Collateral
reduced, by $597,166,000 (from $731,332,000 to $134,166,000), the amount of the
Company's Mortgage Collateral and related assets, the asset management segment's
principal interest earning assets.
16
<PAGE>
The Company's income before income taxes, extraordinary gain (loss) and the
cumulative effect of an accounting change increased in 1993 compared with 1992
due principally to (i) increased home building segment operating profits from
significantly higher home closings; (ii) lower corporate general and
administrative expenses; and (iii) lower corporate and home building interest
expense. These positive income effects partially were offset by lower mortgage
lending operating profit resulting primarily from management's decision to sell
less mortgage loan servicing in 1993 compared with 1992.
The redemption of mortgage-backed bonds in 1992 in connection with the
sales of portions of the Mortgage Collateral resulted in extraordinary losses on
the early extinguishment of debt of $2,851,000, net of income tax benefits of
$1,469,000. These extraordinary losses partially were offset by extraordinary
gains resulting from the early payoff of certain notes payable at a discount
from their carrying value.
The adoption of SFAS No. 109, "Accounting for Income Taxes," increased net
income for 1992 by $1,700,000, or $.08 per share, for the cumulative effect, as
of January 1, 1992, of the accounting change.
17
<PAGE>
HOME BUILDING SEGMENT.
The table below sets forth certain information with respect to the
Company's home building segment during each of the periods presented and at the
end of such periods (dollars in thousands).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1994 1993 1992
--------- --------- --------
<S> <C> <C> <C>
Home sales revenues. . . . . . . . . . . $ 784,453 $ 587,887 $ 417,190
Operating profit . . . . . . . . . . . . 44,464 22,496 17,561
Average selling price per housing
unit . . . . . . . . . . . . . . . . . 186.8 175.8 172.8
Home Gross Margins . . . . . . . . . . . 15.4% 14.2% 14.9%
Homes (units)
Sales contracted, net
Colorado . . . . . . . . . . . . . . 1,837 1,895 1,432
Mid-Atlantic . . . . . . . . . . . . 1,048 1,132 656
California . . . . . . . . . . . . . 567 381 234
Arizona. . . . . . . . . . . . . . . 614 338 210
Nevada . . . . . . . . . . . . . . . 111 129 171
--------- --------- ---------
Total. . . . . . . . . . . . . . . 4,177 3,875 2,703
--------- --------- ---------
--------- --------- ---------
Closed and delivered
Colorado . . . . . . . . . . . . . . 1,887 1,708 1,221
Mid-Atlantic . . . . . . . . . . . . 1,136 904 589
California . . . . . . . . . . . . . 564 331 284
Arizona. . . . . . . . . . . . . . . 504 239 193
Nevada . . . . . . . . . . . . . . . 109 162 127
--------- --------- ---------
Total. . . . . . . . . . . . . . . 4,200 3,344 2,414
--------- --------- ---------
--------- --------- ---------
<CAPTION>
DECEMBER 31
-----------------------------------
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Backlog
Units
Colorado . . . . . . . . . . . . . . 610 660 473
Mid-Atlantic . . . . . . . . . . . . 337 425 197
California . . . . . . . . . . . . . 101 98 48
Arizona. . . . . . . . . . . . . . . 257 147 48
Nevada . . . . . . . . . . . . . . . 29 27 60
--------- --------- ---------
Total. . . . . . . . . . . . . . . 1,334 1,357 826
--------- --------- ---------
--------- --------- ---------
Sales value . . . . . . . . . . . . . $241,900 $250,530 $142,800
--------- --------- ---------
--------- --------- ---------
</TABLE>
HOME BUILDING ACTIVITIES 1994 COMPARED WITH 1993.
HOME SALES REVENUES AND HOMES CLOSED AND DELIVERED. Home sales revenues
for 1994 were the highest in the Company's history, representing an increase of
33% over home sales revenues for 1993. This increase primarily was the result
of increases in home closings in (i) Colorado, due to strong market conditions
in the first half of 1994; (ii) Arizona, due to a significant
18
<PAGE>
expansion of the Company's operations, and continued strong demand for homes, in
the Tucson and Phoenix markets; (iii) California, due to the Company's
acquisition and opening of several new subdivisions in this market, particularly
in Southern California; and (iv) the Company's Mid-Atlantic market, due to
improved market conditions in the first quarter of 1994 and an increase in the
number of active subdivisions in this market. The Company also realized an
$11,000 increase in the average selling price per housing unit.
The Company increased the number of active subdivisions throughout its
markets from 95 at December 31, 1993 to 135 at December 31, 1994. The majority
of the increases in active subdivisions occurred in (i) the Mid-Atlantic market
(a net increase of 18); (ii) California (a net increase of seven); and
(iii) Arizona (a net increase of ten).
AVERAGE SELLING PRICE PER HOUSING UNIT. The increase in the average
selling price per housing unit in 1994 compared with 1993 primarily was due to
increases in average selling prices in all of the Company's markets except
Phoenix and Northern California. The increases in selling prices principally
were due to (i) the mix of homes closed; (ii) general price increases in most of
the Company's markets to, among other things, offset increases in costs; and
(iii) in certain markets, improved market conditions. These increases partially
were offset by lower average selling prices in (i) Northern California primarily
due to the introduction of more affordable homes during the latter part of 1993
in response to continuing consumer demand for lower-priced housing and softness
in consumer demand for new homes; and (ii) Phoenix primarily due to the opening
of new subdivisions which targeted the first-time and first-time move-up buyer.
HOME GROSS MARGINS. Gross margins (home sales revenues less cost of goods
sold, which primarily includes land and construction costs, capitalized
interest, a reserve for warranty expense and financing costs) as a percent of
home sales revenue ("Home Gross Margins") increased during 1994 compared with
1993. The Company achieved higher Home Gross Margins in 1994 compared with 1993
in its Colorado, Southern California and Arizona markets primarily due to
improved market conditions. Home Gross Margins also were higher in the
Company's Mid-Atlantic market in 1994 compared with 1993 due to improved market
conditions through the first quarter of 1994 combined with home closings from a
more profitable mix of subdivisions in 1994 compared with 1993. The increases
partially were offset by lower Home Gross Margins in Northern California as the
Company's profitability in this area continues to be affected adversely by
softness in consumer demand for new homes. To a substantially lesser extent,
Home Gross Margins also were impacted negatively by builder competition in
Nevada.
19
<PAGE>
Increases in, among other things, the costs of subcontracted labor,
finished lots and building materials have affected adversely, and may affect
adversely in the future, Home Gross Margins to the extent that market conditions
prevent the recovery of increased costs through higher sales prices. In
addition, increased home building activities in several of the Company's
markets, particularly Colorado, the Mid-Atlantic region and Arizona, have caused
shortages of subcontracted labor that have increased the period of time required
for completing construction and delivery of homes. Longer delivery periods
increase interest costs capitalized during the construction period, which have
affected adversely, and may affect adversely in the future, Home Gross Margins.
HOME SALES AND BACKLOG. Home sales for 1994 reached their highest level
since 1988. "Sales contracted, net" increased 8% during 1994 compared with
1993. Backlog at December 31, 1994 was approximately the same as at
December 31, 1993. MDC expects approximately 70% of its December 31, 1994
Backlog to close under existing sales contracts during the first six months of
1995. The Backlog at December 31, 1994 included 248 homes that had not been
started.
Sales increased in the year ended December 31, 1994 compared with 1993 in
(i) Arizona (an increase of 82%) due to improved market conditions and an
expansion of the Company's operations in the Phoenix and Tucson markets; and
(ii) California (an increase of 49%) due to an expansion of the Company's
operations in Northern California and the Company's re-entry into the Southern
California market which began in the second half of 1993 and continued through
1994.
Sales for 1994 in Colorado declined 3% compared with 1993 sales. While
sales in Colorado increased by 24% in the first quarter of 1994 compared with
the first quarter of 1993, sales declined in each of the three remaining
quarters of 1994 compared with the same periods in 1993 as, among other things,
new competitors entered the market and mortgage rates increased which affected
adversely the demand for new homes.
Sales for 1994 in the Mid-Atlantic market declined 7% compared with 1993
sales. Sales increased by 11% in the first quarter of 1994 compared with the
same period in 1993 but declined in each of the three remaining quarters of 1994
compared with the same periods in 1993 due to an overall slowing in this market
which began in the second quarter of 1994. The overall Mid-Atlantic market
declined by approximately 10% in 1994 compared with 1993.
While total sales for 1994 increased compared with 1993, sales for the
fourth quarter of 1994 decreased by 13% to 714 homes from 822 homes for the same
period in 1993 as the Company, in general, experienced lower sales per active
subdivision in
20
<PAGE>
each of its markets in the fourth quarter of 1994 compared with the same period
in the prior year.
In addition, sales for the first two months of 1995 decreased by 18% to 762
homes from 930 homes for the same period in 1994 (which reflected the strong
sales experienced during the first quarter of 1994 prior to the significant
increase in mortgage interest rates). During the first two months of 1993, the
Company sold 725 homes. The Company is unable to predict if these trends will
continue in the future.
INVENTORY VALUATION RESERVES. Operating results during the fourth quarter
of 1994 were impacted adversely by $4,000,000 in net realizable value
adjustments related to, among other factors, several projects in Northern
California which experienced significant slowing in sales and reduced selling
prices during the fourth quarter due to softness in consumer demand which led to
a general decline in home sales activity in this market.
MARKETING. Marketing expenses (which include, among other things,
amortization of deferred marketing, model home expenses and sales commissions)
totalled $44,588,000 for 1994 compared with $34,820,000 for 1993. This 28%
increase during 1994 principally was due to the 33% increase in home sales
revenue and expanded operations in all of the Company's major regions.
Significant additional marketing-related salary, sales commission and model home
operation expenses were incurred to support the Company's expanded operations.
Marketing expenses as a percentage of home sales revenues, however, decreased to
5.7% in 1994, compared with 5.9% in 1993.
GENERAL AND ADMINISTRATIVE. General and administrative expenses totalled
$29,215,000 during 1994 compared with $27,497,000 in 1993. General and
administrative expenses during 1993 were affected adversely by non-recurring
charges totalling approximately $2,500,000. While general and administrative
expenses have increased in the aggregate primarily due to salary expense for the
additional personnel needed for the Company's expanded operations, general and
administrative expenses as a percentage of home sales revenues decreased to 3.7%
for 1994 compared with 4.7% in 1993 because the Company was able to deliver more
homes without a proportionate increase in overhead.
HOME BUILDING ACTIVITIES 1993 COMPARED WITH 1992.
HOME SALES REVENUES AND HOMES CLOSED AND DELIVERED. Home sales revenues
increased 41% for 1993 compared with 1992 primarily as a result of
(i) significant increases in home closings in all of the Company's markets,
particularly in Colorado and the Mid-Atlantic region; and (ii) a $3,000 increase
in the average selling price per housing unit.
21
<PAGE>
AVERAGE SELLING PRICE PER HOUSING UNIT. The increase in the average
selling price per housing unit for 1993 compared with 1992 primarily was due to
(i) increases in average selling prices in the Mid-Atlantic region due
principally to the mix of homes closed; and (ii) price increases in most of the
Company's markets to, among other things, offset increases in costs. These
increases partially were offset by lower average selling prices in Northern
California due to the design and sale of more affordable homes in response to
consumer demand for lower-priced housing.
HOME GROSS MARGINS. Overall, Home Gross Margins declined slightly during
1993 compared with 1992. The Company achieved higher Home Gross Margins in
(i) Colorado due to the improved market conditions; and (ii) Arizona due to
improved market conditions and a reduction in lot costs as the Company
substantially completed in 1992 the sale of homes built on certain higher-priced
lots acquired prior to 1990. These increases largely were offset by lower Home
Gross Margins in Northern California as a result of (i) closings from homes
built on higher-priced lots purchased during the peak of the market in 1990; and
(ii) the inability to recover increased housing costs through increases in home
sales prices due to greater builder competition and a softening in the Northern
California market.
MARKETING. Marketing expenses totalled $34,820,000 for 1993 compared with
$26,203,000 for 1992. The 33% increase in 1993 was due to the 39% increase in
home closings and expanded operations in many of the regions in which the
Company operates. As a result of the increased operations, additional
marketing-related salary, commission and model home operating expenses were
incurred.
GENERAL AND ADMINISTRATIVE. General and administrative expenses of the
home building segment totalled $27,497,000 for 1993 compared with $18,529,000
for 1992. This 48% increase in 1993 was due to, among other things,
(i) increased salary expense; and (ii) increased office and other expenses, both
in response to increased operations. Additionally, property taxes increased in
1993 as market conditions improved, particularly in Colorado. General and
administrative expenses in 1993 were affected adversely by $2,500,000 of
expenses incurred primarily in Northern California because of (i) operational
problems in certain subdivisions; and (ii) costs incurred by the Company with
respect to certain potential project acquisitions which were not consummated by
the Company in view of continuing weak conditions in the Northern California
market.
HOME SALES AND BACKLOG. "Sales contracted, net" increased 43% during 1993
compared with 1992. Backlog at December 31, 1993 increased 64% from
December 31, 1992. These increases principally were due to significant
increases in sales in (i) Colorado (an increase of 32%) due to continued
improvement in
22
<PAGE>
this home building market as well as expanded operations; and (ii) the
Mid-Atlantic region (an increase of 73%) due to expansion of the Company's
operations in order to meet increased demand for homes in this market.
UNSOLD HOMES UNDER CONSTRUCTION.
The Company maintains levels of unsold homes in various stages of
completion to assist it in meeting the immediate and near-term demands of its
home buyers. The Company monitors and adjusts its levels of unsold homes under
construction based on, among other factors, its evaluation of market conditions
and in anticipation of seasonal sales patterns and weather.
The Company in the past has offered, and may in the future offer,
incentives to assist in selling certain of its unsold homes under construction.
These incentives include offering prospective home buyers options and upgrades
at a discount, buying down mortgage interest rates and, to a substantially
lesser extent, price concessions. The cost of these incentives is included in
the determination of the Company's Home Gross Margins.
As with all inventories, interest and other carrying costs incurred with
respect to the Company's unsold homes under construction are capitalized during
periods of active construction and expensed following their completion. In view
of the Company's recent sales trends, the period of time required to sell and
close the Company's unsold homes under construction, in some cases, may be
extended. The Company's operating income will be affected adversely by any
additional interest and other carrying costs incurred (most of which will be
expensed) with respect to these unsold homes during this extended period.
The Company is unable to predict the extent to which its Home Gross Margins
and operating income in 1995 will be affected adversely by the incentives
offered and the additional interest and carrying costs incurred with respect to
the Company's unsold homes under construction.
LAND SALES.
Revenue from land sales totalled $8,296,000, $7,441,000 and $5,800,000,
respectively, for the years 1994, 1993 and 1992. The land sales primarily were
in Colorado and, to a lesser extent, in California. Gross profits (losses) from
these land sales were $319,000, $(423,000) and $(26,000), respectively, for the
years 1994, 1993 and 1992.
LAND INVENTORY.
The table below shows the carrying value of MDC's land and land under
development in each of its home building markets at
23
<PAGE>
December 31, 1994, segregated by the years in which the property was acquired or
optioned (in thousands).
<TABLE>
<CAPTION>
DIVISION 1994 1993 1992 1991 PRE-1991 TOTAL
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Colorado. . . . . $ 3,601 $ 5,038 $ 2,318 $ 7,904 $ 71,758 $ 90,619
Mid-Atlantic. . . 7,181 7,171 183 -- 14,541 29,076
California. . . . 17,762 9,023 358 54 4,909 32,106
Arizona . . . . . 16,560 3,324 277 -- 5,110 25,271
Nevada. . . . . . 1,591 5,175 -- -- -- 6,766
-------- -------- -------- -------- -------- --------
Totals . . . . $ 46,695 $ 29,731 $ 3,136 $ 7,958 $ 96,318 $183,838
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
</TABLE>
The Company's net income and cash flow continue to be affected adversely by
the carrying costs (e.g., interest and property taxes) associated with inactive
land inventories. These inactive land inventories comprised approximately 27%
of the carrying value of the Company's total land and land under development at
December 31, 1994 compared with approximately 50% of the $192,881,000 carrying
value at December 31, 1993. The decrease in inactive land inventory in 1994 was
due to the commencement of development and construction activity in certain
subdivisions during 1994 as well as sales of inactive land. Carrying costs on
inactive land inventories are expensed, not capitalized.
The table below shows the total carrying value of the amounts of inactive
land inventories included in the table above owned by MDC in each of its home
building markets at December 31, 1994, segregated by the years in which the
property was acquired (in thousands).
<TABLE>
<CAPTION>
DIVISION 1992 1991 PRE-1991 TOTAL
-------- ------- ------- -------- --------
<S> <C> <C> <C> <C>
Colorado $ 1,868 $ 2,164 $ 42,611 $ 46,643
California -- -- 1,493 1,493
Arizona -- -- 1,810 1,810
------- ------- -------- --------
Totals $ 1,868 $ 2,164 $ 45,914 $ 49,946
------- ------- -------- --------
------- ------- -------- --------
</TABLE>
The Company is actively pursuing opportunities to reduce, through sales or
home building activities, its inactive land inventories.
MORTGAGE LENDING SEGMENT.
The table below summarizes the results of HomeAmerican's operations during
each of the periods presented (in thousands).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1994 1993 1992
-------- -------- --------
Gains from sales of mortgage
servicing
<S> <C> <C> <C>
Bulk . . . . . . . . . . . . . . . . . . $ 5,785 $ 3,422 $ 7,063
Other. . . . . . . . . . . . . . . . . . 985 813 1,296
Net interest income. . . . . . . . . . . . . 2,703 3,138 3,267
24
<PAGE>
Origination fees . . . . . . . . . . . . . . 4,671 6,171 4,195
Gains (losses) on sales of mortgage loans. . (585) 2,864 267
Mortgage servicing and other . . . . . . . . 2,097 1,686 1,523
General and administrative expenses. . . . . (8,705) (10,586) (8,381)
-------- -------- --------
Operating profit . . . . . . . . . . . . . . $ 6,951 $ 7,508 $ 9,230
-------- -------- --------
-------- -------- --------
Principal amount of origination
and purchases:
MDC home buyers. . . . . . . . . . . . . $323,079 $308,230 $192,352
Spot . . . . . . . . . . . . . . . . . . 69,037 248,757 182,026
Correspondent. . . . . . . . . . . . . . 64,365 150,341 193,372
-------- -------- --------
Total. . . . . . . . . . . . . . . . . . $456,481 $707,328 $567,750
-------- -------- --------
-------- -------- --------
</TABLE>
The table below sets forth certain information regarding HomeAmerican's
portfolio of mortgage loans serviced (in thousands).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Beginning Servicing Portfolio. . . . . . . $ 653,331 $ 437,220 $ 592,402
Servicing retained on loans
originated . . . . . . . . . . . . . . . 392,116 556,987 374,378
Purchases from correspondents. . . . . . . 64,365 150,341 193,372
Bulk servicing sales . . . . . . . . . . . (427,340) (287,669) (579,270)
Loan sales "servicing released". . . . . . (80,884) (77,846) (115,243)
Loan principal reductions and other. . . . (32,525) (125,702) (28,419)
--------- --------- ---------
Ending Servicing Portfolio. . . . . . . . $ 569,063 $ 653,331 $ 437,220
--------- --------- ---------
--------- --------- ---------
<CAPTION>
DECEMBER 31,
------------------------------------------------
1994 1993 1992
--------- -------- --------
<S> <C> <C> <C>
Composition of Servicing Portfolio:
FHA insured/VA guaranteed. . . . . . . . $203,991 $373,716 $189,483
Conventional . . . . . . . . . . . . . . 365,072 279,615 247,737
-------- -------- --------
Total Servicing Portfolio. . . . . . . . . $569,063 $653,331 $437,220
-------- -------- --------
-------- -------- --------
Salable Portion of Servicing Portfolio . . $506,098 $574,088 $212,742
-------- -------- --------
-------- -------- --------
</TABLE>
1994 COMPARED WITH 1993. HomeAmerican's loan originations and purchases
decreased by 35% in 1994 compared with 1993 primarily due to increased mortgage
interest rates which resulted in lower mortgage loan originations market wide.
The decrease partially was offset by a 5% increase in the dollar amount of
originations for MDC's home buyers principally due to increased closings by
MDC's home building segment. HomeAmerican originated mortgages for 52% of MDC's
home buyers in 1994 compared with 63%
25
<PAGE>
in 1993. The decline in the percentage of mortgages originated for MDC's home
buyers was the result of, among other things, increased competition for mortgage
loan originations and increases in closings in Southern California where
HomeAmerican does not have an origination facility.
HomeAmerican's operating profit of $6,951,000 during 1994 was lower than
the operating profit of $7,508,000 for 1993 principally due to (i) losses from
sales of mortgage loans totalling $585,000 in 1994 (when mortgage rates were
increasing) compared with gains totalling $2,864,000 in 1993 (when mortgage
rates were decreasing), partially offset by higher gains from bulk sales of
mortgage servicing in 1994. While loan origination fees were lower in 1994
compared with 1993, this reduction was offset by a decrease in general and
administrative expenses as HomeAmerican was able to reduce its general and
administrative costs in response to the decline in its mortgage lending
operations.
At December 31, 1994, servicing on approximately $506,098,000 of conforming
mortgage loans (i.e., loans that meet the criteria for the guarantee programs of
GNMA, FNMA or FHLMC) was available for sale, which represents a 12% decrease
from the servicing on $574,088,000 of conforming mortgage loans available for
sale at December 31, 1993.
1993 COMPARED WITH 1992. HomeAmerican's loan originations and purchases
increased 25% in 1993 compared with 1992 to the highest level of mortgage loan
production in HomeAmerican's history. Substantially all of the increase in
originations was due to (i) increased spot originations for others to refinance
mortgage loans in response to record low mortgage interest rates; and (ii) to a
lesser extent, increases in home closings by MDC's home building segment and an
increase from 58% to 63% in the percentage of originations by HomeAmerican for
MDC's home buyers.
HomeAmerican's operating profit for 1993 was lower than operating profit
for 1992 principally due to (i) management's decision to reduce the amount of
bulk sales of servicing; and (ii) an increase in general and administrative
expenses resulting from increased staff levels needed to process the increased
loan originations, partially offset by significantly increased gains on sales of
mortgage loans and an increase in loan origination fees.
ASSET MANAGEMENT SEGMENT.
OVERVIEW. Since 1986, the Company's asset management segment has been a
significant part of the Company's business. From 1992 through early 1994,
mortgage interest rates fell significantly, encouraging millions of homeowners
to refinance their mortgages by paying them off with the proceeds of new lower
interest rate mortgages. This resulted in a significant decrease
26
<PAGE>
in the Company's mortgage-related assets (and a significant reduction in
corresponding revenue). As a result of the reduction in rates, the Company also
was able to liquidate, generally at a profit, other portions of its
mortgage-related assets. As a consequence, future income from the asset
management segment primarily will be dependent on management fees earned by
FAMC, from two publicly-traded REITs.
At December 31, 1994, FAMC had approximately $190 million in assets under
management for the REITs.
27
<PAGE>
The table below summarizes the results of the asset management segment
operations during each of the periods presented (in thousands).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
FAMC Management fees from the REITs. . . . $ 2,780 $ 2,180 $ 2,566
Equity in losses of Equity CMO
Interests, net of valuation
adjustments. . . . . . . . . . . . . . . -- (3,100) (4,166)
Gains on sales of Mortgage Collateral. . . 295 7,505 8,169
Interest income from CMO Bond. . . . . . . -- 1,490 1,036
Other, net . . . . . . . . . . . . . . . . (279) 921 1,095
------- ------- -------
Operating profit . . . . . . . . . . . . . $2,796 $ 8,996 $ 8,700
------- ------- -------
------- ------- -------
Extraordinary loss related to gains
on sales of Mortgage Collateral, net
of income tax benefit. . . . . . . . . . $ -- $ -- $(2,851)
------- ------- -------
------- ------- -------
</TABLE>
The decrease in the Company's asset management segment operating profit for
1994 compared with 1993 and 1992 is due principally to gains on sales of
Mortgage Collateral in 1993 and 1992 as the lower interest rates in those years
enabled the Company to sell portions of its Mortgage Collateral at a profit.
This profit was partially offset by valuation adjustments related to the
Company's Equity CMO Interests recorded in 1993 and 1992 which were not required
in 1994. Also in 1993 and 1992, the Company earned $1,490,000 and $1,036,000,
respectively, in interest on the CMO Bond (as hereinafter defined). The CMO
Bond was fully paid at December 31, 1993.
EQUITY CMO INTERESTS. During 1993 and 1992, MDC recorded $3,100,000 and
$4,166,000, respectively, in valuation adjustments for its Equity CMO Interests
because of permanent declines in the value of the undiscounted projected cash
flow from the Equity CMO Interests. These declines resulted from higher actual
and projected Mortgage Collateral prepayments caused by low interest rates.
During 1994, higher mortgage interest rates slowed both the actual and
anticipated future prepayment speeds and, accordingly, no additional valuation
adjustments were necessary.
SALES OF MORTGAGE COLLATERAL AND RELATED ASSETS. In 1994, MDC completed
various sales of mortgage-related assets which resulted in pre-tax gains
totalling $295,000. In January 1993, MDC completed a sale of mortgage-related
assets which resulted in a pre-tax gain totalling $5,011,000. In addition, MDC
completed various other sales of mortgage-related assets which resulted in net
gains totalling $2,494,000 in 1993.
In 1992, MDC sold, at a premium, Mortgage Collateral which resulted in
pre-tax gains totalling $8,169,000. The proceeds from certain of these sales
were utilized to redeem in full the related outstanding mortgage-backed bonds,
the redemption of
28
<PAGE>
which resulted in an aggregate extraordinary loss on the early extinguishment of
debt of $2,851,000, net of an income tax benefit of $1,469,000.
INVESTMENT IN A CMO BOND. On July 31, 1992, MDC purchased a $7,823,000
principal amount mortgage-backed bond (the "CMO Bond") for $7,367,000. For the
years 1993 and 1992, the CMO Bond earned interest totalling $1,490,000 and
$1,036,000, respectively. The principal amount of the CMO Bond was fully paid
at December 31, 1993.
OTHER OPERATING RESULTS.
INTEREST EXPENSE. Corporate and home building interest incurred increased
by 40% to $35,799,000 for 1994 compared with $25,505,000 and $24,802,000,
respectively, for the years 1993 and 1992 due to (i) higher average effective
interest rates associated with the 11 1/8% Senior Notes due 2003 (in part due to
the repayment, in December 1993 and January 1994, of $132,496,000 of
Restructured Notes Payable for approximately $100,701,000) compared with the
debt outstanding for the years 1993 and 1992; (ii) higher average effective
interest rates with respect to the Company's variable-rate bank lines of credit
and project loans due to an increase in the prime rate in 1994; and (iii) higher
levels of borrowings resulting from the Company's expanded home building
operations.
The portion of this corporate and home building interest which was
capitalized (the Company capitalizes interest on its home building inventories
during the period of active development and through the completion of
construction) during 1994 totalled $26,345,000 compared with $14,051,000 and
$11,443,000, respectively, during 1993 and 1992. The increase in interest
capitalized for 1994 primarily was due to (i) increased levels of active home
building inventories resulting from expanded operations; and (ii) higher
capitalization rates resulting from higher average effective interest rates on
the Company's debt, particularly with respect to Colorado.
Corporate and home building interest incurred not capitalized is reflected
as interest expense and totalled $9,454,000 for 1994 compared with $11,454,000
and $13,359,000, respectively, for 1993 and 1992.
For a reconciliation of interest incurred, capitalized and expensed, see
Note I to the Company's Consolidated Financial Statements.
CORPORATE GENERAL AND ADMINISTRATIVE EXPENSES. Corporate general and
administrative expenses totalled $15,132,000 for 1994 compared with $14,890,000
and $18,108,000, respectively, for 1993 and 1992. The 18% decrease in 1993
compared with 1992 primarily was due to a reduction in insurance and legal
expenses, partially
29
<PAGE>
offset by an increase in salary expense and financing costs associated with the
Company's expanded operations in 1993.
INCOME TAXES. M.D.C. Holdings, Inc. and its wholly owned subsidiaries
file a consolidated federal income tax return (an "MDC Consolidated Return").
Richmond Homes and its wholly owned subsidiaries filed a separate consolidated
federal income tax return (each a "Richmond Homes Consolidated Return") from
its inception (December 28, 1989) through February 2, 1994, the date Richmond
Homes became a wholly owned subsidiary of MDC.
MDC's overall effective income tax rates of 38%, 37% and 16%, respectively,
for 1994, 1993, and 1992, differed from the federal statutory rate of 35% in
1994 and 1993 and 34% in 1992. These differences primarily were due to, among
other things, (i) the impact of state income taxes; (ii) the realization of
non-taxable income for financial reporting purposes for which no tax liability
was recorded; (iii) in 1994 and 1992, adjustments of prior years' income taxes;
and (iv) in 1992, the reduction in the deferred tax asset valuation allowance.
At December 31, 1994, the Company had a net deferred tax asset of
$11,944,000, net of a valuation allowance of $3,000,000. Given present economic
trends, particularly in the home building industry, as evidenced by recent
improvements in the Company's results of operations, management believes the net
deferred tax asset to be recoverable from future earnings. The valuation
allowance has been provided to offset the related deferred income tax assets due
to the uncertainty of realizing the benefit of certain future tax deductions.
See Note J to the Company's Consolidated Financial Statements.
The Internal Revenue Service (the "IRS") has completed its examination of
the MDC Consolidated Returns for the years 1986 through 1990 and the Richmond
Homes Consolidated Returns for the years 1989 and 1990 and has proposed certain
adjustments to the taxable income reflected in such returns. In general, the
proposed adjustments would shift the recognition of certain items of income and
expense from one year to another ("Timing Adjustments"). To the extent taxable
income in a prior year is increased by proposed Timing Adjustments, taxable
income may be reduced by a corresponding amount in other years; however, the
Company would incur an interest charge as a result of such adjustment. The
Company currently is protesting many of these proposed adjustments through the
IRS appeals process and believes the amount of these adjustments will be reduced
as a result. In the opinion of management, adequate provision has been made for
the additional income taxes and interest which may arise as a result of the
proposed adjustments.
30
<PAGE>
In December 1994, the Company and the IRS appeals officer resolved, subject
to approval of the Congressional Joint Committee on Taxation (the "Joint
Committee"), all outstanding issues with respect to the IRS examination of the
1984 and 1985 MDC Consolidated Returns. In connection with this resolution, the
Company paid the IRS $8,000,000 for the additional taxes and interest due for
1984 and 1985, as computed by the IRS. Adequate provision for these additional
taxes and interest had been made by the Company in prior years. As of March 15,
1995, approval of the Joint Committee had not been received.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL.
MDC uses its capital resources to, among other things, (i) support its
operations, including its inventories of homes, home sites and land;
(ii) provide working capital; and (iii) provide mortgage loans for its home
buyers. Capital resources are generated internally from operations and from
external sources.
In December 1993, the Company completed the 1993 Offering of $190,000,000
principal amount of Senior Notes and $28,000,000 principal amount of Convertible
Subordinated Notes. This 1993 Offering significantly improved the Company's
capital structure and financial condition. The 1993 Offering resulted in net
proceeds, after expenses, of $204,013,000 (the "Net Proceeds"). The Net
Proceeds were used to (i) repurchase, for $100,701,000, the Company's
Restructured Notes Payable with a carrying value on the Company's books of
$132,496,000 at the date of retirement; (ii) redeem, at par ($51,816,000), all
of the Company's then outstanding 11 1/4% senior subordinated notes due
May 1996; (iii) purchase, for $31,211,000, certain assets (including outstanding
shares of MDC Common Stock, investments in metropolitan district bonds and
certain ownership interests in Richmond Homes) from an unaffiliated liquidating
trust; and (iv) pay down existing debt of $14,100,000. The balance of the Net
Proceeds ($6,185,000) was used for general corporate purposes. No principal
payments are required on the Senior Notes or Convertible Subordinated Notes
until 2003 and 2005, respectively.
These repayments and repurchases of debt from the Net Proceeds enabled the
Company to achieve greater operating and financial flexibility by postponing to
2003 significant principal payments which would have otherwise been due in 1994,
1995 and 1996. As a result, the Company has no substantial principal payments
on its publicly-held notes until 2003 except for a $10,230,000 payment due in
1998 to repay in full the Company's subordinated fixed-rate notes.
31
<PAGE>
The Company has expanded its bank lines of credit to, among other things,
reduce the levels of its secured project financing, the cost of which is
generally higher than the cost of bank lines of credit.
Based upon its current financial condition and credit relationships, MDC
believes that it has, or can obtain, adequate financial resources to satisfy its
current and near-term capital requirements. The Company believes that it can
meet its long- term capital needs (including, among other things, meeting future
debt payments and refinancing or paying off other long-term debt as it becomes
due) from operations and external financing sources.
LINES OF CREDIT AND NOTES PAYABLE.
HOME BUILDING. MDC's home building bank lines of credit at December 31,
1994 aggregated $153,000,000 compared with $65,000,000 at December 31, 1993.
Agreements governing $140,000,000 of these lines of credit were entered into
during 1994, with terms that provide for final maturities from four to five
years, including scheduled term-out periods (although the term-out periods may
commence earlier under certain circumstances). Borrowings under the bank lines
of credit are collateralized by home building inventories and are limited to the
value of "eligible collateral" (as defined in the credit agreements). At
December 31, 1994, $62,332,000 was borrowed and an additional $64,258,000 was
collateralized and available to be borrowed under the bank lines of credit.
A bank has advised the Company that it will expand an existing $13,000,000
line of credit with an amended $28,000,000 credit facility. The Company
believes that it will be successful in amending this credit facility; however,
there can be no assurance that this credit facility will be amended or, if
amended, at what levels or terms.
MORTGAGE LENDING. To provide funds to originate and purchase mortgage
loans and to finance these mortgage loans on a short-term basis, HomeAmerican
utilizes its mortgage lending bank line of credit (the "Mortgage Line"). These
mortgage loans are pooled into GNMA, FNMA and FHLMC pools or retained as whole
loans and subsequently are sold in the open market on a "spot" basis or pursuant
to mortgage loan sale commitments. During 1994, 1993 and 1992, HomeAmerican
sold $480,485,000, $695,635,000 and $564,800,000, respectively, principal amount
of mortgage loans and mortgage certificates to unaffiliated purchasers.
The aggregate amount available under the Mortgage Line at December 31, 1994
was $51,000,000. This was reduced from $75,000,000 in 1994 at the Company's
request because of a significant reduction in the number of loans originated and
purchased by HomeAmerican. Borrowings under the Mortgage Line
32
<PAGE>
are collateralized by mortgage loans and mortgage-backed certificates and are
limited to the value of "eligible collateral" (as defined in the credit
agreement). At December 31, 1994, $23,211,000 was borrowed and an additional
$5,929,000 was collateralized and available to be borrowed under the Mortgage
Line. The Company also has additional borrowing capability with available
repurchase agreements.
GENERAL. The Company's lines of credit and notes payable require
compliance with certain covenants, representations and warranties. Currently,
the Company believes that it is in compliance with these covenants,
representations and warranties.
In the event that MDC's lines of credit are not renewed as they become due
or are renewed at substantially lower levels, the Company believes that it could
meet its financing requirements through a combination of internally-generated
funds and new borrowings.
CONSOLIDATED CASH FLOW.
In 1994, MDC used cash of $19,439,000 compared with cash generated in 1993
and 1992 of $1,975,000 and $12,395,000, respectively. At December 31, 1994, the
Company had $43,564,000 available in cash and cash equivalents.
MDC's $19,439,000 use of cash in 1994 primarily resulted from the Company's
net use of cash in Operating Activities of $36,790,000, partially offset by net
cash generated in Investing Activities of $16,395,000 from the redemption by
payment-in-full on certain metropolitan district bonds owned by the Company.
$76,991,000 of cash was used in Operating Activities to increase MDC's home
building inventories primarily as a result of expanded home building operations.
A portion of this cash required to increase home building inventories was
provided by (i) a $24,076,000 reduction in mortgage loans in inventory; and
(ii) $29,545,000 in net income generated before non-cash expenses such as
depreciation, amortization and valuation adjustments. Cash also was used in
Operating Activities in connection with increases in receivables and reductions
in accounts payable and accrued expenses.
For 1993, MDC's net cash used in Operating Activities of $34,237,000 was
offset by cash generated from (i) Investing Activities of $26,517,000 with
respect to distributions of capital from Equity CMO Interests, cash received
from redemption of marketable securities and principal payments received from
the CMO Bond; and (ii) the 1993 Offering discussed above. Net Cash used in
Operating Activities in 1993 principally resulted from increases in home
building inventories and mortgage loans held in inventory.
33
<PAGE>
For 1992, cash generated by MDC of $12,395,000 principally was due to net
cash generated in Operating Activities of $16,361,000 resulting from net income
generated and an increase in accounts payable and accrued expenses, partially
offset by increases in receivables and home building inventories.
As the Company's home building activities have expanded in 1993 and 1994,
the Company has used cash in Operating Activities primarily to expand its level
of home building inventories to meet the increased demand for new homes. To the
extent the Company may continue to expand the home building segment in the
future, and such expansion is not funded by net income, cash flows from
Operating Activities could continue to be negative. The Company generally funds
these negative cash flows through increased borrowings under bank lines of
credit.
Net cash provided by Investing Activities is primarily generated by
principal payments and prepayments on, and sales of, Mortgage Collateral
(collectively, "Mortgage Collateral Reductions") and a reduction in restricted
cash. Mortgage Collateral Reductions were substantial during 1992 through 1994.
During this period, Mortgage Collateral and mortgage-related assets declined
from $731,332,000 to $64,574,000 substantially as a result of (i) the high rate
of prepayments on the Mortgage Collateral; and (ii) sales of Mortgage Collateral
and mortgage-related assets at a premium to carrying value. Most of the cash
generated by the Mortgage Collateral Reductions and changes in restricted cash
was required to be used in Financing Activities to make principal payments on
the mortgage-backed bonds collateralized by the Mortgage Collateral and,
accordingly, had a relatively minor net cash impact. The Company anticipates
that its Mortgage Collateral and related mortgage-backed bonds will continue to
decrease.
CHANGES IN HOME BUILDING ASSETS.
Housing completed or under construction increased to $280,319,000 at
December 31, 1994 compared with $201,023,000 and $132,752,000 at December 31,
1993 and 1992, respectively, principally due to an increase in Backlog and
unsold homes under construction during 1994 and 1993.
Land and land under development totalled $183,838,000 at December 31, 1994
compared with $192,881,000 and $206,583,000 at December 31, 1993 and 1992,
respectively. The net decline in land over these periods is due principally to
(i) increased housing construction activity; and (ii) the increased use of
"rolling" options, with periodic takedowns of lots, to acquire new land
inventories.
The Company's total home building inventories at December 31, 1994 include
$42,478,000 of interest capitalized in the current and prior periods,
representing 9% of the inventory
34
<PAGE>
balance on such date. Interest capitalized in home building inventories at
December 31, 1993 and 1992 was $42,681,000 and $48,440,000, respectively,
representing 11% and 14%, respectively, of the inventory balances on such dates.
Based upon its current business plan, MDC anticipates the acquisition of
various parcels of finished lots and partially- developed land for use in its
future home building operations during 1995. The Company currently intends to
acquire a portion of the land inventories required in future periods through
takedowns of lots subject to "rolling" options entered into in prior periods and
under new "rolling" options. The use of "rolling" options lessens the Company's
land-related risk and improves liquidity.
IMPACT OF INFLATION, CHANGING PRICES AND ECONOMIC CONDITIONS
Real estate and residential housing prices are affected by inflation, which
can cause increases in the price of land, raw materials and subcontracted labor.
Unless costs are recovered through higher sales prices, Home Gross Margins can
decrease. If interest rates increase, construction and financing costs, as well
as the cost of borrowings, also increase, which can result in lower Home Gross
Margins. Increases in home mortgage interest rates make it more difficult for
MDC's customers to qualify for home mortgage loans, potentially decreasing home
sales volume. Increases in interest rates also may affect adversely the volume
of mortgage loan originations.
The volatility of interest rates could have an adverse effect on MDC's
future operations and liquidity. Among other things, these conditions may
(i) affect adversely the demand for housing and the availability of mortgage
financing; and (ii) reduce the credit facilities offered to MDC by banks,
investment bankers and mortgage bankers.
MDC's business also is affected significantly by, among other things,
general economic conditions and particularly the demand for new homes in the
areas in which it builds.
PROPOSED STATEMENT OF FINANCIAL ACCOUNTING STANDARDS
In November 1993, the Financial Accounting Standards Board issued a
Proposed Statement of Financial Accounting Standards titled "Accounting for the
Impairment of Long-Lived Assets" (the "Proposed Statement"). The Company
understands the standards in the Proposed Statement have been modified such that
the expected standards in the final statement, which is scheduled to be issued
in the near future, will not have a material impact on the results of operations
and financial position of the Company in the year of adoption.
35
<PAGE>
ITEM 8. FINANCIAL STATEMENTS
M.D.C. HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Page
Consolidated Financial Statements:
Report of Independent Accountants . . . . . . . . . . . . . . . . . F- 2
Consolidated Balance Sheets as of December 31, 1994 and December 31, 1993 F- 3
Consolidated Statements of Income for the Three Years
Ended December 31, 1994. . . . . . . . . . . . . . . . . . . . . . F- 5
Consolidated Statements of Stockholders' Equity for the Three Years
Ended December 31, 1994. . . . . . . . . . . . . . . . . . . . . . F- 6
Consolidated Statements of Cash Flows for the Three Years Ended
December 31, 1994. . . . . . . . . . . . . . . . . . . . . . . . . F- 7
Notes to Consolidated Financial Statements. . . . . . . . . . . . . F-10
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREOWNERS OF
M.D.C. HOLDINGS, INC.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, stockholders' equity and of cash
flows present fairly, in all material respects, the financial position of M.D.C.
Holdings, Inc. and its subsidiaries at December 31, 1994 and 1993, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1994, in conformity with generally accepted
accounting principles. 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 of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
As discussed in Note J to the financial statements, the Company changed its
method of accounting for income taxes in 1992.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Los Angeles, California
February 15, 1995
F-2
<PAGE>
M.D.C. HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
ASSETS 1994 1993
-------- --------
<S> <C> <C>
Corporate
Cash and cash equivalents. . . . . . . . . . . $ 31,210 $ 42,443
Property and equipment, net. . . . . . . . . . 9,962 10,432
Deferred income taxes. . . . . . . . . . . . . 11,944 8,100
Deferred issue costs, net. . . . . . . . . . . 10,621 11,233
Other assets, net. . . . . . . . . . . . . . . 3,270 3,965
-------- --------
67,007 76,173
-------- --------
Home Building
Cash and cash equivalents. . . . . . . . . . . 10,162 18,479
Home sales and other accounts receivable . . . 12,508 5,423
Investments and marketable securities, net . . 6,089 --
Investment in metropolitan district bonds. . . -- 13,795
Inventories, net
Housing completed or under construction. . . 280,319 201,023
Land and land under development. . . . . . . 183,838 192,881
Prepaid expenses and other assets, net . . . . 43,975 48,863
-------- --------
536,891 480,464
-------- --------
Mortgage Lending
Cash and cash equivalents. . . . . . . . . . . 1,607 1,505
Restricted cash. . . . . . . . . . . . . . . . 2,650 3,400
Accrued interest and other assets, net . . . . 1,447 2,571
Mortgage loans held in inventory, net. . . . . 44,368 68,065
-------- --------
50,072 75,541
-------- --------
Asset Management
Cash and cash equivalents. . . . . . . . . . . 585 576
Mortgage Collateral, net, and assets
related to mortgage-backed bonds and
related liabilities. . . . . . . . . . . . . 64,574 134,166
Other loans and assets, net. . . . . . . . . . 6,316 9,946
-------- --------
71,475 144,688
-------- --------
Total Assets. . . . . . . . . . . . . . . $725,445 $776,866
-------- --------
-------- --------
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
M.D.C. HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
LIABILITIES 1994 1993
-------- --------
<S> <C> <C>
Corporate
Accounts payable and accrued expenses. . . . . $ 34,311 $ 20,846
Income taxes payable . . . . . . . . . . . . 11,166 28,711
Notes payable. . . . . . . . . . . . . . . . . 3,583 3,624
Senior Notes, net. . . . . . . . . . . . . . . 187,352 187,199
Subordinated notes, net. . . . . . . . . . . . 38,217 38,213
-------- --------
274,629 278,593
-------- --------
Home Building
Accounts payable and accrued expenses. . . . . 75,399 70,741
Lines of credit. . . . . . . . . . . . . . . . 62,332 24,645
Notes payable. . . . . . . . . . . . . . . . . 33,585 62,495
-------- --------
171,316 157,881
-------- --------
Mortgage Lending
Accounts payable and accrued expenses. . . . . 2,450 8,487
Line of credit . . . . . . . . . . . . . . . . 23,211 29,500
-------- --------
25,661 37,987
-------- --------
Asset Management
Accounts payable and accrued expenses. . . . . 670 3,051
Mortgage-backed bonds, net, and related
liabilities, recourse solely to limited-
purpose subsidiary assets. . . . . . . . . . 60,874 123,500
-------- --------
61,544 126,551
-------- --------
Total Liabilities . . . . . . . . . . . . 533,150 601,012
-------- --------
COMMITMENTS AND CONTINGENCIES (NOTES J,
L AND N) -- --
-------- --------
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 25,000,000
shares authorized; none issued . . . . . . . -- --
Common Stock, $.01 par value; 100,000,000
shares authorized; 21,187,000 and
20,914,000 shares issued, respectively, at
December 31, 1994 and 1993 . . . . . . . . . 212 209
Additional paid-in capital . . . . . . . . . . 133,934 133,455
Retained earnings. . . . . . . . . . . . . . . 71,502 57,879
-------- --------
205,648 191,543
Less treasury stock, at cost; 2,314,000 and
2,664,000 shares, respectively, at
December 31, 1994 and 1993 . . . . . . . . . (13,353) (15,689)
-------- --------
Total Stockholders' Equity . . . . . . . . 192,295 175,854
-------- --------
Total Liabilities and Stockholders'
Equity . . . . . . . . . . . . . . . . . $725,445 $776,866
-------- --------
-------- --------
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
M.D.C. HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES:
Home Building. . . . . . . . . . . . . . . . $ 793,793 $ 596,813 $ 423,131
Mortgage Lending . . . . . . . . . . . . . . 15,850 19,725 19,344
Asset Management . . . . . . . . . . . . . . 13,869 33,162 66,597
Corporate. . . . . . . . . . . . . . . . . . 1,357 2,376 2,496
---------- ---------- ----------
Total Revenues. . . . . . . . . . . . . . 824,869 652,076 511,568
---------- ---------- ----------
COSTS AND EXPENSES:
Home Building. . . . . . . . . . . . . . . . 749,329 574,317 405,570
Mortgage Lending . . . . . . . . . . . . . . 8,899 12,217 10,114
Asset Management . . . . . . . . . . . . . . 11,073 24,166 57,897
Corporate general and administrative . . . . 15,132 14,890 18,108
Corporate and home building interest . . . . 9,454 11,454 13,359
---------- ---------- ----------
Total Expenses. . . . . . . . . . . . . . 793,887 637,044 505,048
---------- ---------- ----------
Income before income taxes, extraordinary
gain (loss) and cumulative effect of
accounting change. . . . . . . . . . . . . . 30,982 15,032 6,520
Provision for income taxes . . . . . . . . . . 11,727 4,976 1,755
---------- ---------- ----------
Income before extraordinary gain (loss)
and cumulative effect of accounting
change . . . . . . . . . . . . . . . . . . . 19,255 10,056 4,765
Extraordinary gain (loss) from early
extinguishment of debt, net of income
taxes (benefit) of: 1993, $9,967; 1992,
($1,346) . . . . . . . . . . . . . . . . . . -- 15,823 (2,613)
Cumulative effect of accounting change . . . . -- -- 1,700
---------- ---------- ----------
NET INCOME . . . . . . . . . . . . . . . . . . $ 19,255 $ 25,879 $ 3,852
---------- ---------- ----------
---------- ---------- ----------
EARNINGS PER SHARE
PRIMARY EARNINGS PER SHARE
Income before extraordinary gain (loss)
and cumulative effect of accounting change $ .94 $ .45 $ .22
Extraordinary gain (loss) from early
extinguishment of debt . . . . . . . . . . -- .71 (.12)
Cumulative effect of accounting change . . . -- -- .08
---------- ---------- ----------
NET INCOME . . . . . . . . . . . . . . . . . $ .94 $ 1.16 $ .18
---------- ---------- ----------
---------- ---------- ----------
FULLY-DILUTED EARNINGS PER SHARE
Income before extraordinary gain (loss)
and cumulative effect of accounting change $ .87 $ .45 $ .22
Extraordinary gain (loss) from early
extinguishment of debt . . . . . . . . . . -- .71 (.12)
Cumulative effect of accounting change . . . -- -- .08
---------- ---------- ----------
NET INCOME . . . . . . . . . . . . . . . . . $ .87 $ 1.16 $ .18
---------- ---------- ----------
---------- ---------- ----------
WEIGHTED-AVERAGE SHARES OUTSTANDING
Primary. . . . . . . . . . . . . . . . . . 20,406 22,340 21,850
---------- ---------- ----------
---------- ---------- ----------
Fully-diluted. . . . . . . . . . . . . . . 24,021 22,340 21,850
---------- ---------- ----------
---------- ---------- ----------
DIVIDENDS PER SHARE. . . . . . . . . . . . . . $ .06 $ -- $ --
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
M.D.C. HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED TREASURY
STOCK CAPITAL EARNINGS STOCK TOTAL
------ ---------- --------- ---------- --------
<S> <C> <C> <C> <C> <C>
BALANCES-JANUARY 1, 1992 . . . . . . . . $ 202 $131,860 $ 28,922 $ (496) $160,488
Shares issued. . . . . . . . . . . . . 2 241 -- -- 243
Shares reacquired. . . . . . . . . . . -- -- -- (20) (20)
Net unrealized loss on marketable
securities . . . . . . . . . . . . . -- -- (612) -- (612)
Non-qualified stock options
exercised. . . . . . . . . . . . . . -- 231 -- -- 231
Net income . . . . . . . . . . . . . . -- -- 3,852 -- 3,852
------ --------- -------- --------- --------
BALANCES-DECEMBER 31, 1992 . . . . . . . 204 132,332 32,162 (516) 164,182
Shares issued. . . . . . . . . . . . . 5 430 -- -- 435
Shares reacquired. . . . . . . . . . . -- -- -- (15,173) (15,173)
Net unrealized loss on marketable
securities. . . . . . . . . . . . . -- -- (162) -- (162)
Non-qualified stock options
exercised . . . . . . . . . . . . . -- 693 -- -- 693
Net income . . . . . . . . . . . . . . -- -- 25,879 -- 25,879
------ --------- -------- --------- --------
BALANCES-DECEMBER 31, 1993 . . . . . . . 209 133,455 57,879 (15,689) 175,854
Shares issued. . . . . . . . . . . . . 3 265 (46) 256 478
Shares reacquired. . . . . . . . . . . -- -- -- (1,505) (1,505)
Shares issued to acquire Richmond
Homes common stock . . . . . . . . . -- -- (3,585) 3,585 --
Net unrealized loss on available-
for-sale securities. . . . . . . . . -- -- (860) -- (860)
Non-qualified stock options
exercised. . . . . . . . . . . . . . -- 214 -- -- 214
Dividends declared . . . . . . . . . . -- -- (1,141) -- (1,141)
Net income . . . . . . . . . . . . . . -- -- 19,255 -- 19,255
------ --------- -------- --------- --------
BALANCES-DECEMBER 31, 1994 . . . . . . . $212 $133,934 $71,502 $(13,353) $192,295
------ --------- -------- --------- --------
------ --------- -------- --------- --------
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
M.D.C. HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income. . . . . . . . . . . . $ 19,255 $ 25,879 $ 3,852
Adjustments To Reconcile Net
Income To Net Cash Provided By
(Used In) Operating Activities:
Extraordinary (gain) loss from
early extinguishment of debt . -- (25,790) 3,959
Gains on sale of mortgage-
related assets, net. . . . . . (295) (7,505) (8,169)
Depreciation and amortization . 10,134 8,038 8,161
Inventory valuation
adjustments. . . . . . . . . . 4,000 -- --
Equity CMO Interest valuation
adjustments. . . . . . . . . . -- 3,100 3,529
Deferred income taxes . . . . . (3,844) (4,151) (20,696)
Net Changes In Assets and
Liabilities:
Receivables. . . . . . . . . . . (5,462) 3,489 2,709
Home building inventories. . . . (76,991) (45,252) 4,516
Mortgage loans held in
inventory . . . . . . . . . . . 24,076 (8,773) (1,839)
Accounts payable and accrued
expenses. . . . . . . . . . . . (8,833) 25,262 26,089
Other, net . . . . . . . . . . . 1,170 (8,534) (5,750)
-------- -------- --------
Net Cash Provided By (Used In)
Operating Activities . . . . . . (36,790) (34,237) 16,361
-------- -------- --------
INVESTING ACTIVITIES:
Mortgage Collateral
Principal payments and
prepayments received . . . . . 29,569 95,209 209,996
Sales . . . . . . . . . . . . . 19,526 47,060 82,528
Distributions of Capital From
Equity CMO Interests . . . . . . 3,213 7,403 13,648
CMO Bond
Purchase. . . . . . . . . . . . -- -- (7,367)
Principal payments received . . -- 7,114 709
Changes In Investments and
Marketable Securities, net . . . (6,377) 12,000 (12,000)
Redemption of (Investment in)
Metropolitan District Bonds. . . 16,395 (8,700) (2,700)
Changes In Restricted Cash . . . . 16,159 13,071 7,847
Other, net . . . . . . . . . . . . 877 (4,076) (1,780)
-------- -------- --------
Net Cash Provided By Investing
Activities . . . . . . . . . . . 79,362 169,081 290,881
-------- -------- --------
(Continued)
See notes to consolidated financial statements.
F-7
<PAGE>
M.D.C. HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(Continued)
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1994 1993 1992
---------- ---------- -----------
<S> <C> <C> <C>
FINANCING ACTIVITIES:
Mortgage-backed Bonds -
Principal Payments . . . . . . . $ (60,094) $ (139,658) $ (281,326)
Lines of Credit
Advances. . . . . . . . . . . . 641,874 352,410 165,911
Principal payments. . . . . . . (612,449) (365,387) (150,462)
Senior and Subordinated Notes
Net proceeds. . . . . . . . . . -- 204,013 --
Payments. . . . . . . . . . . . -- (54,498) --
Notes Payable
Borrowings. . . . . . . . . . . 15,870 79,329 38,960
Principal payments. . . . . . . (44,835) (192,940) (68,153)
Treasury Stock Purchases. . . . . (1,505) (15,173) --
Dividend Payments . . . . . . . . (1,141) -- --
Other, Net. . . . . . . . . . . . 269 (965) 223
---------- ---------- ----------
Net Cash Used In Financing
Activities. . . . . . . . . . . . (62,011) (132,869) (294,847)
---------- ---------- ----------
Net (Decrease) Increase In Cash
and Cash Equivalents. . . . . . . (19,439) 1,975 12,395
Cash and Cash Equivalents
Beginning of Year. . . . . . . . 63,003 (61,028) 48,633
---------- ---------- ----------
End of Year. . . . . . . . . . . $ 43,564 $ 63,003 $ 61,028
---------- ---------- ----------
---------- ---------- ----------
<CAPTION>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<S> <C> <C> <C>
Cash Paid During the Period
For:
Interest, net of amounts
capitalized . . . . . . . . . . $ 15,313 $ 29,499 $ 66,962
Income taxes . . . . . . . . . . 32,529 8,245 4,186
(Continued)
See notes to consolidated financial statements.
F-8
<PAGE>
M.D.C. HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(Continued)
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Home building land inventory
purchases financed by seller. . $ 4,164 $ 13,250 $ 8,213
Home building land inventory
sales financed by MDC . . . . . 1,438 2,835 2,392
Disposition of land
inventories collateralized by
notes payable
Inventories. . . . . . . . . . 2,864 -- 590
Notes payable. . . . . . . . . 2,176 -- 500
Accrued interest and other
liabilities . . . . . . . . . 688 -- 130
Sale of mortgage-related
assets, subject to related
liabilities
Mortgage Collateral and
related assets. . . . . . . . -- -- 92,305
Mortgage-backed bonds and
related liabilities . . . . . -- -- 91,300
Settlement of civil claims
Mortgage Collateral and
related assets. . . . . . . . -- -- 98,927
Mortgage-backed bonds
and related liabilities . . . -- -- 71,550
Notes payable and other
liabilities . . . . . . . . . -- -- 23,490
Purchase of metropolitan
district bonds in exchange
for reduction in receivables. . -- -- 2,395
</TABLE>
See notes to consolidated financial statements.
F-9
<PAGE>
M.D.C. HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements of
M.D.C. Holdings, Inc. ("MDC" or the "Company", which, unless otherwise
indicated, refers to M.D.C. Holdings, Inc. and its subsidiaries) include the
accounts of MDC and its wholly owned and majority-owned subsidiaries.
Investments in 50% or less owned limited partnerships, joint ventures and
ownership interests in trusts are accounted for using the equity method. All
significant intercompany balances and transactions have been eliminated in
consolidation.
In the home building segment of its operations, MDC designs, constructs and
sells residential housing and, to a lesser extent, acquires and develops land
for use in its home building operations and for sale to others.
MDC's mortgage lending operations are conducted by HomeAmerican Mortgage
Corporation ("HomeAmerican"), which provides mortgage loans for MDC home buyers
as well as for others. Substantially all of the mortgage loans originated by
HomeAmerican, as well as mortgage loans purchased from unaffiliated loan
correspondents, subsequently are sold to private investors. Additionally,
HomeAmerican sells mortgage loan servicing.
In MDC's asset management segment, Financial Asset Management Corporation
(an indirect, wholly owned subsidiary of M.D.C. Holdings, Inc., "FAMC") manages
the operations of two publicly-traded real estate investment trusts (each a
"REIT"). MDC also owns interests in various other investments.
HOME BUILDING.
INVENTORIES - Inventories are stated at the lower of cost or net realizable
value and include interest capitalized during the period of active development
through the completion of construction. Construction-related overhead and
salaries are capitalized and allocated proportionately to projects actively
being developed. Land and related costs are transferred to housing inventory
when construction commences.
Net realizable value is based on the Company's plans for development and
build-out of each project using estimated sales prices less estimated costs to
complete (which includes interest anticipated to be capitalized during active
development) and sell the project. Net realizable value does not represent, for
a
F-10
<PAGE>
specific project, the current sales price that the Company could obtain from
third parties for such properties and projects at their current stage of
development. Management believes that its assumptions as to projected demand
are reasonable based on present economic conditions and that financing will be
available to enable the Company to realize the carrying value of its home
building inventories consistent with its plans for build-out and development.
At December 31, 1994 and 1993, inventory valuation reserves totalled $34,067,000
and $40,829,000, respectively. The Company charged $4,000,000 in 1994 and
$2,345,000 in 1993 to costs and expenses in connection with such inventory
valuation reserves. Inventory valuation reserves utilized through home sales,
land sales and in connection with the deeding of inactive land inventories,
totalled $10,762,000, $8,616,000 and $11,808,000 for the years ended
December 31, 1994, 1993 and 1992, respectively.
REVENUE RECOGNITION - Revenues from real estate sales are recognized when a
sufficient down payment has been received, financing has been arranged, title,
possession and other attributes of ownership have been transferred to the buyer
and the Company is not obligated to perform significant additional activities
after the sale.
WARRANTY COSTS - The Company's homes are sold with limited ten-year
warranties from independent entities. Home buyer claims under these warranties
generally are subject to a deductible payable by the Company. Reserves, which
are included in home cost of sales, are established by the Company on a
per-house basis to cover anticipated costs of repairs during the Company's
warranty period and a portion of the supplemental warranty deductible.
MORTGAGE LENDING.
RESTRICTED CASH - Restricted cash represents cash pledged to support
certain letters of credit.
MORTGAGE LOANS HELD IN INVENTORY - The Company generally purchases forward
commitments to deliver mortgage loans held for sale. Mortgage loans held in
inventory are stated at the lower of aggregate cost or market based upon such
commitments for loans to be delivered into such commitments or prevailing market
for uncommitted loans. Substantially all of the loans originated or purchased
by the Company are sold to private investors within 45 days of origination or
purchase. Gains or losses on mortgage loans held in inventory are realized when
the loans are sold.
REVENUE RECOGNITION - Loan origination fees in excess of origination costs
incurred and loan commitment fees are deferred
F-11
<PAGE>
until the related loans are sold. Loan servicing fees are recorded as revenue
when the mortgage loan payments are received. Revenues from the sale of
mortgage loan servicing are recognized when title and all risks and rewards of
ownership have irrevocably passed to the buyer and there are no significant
unresolved contingencies.
ASSET MANAGEMENT.
RESTRICTED CASH - Restricted cash represents mortgage loan principal and
interest receipts held pending distribution to holders of mortgage-backed bonds.
EQUITY CMO INTERESTS - MDC owns a 49.999% ownership interest in seven
trusts which in 1987 issued collateralized mortgage obligations ("CMOs")
collateralized by fixed-rate agency-guaranteed mortgage certificates. These
interests (collectively, "Equity CMO Interests") are accounted for on the equity
method.
MDC's Equity CMO Interests are carried at the lower of cost or undiscounted
projected excess cash flow ("Projected Excess Cash Flow") and are included in
the line item "Other loans and assets" on the Consolidated Balance Sheet. To
the extent Projected Excess Cash Flow is less than carrying cost, a valuation
adjustment is recorded. These valuation adjustments provide for estimated
losses to be recognized by the related ownership interest in the trusts
subsequent to the date on which the valuation adjustments were taken, and the
Company's share of such losses have been, and will in the future be, charged
against these valuation adjustments as they occur.
MORTGAGE COLLATERAL AND RELATED ASSETS - Effective January 1, 1994, the
Company adopted the provisions of Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." The adoption of SFAS No. 115 had no effect on the Company's Net
Income and had an immaterial effect on the Company's Stockholders' Equity. The
adoption of SFAS No. 115 changed the accounting for mortgage certificates
collateralizing mortgage-backed bonds from a cost basis to a market basis.
Accordingly, at December 31, 1994, mortgage certificates collateralizing
mortgage-backed bonds are recorded at market. Mortgage certificates are repaid
through the pass through of principal payments from the mortgage loans
collateralizing these certificates or, in the event of default by the borrower,
proceeds from the sale of the underlying property and/or mortgage insurance
proceeds. Conventional mortgage loans collateralizing mortgage-backed bonds are
carried at cost (outstanding principal
F-12
<PAGE>
balance, net of unamortized premium or discount) and have private mortgage
insurance.
AMORTIZATION OF PREMIUMS AND DISCOUNTS - Premiums and discounts on Mortgage
Collateral (as hereinafter defined) and original issue discounts on CMO bonds
are amortized over their respective estimated lives based upon a method which
provides a constant effective yield and assumes an estimated principal
prepayment rate which is adjusted prospectively for actual experience.
GENERAL.
CASH AND CASH EQUIVALENTS - The Company periodically invests funds not
immediately required for operating purposes in highly liquid, short-term
investments with an original maturity of 90 days or less such as commercial
paper and repurchase agreements which are included in cash and cash equivalents
in the Consolidated Balance Sheet and Consolidated Statement of Cash Flows.
PROPERTY AND EQUIPMENT - Property and equipment is carried at cost less
accumulated depreciation and amortization. Depreciation and amortization are
computed using the straight-line method over the estimated useful lives of the
related assets.
EARNINGS PER SHARE - Primary earnings per share are based on the
weighted-average number of common and common equivalent shares outstanding
during each period. For the year ended December 31, 1994, fully-diluted
earnings per share also assumes the conversion into Common Stock of all of the
outstanding convertible subordinated notes at the stated conversion price.
RECLASSIFICATIONS - Certain amounts in the 1993 and 1992 consolidated
financial statements have been reclassified to conform to the 1994 presentation.
F-13
<PAGE>
B. INFORMATION ON BUSINESS SEGMENTS
The Company operates in three business segments: home building, mortgage
lending and asset management. A summary of the Company's segment information is
shown below (in thousands).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Home Building
Home sales. . . . . . . . . . . . . $784,453 $587,887 $417,190
Land sales. . . . . . . . . . . . . 8,296 7,441 5,800
Other revenues. . . . . . . . . . . 1,044 1,485 141
-------- -------- --------
793,793 596,813 423,131
-------- -------- --------
Home cost of sales. . . . . . . . . 663,549 504,136 355,012
Land cost of sales. . . . . . . . . 7,977 7,864 5,826
Inventory valuation reserves. . . . 4,000 -- --
Marketing . . . . . . . . . . . . . 44,588 34,820 26,203
General and administrative. . . . . 29,215 27,497 18,529
-------- -------- --------
749,329 574,317 405,570
-------- -------- --------
Operating Profit . . . . . . . . . 44,464 22,496 17,561
-------- -------- --------
Mortgage Lending
Interest revenues . . . . . . . . . 2,897 4,769 5,000
Origination fees. . . . . . . . . . 4,671 6,171 4,195
Sale of mortgage servicing. . . . . 6,770 4,235 8,359
Gains (losses) on sales of
mortgage loans, net. . . . . . . . (585) 2,864 267
Mortgage servicing and other. . . . 2,097 1,686 1,523
-------- -------- --------
15,850 19,725 19,344
-------- -------- --------
Interest expense. . . . . . . . . . 194 1,631 1,733
General and administrative. . . . . 8,705 10,586 8,381
-------- -------- --------
8,899 12,217 10,114
-------- -------- --------
Operating Profit . . . . . . . . . 6,951 7,508 9,230
-------- -------- --------
Asset Management
Interest revenues . . . . . . . . . 8,065 20,584 55,029
Gains on sales of mortgage-
related assets . . . . . . . . . . 295 7,505 8,169
Management fees and other . . . . . 5,509 5,073 3,399
-------- -------- --------
13,869 33,162 66,597
-------- -------- --------
Interest expense. . . . . . . . . . 7,624 18,118 50,513
Equity in losses of Equity CMO
Interests, net . . . . . . . . . . -- 3,100 4,166
General and administrative. . . . . 3,449 2,948 3,218
-------- -------- --------
11,073 24,166 57,897
-------- -------- --------
Operating Profit . . . . . . . . . 2,796 8,996 8,700
-------- -------- --------
</TABLE>
(Continued)
F-14
<PAGE>
(Continued)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Corporate
Other revenues . . . . . . . . . . $ 1,357 $ 2,376 $ 2,496
-------- -------- --------
Interest expense . . . . . . . . . 9,454 11,454 13,359
General and administrative . . . . 15,132 14,890 18,108
-------- -------- --------
24,586 26,344 31,467
-------- -------- --------
Net Corporate Expenses . . . . . (23,229) (23,968) (28,971)
-------- -------- --------
Income Before Income Taxes,
Extraordinary Gain (Loss) and
Cumulative Effect of Accounting
Change . . . . . . . . . . . . . . $ 30,982 $ 15,032 $ 6,520
-------- -------- --------
-------- -------- --------
</TABLE>
Corporate general and administrative expenses consist principally of
salaries and other administrative expenses which are not identifiable to a
specific segment. Transfers between segments are recorded at cost. Capital
expenditures and related depreciation and amortization for the years ended
December 31, 1994, 1993 and 1992 were not material. Identifiable segment assets
are shown on the face of the Consolidated Balance Sheet.
C. PURCHASE OF ASSETS
In December 1993, as part of the use of proceeds in the 1993 Offering
described in Note G, the Company purchased from an unaffiliated liquidating
trust (the "Trust") (i) 1,990 shares (19.9%) of Richmond Homes, Inc. I (the
Company's consolidated subsidiary which conducts substantially all of the
Company's home building activities in Colorado, "Richmond Homes") common stock;
(ii) 1,400 shares of Class A preferred stock of Richmond Homes; (iii) a general
partnership interest in Rock Creek Investment Partnership, a partnership in
which Richmond Homes also was a partner; and (iv) 2,560,866 shares of Common
Stock of MDC ("MDC Common Stock") (collectively, the "Trust Securities").
MDC paid $16,038,000 in cash for the Trust Securities other than the shares
of MDC Common Stock. The purchase price of the Trust Securities, other than the
shares of MDC Common Stock, was allocated to the assets received to the extent
of their fair value. The consideration paid in excess of the fair value was
accounted for as a part of the reacquisition price of the Restructured Notes
Payable (as hereinafter defined) which were repurchased in related transactions.
See Note G. The per share purchase price for the shares of MDC Common Stock was
approximately $5.93 which was based on closing prices of MDC Common Stock
reported on the New York Stock Exchange for certain trading days preceding the
closing date of the 1993 Offering.
F-15
<PAGE>
Following the purchase of the Trust Securities, MDC owned 65% of the outstanding
Richmond Homes common stock and all of the Richmond Homes preferred stock.
Prior to February 2, 1994, Larry A. Mizel (Chairman of the Board and
Chief Executive Officer of the Company) and David D. Mandarich (Executive
Vice President-Real Estate, Co-Chief Operating Officer and a director of the
Company) owned 35% of the outstanding shares of Richmond Homes common stock. In
furtherance of the Company's desire to own all of the outstanding shares of
Richmond Homes common stock, in December 1993, a special committee of the Board
of Directors of the Company (the "Special Committee") negotiated on behalf of
the Company terms of an option agreement with Messrs. Mizel and Mandarich to
acquire the shares of Richmond Homes common stock owned by them in exchange for
MDC Common Stock with a value of up to $3,500,000 in the aggregate. For
purposes of the exchange, the shares of MDC Common Stock were valued at $5.75
per share, the closing price of MDC Common Stock on the date of the option
agreement. The Special Committee engaged a financial advisor to perform a
business enterprise valuation of Richmond Homes. In February 1994, based on the
results of the valuation, the maximum value of $3,500,000 of MDC Common Stock
(an aggregate of 608,695 shares) was issued to Messrs. Mizel and Mandarich in
exchange for their shares of Richmond Homes common stock. As of February 2,
1994, MDC owns 100% of the equity of Richmond Homes.
As the transaction with Messrs. Mizel and Mandarich was between related
parties, the issuance of the MDC Common Stock was recorded based on the net book
value of Richmond Homes, which had approximately zero common stockholders'
equity at the date of the acquisition. Accordingly, the value of the shares of
MDC Common Stock issued to Messrs. Mizel and Mandarich was recorded at zero.
D. MORTGAGE LOANS HELD IN INVENTORY
Mortgage loans held in inventory consist of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1993
-------- --------
<S> <C> <C>
First mortgage loans
Conventional . . . . . . . . . . . . . . . . $ 28,857 $ 32,182
FHA and VA . . . . . . . . . . . . . . . . . 17,467 36,913
-------- --------
46,324 69,095
Less
Unamortized discounts. . . . . . . . . . . . (1,063) (177)
Deferred fees. . . . . . . . . . . . . . . . (212) (205)
Allowance for loan losses. . . . . . . . . . (681) (648)
-------- --------
Total. . . . . . . . . . . . . . . . . . . . $44,368 $68,065
-------- --------
-------- --------
</TABLE>
F-16
<PAGE>
Mortgage loans held in inventory consist primarily of loans collateralized by
first mortgages and deeds of trust due over periods of up to 30 years. The
weighted-average effective yield on mortgage loans held in inventory was
approximately 8.4% and 7.1%, respectively, at December 31, 1994 and 1993.
E. MORTGAGE COLLATERAL AND RELATED ASSETS AND MORTGAGE-BACKED BONDS AND
RELATED LIABILITIES
In the past, mortgage-backed bonds were issued by limited- purpose
subsidiaries of the asset management segment and other non-related entities.
Payments are made on the bonds on a periodic basis as a result of, and in
amounts related to, corresponding payments received on the underlying mortgage
collateral (the "Mortgage Collateral"). Mortgage Collateral for mortgage-backed
bonds payable consists of fixed-rate mortgage loans and mortgage-backed
securities secured by first liens on single-family residential housing.
Mortgage-backed securities consist of Government National Mortgage Association
("GNMA") certificates, Federal National Mortgage Association ("FNMA") mortgage
pass-through certificates and conventional mortgage loans. All of the Mortgage
Collateral and related assets are held by a trustee. All principal and interest
on the collateral is remitted directly to a trustee and is available for payment
on the bonds, all of which are rated "AAA" by Standard and Poor's Corporation or
other national credit rating agencies. The Company has not guaranteed, nor is
it otherwise obligated with respect to, these mortgage-backed bond issues.
F-17
<PAGE>
The following assets and liabilities are held by trustees (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1993
------- --------
<S> <C> <C>
Assets
Restricted cash. . . . . . . . . . . . . . . $ 3,227 $ 15,071
Interest and other receivables . . . . . . . 640 1,428
Mortgage-backed securities
FNMA certificates. . . . . . . . . . . . . 13,382 22,962
GNMA certificates. . . . . . . . . . . . . 34,164 56,590
Conventional mortgage loans. . . . . . . . . 13,930 36,135
Valuation reserve. . . . . . . . . . . . . . (2,259) --
Unamortized discounts and premiums, net. . . (301) (1,189)
Other assets . . . . . . . . . . . . . . . . 1,791 3,169
------- --------
Total Mortgage Collateral and Related Assets . 64,574 134,166
------- --------
Liabilities
Accounts payable and accrued interest. . . . 1,231 3,470
Mortgage-backed bonds. . . . . . . . . . . . 59,926 120,818
Unamortized discounts. . . . . . . . . . . . (283) (788)
------- --------
Total Mortgage-Backed Bonds and Related
Liabilities. . . . . . . . . . . . . . . . . 60,874 123,500
------- --------
Net Assets . . . . . . . . . . . . . . . . . . $ 3,700 $ 10,666
------- --------
------- --------
</TABLE>
The weighted-average effective yield on the Mortgage Collateral was
approximately 9.5% and 9.9% at December 31, 1994 and 1993. Mortgage-backed
bonds mature through 2019 and bear interest at weighted-average rates of 9.9%
and 10.0%, respectively, at December 31, 1994 and 1993. The negative difference
between the effective yield on the Mortgage Collateral and interest rates on the
mortgage-backed bonds primarily is covered by the overcollateralization of the
bonds.
Because the mortgage-backed bond indentures prohibit liquidation of the
Mortgage Collateral, the Mortgage Collateral cannot be sold unless the
corresponding mortgage-backed bonds payable are redeemed. The mortgage-backed
bonds can be redeemed before maturity by the Company only under certain
prescribed conditions. If those conditions are met, and the Company redeems the
mortgage-backed bonds, the mortgage-backed bonds would be redeemed at par and
any market appreciation or depreciation on the related Mortgage Collateral would
accrue to the Company.
In 1994 and 1993, MDC sold, at a premium, Mortgage Collateral totalling
$19,088,000 and $44,735,000, respectively. The proceeds from these sales were
utilized to redeem in full the
F-18
<PAGE>
related outstanding mortgage-backed bonds which totalled $19,109,000 and
$44,375,000, respectively. These sales, net of redemptions, resulted in pre-tax
gains totalling $295,000 and $2,129,000, respectively.
In 1992, MDC sold, at a premium, Mortgage Collateral totalling $73,345,000.
The proceeds from these sales were utilized to redeem in full the related
outstanding mortgage- backed bonds which totalled $74,021,000. Additionally, in
1992, the Company sold, at a premium, Mortgage Collateral and related assets
totalling $92,305,000 subject to the related mortgage- backed bonds and related
liabilities totalling $91,300,000. The above sales resulted in pre-tax gains
totalling $8,169,000. The redemption of the $74,021,000 of mortgage-backed
bonds resulted in an aggregate extraordinary loss on the early extinguishment of
debt of $2,851,000, net of an income tax benefit of $1,469,000.
F. LINES OF CREDIT
HOME BUILDING - The aggregate amount of MDC's home building bank lines of
credit at December 31, 1994 was $153,000,000 compared with $65,000,000 at
December 31, 1993. Available borrowings under these bank lines of credit are
collateralized by home building inventories and are limited to the value of
"eligible collateral" (as defined in the credit agreements). At December 31,
1994, $62,332,000 was borrowed and an additional $64,258,000 was collateralized
and available to be borrowed. At December 31, 1994, the weighted-average
interest rate of the lines of credit was 8.85%.
MORTGAGE LENDING - The aggregate amount available under MDC's mortgage
lending bank line of credit at December 31, 1994, was $51,000,000. Available
borrowings under this bank line of credit are collateralized by mortgage loans
and mortgage-backed certificates and are limited to the value of "eligible
collateral" (as defined in the credit agreement). At December 31, 1994,
$23,211,000 was borrowed and an additional $5,929,000 was collateralized and
available to be borrowed. The mortgage lending line of credit is cancellable
upon 90 days' notice. At December 31, 1994, the weighted-average interest rate
of the line was 3.42%.
GENERAL - The agreements for the Company's bank lines of credit include
representations, warranties and covenants, the most restrictive of which require
that the Company maintain certain minimum defined stockholders' equity.
Currently, the Company believes that it is in compliance with these covenants,
representations and warranties.
F-19
<PAGE>
G. NOTES PAYABLE
SENIOR NOTES AND SUBORDINATED NOTES - The Senior Notes (as hereinafter
defined) and the subordinated notes consist of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1993
-------- ---------
<S> <C> <C>
Senior Notes
11 1/8% Senior Notes due December 2003
(effective rate 12.3%). . . . . . . . . $187,352 $187,199
-------- --------
-------- --------
Subordinated notes
8 3/4% Convertible Subordinated Notes
due December 2005, convertible into
Common Stock at $7.75 per common share
(effective rate 9.5%) . . . . . . . . . $ 28,000 $ 28,000
6.64% Subordinated Fixed-Rate Notes
due April 1998(effective rate 6.7%). . . 10,217 10,213
-------- --------
$ 38,217 $ 38,213
-------- --------
-------- --------
</TABLE>
In December 1993, the Company completed an offering (the "1993
Offering") of $190,000,000 principal amount of 11 1/8% senior notes due 2003
(the "Senior Notes") and $28,000,000 principal amount of 8 3/4% convertible
subordinated notes due 2005 (the "Convertible Subordinated Notes"). The
Senior Notes were sold at 98.525% of par value. The Convertible Subordinated
Notes were sold at par value and are convertible into MDC Common Stock at an
initial conversion price of $7.75 per share, subject to adjustment upon
certain events. A portion of the proceeds of the 1993 Offering was utilized
to redeem $51,816,000 principal amount of 11 1/4% senior subordinated notes
due May 1996 at par value, resulting in an extraordinary loss on the early
extinguishment of debt of $885,000, net of an income tax benefit of $559,000.
The Senior Notes are guaranteed, fully and unconditionally, and jointly
and severally on an unsecured subordinated basis (the "Guaranties") by most
of the Company's home building segment subsidiaries (the "Guarantors"). The
Guaranties are subordinated to all Guarantor Senior Indebtedness as defined
in the indenture pursuant to which the Senior Notes are issued (the "Senior
Notes Indenture"). In addition, the Senior Notes are secured by a first
priority pledge of the capital stock of most of the Guarantors plus the
capital stock of HomeAmerican. The Senior Notes Indenture contains certain
covenants which, among other things, limit (i) the incurrence of additional
Indebtedness (as defined) by the Company and Restricted Subsidiaries (as
defined);
F-20
<PAGE>
(ii) the payment of dividends; (iii) the repurchase of capital stock or
subordinated indebtedness; and (iv) the ability to enter into transactions with
Affiliates (as defined) or merge, consolidate or transfer substantially all of
the Company's or a Guarantor's assets. At December 31, 1994, the Company was in
compliance with all covenants.
The Company, as of April 1, 1993, exchanged its $10,230,000 principal
amount subordinated exchangeable variable-rate notes due July 1994 for
five-year subordinated fixed-rate notes. The new notes bear interest at
6.64%, payable quarterly, and mature on April 1, 1998.
The Company redeemed its remaining $355,000 principal amount 10 1/2%
subordinated notes due April 1995 at par on March 31, 1993. On April 15,
1993, the Company's 7% subordinated notes totalling $1,355,000 matured and
were paid in full.
RESTRUCTURED NOTES PAYABLE - All of the restructured notes payable (the
"Restructured Notes Payable") outstanding were repurchased by the Company in
December 1993 and January 1994 with a portion of the proceeds from the 1993
Offering. The consideration paid for the Restructured Notes Payable plus
certain reacquisition costs described in Note C resulted in an extraordinary
gain on the early extinguishment of debt in 1993 of $16,708,000, net of
income taxes of $10,526,000.
OTHER NOTES PAYABLE - Notes payable other than the notes discussed above
consist principally of loans collateralized by real estate, mortgage loans
and a building. These notes bear interest at rates ranging from 8.0% to
12.0%. The aggregate net carrying value of the assets collateralizing the
other notes payable totalled approximately $70,000,000 at December 31, 1994.
GENERAL - The following table sets forth the scheduled principal
payments on the Senior Notes, subordinated notes and notes payable at
December 31, 1994 (in thousands).
<TABLE>
<S> <C>
1995.......... $ 14,826
1996.......... 11,381
1997.......... 2,388
1998.......... 13,195
1999.......... 834
Thereafter.... 222,761
</TABLE>
H. STOCKHOLDERS' EQUITY
In 1993, the Company adopted incentive plans (the "Plans") to replace
the 1983 Incentive Stock Option Plan and the 1983 Non-
F-21
<PAGE>
Qualified Stock Option Plan, each of which expired in January 1993. A summary
of the Plans follows:
EMPLOYEE EQUITY INCENTIVE PLAN - The Employee Equity Incentive Plan (the
"Employee Plan") provides for an initial authorization of 2,100,000 shares of
MDC Common Stock for issuance thereunder plus an additional annual
authorization equal to 10% of the then authorized shares of MDC Common Stock
under the Employee Plan as of each succeeding annual anniversary of the
effective date of the Employee Plan. Under the Employee Plan, the Company
may grant awards of restricted stock, incentive and non-statutory stock
options and dividend equivalents, or any combination thereof, to officers and
employees of the Company or any of its subsidiaries. The incentive stock
options granted under this plan are exercisable at prices greater than or
equal to the market value on the date of grant over periods of up to six
years. Non-statutory options granted under this plan have discretionary
exercise prices and are exercisable over periods of up to six years.
DIRECTOR EQUITY INCENTIVE PLAN - Under the Director Equity Incentive
Plan (the "Director Plan"), non-employee directors of the Company will be
entitled to receive stock options. The Director Plan provides for an initial
authorization of 300,000 shares of MDC Common Stock for issuance thereunder
plus an additional annual authorization of shares equal to 10% of the then
authorized shares of MDC Common Stock under the Director Plan. Each option
granted under the Director Plan will expire five years from the date of
grant. The option exercise price must be equal to 100% of the fair market
value of the MDC Common Stock on the date of grant of the option.
F-22
<PAGE>
A summary of the changes in options during each of the three years ended
December 31, 1994 is as follows (in shares of MDC Common Stock):
<TABLE>
<S> <C>
Outstanding - January 1, 1992. . . . . . . . . . . . . . . . . . . . . 2,545,270
Exercised at prices ranging from $.28 to $1.88. . . . . . . . . . (256,850)
Granted - prices ranging from $3.00 to $3.38. . . . . . . . . . . 490,000
Cancelled . . . . . . . . . . . . . . . . . . . . . . . . . . . . (179,983)
---------
Outstanding - December 31, 1992. . . . . . . . . . . . . . . . . . . . 2,598,437
Exercised at prices ranging from $.28 to $1.88. . . . . . . . . . (489,938)
Granted at prices ranging from $3.88 to $6.60 . . . . . . . . . . 1,185,000
Cancelled . . . . . . . . . . . . . . . . . . . . . . . . . . . . (92,125)
---------
Outstanding - December 31, 1993. . . . . . . . . . . . . . . . . . . . 3,201,374
Exercised at prices ranging from $.28 to $1.88. . . . . . . . . . (271,974)
Granted at prices ranging from $4.75 to $6.38 . . . . . . . . . . . 635,000
Cancelled . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,000)
---------
Outstanding - December 31, 1994 3,561,400
---------
---------
Exercise prices of outstanding options . . . . . . . . . . . . . . . . $.28 to
at December 31, 1994 $6.60
---------
---------
Exercisable at December 31, 1994 . . . . . . . . . . . . . . . . . . . 1,953,888
---------
---------
Reserved for issuance at December 31, 1994 . . . . . . . . . . . . . . 870,000
---------
---------
</TABLE>
I. INTEREST
Interest activity is set forth below (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Interest capitalized in home
building inventory, beginning
of year . . . . . . . . . . . . . . . $ 42,681 $ 48,440 $ 58,383
Corporate and home building
interest incurred. . . . . . . . . . . 35,799 25,505 24,802
Corporate and home building
interest expensed. . . . . . . . . . . (9,454) (11,454) (13,359)
Previously capitalized home
building interest included in
cost of sales. . . . . . . . . . . . . (26,548) (19,810) (21,386)
-------- -------- --------
Interest capitalized in home
building inventory, end of year . . . $ 42,478 $ 42,681 $ 48,440
-------- -------- --------
-------- -------- --------
Home building inventories, end of
year . . . . . . . . . . . . . . . . . $464,157 $393,904 $339,335
-------- -------- --------
-------- -------- --------
</TABLE>
F-23
<PAGE>
J. INCOME TAXES
The Company adopted SFAS No. 109, "Accounting for Income Taxes," effective
January 1, 1992. The cumulative effect of this change in accounting for income
taxes was $1,700,000, determined as of January 1, 1992, and is reported
separately in the Consolidated Statements of Income for the year ended
December 31, 1992.
Total income tax expense (benefit) has been allocated as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Tax expense on income before
income taxes, extraordinary gain
(loss) and cumulative effect of
accounting change. . . . . . . . . . . . . $11,727 $ 4,976 $ 1,755
Extraordinary gain (loss) . . . . . . . . . . -- 9,967 (1,346)
Stockholders' equity, related to
exercise of stock options. . . . . . . . . (214) (693) (231)
------- ------- -------
$11,513 $14,250 $ 178
------- ------- -------
------- ------- -------
</TABLE>
The significant components of income tax expense on income before income
taxes, extraordinary gain (loss) and cumulative effect of accounting change
consist of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Current Tax Expense
Federal . . . . . . . . . . . . . . . . . . . $13,970 $ 6,485 $10,371
State . . . . . . . . . . . . . . . . . . . . 1,603 853 1,070
------- ------- -------
Total Current . . . . . . . . . . . . . . 15,573 7,338 11,441
------- ------- -------
Deferred Tax Expense (Benefit)
Federal . . . . . . . . . . . . . . . . . . . (2,540) (1,933) (9,736)
State . . . . . . . . . . . . . . . . . . . . (1,306) (429) 50
------- ------- -------
Total Deferred . . . . . . . . . . . . . . (3,846) (2,362) (9,686)
------- ------- -------
Total Income Tax Expense . . . . . . . . . . . . . $11,727 $4,976 $1,755
------- ------- -------
------- ------- -------
</TABLE>
F-24
<PAGE>
The provision for income tax expense differs from the amount which would be
computed by applying the statutory federal income tax rate of 35% in 1994 and
1993 and 34% in 1992 to pre-tax income before extraordinary gain (loss) and
cumulative effect of accounting change, as a result of the following (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1994 1993 1992
------- ------ ------
<S> <C> <C> <C>
Tax expense computed at statutory
rate . . . . . . . . . . . . . . . . . . . . . $10,844 $5,261 $2,216
Increase (reduction) due to:
Permanent differences between
financial statement income and
taxable income . . . . . . . . . . . . . . (1,089) (559) (621)
State income tax, net of federal benefit. . . 933 274 708
Adjustments to prior years' income
taxes. . . . . . . . . . . . . . . . . . . 978 -- 108
Other . . . . . . . . . . . . . . . . . . . . 61 -- (656)
------- ------ ------
Income Tax Expense . . . . . . . . . . . . . . . . $11,727 $4,976 $1,755
------- ------ ------
------- ------ ------
</TABLE>
The tax effects of the temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below (in thousands).
<TABLE>
<CAPTION>
DECEMBER 31,
------- -------
1994 1993
------- -------
<S> <C> <C>
Deferred Tax Assets:
Investment in partnerships, Equity CMO
Interests and other non-consolidated
subsidiaries . . . . . . . . . . . . . . . . . . . . $ 655 $ 5,538
Reserve for losses. . . . . . . . . . . . . . . . . . . 10,340 6,845
Inventory valuation reserves. . . . . . . . . . . . . . 8,092 8,200
Equity CMO Interest impairment. . . . . . . . . . . . . 1,610 2,199
Accrued liabilities . . . . . . . . . . . . . . . . . . 4,196 2,594
Property and equipment. . . . . . . . . . . . . . . . . 932 919
Other assets, additional costs
capitalized for tax purposes . . . . . . . . . . . . 910 1,825
------- -------
Total gross deferred tax assets . . . . . . . . . 26,735 28,120
Less valuation allowance. . . . . . . . . . . . . . . . (3,000) (2,939)
------- -------
Deferred tax assets . . . . . . . . . . . . . . . 23,735 25,181
------- -------
Deferred Tax Liabilities:
Inventory, additional costs capitalized
for financial statement purposes. . . . . . . . . . 5,353 12,163
Discount on notes receivable. . . . . . . . . . . . . . 5,536 3,182
Deferred revenue, principally due to
installment sales. . . . . . . . . . . . . . . . . . 902 1,736
------- -------
Total gross deferred tax liabilities. . . . . . . 11,791 17,081
------- -------
Net Deferred Tax Asset. . . . . . . . . . . . . . . . . $11,944 $8,100
------- -------
------- -------
</TABLE>
F-25
<PAGE>
M.D.C. Holdings, Inc. and its wholly owned subsidiaries file a consolidated
federal income tax return (an "MDC Consolidated Return"). Richmond Homes and
its wholly owned subsidiaries filed separate consolidated federal income tax
returns for the periods from December 28, 1989 through February 2, 1994 (each a
"Richmond Homes Consolidated Return").
The Internal Revenue Service (the "IRS") has completed its examination of
the MDC Consolidated Returns for the years 1986 through 1990 and the Richmond
Homes Consolidated Returns for the years 1989 and 1990 and has proposed certain
adjustments to the taxable income reflected in such returns. In general, the
proposed adjustments would shift the recognition of certain items of income and
expense from one year to another ("Timing Adjustments"). To the extent taxable
income in a prior year is increased by proposed Timing Adjustments, taxable
income may be reduced by a corresponding amount in other years; however, the
Company would incur an interest charge as a result of such adjustment. The
Company currently is protesting many of these proposed adjustments through the
IRS appeals process and believes the amount of these adjustments will be reduced
as a result. In the opinion of management, adequate provision has been made for
the additional income taxes and interest which may arise as a result of the
proposed adjustments.
In December 1994, the Company and the IRS appeals officer resolved, subject
to approval of the Congressional Joint Committee on Taxation, all outstanding
issues with respect to the IRS examination of the 1984 and 1985 MDC Consolidated
Returns. In connection with this resolution, the Company paid the IRS
$8,000,000 for the additional taxes and interest due for 1984 and 1985, as
computed by the IRS. Adequate provision for these additional taxes and interest
had been made by the Company in prior years.
F-26
<PAGE>
K. EARNINGS PER SHARE
Primary earnings per share are based on the weighted-average number of
common and common equivalent shares outstanding during each period. In 1994,
the computation of fully-diluted earnings per share also assumes the conversion
into MDC Common Stock of all of the $28,000,000 outstanding principal amount of
the 8 3/4% Convertible Subordinated Notes at a conversion price of $7.75 per
share of MDC Common Stock. The primary and fully-diluted earnings per share
calculations are shown below (in thousands, except per share amounts).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1994 1993 1992
--------- --------- --------
<S> <C> <C> <C>
PRIMARY EARNINGS PER SHARE CALCULATION:
Income before extraordinary gain (loss) and cumulative effect of
accounting change. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 19,255 $ 10,056 $ 4,765
Extraordinary gain (loss) from early extinguishment of debt, net of
income taxes (benefit) of: 1993, $9,967; 1992, ($1,346) . . . . . . . . -- 15,823 (2,613)
Cumulative effect of accounting change. . . . . . . . . . . . . . . . . . . -- -- 1,700
--------- --------- --------
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 19,255 $ 25,879 $ 3,852
--------- --------- --------
--------- --------- --------
Weighted-average shares outstanding . . . . . . . . . . . . . . . . . . . . . . 18,951 20,501 20,162
Dilutive stock options. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,455 1,839 1,688
--------- --------- --------
Total Weighted-Average Shares . . . . . . . . . . . . . . . . . . . . . . . . . 20,406 22,340 21,850
--------- --------- --------
--------- --------- --------
PRIMARY EARNINGS PER SHARE
Income before extraordinary gain (loss) and cumulative effect of
accounting change. . . . . . . . . . . . . . . . . . . . . . . . . . . $ .94 $ .45 $ .22
Extraordinary gain (loss) from early extinguishment of debt . . . . . . . . -- .71 (.12)
Cumulative effect of accounting change. . . . . . . . . . . . . . . . . . . -- -- .08
--------- --------- --------
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .94 $ 1.16 $ .18
--------- --------- --------
--------- --------- --------
F-27
<PAGE>
FULLY-DILUTED EARNINGS PER SHARE CALCULATION:
Income before extraordinary gain (loss) and cumulative effect of
accounting change. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 19,255 $ 10,056 $ 4,765
Adjustment for interest on Convertible Subordinated Notes, net of
income tax benefit; conversion assumed . . . . . . . . . . . . . . . . 1,536 -- --
--------- --------- --------
Adjusted income before extraordinary gain (loss) and cumulative effect
of accounting change . . . . . . . . . . . . . . . . . . . . . . . . . 20,791 10,056 4,765
Extraordinary gain (loss) from early extinguishment of debt, net of
income taxes (benefit) of: 1993, $9,967; 1992, ($1,346). . . . . . . . -- 15,823 (2,613)
Cumulative effect of accounting change. . . . . . . . . . . . . . . . . . . -- -- 1,700
--------- --------- --------
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,791 $ 25,879 $ 3,852
--------- --------- --------
--------- --------- --------
Weighted-average shares outstanding . . . . . . . . . . . . . . . . . . . . . . 18,951 20,501 20,162
Dilutive stock options. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,457 1,839 1,688
Shares issuable upon conversion of
Convertible Subordinated Notes; conversion assumed. . . . . . . . . . . . . 3,613 -- --
--------- --------- --------
Total Weighted-Average Shares . . . . . . . . . . . . . . . . . . . . . . . . . 24,021 22,340 21,850
--------- --------- --------
--------- --------- --------
FULLY-DILUTED EARNINGS PER SHARE
Income before extraordinary gain (loss) and cumulative effect of
accounting change. . . . . . . . . . . . . . . . . . . . . . . . . . . $ .87 $ .45 $ .22
Extraordinary gain (loss) from early extinguishment of debt . . . . . . . . -- .71 (.12)
Cumulative effect of accounting change. . . . . . . . . . . . . . . . . . . -- -- .08
--------- --------- --------
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .87 $ 1.16 $ .18
--------- --------- --------
--------- --------- --------
</TABLE>
L. LEGAL PROCEEDINGS
SETTLEMENT OF WESTERN SAVINGS CIVIL MATTERS.
In December 1994, the Company and the Resolution Trust Corporation (the
"RTC"), acting in its corporate capacity as receiver for Western Savings and
Loan Association ("Western"), executed a final settlement agreement providing
for the mutual release of all potential claims between the parties and certain
related persons insofar as such claims relate to any of the Company's past
transactions with Western.
Under the terms of the settlement, MDC paid to the RTC $3,912,000, which
MDC reserved (and set aside the cash) for as of December 31, 1992 when an
agreement in principle for the settlement was executed by the parties. MDC
believes that consummation of the settlement agreement will not result in any
material adverse effect on the Company's operations or financial position. The
settlement remains subject to the entry of a court order determining that the
settlement precludes the filing of
F-28
<PAGE>
cross-claims against MDC by various third parties, a condition which can be
waived or extended by the Company.
EXPANSIVE SOILS CASES.
On October 21, 1994, a complaint was served on several of the Company's
subsidiaries in an action initiated by six homeowners in Highlands Ranch,
Colorado. On January 26, 1995, counsel for the Company accepted service of two
additional complaints by a homeowner in the Stonegate subdivision in Douglas
County, Colorado and by a homeowner in the Rock Creek development located in
Boulder County, Colorado. The complaints, each of which seek certification of a
class action, purport to allege substantially identical claims relating to the
construction of homes on lots with expansive soils, including negligence, breach
of express and implied warranties, violation of the Colorado Consumer Protection
Act, non-disclosure and a claim for exemplary damages. The homeowners in each
complaint seek, individually and on behalf of the alleged class, recovery in
unspecified amounts including actual damages, statutory damages, exemplary
damages and treble damages. The Company has not as yet been required to file a
response to any of the complaints or to any discovery in these cases. While the
ultimate outcome of these matters is uncertain, management does not believe that
the outcome of these matters will have a material adverse effect on the
financial condition or results of operations of the Company.
The Company has notified its insurance carriers of these complaints and
currently is reviewing with the carriers how the Company will proceed. The
insurance carriers providing primary coverage have (i) agreed to defend the
Company in the Highlands Ranch case subject to reservations of rights; and
(ii) not responded, as yet, to the request to defend the Company with respect to
the matters alleged in the two other complaints.
OTHER.
The Company and certain of its subsidiaries and affiliates have been named
as defendants in various other claims, complaints and legal actions arising in
the normal course of business. In the opinion of management, the outcome of
these matters will not have a material adverse effect upon the financial
condition or results of operations of the Company.
The Company is not aware of any litigation, matter or pending claim against
the Company which would result in material contingent liabilities related to
environmental hazards or asbestos.
F-29
<PAGE>
M. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
such value.
CASH AND CASH EQUIVALENTS - For cash and cash equivalents, the carrying
value is a reasonable estimate of fair value.
INVESTMENTS AND MARKETABLE SECURITIES, NET - Investments in marketable
equity securities are carried on the balance sheet at cost, which approximates
market value. Accordingly, the carrying value of the investments is a
reasonable estimate of the fair value.
INVESTMENT IN METROPOLITAN DISTRICT BONDS - Investments in metropolitan
district bonds are carried on the balance sheet at cost, which approximates
market value. Accordingly, the carrying value of the investments is a
reasonable estimate of the fair value.
MORTGAGE LOANS HELD IN INVENTORY - The Company generally purchases forward
commitments to deliver mortgage loans held for sale. For loans which have no
forward commitments, loans in inventory are stated at the lower of cost or
market. Accordingly, the carrying value is a reasonable estimate of fair value.
MORTGAGE COLLATERAL, NET, AND ASSETS RELATED TO MORTGAGE-BACKED BONDS AND
RELATED LIABILITIES, AND MORTGAGE-BACKED BONDS, NET, AND RELATED LIABILITIES,
RECOURSE SOLELY TO LIMITED-PURPOSE SUBSIDIARY ASSETS - Mortgage Collateral and
related assets which are estimated not to be salable (under terms in indentures
governing the corresponding mortgage-backed bonds) within one year are valued at
par plus (minus) the discounted estimated value of the remaining cash flow (cash
deficit) to be realized (paid) by MDC over the remaining economic life of the
corresponding Mortgage Collateral.
Mortgage Collateral and related assets which are estimated to be salable
(under terms in indentures governing the corresponding mortgage-backed bonds)
within one year, at a profit or to minimize a loss, are valued at the estimated
value of the Mortgage Collateral (less any costs necessary to effect the sale
and subsequent call of the related mortgage-backed bonds) plus (minus) the
discounted estimated value of the remaining cash flow (cash deficit) to be
realized (paid) by MDC from December 31, 1994 to the date of estimated sale.
F-30
<PAGE>
Mortgage-backed bonds and related liabilities are valued at call or
settlement value (generally face value).
The cash flow estimates used in determining the fair value for the Mortgage
Collateral and related assets assume the liquidation of the mortgage-backed
bonds and related liabilities at call or settlement dates.
NOTES PAYABLE AND LINES OF CREDIT - The Company's notes payable and lines
of credit are at floating rates or at fixed rates which approximate current
market rates and have relatively short-term maturities. Accordingly, the
carrying value is a reasonable estimate of fair value.
SENIOR NOTES AND SUBORDINATED NOTES - Senior Notes and subordinated notes
are valued based on dealer quotes.
The estimated fair values of the Company's financial instruments are as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1993
---------------------- ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
--------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents. . . . . . . $ 43,564 $ 43,564 $ 63,003 $ 63,003
Investments and marketable
securities, net. . . . . . . . . . . 6,089 6,089 765 765
Investment in metropolitan
district bonds . . . . . . . . . . . -- -- 13,795 13,795
Mortgage loans held in inventory . . . 44,368 44,368 68,065 68,065
Mortgage Collateral, net, and
assets related to mortgage-
backed bonds and related
liabilities. . . . . . . . . . . . . 64,574 63,380 134,166 128,824
Financial liabilities
Notes payable. . . . . . . . . . . . . 37,168 37,168 66,119 66,119
Lines of credit. . . . . . . . . . . . 85,543 85,543 54,145 54,145
Senior Notes . . . . . . . . . . . . . 187,352 156,750 187,199 195,700
Subordinated notes . . . . . . . . . . 38,217 31,922 38,213 39,011
Mortgage-backed bonds, net, and
related liabilities, recourse
solely to limited-purpose
subsidiary assets. . . . . . . . . . 60,874 60,874 123,500 123,500
</TABLE>
N. COMMITMENTS AND CONTINGENCIES
To reduce exposure to fluctuations in interest rates, HomeAmerican makes
commitments to originate (buy) and sell loans and mortgage-backed securities.
At December 31, 1994, commitments by HomeAmerican to originate mortgage loans
totalled $24,125,000, at market rates of interest. At December 31, 1994,
unexpired forward commitments to sell loans totalled $55,700,000.
F-31
<PAGE>
MDC leases office space, equipment and certain of its model show homes
under noncancellable operating leases. Future minimum rental payments for
leases with initial terms in excess of one year are $2,294,000 in 1995,
$1,726,000 in 1996, $1,039,000 in 1997, $819,000 in 1998, $397,000 in 1999 and
$194,000 thereafter. Rent expense under cancellable and noncancellable leases
totalled $3,250,000, $2,956,000 and $2,731,000 in 1994, 1993 and 1992,
respectively.
On August 4, 1994, Superior Metropolitan District No. 1 ("District No. 1")
and Superior Metropolitan District No. 2 ("District No. 2") (collectively, the
"Districts") issued $35,730,000 principal amount of bonds (the "Bonds"). The
Districts were organized and are operated to provide, among other things, water
and sanitary sewer services, street improvements and park and recreation
facilities for inhabitants of a master- planned community located northwest of
Denver (the "Project"). A significant portion of the Project served by the
Districts is owned and is being developed by the Company. The Company received
$16,395,000 of the proceeds of the Bond issuances to redeem in full, at par
value, the Districts' outstanding bonds. Additionally, proceeds totalling
approximately $11,000,000 were paid to the Company by District No. 1 to purchase
certain interests in a water supply project (the "Water Project") and to
reimburse the Company for prepaid water taps and for certain other funds
previously advanced to District No. 1.
In connection with the issuance of the Bonds, MDC has guaranteed payment of
principal and interest on $27,500,000 principal amount of District No. 1 Bonds
and has entered into certain agreements with District No. 1 to purchase certain
water and sewer taps and pay certain storm drainage fees in connection with the
Company's home building operations within the Project. In connection with the
guarantee, MDC was required to deposit $6,000,000 into a trust account. The
$6,000,000 will be released in $1,000,000 increments as certain levels of
completed homes are achieved in the Project, provided that if the Water Project
is not completed by January 1, 1997 or if the Water Project is enjoined and such
injunction is not lifted, no withdrawals may occur. In addition, MDC has
guaranteed payment of principal and interest on $2,580,000 principal amount of
District No. 2 Bonds.
O. SUPPLEMENTAL GUARANTOR INFORMATION
The Senior Notes are unconditionally guaranteed on an unsecured
subordinated basis, jointly and severally, by Richmond American Homes of
California, Inc., Richmond American Homes of Maryland, Inc., Richmond American
Homes of Nevada, Inc., Richmond American Homes of Virginia, Inc., Richmond
American Homes, Inc.,
F-32
<PAGE>
Richmond Homes, Inc. I and Richmond Homes, Inc. II (collectively, the
"Guarantors"). The Guaranties are subordinated to all Guarantor Senior
Indebtedness (as defined in the Senior Notes Indenture).
In June 1994, MDC (Parent Company) exchanged three notes receivable from a
Guarantor subsidiary with a carrying amount of $104,350,000 for a new note
receivable from the same Guarantor subsidiary with a principal amount of
$69,731,000. Because the exchange was between parties under common control, the
difference between the principal amounts of the notes exchanged, net of income
taxes, was recorded as an additional investment in the Guarantor subsidiary by
the Parent and as additional paid-in-capital by the Guarantor subsidiary.
Supplemental combining financial information follows.
F-33
<PAGE>
SUPPLEMENTAL COMBINING BALANCE SHEET
DECEMBER 31, 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNCONSOLIDATED
-----------------------------------------
NON-
GUARANTOR GUARANTOR ELIMINATING CONSOLIDATED
MDC SUBSIDIARIES SUBSIDIARIES ENTRIES MDC
--------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Corporate. . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents. . . . . . . . . . . . . $ 31,210 $ -- $ -- $ -- $ 31,210
Investments in subsidiaries. . . . . . . . . . . . 327,021 26,822 16,948 (370,791) --
Advances and notes receivable - Parent and
subsidiaries. . . . . . . . . . . . . . . . . . 145,900 -- 106,486 (252,386) --
Property and equipment, net. . . . . . . . . . . . 9,962 -- -- -- 9,962
Deferred income taxes. . . . . . . . . . . . . . . 11,944 -- -- -- 11,944
Deferred issue costs, net. . . . . . . . . . . . . 10,621 -- -- -- 10,621
Other assets, net. . . . . . . . . . . . . . . . . 3,017 -- 253 -- 3,270
-------- -------- -------- --------- --------
539,675 26,822 123,687 (623,177) 67,007
-------- -------- -------- --------- --------
Home Building
Cash and cash equivalents. . . . . . . . . . . . . -- 9,656 506 -- 10,162
Home sales and other accounts receivable . . . . . 243 23,572 -- (11,307) 12,508
Investments and marketable securities, net . . . . 6,089 -- -- -- 6,089
Inventories, net
Housing completed or under construction . . . . -- 258,044 22,275 -- 280,319
Land and land under development . . . . . . . . -- 146,655 37,813 (630) 183,838
Prepaid expenses and other assets, net . . . . . . 6,601 33,011 4,363 -- 43,975
-------- -------- -------- --------- --------
12,933 470,938 64,957 (11,937) 536,891
-------- -------- -------- --------- --------
Mortgage Lending
Cash and cash equivalents. . . . . . . . . . . . . -- -- 1,607 -- 1,607
Restricted cash. . . . . . . . . . . . . . . . . . -- -- 2,650 -- 2,650
Accrued interest and other assets, net . . . . . . -- -- 1,447 -- 1,447
Mortgage loans held in inventory, net. . . . . . . -- -- 44,368 -- 44,368
-------- -------- -------- --------- --------
-- -- 50,072 -- 50,072
-------- -------- -------- --------- --------
Asset Management
Cash and cash equivalents. . . . . . . . . . . . . -- -- 585 -- 585
Mortgage Collateral, net, and assets related
to mortgage-backed bonds and related
liabilities . . . . . . . . . . . . . . . . . . -- -- 64,574 -- 64,574
Other loans and assets, net. . . . . . . . . . . . -- -- 6,316 -- 6,316
-------- -------- -------- --------- --------
-- -- 71,475 -- 71,475
-------- -------- -------- --------- --------
Total Assets. . . . . . . . . . . . . . . . $552,608 $497,760 $310,191 $(635,114) $725,445
-------- -------- -------- --------- --------
-------- -------- -------- --------- --------
</TABLE>
F-34
<PAGE>
SUPPLEMENTAL COMBINING BALANCE SHEET
DECEMBER 31, 1994
(IN THOUSANDS)
(continued)
<TABLE>
<CAPTION>
UNCONSOLIDATED
-----------------------------------------
NON-
GUARANTOR GUARANTOR ELIMINATING CONSOLIDATED
MDC SUBSIDIARIES SUBSIDIARIES ENTRIES MDC
--------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
LIABILITIES
Corporate
Accounts payable and accrued expenses. . . . . . . $ 34,192 $ -- $ 119 $ -- $ 34,311
Advances and notes payable
- Parent and Subsidiaries . . . . . . . . . . . 78,665 174,880 7,385 (260,930) --
Income taxes payable . . . . . . . . . . . . . . . 11,166 -- -- -- 11,166
Notes payable. . . . . . . . . . . . . . . . . . . 3,583 -- -- -- 3,583
Senior Notes, net. . . . . . . . . . . . . . . . . 187,352 -- -- -- 187,352
Subordinated notes, net. . . . . . . . . . . . . . 38,217 -- -- -- 38,217
-------- -------- -------- --------- --------
353,175 174,880 7,504 (260,930) 274,629
-------- -------- -------- --------- --------
Home Building
Accounts payable and accrued expenses. . . . . . . 2,562 64,389 8,448 -- 75,399
Lines of credit. . . . . . . . . . . . . . . . . . -- 62,332 -- -- 62,332
Notes payable. . . . . . . . . . . . . . . . . . . 4,576 18,857 10,152 -- 33,585
-------- -------- -------- --------- --------
7,138 145,578 18,600 -- 171,316
-------- -------- -------- --------- --------
Mortgage Lending
Accounts payable and accrued expenses. . . . . . . -- -- 13,757 (11,307) 2,450
Line of credit . . . . . . . . . . . . . . . . . . -- -- 23,211 -- 23,211
-------- -------- -------- --------- --------
-- -- 36,968 (11,307) 25,661
-------- -------- -------- --------- --------
Asset Management
Accounts payable and accrued expenses. . . . . . . -- -- 670 -- 670
Mortgage-backed bonds, net, and related
liabilities, recourse solely to limited-
purpose subsidiary assets . . . . . . . . . . . -- -- 60,874 -- 60,874
-------- -------- -------- --------- --------
-- -- 61,544 -- 61,544
-------- -------- -------- --------- --------
Total Liabilities . . . . . . . . . . . . . 360,313 320,458 124,616 (272,237) 533,150
-------- -------- -------- --------- --------
STOCKHOLDERS' EQUITY
Preferred stock. . . . . . . . . . . . . . . . . . -- -- 10 (10) --
Common Stock . . . . . . . . . . . . . . . . . . . 212 18 121 (139) 212
Additional paid-in capital . . . . . . . . . . . . 133,934 144,756 234,578 (379,334) 133,934
Retained earnings. . . . . . . . . . . . . . . . . 71,502 32,528 (49,125) 16,597 71,502
Less treasury stock. . . . . . . . . . . . . . . . (13,353) -- (9) 9 (13,353)
-------- -------- -------- --------- --------
Total Stockholders' Equity. . . . . . . . . . . 192,295 177,302 185,575 (362,877) 192,295
-------- -------- -------- --------- --------
Total Liabilities and Stockholders' Equity. . . $552,608 $497,760 $310,191 $(635,114) $725,445
-------- -------- -------- --------- --------
-------- -------- -------- --------- --------
</TABLE>
F-35
<PAGE>
SUPPLEMENTAL COMBINING BALANCE SHEET
DECEMBER 31, 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNCONSOLIDATED
-----------------------------------------
NON-
GUARANTOR GUARANTOR ELIMINATING CONSOLIDATED
MDC SUBSIDIARIES SUBSIDIARIES ENTRIES MDC
--------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Corporate
Cash and cash equivalents. . . . . . . . . . . . . $ 42,443 $ -- $ -- $ -- $ 42,443
Investments in subsidiaries. . . . . . . . . . . . 191,462 23,009 15,030 (229,501) --
Advances and notes receivable
- Parent and subsidiaries . . . . . . . . . . . 260,931 37 91,348 (352,316) --
Property and equipment, net. . . . . . . . . . . . 10,432 -- -- -- 10,432
Deferred income taxes. . . . . . . . . . . . . . . -- 8,100 -- -- 8,100
Deferred issue costs, net. . . . . . . . . . . . . 11,233 -- -- -- 11,233
Other assets, net. . . . . . . . . . . . . . . . . 3,476 -- 489 -- 3,965
-------- -------- -------- --------- --------
519,977 31,146 106,867 (581,817) 76,173
-------- -------- -------- --------- --------
Home Building
Cash and cash equivalents. . . . . . . . . . . . . -- 17,792 687 -- 18,479
Home sales and other accounts receivable . . . . . 41 9,059 213 (3,890) 5,423
Investment in metropolitan district bonds. . . . . 11,400 2,395 -- -- 13,795
Inventories, net
Housing completed or under construction . . . . -- 187,796 13,227 -- 201,023
Land and land under development . . . . . . . . (1,530) 153,068 40,252 1,091 192,881
Prepaid expenses and other assets, net . . . . . . 1,312 39,728 5,400 2,423 48,863
-------- -------- -------- --------- --------
11,223 409,838 59,779 (376) 480,464
-------- -------- -------- --------- --------
Mortgage Lending
Cash and cash equivalents. . . . . . . . . . . . . -- -- 1,505 -- 1,505
Restricted cash. . . . . . . . . . . . . . . . . . -- -- 3,400 -- 3,400
Accrued interest and other assets, net . . . . . . -- -- 2,571 -- 2,571
Mortgage loans held in inventory, net. . . . . . . -- -- 68,065 -- 68,065
-------- -------- -------- --------- --------
-- -- 75,541 -- 75,541
-------- -------- -------- --------- --------
Asset Management
Cash and cash equivalents. . . . . . . . . . . . . -- -- 576 -- 576
Mortgage Collateral, net, and assets related
to mortgage-backed bonds and related
liabilities . . . . . . . . . . . . . . . . . . -- -- 134,166 -- 134,166
Other loans and assets, net. . . . . . . . . . . . -- -- 9,946 -- 9,946
-------- -------- -------- --------- --------
-- -- 144,688 -- 144,688
-------- -------- -------- --------- --------
Total Assets. . . . . . . . . . . . . . . . . $531,200 $440,984 $386,875 $(582,193) $776,866
-------- -------- -------- --------- --------
-------- -------- -------- --------- --------
</TABLE>
F-36
<PAGE>
SUPPLEMENTAL COMBINING BALANCE SHEET
DECEMBER 31, 1993
(IN THOUSANDS)
(continued)
<TABLE>
<CAPTION>
UNCONSOLIDATED
------------------------------------
NON-
GUARANTOR GUARANTOR ELIMINATING CONSOLIDATED
MDC SUBSIDIARIES SUBSIDIARIES ENTRIES MDC
-------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
LIABILITIES
Corporate
Accounts payable and accrued expenses. . . . . . . . . . . $ 20,564 $ -- $ 282 $ -- $ 20,846
Advances and notes payable - Parent and subsidiaries . . . 68,342 176,576 120,800 (365,718) --
Income taxes payable . . . . . . . . . . . . . . . . . . . 26,635 2,076 -- -- 28,711
Notes payable. . . . . . . . . . . . . . . . . . . . . . . 3,624 -- -- -- 3,624
Senior Notes, net. . . . . . . . . . . . . . . . . . . . . 187,199 -- -- -- 187,199
Subordinated notes, net. . . . . . . . . . . . . . . . . . 38,213 -- -- -- 38,213
--------- --------- --------- ---------- ----------
344,577 178,652 121,082 (365,718) 278,593
--------- --------- --------- ---------- ----------
Home Building
Accounts payable and accrued expenses. . . . . . . . . . . 864 62,768 6,800 309 70,741
Lines of credit. . . . . . . . . . . . . . . . . . . . . . -- 24,645 -- -- 24,645
Notes payable. . . . . . . . . . . . . . . . . . . . . . . 9,905 40,548 12,042 -- 62,495
--------- --------- --------- ---------- ----------
10,769 127,961 18,842 309 157,881
--------- --------- --------- ---------- ----------
Mortgage Lending
Accounts payable and accrued expenses. . . . . . . . . . . -- -- 12,375 (3,888) 8,487
Line of credit . . . . . . . . . . . . . . . . . . . . . . -- -- 29,500 29,500
--------- --------- --------- ---------- ----------
-- -- 41,875 (3,888) 37,987
--------- --------- --------- ---------- ----------
Asset Management
Accounts payable and accrued expenses. . . . . . . . . . . -- -- 3,051 -- 3,051
Mortgage-backed bonds, net, and related liabilities,
recourse solely to limited-purpose subsidiary assets . . . -- -- 123,500 -- 123,500
--------- --------- --------- ---------- ----------
-- -- 126,551 -- 126,551
--------- --------- --------- ---------- ----------
Total Liabilities. . . . . . . . . . . . . . . . . . . . . 355,346 306,613 308,350 (369,297) 601,012
--------- --------- --------- ---------- ----------
STOCKHOLDERS' EQUITY
Preferred stock. . . . . . . . . . . . . . . . . . . . . . -- 20,475 10 (20,485) --
Common Stock . . . . . . . . . . . . . . . . . . . . . . . 209 19 124 (143) 209
Additional paid-in capital . . . . . . . . . . . . . . . . 133,455 99,725 128,075 227,800) 133,455
Retained earnings. . . . . . . . . . . . . . . . . . . . . 57,879 14,152 (49,675) 35,523 57,879
Less treasury stock. . . . . . . . . . . . . . . . . . . . (15,689) -- (9) 9 (15,689)
--------- --------- --------- ---------- ----------
Total Stockholders' Equity . . . . . . . . . .. . . . . 175,854 134,371 78,525 (212,896) 175,854
--------- --------- --------- ---------- ----------
Total Liabilities and Stockholders' Equity . . . . . . $ 531,200 $ 440,984 $ 386,875 $ (582,193) $ 776,866
--------- --------- --------- ---------- ----------
--------- --------- --------- ---------- ----------
</TABLE>
F-37
<PAGE>
SUPPLEMENTAL COMBINING STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNCONSOLIDATED
------------------------------------
NON-
GUARANTOR GUARANTOR ELIMINATING CONSOLIDATED
MDC SUBSIDIARIES SUBSIDIARIES ENTRIES MDC
-------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Home Building. . . . . . . . . . . . . . . . . . . . . . . $131 $738,400 $59,542 $(4,280) $793,793
Mortgage Lending . . . . . . . . . . . . . . . . . . . . . -- -- 15,850 -- 15,850
Asset Management . . . . . . . . . . . . . . . . . . . . . -- -- 13,869 -- 13,869
Corporate. . . . . . . . . . . . . . . . . . . . . . . . . 1,294 -- 63 -- 1,357
Equity in earnings of subsidiaries . . . . . . . . . . . . 36,187 4,351 2,230 (42,768) --
-------- ------------ ------------ ----------- ------------
Total Revenues . . . . . . . . . . . . . . . . . . . . . 37,612 742,751 91,554 (47,048) 824,869
-------- ------------ ------------ ----------- ------------
COSTS AND EXPENSES:
Home Building. . . . . . . . . . . . . . . . . . . . . . . 2,432 694,487 54,913 (2,503) 749,329
Mortgage Lending . . . . . . . . . . . . . . . . . . . . . -- -- 8,899 -- 8,899
Asset Management . . . . . . . . . . . . . . . . . . . . . -- -- 11,073 -- 11,073
Corporate general and administrative . . . . . . . . . . . 14,876 -- 256 -- 15,132
Corporate and home building interest . . . . . . . . . . . (10,678) 18,144 3,836 (1,848) 9,454
-------- ------------ ------------ ----------- ------------
Total Expenses. . . . . . . . . . . . . . . . . . . . . 6,630 712,631 78,977 (4,351) 793,887
-------- ------------ ------------ ----------- ------------
Income before income taxes . . . . . . . . . . . . . . . . . 30,982 30,120 12,577 (42,697) 30,982
Provision for income taxes . . . . . . . . . . . . . . . . . 11,727 11,747 4,905 (16,652) 11,727
-------- ------------ ------------ ----------- ------------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . $19,255 $18,373 $7,672 $(26,045) $19,255
-------- ------------ ------------ ----------- ------------
-------- ------------ ------------ ----------- ------------
</TABLE>
F-38
<PAGE>
SUPPLEMENTAL COMBINING STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNCONSOLIDATED
------------------------------------
NON-
GUARANTOR GUARANTOR ELIMINATING CONSOLIDATED
MDC SUBSIDIARIES SUBSIDIARIES ENTRIES MDC
-------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Home Building. . . . . . . . . . . . . . . . . . . . . $244 $571,059 $43,029 $ (17,519) $ 596,813
Mortgage Lending . . . . . . . . . . . . . . . . . . . -- -- 19,725 -- 19,725
Asset Management . . . . . . . . . . . . . . . . . . . -- -- 34,535 (1,373) 33,162
Corporate. . . . . . . . . . . . . . . . . . . . . . . 2,082 -- 280 14 2,376
Equity in earnings of subsidiaries . . . . . . . . . . 26,257 5,277 -- (31,534) --
-------- ------------ ------------ ----------- ------------
Total Revenues . . . . . . . . . . . . . . . . . . . 28,583 576,336 97,569 (50,412) 652,076
-------- ------------ ------------ ----------- ------------
COSTS AND EXPENSES:
Home Building. . . . . . . . . . . . . . . . . . . . . (1,258) 552,025 36,448 (12,898) 574,317
Mortgage Lending . . . . . . . . . . . . . . . . . . . -- -- 12,217 -- 12,217
Asset Management . . . . . . . . . . . . . . . . . . . -- -- 24,166 -- 24,166
Corporate general and administrative . . . . . . . . . 14,757 -- 133 -- 14,890
Corporate and home building interest . . . . . . . . . 52 9,460 3,712 (1,770) 11,454
-------- ------------ ------------ ----------- ------------
Total Expenses. . . . . . . . . . . . . . . . . . . 13,551 561,485 76,676 (14,668) 637,044
-------- ------------ ------------ ----------- ------------
Income before income taxes and extraordinary gain. . . . 15,032 14,851 20,893 (35,744) 15,032
Provision for income taxes . . . . . . . . . . . . . . . 4,976 5,806 7,428 (13,234) 4,976
Income before extraordinary gain . . . . . . . . . . . . 10,056 9,045 13,465 (22,510) 10,056
Extraordinary gain from early extinguishment of debt,
net of income taxes. . . . . . . . . . . . . . . . . . . 15,823 -- -- -- 15,823
-------- ------------ ------------ ----------- ------------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . $ 25,879 $ 9,045 $ 13,465 $ (22,510) $ 25,879
-------- ------------ ------------ ----------- ------------
-------- ------------ ------------ ----------- ------------
</TABLE>
F-39
<PAGE>
SUPPLEMENTAL COMBINING STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 1992
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNCONSOLIDATED
----------------------------------------
NON-
GUARANTOR GUARANTOR ELIMINATING CONSOLIDATED
MDC SUBSIDIARIES SUBSIDIARIES ENTRIES MDC
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Home Building . . . . . . . . . . . . . . . $ -- $403,037 $ 37,338 $(17,244) $423,131
Mortgage Lending. . . . . . . . . . . . . . -- -- 19,344 -- 19,344
Asset Management. . . . . . . . . . . . . . -- -- 67,738 (1,141) 66,597
Corporate . . . . . . . . . . . . . . . . . 2,540 -- 1,831 (1,875) 2,496
Equity in earnings of subsidiaries. . . . . 9,451 4,130 -- (13,581) --
----------- ------------ ----------- ------------ -----------
Total Revenues . . . . . . . . . . . . 11,991 407,167 126,251 (33,841) 511,568
----------- ------------ ----------- ------------ -----------
COSTS AND EXPENSES:
Home Building . . . . . . . . . . . . . . . -- 388,473 33,479 (16,382) 405,570
Mortgage Lending. . . . . . . . . . . . . . -- -- 10,114 -- 10,114
Asset Management. . . . . . . . . . . . . . -- -- 57,897 -- 57,897
Corporate general and administrative. . . . 18,310 -- (89) (113) 18,108
Corporate and home building interest. . . . 698 8,932 4,869 (1,140) 13,359
----------- ------------ ----------- ------------ -----------
Total Expenses . . . . . . . . . . . . 19,008 397,405 106,270 (17,635) 505,048
----------- ------------ ----------- ------------ -----------
Income (loss) before income taxes,
extraordinary gain (loss) and
cumulative effect of accounting change. . . . (7,017) 9,762 19,981 (16,206) 6,520
Provision (benefit) for income taxes. . . . . . (3,426) 3,385 7,780 (5,984) 1,755
----------- ------------ ----------- ------------ -----------
Income (loss) before extraordinary
gain (loss) and cumulative effect of
accounting change . . . . . . . . . . . . . (3,591) 6,377 12,201 (10,222) 4,765
Extraordinary gain (loss) from early
extinguishment of debt, net of income
taxes (benefit) . . . . . . . . . . . . . . 7,443 238 (2,851) (7,443) (2,613)
Cumulative effect of accounting change. . . . . -- 1,700 -- -- 1,700
----------- ------------ ----------- ------------ -----------
NET INCOME. . . . . . . . . . . . . . . . . . . $ 3,852 $ 8,315 $ 9,350 $(17,665) $ 3,852
----------- ------------ ----------- ------------ -----------
----------- ------------ ----------- ------------ -----------
</TABLE>
F-40
<PAGE>
SUPPLEMENTAL COMBINING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNCONSOLIDATED
-------------------------------------
NON-
GUARANTOR GUARANTOR ELIMINATING CONSOLIDATED
MDC SUBSIDIARIES SUBSIDIARIES ENTRIES MDC
---------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES . . . . . . . $(22,467) $ (29,215) $ 3,239 $ 11,653 $(36,790)
---------- ------------ ------------ ----------- ------------
INVESTING ACTIVITIES:
Mortgage Collateral
Principal payments and
prepayments received . . . . -- 1,679 27,890 -- 29,569
Sales . . . . . . . . . . . . . -- -- 19,526 -- 19,526
Distributions of Capital
From Equity CMO Interests. . . . . -- -- 3,213 -- 3,213
Changes in Investments and
Marketable Securities, net . . . . (6,377) -- -- -- (6,377)
Redemption of (Investment in)
Metropolitan District Bonds. . . . 14,000 2,395 -- -- 16,395
Affiliate Notes Receivable . . . . . 13,282 -- 11,097 (24,379) --
Changes in Restricted Cash . . . . . -- -- 16,159 -- 16,159
Other, net . . . . . . . . . . . . . (301) 1,424 (246) -- 877
---------- ------------ ------------ ----------- ------------
Net Cash Provided By Investing
Activities . . . . . . . . . . . . 20,604 5,498 77,639 (24,379) 79,362
---------- ------------ ------------ ----------- ------------
FINANCING ACTIVITIES:
Net Increase (Reduction) in
Borrowings From Parent and
Subsidiaries . . . . . . . . . . . (1,623) 18,905 (12,675) (4,607) --
Mortgage-backed Bonds -
Principal Payments . . . . . . . . -- -- (60,094) -- (60,094)
Lines of Credit
Advances. . . . . . . . . . . . -- 641,874 -- -- 641,874
Principal payments. . . . . . . -- (606,160) (6,289) -- (612,449)
Notes Payable
Borrowings. . . . . . . . . . . -- 15,870 -- -- 15,870
Principal payments. . . . . . . (5,370) (37,575) (1,890) -- (44,835)
Maturity of Affiliate-Owned
Debt. -- (17,333) -- 17,333 --
Treasury Stock Purchases . . . . . . (1,505) -- -- -- (1,505)
Dividend Payments. . . . . . . . . (1,141) -- -- -- (1,141)
Other, net . . . . . . . . . . . . 269 -- -- -- 269
---------- ------------ ------------ ----------- ------------
Net Cash Provided By (Used In)
Financing Activities . . . . . . . (9,370) 15,581 (80,948) 12,726 (62,011)
---------- ------------ ------------ ----------- ------------
Net Decrease in Cash and Cash
Equivalents. . . . . . . . . . . . (11,233) (8,136) (70) -- (19,439)
Cash and Cash Equivalents
Beginning of Year. . . . . . . . 42,443 17,792 2,768 -- 63,003
---------- ------------ ------------ ----------- ------------
End of Year. . . . . . . . . . . $ 31,210 $ 9,656 $ 2,698 $ -- $ 43,564
========== ============ ============ =========== ============
</TABLE>
F-41
<PAGE>
SUPPLEMENTAL COMBINING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNCONSOLIDATED
----------------------------------------
NON-
GUARANTOR GUARANTOR ELIMINATING CONSOLIDATED
MDC SUBSIDIARIES SUBSIDIARIES ENTRIES MDC
------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
NET CASH USED IN OPERATING ACTIVITIES. . . . . . $ (5,410) $ (10,084) $ (13,562) $ (5,181) $(34,237)
------------ ------------ ------------ ------------ -----------
INVESTING ACTIVITIES:
Mortgage Collateral
Principal payments and
prepayments received. . . . . . . . . . . -- 801 94,408 -- 95,209
Sales . . . . . . . . . . . . . . . . . . . -- -- 47,060 -- 47,060
Distributions of Capital
From Equity CMO Interests. . . . . . . . . . . -- -- 7,403 -- 7,403
CMO Bond Principal Payments Received . . . . . . 7,114 7,114
Changes in Investments and
Marketable Securities, net . . . . . . . . . . 12,000 -- -- -- 12,000
Redemption of (Investment in)
Metropolitan District Bonds. . . . . . . . . . (8,700) -- -- -- (8,700)
Proceeds From Affiliate Debt
Maturity . . . . . . . . . . . . . . . . . . . 20 1,750 (1,770) --
Affiliate Notes Receivable. . . . . . . . . . . 6,406 -- 4,120 (10,526) --
Changes in Restricted Cash . . . . . . . . . . . -- -- 13,071 -- 13,071
Other, net . . . . . . . . . . . . . . . . . . . (3,054) (318) (704) (4,076)
----------- ---------- ----------- ------------ ----------
Net Cash Provided By Investing Activities. . . . 6,652 503 174,222 (12,296) 169,081
----------- ---------- ----------- ------------ ----------
FINANCING ACTIVITIES:
Net Increase (Reduction) in Borrowings
From Parent and Subsidiaries . . . . . . . . . (20,758) 26,761 (11,346) 5,343 --
Mortgage-backed Bonds - Principal
Payments . . . . . . . . . . . . . . . . . . . -- -- (139,658) -- (139,658)
Lines of Credit
Advances. . . . . . . . . . . . . . . . . . 2,887 349,523 -- -- 352,410
Principal payments. . . . . . . . . . . . . (4,921) (351,532) (8,934) -- (365,387)
Senior and Subordinated Notes
Net proceeds. . . . . . . . . . . . . . . . 204,013 -- -- -- 204,013
Payments. . . . . . . . . . . . . . . . . . (54,518) -- -- 20 (54,498)
Notes Payable
Borrowings. . . . . . . . . . . . . . . . . -- 75,493 3,836 -- 79,329
Principal payments. . . . . . . . . . . . . (103,607) (85,010) (4,323) -- (192,940)
Maturity of Affiliate-Owned Debt . . . . . . . . (1,750) -- -- 1,750 --
Affiliate notes payable. . . . . . . . . . . . . -- (10,256) -- 10,256 --
Treasury Stock Purchase. . . . . . . . . . . . . (15,173) -- -- -- (15,173)
Other, net . . . . . . . . . . . . . . . . . . . (965) (108) -- 108 (965)
----------- ---------- ----------- ----------- ----------
Net Cash Provided By (Used In)
Financing Activities . . . . . . . . . . . . . 5,208 4,871 (160,425) 17,477 (132,869)
----------- ---------- ----------- ----------- ----------
Net Increase (Decrease) in Cash and Cash
Equivalents. . . . . . . . . . . . . . . . . . 6,450 (4,710) 235 -- 1,975
Cash and Cash Equivalents
Beginning of Year. . . . . . . . . . . . . . 35,993 22,502 2,533 -- 61,028
----------- ---------- ----------- ----------- ----------
End of Year. . . . . . . . . . . . . . . . . $ 42,443 $ 17,792 $ 2,768 $ -- $ 63,003
----------- ---------- ----------- ----------- ----------
----------- ---------- ----------- ----------- ----------
</TABLE>
F-42
<PAGE>
SUPPLEMENTAL COMBINING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1992
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNCONSOLIDATED
-------------------------------------
NON-
GUARANTOR GUARANTOR ELIMINATING CONSOLIDATED
MDC SUBSIDIARIES SUBSIDIARIES ENTRIES MDC
--------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES . . . . . . . . . . $(10,657) $ 21,514 $ 3,716 $ 1,788 $ 16,361
INVESTING ACTIVITIES:
Mortgage Collateral
Principal payments
and prepayments received. . . . . -- 833 209,163 -- 209,996
Sales. . . . . . . . . . . . . . . . -- -- 82,528 -- 82,528
Distributions of Capital
From Equity CMO Interests. . . . . . -- -- 13,648 -- 13,648
CMO Bond
Purchase . . . . . . . . . . . . . . -- -- (7,367) -- (7,367)
Principal payments . . . . . . . . . -- -- 709 -- 709
Changes in Investments and
Marketable Securities, net . . . . . (12,000) -- -- -- (12,000)
Investment in Metropolitan
District Bonds . . . . . . . . . . . (2,700) -- -- -- (2,700)
Changes in Restricted Cash. . . . . . . . -- -- 7,847 -- 7,847
Affiliate Notes Receivable
Advances . . . . . . . . . . . . . . -- -- (22,500) 22,500 --
Repayments . . . . . . . . . . . . . 12,298 -- 16,491 (28,789) --
Other, net. . . . . . . . . . . . . . . . (598) (738) (444) -- (1,780)
-------- --------- --------- -------- ---------
Net Cash Provided By (Used In)
Investing Activities . . . . . . . . (3,000) 95 300,075 (6,289) 290,881
-------- --------- --------- -------- ---------
FINANCING ACTIVITIES:
Net Increase (Reduction) in
Borrowings From Parent and
Subsidiaries . . . . . . . . . . . . . 34,959 (1,618) (31,542) (1,799) --
Mortgage-backed Bonds -
Principal Payments. . . . . . . .. . . -- -- (281,326) -- (281,326)
Lines of Credit
Advances . . . . . . . . . . . . . . 16,309 136,608 12,994 -- 165,911
Principal payments . . . . . . . . . (20,228) (129,332) (902) -- (150,462)
Notes Payable
Borrowings . . . . . . . . . . . . . -- 38,604 356 -- 38,960
Principal payments . . . . . . . . . (11,615) (53,795) (2,743) -- (68,153)
Notes Payable - Affiliate
Advances . . . . . . . . . . . . . . -- 22,500 -- (22,500) --
Principal payments . . . . . . . . . -- (28,789) -- 28,789 --
Other . . . . . . . . . . . . . . . . . . 223 -- -- -- 223
-------- --------- ----------- -------- ---------
Net Cash Provided By (Used In)
Financing Activities . . . . . . . . 19,648 (15,822) (303,163) 4,490 (294,847)
-------- --------- --------- -------- ---------
Net Increase in Cash and Cash
Equivalents . . . . . . . . . . . . 5,991 5,787 628 (11) 12,395
Cash and Cash Equivalents
Beginning of Year . . . . . . . . . 30,002 16,715 1,905 11 48,633
-------- --------- --------- -------- ---------
End of Year . . . . . . . . . . . . $ 35,993 $ 22,502 $ 2,533 $ -- $ 61,028
-------- --------- --------- -------- ---------
-------- --------- --------- -------- ---------
</TABLE>
F-43
<PAGE>
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Investments in subsidiaries are accounted for on the equity method for
purposes of the supplemental information. The Guarantors follow the accounting
policies set forth in Note A.
RELATED PARTIES. The Guarantors are members of a group of affiliated
companies and have transactions and relationships with members of the group.
MDC charges the Guarantors for a share of its general and administrative
expenses, which amounted to $2,846,000, $2,654,000 and $2,552,000, respectively,
in 1994, 1993 and 1992.
MDC pays costs associated with litigation and other significant claims
against the Guarantors as it considers such costs to be a general corporate
expense. Amounts paid by MDC on behalf of the Guarantors amounted to
approximately $769,000, $3,481,000, and $1,620,000, respectively, in 1994, 1993
and 1992.
Advances and notes receivable/payable-Parent (M.D.C. Holdings, Inc.) and
subsidiaries consists, among other things, of ongoing activities relating to the
Guarantors' participation in MDC's cash management system and current and
deferred income taxes.
INCOME TAXES. The Guarantors report their results of operations as if they
were separate taxpayers. The current tax liabilities and deferred income tax
assets and liabilities of the Guarantors are reported in the financial
statements in the Advances and notes receivable/payable--Parent and subsidiaries
accounts.
P. RELATED PARTY TRANSACTIONS
MDC has transacted business with related or affiliated companies and with
certain officers and directors of the Company.
FAMC has agreements with Asset Investors Corporation and Commercial
Assets, Inc., each a publicly-traded REIT, to advise them on various facets of
their business and to manage their day-to-day operations subject to the
supervision of their respective boards of directors. FAMC earned fees from
management and administration, including from acquisitions and incentives from
these agreements which are included in asset management revenues of $2,780,000
during 1994, $2,180,000 during 1993 and $2,566,000 during 1992.
The Company acquired certain assets from Messrs. Mizel and Mandarich in
February 1994. See Note C.
F-44
<PAGE>
On December 28, 1989, MDC granted loans to Messrs. Mizel and Mandarich for
purposes of purchasing shares of common stock of Richmond Homes. On February 2,
1994, in conjunction with MDC's acquisition of Richmond Homes common stock from
Messrs. Mizel and Mandarich as discussed in Note C, MDC exchanged these loans
for new loans of equal amount. Each of the notes evidencing the new loans now
provides that, upon sale of any of the MDC Common Stock acquired by
Messrs. Mizel and Mandarich in exchange for their respective Richmond Homes
common stock, the cash proceeds shall be remitted to the Company in payment of
accrued interest and principal under the note. The new loans, which mature in
1999, bear interest at 8.0% and are unsecured. At both December 31, 1994 and
1993, $840,000 of such loans were outstanding. Interest income of $67,000 was
recognized on these loans in each of 1994, 1993 and 1992.
The Company utilizes the services of companies owned by two former
employees of the Company, one of whom is the brother-in-law of a current officer
and director of the Company. During 1994, 1993 and 1992, the Company paid
$11,880,000, $11,557,000 and $9,268,000, respectively, for plumbing, door and
millwork services provided by these companies.
The Company leases office space and furniture to certain organizations in
which certain officers and/or directors of the Company have an ownership
interest. The rental revenue from those leases totalled $250,000, $259,000 and
$200,000, respectively, in 1994, 1993 and 1992.
The Company utilizes in the ordinary course of business the services of a
marketing and communications firm which is owned by the brother-in-law of an
officer and director of the Company. Total fees paid for advertising and
marketing design services were $275,000, $246,000 and $134,000, respectively, in
1994, 1993 and 1992.
F-45
<PAGE>
Q. SUMMARIZED QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
Unaudited summarized quarterly consolidated financial information for the
two years ended December 31, 1994 is as follows (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
QUARTER
--------------------------------------
FOURTH THIRD SECOND FIRST
-------- -------- -------- --------
<S> <C> <C> <C>
1994
Revenues . . . . . . . . . . . . . . . . . . . . $244,156 $214,249 $197,771 $168,693
-------- -------- -------- --------
-------- -------- -------- --------
Net Income. . . . . . . . . . . . . . . . . $ 4,325 $ 5,420 $ 5,704 $ 3,806
-------- -------- -------- --------
-------- -------- -------- --------
Earnings Per Share
Primary . . . . . . . . . . . . . . . . . . $ .21 $ .26 $ .28 $ .19
-------- -------- -------- --------
-------- -------- -------- --------
Fully-Diluted . . . . . . . . . . . . . . . $ .20 $ .24 $ .25 $ .18
-------- -------- -------- --------
-------- -------- -------- --------
Weighted-Average Shares Outstanding
Primary . . . . . . . . . . . . . . . . . . 20,320 20,499 20,480 20,326
-------- -------- -------- --------
-------- -------- -------- --------
Fully-Diluted . . . . . . . . . . . . . . . 23,939 24,111 24,094 23,939
-------- -------- -------- --------
-------- -------- -------- --------
<CAPTION>
QUARTER
--------------------------------------
FOURTH THIRD SECOND FIRST
-------- -------- -------- --------
1993
Revenues . . . . . . . . . . . . . . . . . . . . $185,343 $191,191 $159,657 $115,885
-------- -------- -------- --------
-------- -------- -------- --------
Income before extraordinary
gain and cumulative effect of
accounting change . . . . . . . . . . . . . $ 2,904 $ 3,223 $ 3,014 $ 915
Extraordinary gain . . . . . . . . . . . . . . . 15,823 -- -- --
-------- -------- -------- --------
Net Income. . . . . . . . . . . . . . . . . $ 18,727 $ 3,223 $ 3,014 $ 915
-------- -------- -------- --------
-------- -------- -------- --------
Earnings Per Share - Primary
and Fully-Diluted
Income before extraordinary gain. . . . . $ .13 $ .14 $ .14 $ .04
Extraordinary gain. . . . . . . . . . . . .71 -- -- --
-------- -------- -------- --------
Net Income. . . . . . . . . . . . . . $ .84 $ .14 $ .14 $ .04
-------- -------- -------- --------
-------- -------- -------- --------
Weighted-Average Shares
Outstanding - Primary and
Fully-Diluted. . . . . . . . . . . . . . . . 22,359 22,431 22,337 22,231
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
F-46
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information required to be set forth hereunder has been omitted and will be
incorporated by reference, when filed, from the Company's Proxy Statement for
its 1995 Annual Meeting of Shareowners to be held on or about May 25, 1995.
ITEM 11. EXECUTIVE COMPENSATION.
Information required to be set forth hereunder has been omitted and will be
incorporated by reference, when filed, from the Company's Proxy Statement for
its 1995 Annual Meeting of Shareowners to be held on or about May 25, 1995.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information required to be set forth hereunder has been omitted and will be
incorporated by reference, when filed, from the Company's Proxy Statement for
its 1995 Annual Meeting of Shareowners to be held on or about May 25, 1995.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information required to be set forth hereunder has been omitted and will be
incorporated by reference, when filed, from the Company's Proxy Statement for
its 1995 Annual Meeting of Shareowners to be held on or about May 25, 1995.
36
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(A) 1. FINANCIAL STATEMENTS.
The following consolidated financial statements of the Company and its
subsidiaries are included in Part II, Item 8:
PAGE
----
M.D.C. Holdings, Inc. and Subsidiaries
Report of Independent Accountants . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets as of December 31, 1994 and 1993. . . . . F-3
Consolidated Statements of Income for the three
years ended December 31, 1994 . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Stockholders' Equity for
the three years ended December 31, 1994 . . . . . . . . . . . . . . F-6
Consolidated Statements of Cash Flows for the three
years ended December 31, 1994 . . . . . . . . . . . . . . . . . . . F-7
Notes to Consolidated Financial Statements. . . . . . . . . . . . . .F-10
All schedules are omitted because they are not applicable, not material, not
required or the required information is included in the applicable financial
statements or notes thereto.
Financial statements for certain unconsolidated partnerships and joint
ventures owned 50% or less by the Company or its subsidiaries, which are
accounted for on the equity method, have been omitted because they do not,
individually, or in the aggregate, constitute a significant subsidiary.
37
<PAGE>
(A) 3. EXHIBITS.
3.1(a) Form of Amendment to the Certificate of Incorporation of M.D.C.
Holdings, Inc. (hereinafter sometimes referred to as "MDC", the
"Company" or the "Registrant") regarding director liability,
filed with the Delaware Secretary of State on July 1, 1987
(incorporated by reference to Exhibit 3.1(a) of the Company's
Quarterly Report on Form 10-Q dated June 30, 1987). *
3.1(b) Form of Certificate of Incorporation of MDC, as amended
(incorporated herein by reference to Exhibit 3.1(b) of the
Company's Quarterly Report on Form 10-Q dated June 30, 1987). *
3.2(a) Form of Amendment to the Bylaws of MDC regarding indemnification
adopted by its Board of Directors and effective as of March 20,
1987 (incorporated herein by reference to Exhibit 3.2(a) of the
Company's Quarterly Report on Form 10-Q dated June 30, 1987). *
3.2(b) Form of Bylaws of MDC, as amended (incorporated herein by
reference to Exhibit 3.2(b) of the Company's Quarterly Report on
Form 10-Q dated June 30, 1987). *
4.1 Form of Certificate for shares of the Company's common stock
(incorporated herein by reference to Exhibit 4.1 of the Company's
Registration Statement on Form S-3, Registration No. 33-426). *
4.2(a) Form of Indenture, dated as of June 15, 1984, between the Company
and The Royal Bank and Trust Company, with respect to the
Company's Subordinated Exchangeable Variable Rate Notes (the
"1984 RBTC Indenture") (incorporated herein by reference to
Exhibit 4.3 of the Company's Registration Statement on Form S-2,
Registration No. 2-90744). *
4.2(b) First Supplemental Indenture, dated as of June 20, 1985, to the
1984 RBTC Indenture (incorporated herein by reference to Exhibit
4.13(a) of the Company's Registration Statement on Form S-3,
Registration No. 33-426). *
4.2(c) Form of the Company's Subordinated Exchangeable Variable Rate
Notes (filed as Exhibits A and B to Exhibit 4.13 and incorporated
herein by reference to
38
<PAGE>
Exhibit 4.3 of the Company's Registration Statement on Form S-2,
Registration No. 2-90744). *
4.3(a) Form of Senior Notes Indenture, dated as of December 15, 1993, by
and among the Company, the Guarantors and Pledgors named therein
and First Bank National Association, a National Association, as
Trustee, with respect to the Company's 11 1/8% Senior Notes due
2003, including form of Senior Note (the "Senior Notes
Indenture") (incorporated herein by reference to Exhibit 4.1 of
the Company's Form 8-K dated January 11, 1994). *
4.3(b) First Supplemental Indenture, dated as of February 2, 1994, to
the Senior Notes Indenture (incorporated herein by reference to
Exhibit 4.4(b) of the Company's Annual Report on Form 10-K for
the year ended December 31, 1993). *
4.4 Form of Convertible Notes Indenture, dated as of December 15,
1993, by and between the Company and First Bank National
Association, a National Association, as Trustee, with respect to
the Company's 8 3/4% Convertible Subordinated Notes due 2005,
including form of Convertible Note (incorporated herein by
reference to Exhibit 4.2 of the Company's Form 8-K dated January
11, 1994). *
4.5 Loan Agreement and related Promissory Note between Richmond
American Homes, Inc., Richmond American Homes of California,
Inc., Richmond Homes, Inc. I, Richmond Homes, Inc. II and
Richmond American Homes of Nevada, Inc., all wholly owned
subsidiaries of the Company and Bank One, Arizona, N.A. ("Bank
One") dated June 13, 1994.
4.6 Guaranty of Payment between the Company and Bank One dated June
13, 1994.
4.7 Form of Senior Notes Registration Rights Agreement, dated as of
December 28, 1993, by and among the Company, the Guarantors named
therein and the Purchasers who are signatories thereto, with
respect to the Company's Senior Notes (incorporated herein by
reference to Exhibit 4.3 of the Company's Form 8-K dated January
11, 1994). *
4.8 Form of Convertible Notes Registration Rights Agreement, dated as
of December 28, 1993, by and between the Company and the
Purchasers who are
39
<PAGE>
signatories thereto, with respect to the Company's Convertible
Subordinated Notes (incorporated herein by reference to Exhibit
4.4 of the Company's Form 8-K dated January 11, 1994). *
4.9 Guaranty Agreement between the Company as guarantor and Bank One,
Denver, N.A., as Trustee under Indenture of Trust dated as of
June 1, 1994 between it and Superior Metropolitan District No. 1
dated as of June 1, 1994 (incorporated herein by reference to
Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q dated
September 30, 1994). *
4.10 Guaranty Agreement between the Company as guarantor and Bank One,
Denver, N.A., as Trustee under Indenture of Trust dated as of
June 1, 1994 between it and Superior Metropolitan District No. 2,
dated as of June 1, 1994 (incorporated herein by reference to
Exhibit 10.2 of the Company's Quarterly Report on Form 10-Q dated
September 30, 1994). *
10.1(a) The Company's 1983 Incentive Stock Option Plan (incorporated
herein by reference to Exhibit 10.4 of the Company's Annual
Report on Form 10-K for the year ended December 31, 1982). *
10.1(b) 1987 Amendments to the Incentive Stock Option Plan of MDC
(incorporated herein by reference to Exhibit 10.1(a) of the
Company's Annual Report on Form 10-K for the year ended December
31, 1986). *
10.1(c) 1988 Amendment to the 1983 Incentive Stock Option Plan of MDC
(incorporated herein by reference to Exhibit 19.3(a) of the
Company's Quarterly Report on Form 10-Q dated June 30, 1988). *
10.2(a) The Company's 1983 Non-Qualified Stock Option Plan (incorporated
herein by reference to Exhibit 10.5 of the Company's Annual
Report on Form 10-K for the year ended December 31, 1983). *
10.2(b) 1988 Amendment to the 1983 Non-Qualified Stock Option Plan of MDC
(incorporated herein by reference to Exhibit 10.2(b) of the
Company's Quarterly Report on Form 10-Q dated June 30, 1988). *
10.3 The Company's Employee Equity Incentive Plan (incorporated herein
by reference to Exhibit A of the Company's Proxy Statement dated
May 14, 1993
40
<PAGE>
relating to the 1993 Annual Meeting of Stockholders).*
10.4 The Company's Director Equity Incentive Plan (incorporated herein
by reference to Exhibit B of the Company's Proxy Statement dated
May 14, 1993 relating to the 1993 Annual Meeting of
Stockholders).*
10.5(a) Amended Management Agreement between Asset Investors Corporation
("AIC") and Financial Asset Management Corporation ("FAMC") dated
as of January 1, 1990 (incorporated herein by reference to
Exhibit 10.8(d) to the Company's Annual Report on Form 10-K for
the year ended December 31, 1989). *
10.5(b) Amended Management Agreement between AIC and FAMC dated as of
January 1, 1991 (incorporated herein by reference to Exhibit 19
of the Company's Quarterly Report on Form 10-Q dated June 30,
1991). *
10.5(c) Amended Management Agreement between AIC and FAMC dated as of
January 1, 1992 (incorporated herein by reference to Exhibit
10.3(c) of the Company's Annual Report on Form 10-K for the year
ended December 31, 1991). *
10.5(d) Management Agreement between AIC and FAMC dated as of January 1,
1993.
10.5(e) Amendment to Management Agreement dated as of January 1, 1993
between AIC and FAMC dated as of October 12, 1993.
10.5(f) Management Agreement between AIC and FAMC dated as of January 1,
1994.
10.5(g) Management Agreement between Commercial Assets, Inc. ("CAI") and
FAMC dated as of August __, 1993.
10.5(h) Management Agreement between CAI and FAMC dated as of October 12,
1993.
10.6 CMO Participation Agreement among the Company, M.D.C. Asset
Investors, Inc. and Yosemite Financial, Inc. (incorporated herein
by reference to Exhibit 10.6 of M.D.C. Asset Investors, Inc.'s
Registration Statement on Form S-11, Registration No. 33-9557). *
41
<PAGE>
10.7(a) Form of Indemnity Agreement entered into between the Registrant
and each member of its Board of Directors as of March 20, 1987
(incorporated herein by reference to Exhibit 19.1 of the
Company's Quarterly Report on Form 10-Q dated June 30, 1987). *
10.7(b) Form of Indemnity Agreement entered into between the Registrant
and certain officers of the Registrant on various dates during
1988 and early 1989 (incorporated herein by reference to
Exhibit 10.18(b) to the Company's Annual Report on Form 10-K for
the year ended December 31, 1988). *
10.7(c) Form of Indemnity Agreement entered into between the Registrant
and John J. Heaney dated as of May 12, 1989 (incorporated herein
by reference to Exhibit 10.17 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1990). *
10.7(d) Form of Agreement, relating to the advancement of expenses and
indemnification, entered into between the Registrant and each of
its current and former officers and directors named in certain
securities litigation (incorporated herein by reference to
Exhibit 10.18(c) to the Company's Annual Report on Form 10-K for
the year ended December 31, 1988). *
10.8 Indemnification Agreement by and among the Company and Larry A.
Mizel ("Mizel") and David D. Mandarich ("Mandarich") dated
December 21, 1989 (incorporated herein by reference to Exhibit 9
of the Company's Form 8-K dated December 28, 1989). *
10.9 Promissory Note in the amount of $559,920 from Mizel to the
Company dated February 2, 1994 (incorporated herein by reference
to Exhibit 10.9 of the Company's Annual Report on Form 10-K for
the year ended December 31, 1993). *
10.10 Promissory Note in the amount of $280,080 from Mandarich to the
Company February 2, 1994 (incorporated herein by reference to
Exhibit 10.10 of the Company's Annual Report on Form 10-K for
the year ended December 31, 1993). *
10.11 Fifth Amendment to Piney Creek Development Co. Joint Venture
Agreement dated June 13, 1991 by and between Commercial Federal
Bank and Land (incorporated herein by reference to Exhibit 10.25
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1991). *
10.12 Letter Agreement effective October 1, 1994 by and between Gilbert
Goldstein, P.C. and the Company.
42
<PAGE>
10.13 MDC 401(k) Savings Plan (incorporated herein by reference to
Exhibit 10.31(a) to the Company's Annual Report on Form 10-K for
the year ended December 31, 1992).*
10.14(a) Purchase Agreement dated as of December 6, 1993 by and between
the Company and the Base Assets Trust (incorporated herein by
reference to Exhibit (c)(2) of the Company's Form 8-K dated
December 6, 1993).*
10.14(b) Amendment to Purchase Agreement dated as of December 10, 1993 by
and between the Company and the Base Assets Trust (incorporated
herein by reference to Exhibit (c)(3) of the Company's Form 8-K
dated December 6, 1993).*
10.15(a) Option Agreement dated as of December 6, 1993 by and among the
Company and Mizel and Mandarich (incorporated herein by reference
to Exhibit (c)(4) of the Company's Form 8-K dated December 6,
1993).*
10.15(b) First Amendment to Option Agreement dated December 20, 1993 by
and among the Company and Mizel and Mandarich (incorporated
herein by reference to Exhibit 10.15(b) of the Company's Annual
Report on Form 10-K for the year ended December 31, 1993).*
10.16 M.D.C. Holdings, Inc. Executive Officer Performance-Based
Compensation Plan (incorporated herein by reference to Exhibit A
to the Company's Proxy Statement dated May 25, 1994 related to
the 1994 Meeting of Shareowners). *
10.17 Employment Agreement between the Company and Michael Touff dated
December 31, 1994.
21 Subsidiaries of the Company.
23 Consent of Price Waterhouse LLP.
27 Financial Data Schedule.
99 Agreement and Plan of Merger dated February 2, 1994 between
Richmond Acquisitions, Inc. and Richmond Homes (incorporated
herein by reference to Exhibit 99 of the Company's Annual Report
on Form 10-K for the year ended December 31, 1993).*
___________________
* Incorporated herein by reference.
(B) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the last quarter of the year ended
December 31, 1994.
43
<PAGE>
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
this 27th day of March, 1995 on its behalf by the undersigned, thereunto duly
authorized.
M.D.C. HOLDINGS, INC.
(Registrant)
By: /s/ Larry A. Mizel
-----------------------
Larry A. Mizel
CHIEF EXECUTIVE OFFICER
By: /s/ Paris G. Reece III
-----------------------
Paris G. Reece III
Senior VICE PRESIDENT, CHIEF
FINANCIAL OFFICER AND PRINCIPAL
ACCOUNTING OFFICER
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned officers and/or
directors of the Registrant, by virtue of their signatures to this report,
appearing below, hereby constitute and appoint Larry A. Mizel, Spencer I. Browne
and Paris G. Reece III, or any one of them, with full power of substitution, as
attorneys-in-fact in their names, places and steads to execute any and all
amendments to this report in the capacities set forth opposite their names and
hereby ratify all that said attorneys-in-fact do by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Larry A. Mizel Chairman of the Board of March 27, 1995
----------------------- Directors and Chief --------------
Larry A. Mizel Executive Office
/s/ Spencer I. Browne Director, President and March 27, 1995
----------------------- Co-Chief Operating --------------
Spencer I. Browne Officer
44
<PAGE>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ David D. Mandarich Director, Executive Vice March 27, 1995
----------------------- --------------
David D. Mandarich President - Real Estate
and Co-Chief Operating
Officer
/s/ Steven J. Borick Director March 27, 1995
----------------------- --------------
Steven J. Borick
/s/ Gilbert Goldstein Director March 27, 1995
----------------------- --------------
Gilbert Goldstein
/s/ William B. Kemper Director March 27, 1995
----------------------- --------------
William B. Kemper
/s/ Herbert T. Buchwald Director March 27, 1995
----------------------- --------------
Herbert T. Buchwald
(A Majority of the Board of Directors)
45
<PAGE>
INDEX TO EXHIBITS
4.5 Loan Agreement and related Promissory Note between Richmond
American Homes, Inc., Richmond American Homes of California,
Inc., Richmond Homes, Inc. I, Richmond Homes, Inc. II and
Richmond American Homes of Nevada, Inc., all wholly owned
subsidiaries of the Company and Bank One, Arizona, N.A. ("Bank
One") dated June 13, 1994.
4.6 Guaranty of Payment between the Company and Bank One dated June
13, 1994.
10.5(d) Management Agreement between AIC and FAMC dated as of January 1,
1993.
10.5(e) Amendment to Management Agreement dated as of January 1, 1993
between AIC and FAMC dated as of October 12, 1993.
10.5(f) Management Agreement between AIC and FAMC dated as of January 1,
1994.
10.5(g) Management Agreement between Commercial Assets, Inc. ("CAI") and
FAMC dated as of August __, 1993.
10.5(h) Management Agreement between CAI and FAMC dated as of October 12,
1993.
10.12 Letter Agreement effective October 1, 1994 by and between Gilbert
Goldstein, P.C. and the Company.
10.17 Employment Agreement between the Company and Michael Touff dated
December 31, 1994.
21 Subsidiaries of the Company.
23 Consent of Price Waterhouse LLP.
27 Financial Data Schedule.
<PAGE>
LOAN AGREEMENT
between
Richmond American Homes, Inc.,
a Delaware corporation
Richmond American Homes of California, Inc.,
a Colorado corporation
Richmond Homes, Inc. I,
a Delaware corporation
Richmond Homes, Inc. II,
a Delaware corporation
Richmond American Homes of Nevada, Inc.,
a Colorado corporation
and
BANK ONE, ARIZONA, NA,
a national banking association
Dated June 13, 1994
<PAGE>
TABLE OF CONTENTS
Page
----
1. SCHEDULE OF TERMS . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
3. LETTER OF CREDIT AND LOAN FACILITY. . . . . . . . . . . . . . . . . . . 18
3.1 Loan Facility. . . . . . . . . . . . . . . . . . . . . . . . . . . 18
3.1.1 Commitment . . . . . . . . . . . . . . . . . . . . . . . 18
3.1.2 Conversion Period. . . . . . . . . . . . . . . . . . . . 19
3.1.2.1 Conversion Period Established by Bank . . . . . . . 19
3.1.2.2 Conversion Period Resulting from Operating Losses . 20
3.1.2.3 Conversion Period Resulting from Other Breaches by
Guarantor . . . . . . . . . . . . . . . . . . . . . 21
3.1.3 Voluntary Reductions in Commitment Amount. . . . . . . . 22
3.2 Letter of Credit . . . . . . . . . . . . . . . . . . . . . . . . . 22
3.2.1 Issuance of Letter of Credit . . . . . . . . . . . . . . 22
3.2.2 Issuance Procedure . . . . . . . . . . . . . . . . . . . 22
3.2.3 Reimbursement of Bank for Payment of Drafts Drawn or
Drawn and Accepted Under the Letter of Credit. . . . . . 23
3.3 A&D Subcommitment Facility . . . . . . . . . . . . . . . . . . . . 24
3.4 Request for Letters of Credit and Advances . . . . . . . . . . . . 24
3.5 Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
3.5.1 Purpose of Facility and Use of Advances. . . . . . . . . 25
3.5.2 Determination of Amount of Advances and Limitations on
Advances . . . . . . . . . . . . . . . . . . . . . . . . 25
3.5.2.1 General Determination . . . . . . . . . . . . . . . 25
3.5.2.2 Percentage Limitations. . . . . . . . . . . . . . . 25
3.5.3 Term Period. . . . . . . . . . . . . . . . . . . . . . . 26
3.5.3.1 Presold Units . . . . . . . . . . . . . . . . . . . 26
3.5.3.2 Spec Units. . . . . . . . . . . . . . . . . . . . . 27
3.5.3.3 Model Units . . . . . . . . . . . . . . . . . . . . 27
3.5.3.4 A&D Projects. . . . . . . . . . . . . . . . . . . . 27
3.5.4 Limitation on Eligible Collateral. . . . . . . . . . . . 27
3.5.5 Classification and Reclassification of Units . . . . . . 28
3.5.6 Limitations Relating to Each Borrower. . . . . . . . . . 28
3.5.7 A&D Budget Limitations and Covenants . . . . . . . . . . 28
3.5.7.1 General Limitation. . . . . . . . . . . . . . . . . 28
3.5.7.2 Borrower Equity . . . . . . . . . . . . . . . . . . 29
-i-
<PAGE>
3.5.7.3 Specific Line Item Limitations. . . . . . . . . . . 29
3.5.8 Further Limitations on Advances. . . . . . . . . . . . . 30
3.5.8.1 Land Advance. . . . . . . . . . . . . . . . . . . . 30
3.5.8.2 Retainage . . . . . . . . . . . . . . . . . . . . . 30
3.5.8.3 Information Relating to A&D Budgets . . . . . . . . 31
3.5.8.4 Amount of Advances for Soft Costs . . . . . . . . . 31
3.5.9 Deficiencies . . . . . . . . . . . . . . . . . . . . . . 32
3.5.10 General. . . . . . . . . . . . . . . . . . . . . . . . . 32
3.5.11 Releases of Collateral . . . . . . . . . . . . . . . . . 32
3.5.11.1 Release of Certain Collateral at Request of
Borrower. . . . . . . . . . . . . . . . . . . . . . 32
3.5.11.2 Mandatory Releases by Borrower. . . . . . . . . . . 34
3.5.12 Extraordinary Events Affecting Collateral. . . . . . . . 35
3.5.12.1 Material Damage, Destruction, or Condemnation . . . 35
3.5.12.2 Default Regarding Title Insurance . . . . . . . . . 35
3.5.13 Advances During Conversion Period. . . . . . . . . . . . 35
3.6 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
3.6.1 Commitment Fees. . . . . . . . . . . . . . . . . . . . . 36
3.6.1.1 Quarterly Commitment Fee. . . . . . . . . . . . . . 36
3.6.1.2 Extension Fee . . . . . . . . . . . . . . . . . . . 36
3.6.2 Unused Commitment Fee. . . . . . . . . . . . . . . . . . 36
3.6.3 Processing Fee . . . . . . . . . . . . . . . . . . . . . 37
3.6.4 Attorneys' Costs, Expenses, and Fees . . . . . . . . . . 37
3.6.5 Appraisal Fees, Title Insurance Premium, and Other
Costs, Expenses, and Fees. . . . . . . . . . . . . . . . 37
3.7 Mandatory Prepayments. . . . . . . . . . . . . . . . . . . . . . . 37
4. CONDITIONS PRECEDENT. . . . . . . . . . . . . . . . . . . . . . . . . . 38
4.1 Conditions Precedent to Effectiveness of this Agreement and to
the Effectiveness of the Commitment. . . . . . . . . . . . . . . . 38
4.1.1 Representations and Warranties Accurate. . . . . . . . . 38
4.1.2 Defaults . . . . . . . . . . . . . . . . . . . . . . . . 38
4.1.3 Documents. . . . . . . . . . . . . . . . . . . . . . . . 38
4.1.3.1 Loan and Other Documents. . . . . . . . . . . . . . 38
4.1.3.2 Corporation, Limited Liability Company, or
Partnership Documents . . . . . . . . . . . . . . . 38
4.1.3.3 Insurance Policies. . . . . . . . . . . . . . . . . 39
4.1.3.4 Opinion Letter. . . . . . . . . . . . . . . . . . . 39
4.1.3.5 Financial Statements. . . . . . . . . . . . . . . . 39
4.1.3.6 Contracts . . . . . . . . . . . . . . . . . . . . . 39
4.1.4 Completion of Filings and Recordings . . . . . . . . . . 39
-iii-
<PAGE>
4.1.5 Payment of Costs, Expenses, and Fees . . . . . . . . . . 40
4.1.6 Other Items or Actions . . . . . . . . . . . . . . . . . 40
4.1.7 Tri-Party Agreement. . . . . . . . . . . . . . . . . . . 40
4.2 Conditions Precedent to Approval of Subdivisions . . . . . . . . . 40
4.2.1 Plat and/or Survey . . . . . . . . . . . . . . . . . . . 40
4.2.2 CC&Rs. . . . . . . . . . . . . . . . . . . . . . . . . . 41
4.2.3 Types of Units . . . . . . . . . . . . . . . . . . . . . 41
4.2.4 Unit Base Appraisals . . . . . . . . . . . . . . . . . . 41
4.2.5 Lot Information. . . . . . . . . . . . . . . . . . . . . 41
4.2.6 Completion . . . . . . . . . . . . . . . . . . . . . . . 41
4.2.7 Approvals. . . . . . . . . . . . . . . . . . . . . . . . 41
4.2.8 Soils Tests. . . . . . . . . . . . . . . . . . . . . . . 42
4.2.9 Environmental Assessment . . . . . . . . . . . . . . . . 42
4.2.10 Environmental Indemnity. . . . . . . . . . . . . . . . . 42
4.2.11 Utilities. . . . . . . . . . . . . . . . . . . . . . . . 42
4.2.12 Preliminary Title Report . . . . . . . . . . . . . . . . 42
4.2.13 Drainage; Flood Report . . . . . . . . . . . . . . . . . 42
4.2.14 Deed of Trust/Modification to Deed of Trust. . . . . . . 43
4.2.15 Title Insurance. . . . . . . . . . . . . . . . . . . . . 43
4.2.16 Assessments, Charges, and Taxes. . . . . . . . . . . . . 43
4.2.17 Assignments. . . . . . . . . . . . . . . . . . . . . . . 43
4.2.18 Other. . . . . . . . . . . . . . . . . . . . . . . . . . 43
4.3 Additional Conditions Precedent to the Inclusion of Each Unit in
Eligible Collateral. . . . . . . . . . . . . . . . . . . . . . . . 43
4.3.1 Representations and Warranties Accurate. . . . . . . . . 44
4.3.2 Defaults . . . . . . . . . . . . . . . . . . . . . . . . 44
4.3.3 Satisfaction of Other Conditions . . . . . . . . . . . . 44
4.3.4 Documents. . . . . . . . . . . . . . . . . . . . . . . . 44
4.3.4.1 Unit Base Appraisal . . . . . . . . . . . . . . . . 44
4.3.4.2 Unit Budget . . . . . . . . . . . . . . . . . . . . 44
4.3.4.3 Unit Plans and Specifications . . . . . . . . . . . 44
4.3.4.4 Purchase Contract . . . . . . . . . . . . . . . . . 44
4.3.4.5 Deed of Trust/Modification to Deed of Trust . . . . 44
4.3.4.6 Assessments, Charges, and Taxes . . . . . . . . . . 45
4.3.4.7 Completion of Filings and Recordings. . . . . . . . 45
4.3.4.8 Contracts . . . . . . . . . . . . . . . . . . . . . 45
4.3.5 Limitations. . . . . . . . . . . . . . . . . . . . . . . 45
4.3.6 Start of Construction. . . . . . . . . . . . . . . . . . 45
4.3.7 Distressed Improvement Districts . . . . . . . . . . . . 45
4.3.8 Other Items. . . . . . . . . . . . . . . . . . . . . . . 46
4.3.9 Other Actions. . . . . . . . . . . . . . . . . . . . . . 46
4.4 Additional Conditions Precedent to All Advances Against Eligible
Collateral that Includes Units . . . . . . . . . . . . . . . . . . 46
4.4.1 Representations and Warranties Accurate. . . . . . . . . 46
4.4.2 Defaults . . . . . . . . . . . . . . . . . . . . . . . . 46
-iii-
<PAGE>
4.4.3 Other Conditions Precedent . . . . . . . . . . . . . . . 46
4.4.4 Inspection Report. . . . . . . . . . . . . . . . . . . . 46
4.4.5 Lot Location Survey. . . . . . . . . . . . . . . . . . . 46
4.4.6 Approvals and Inspections by Governmental Authorities. . 46
4.4.7 Title Policy Endorsements. . . . . . . . . . . . . . . . 46
4.4.8 Payment of costs, Expenses, and Fees . . . . . . . . . . 47
4.5 Conditions Precedent to Approval of A&D Projects . . . . . . . . . 47
4.5.1 Appraisal. . . . . . . . . . . . . . . . . . . . . . . . 47
4.5.2 Plat or Survey . . . . . . . . . . . . . . . . . . . . . 47
4.5.3 Environmental Assessment . . . . . . . . . . . . . . . . 48
4.5.4 Environmental Indemnity. . . . . . . . . . . . . . . . . 48
4.5.5 Deed of Trust/Title Policy . . . . . . . . . . . . . . . 48
4.5.6 Drainage; Flood Zone . . . . . . . . . . . . . . . . . . 49
4.5.7 Services . . . . . . . . . . . . . . . . . . . . . . . . 49
4.5.8 Assessments, Charges, and Taxes. . . . . . . . . . . . . 49
4.5.9 Soils Tests. . . . . . . . . . . . . . . . . . . . . . . 49
4.5.10 Plans and Specifications . . . . . . . . . . . . . . . . 49
4.5.11 Budget . . . . . . . . . . . . . . . . . . . . . . . . . 49
4.5.12 Construction Contracts . . . . . . . . . . . . . . . . . 49
4.5.13 Borrower's Equity. . . . . . . . . . . . . . . . . . . . 50
4.5.14 Zoning . . . . . . . . . . . . . . . . . . . . . . . . . 50
4.5.15 Preliminary Title Report . . . . . . . . . . . . . . . . 50
4.5.16 Distressed Improvement Districts . . . . . . . . . . . . 50
4.5.17 Purchase Documents . . . . . . . . . . . . . . . . . . . 50
4.5.18 Construction Schedule. . . . . . . . . . . . . . . . . . 50
4.5.19 Marketing Information. . . . . . . . . . . . . . . . . . 50
4.5.20 Pro Forma Cash Flow. . . . . . . . . . . . . . . . . . . 51
4.5.21 Term Sheet . . . . . . . . . . . . . . . . . . . . . . . 51
4.5.22 Other Items. . . . . . . . . . . . . . . . . . . . . . . 51
4.5.23 Other Actions by Loan Parties. . . . . . . . . . . . . . 51
4.6 Additional Conditions Precedent to All Advances Against Eligible
Collateral Containing A&D Projects . . . . . . . . . . . . . . . . 51
4.6.1 Representations and Warranties Accurate. . . . . . . . . 51
4.6.2 Defaults . . . . . . . . . . . . . . . . . . . . . . . . 51
4.6.3 Other Conditions . . . . . . . . . . . . . . . . . . . . 51
4.6.4 Inspection Report. . . . . . . . . . . . . . . . . . . . 51
4.6.5 Approvals and Inspections by Governmental Authorities. . 51
4.6.6 Title Policy Endorsements. . . . . . . . . . . . . . . . 52
4.6.7 Payment of Costs, Expenses, and Fees . . . . . . . . . . 52
4.7 Right to Waive . . . . . . . . . . . . . . . . . . . . . . . . . . 52
5. BORROWER REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . 52
5.1 Closing Representations and Warranties . . . . . . . . . . . . . . 52
5.1.1 Corporate, Limited Liability Company, or Partnership
Existence and Authorization. . . . . . . . . . . . . . . 52
-iv-
<PAGE>
5.1.2 No Approvals, etc. . . . . . . . . . . . . . . . . . . . 53
5.1.3 No Conflicts . . . . . . . . . . . . . . . . . . . . . . 53
5.1.4 Execution and Delivery and Binding Nature of Documents . 53
5.1.5 Accurate Information . . . . . . . . . . . . . . . . . . 53
5.1.6 Purpose of Advances . . . . . . . . . . . . . . . . . . 54
5.1.7 Legal Proceedings; Hearings, Inquiries, and
Investigations . . . . . . . . . . . . . . . . . . . . . 54
5.1.8 No Event of Default or Unmatured Event of Default. . . . 54
5.1.9 Approvals and Permits; Assets and Property . . . . . . . 54
5.1.10 Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . 54
5.1.11 ERISA. . . . . . . . . . . . . . . . . . . . . . . . . . 55
5.1.12 Compliance with Law. . . . . . . . . . . . . . . . . . . 55
5.1.13 Unit Budgets and Plans and Specifications. . . . . . . . 55
5.1.14 Budgets, Plans and Specifications, and Construction
Contract(s). . . . . . . . . . . . . . . . . . . . . . . 55
5.1.15 Environmental Matters. . . . . . . . . . . . . . . . . . 55
5.2 Representations and Warranties Upon Requests for Advances. . . . . 56
5.3 Representations and Warranties Upon Delivery of Financial
Statements, Documents, and Other Information . . . . . . . . . . . 56
6. BORROWER AFFIRMATIVE COVENANTS. . . . . . . . . . . . . . . . . . . . . 56
6.1 Corporate Existence. . . . . . . . . . . . . . . . . . . . . . . . 56
6.2 Books and Records; Access By Bank. . . . . . . . . . . . . . . . . 56
6.3 Information and Statements . . . . . . . . . . . . . . . . . . . . 57
6.3.1 Fiscal Period Financial Statements . . . . . . . . . . . 57
6.3.1.1 Statements. . . . . . . . . . . . . . . . . . . . . 57
6.3.1.2 Projection. . . . . . . . . . . . . . . . . . . . . 57
6.3.2 Annual Financial Statements. . . . . . . . . . . . . . . 57
6.3.3 Closing Report . . . . . . . . . . . . . . . . . . . . . 58
6.3.4 Compliance Certificates. . . . . . . . . . . . . . . . . 58
6.3.5 Sales and Inventory Reports. . . . . . . . . . . . . . . 58
6.3.6 Gross Profit Analysis. . . . . . . . . . . . . . . . . . 58
6.3.7 Backlog Report . . . . . . . . . . . . . . . . . . . . . 59
6.3.8 Borrowing Base Report. . . . . . . . . . . . . . . . . . 59
6.3.9 Collateral Certificate . . . . . . . . . . . . . . . . . 59
6.3.10 Land Holdings. . . . . . . . . . . . . . . . . . . . . . 60
6.3.11 Unit Budgets . . . . . . . . . . . . . . . . . . . . . . 60
6.3.12 Other Construction Information . . . . . . . . . . . . . 60
6.3.13 Other Items and Information. . . . . . . . . . . . . . . 61
6.4 Law; Judgments; Material Agreements; Approvals and Permits . . . . 61
6.5 Taxes and Other Indebtedness . . . . . . . . . . . . . . . . . . . 62
-v-
<PAGE>
6.6 Assets and Property. . . . . . . . . . . . . . . . . . . . . . . . 62
6.7 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
6.7.1 Property . . . . . . . . . . . . . . . . . . . . . . . . 62
6.7.2 Liability. . . . . . . . . . . . . . . . . . . . . . . . 62
6.7.3 Flood. . . . . . . . . . . . . . . . . . . . . . . . . . 63
6.7.4 Worker's Compensation. . . . . . . . . . . . . . . . . . 63
6.7.5 Additional Insurance . . . . . . . . . . . . . . . . . . 63
6.7.6 Other. . . . . . . . . . . . . . . . . . . . . . . . . . 63
6.7.7 Evidence . . . . . . . . . . . . . . . . . . . . . . . . 63
6.8 ERISA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
6.9 Unit Base Appraisals . . . . . . . . . . . . . . . . . . . . . . . 64
6.10 A&D Appraisals . . . . . . . . . . . . . . . . . . . . . . . . . . 64
6.11 Commencement and Completion of A&D Improvements. . . . . . . . . . 65
6.12 Change Orders. . . . . . . . . . . . . . . . . . . . . . . . . . . 65
6.13 Commencement and Completion of Units . . . . . . . . . . . . . . . 66
6.14 Tri-Party Agreement and Title Insurance. . . . . . . . . . . . . . 66
6.14.1 Tri-Party Agreement. . . . . . . . . . . . . . . . . . . 66
6.14.2 Title Insurance Claims . . . . . . . . . . . . . . . . . 67
6.15 Rights of Inspection; Correction of Defects; Agency. . . . . . . . 67
6.16 Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . . 68
6.17 Verification of Costs. . . . . . . . . . . . . . . . . . . . . . . 68
6.18 Use of Proceeds of Advances. . . . . . . . . . . . . . . . . . . . 68
6.19 Cross-Collateralization. . . . . . . . . . . . . . . . . . . . . . 69
6.20 Bank's Inspector(s). . . . . . . . . . . . . . . . . . . . . . . . 69
6.21 Plat Map . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
6.22 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . 70
6.23 Costs and Expenses of Borrower's Performance of Covenants and
Satisfaction of Conditions . . . . . . . . . . . . . . . . . . . . 70
6.24 Payment of Net Sales Proceeds. . . . . . . . . . . . . . . . . . . 70
6.25 Construction and Sales Records . . . . . . . . . . . . . . . . . . 70
7. BORROWER NEGATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . 70
7.1 Corporate Restrictions . . . . . . . . . . . . . . . . . . . . . . 70
7.2 Change in or Reacquisition of Ownership Interests. . . . . . . . . 71
8. ADDITIONAL RIGHTS OF BANK . . . . . . . . . . . . . . . . . . . . . . . 71
9. BANK'S OBLIGATIONS TO BORROWER ONLY AND DISCLAIMER BY BANK. . . . . . . 73
10. PUBLICITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
11. NO BROKERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
12. PROVISIONS IN THE NOTE GOVERN THIS AGREEMENT. . . . . . . . . . . . . . 73
13. CHOICE OF LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
-vi-
<PAGE>
14. COUNTERPART EXECUTION . . . . . . . . . . . . . . . . . . . . . . . . . 75
EXHIBITS
A Form of A&D Term Sheet
B Unit Collateral Values
-vii-
<PAGE>
LOAN AGREEMENT
DATE: June 13, 1994
PARTIES: BORROWERS RICHMOND AMERICAN HOMES, INC.
NAMES AND a Delaware corporation
ADDRESSES:
4647 North 32nd Street, Suite 180
Phoenix, Arizona 85018
Attention: President
RICHMOND AMERICAN HOMES OF CALIFORNIA, INC., a Colorado
corporation
11000 White Rock Road, Suite 110
Rancho Cordova, California 95670
Attention: President
RICHMOND HOMES, INC. I
a Delaware corporation
4600 South Ulster Street, Suite 400
Denver, Colorado 80237
Attention: President
RICHMOND HOMES, INC. II
a Delaware corporation
4600 South Ulster Street, Suite 400
Denver, Colorado 80237
Attention: President
RICHMOND AMERICAN HOMES OF NEVADA, INC.
a Colorado corporation
1919 South Jones Boulevard, Suite A
Las Vegas, Nevada 89102
Attention: President
BANK: BANK ONE, ARIZONA, NA
a national banking association.
BANK ADDRESS: Real Estate Division
P.O. Box 29542
Phoenix, Arizona 85038
Attention: Dept. A-383
AGREEMENT: For good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, Borrower and Bank agree as follows:
<PAGE>
1. SCHEDULE OF TERMS.
Commitment Amount: $ 75,000,000.00, as the same may be reduced from
time to time pursuant to SECTION 3.1.2 and SECTION 3.1.3.
Guarantor: M.D.C. HOLDINGS, INC., a Delaware corporation
Unit Completion Date: Nine (9) Calendar Months after each such Unit
first constitutes Eligible Collateral.
3.5.11.1 Release Fee: $10.00 for each Lot or Unit to be released, if
releases are done by Title Company; $20.00 for each Lot or Unit
to be released, if releases are not done by Title Company.
3.6.1.1 Quarterly Commitment Fee: One-quarter of one percent (1%) per
annum payable per quarter of the Lower $50,000,000.00 of the
Commitment Amount, and one-quarter of one-half of one percent
(.5%) per annum payable per quarter of the Upper $25,000,000.00
of the Commitment Amount.
3.6.2 Unused Commitment Fee Rate: One-quarter of one percent (.25%)
per annum.
3.6.3 Processing Fee: $500.00 per state where the Eligible Collateral
is located per month payable for each month.
5.1.5, 6.2, 6.3.1, and 6.3.2. Financial statements and accounting system
requirements: accrual basis and GAAP
5.1.5 Fiscal year of Borrower: From January 1 to December 31.
6.3.1 Quarterly unaudited Borrower prepared financial statements for
each of the first three (3) calendar quarters (including cash
flow statements), due within forty-five (45) days after the end
of each quarter, and with respect to Guarantor, quarterly
unaudited Guarantor prepared financial statements for each of the
first three (3) calendar quarters, due within forty-five (45)
days after the end of each quarter.
-2-
<PAGE>
Person(s) to sign and certify financial statements on behalf of each
Borrower or Guarantor, as applicable: President, Chief Financial Officer,
or other executive officer reasonably acceptable to Bank.
6.3.2 Financial statements due within ninety (90) days after the end of
each fiscal year of each Borrower or Guarantor, as applicable.
Certification requirements:
Borrowers statements: Borrower prepared financial statements.
Guarantor statements: Independent certified public accountant
satisfactory to Bank to audit financial statements and deliver an
opinion on the financial statements.
6.7.1 Minimum property insurance amount: The full replacement value of
any and all Units constituting Eligible Collateral.
6.7.2 Minimum liability insurance amounts:
Per occurrence: $1,000,000.
General aggregate: $2,000,000.
Minimum umbrella excess liability insurance amount:
$25,000,000 for the first month after the date of this Agreement
and $50,000,000 thereafter.
Minimum motor vehicle liability insurance amount:
$1,000,000.
2. DEFINITIONS. In this Agreement, the following terms shall have the
following meanings:
"A&D APPRAISAL" means an appraisal of the A&D Land and the A&D Improvements as
they will exist upon completion of the A&D Improvements (or as they currently
exist, with respect to A&D Improved Lot Projects) (i) ordered by Bank, (ii)
prepared by an appraiser satisfactory to Bank, (iii) in compliance with all
federal and state standards for appraisals, (iv) reviewed by Bank, and (v) in
form and substance satisfactory to Bank in its absolute and sole discretion.
"A&D APPRAISAL REVIEW MARKET VALUE" means the market value for the A&D Land and
the A&D Improvements as they will exist upon completion of the A&D Improvements
(or as they currently exist, with respect to A&D Improved Lot Projects), which
shall be the
-3-
<PAGE>
value approved or determined by Bank in its absolute and sole discretion after
its review of an A&D Appraisal.
"A&D BUDGET" means the budget for the A&D Improvements and the acquisition cost
of the A&D Land approved by Bank in its reasonable discretion and as set forth
on the A&D Term Sheet, as amended and modified from time to time in accordance
with this Agreement. With respect to A&D Improved Lot Projects, the A&D Budget
shall set forth the actual costs for the A&D Improvements and the acquisition
cost of the A&D Land.
"A&D COLLATERAL VALUE" means the maximum Advances the applicable Borrower may
obtain against an A&D Project that constitutes Eligible Collateral based upon
the stage of construction of the A&D Improvements, determined by Bank on a
cumulative basis based on the Construction Report, the results of Bank's
inspections, and such other information available to Bank. If construction of
the A&D Improvements has not commenced, or if the applicable Borrower has not
recorded a final plat with respect to the A&D Project as provided in SECTION
6.21, then the A&D Collateral Value shall be the maximum Advance that the
applicable Borrower may obtain against the A&D Land, as set forth on the A&D
Term Sheet.
"A&D COMMENCEMENT DATE" means the date by which construction of the A&D
Improvements shall be commenced, but in any event not later than ninety (90)
days after the A&D Eligibility Date.
"A&D COMPLETION DATE" means the date that is fifteen (15) Calendar Months after
the A&D Eligibility Date.
"A&D CONTRACTOR" means the licensed contractor (if any) retained by the
applicable Borrower to construct some or all the A&D Improvements.
"A&D DEFICIENCY AMOUNT" means the Estimated A&D Aggregate Costs, Expenses, and
Fees (as defined below), less the undisbursed amount of the applicable A&D
Subcommitment. "ESTIMATED A&D AGGREGATE COSTS, EXPENSES, AND FEES" means the
amount that (in the absolute and sole discretion of Bank) is necessary to pay
(A) any then unpaid, previously incurred costs, expenses, and fees for services,
work, and materials previously used in construction of the A&D Improvements, (B)
the remainder of the services, work, and materials to fully complete
construction of the A&D Improvements, and (C) any other costs, expenses, and
fees incurred or to be incurred in connection with the A&D Improvements.
"A&D DEFICIENCY DETERMINATION" means a determination by Bank (in its absolute
and sole discretion) from time to time that the Estimated A&D Aggregate Costs,
Expenses, and Fees exceeds by more than $50,000.00 the total undisbursed amount
of the applicable A&D Subcommitment.
-4-
<PAGE>
"A&D ELIGIBILITY DATE" means the date the A&D Project is deemed to be Eligible
Collateral, as set forth on the A&D Term Sheet.
"A&D ENGINEER" means the licensed engineer retained by the Borrower in
connection with the construction of the A&D Improvements.
"A&D IMPROVED LOT PROJECT" means an A&D Project where the A&D Improvements have
been completed prior to the A&D Eligibility Date.
"A&D IMPROVEMENTS" means (i) offsite improvements which may exist or which are
to be constructed on the A&D Land (including, without limitation, curbs,
grading, landscape, sprinklers, storm and sanitary sewers, paving, sidewalks,
and utilities) necessary to make the A&D Land suitable for the construction of
single family homes, and (ii) any common area improvements which may exist or
which are to be constructed on the A&D Land.
"A&D LAND" means the real property upon which the A&D Improvements exist or are
to be constructed.
"A&D LOT" means an individual lot designated on the final subdivision plat or
filing of the A&D Land.
"A&D PLANS AND SPECIFICATIONS" means all plans and specifications for the A&D
Improvements and the related working drawings prepared by the Engineer, as
amended and modified from time to time in accordance with this Agreement.
"A&D PROJECT" means the A&D Land, the A&D Improvements, and the fixtures and
other tangible personal property located or used in or on the A&D Land or the
A&D Improvements.
"A&D PROJECT TERM" means the maximum period for which an A&D Project may
continue to qualify as Eligible Collateral, as set forth in SECTION 3.5.3.
"A&D SUBCOMMITMENT" means the total commitment approved by Bank with respect to
each A&D Project, as set forth on the A&D Term Sheet.
"A&D TERM SHEET" means a term sheet in the form attached as EXHIBIT A.
"A&D TOTAL COSTS" means, with respect to each A&D Project, the total costs,
expenses and fees included in the respective A&D Budget (including the cost of
the applicable A&D Land).
"A&D UNIMPROVED LOT PROJECT" means an A&D Project where the A&D Improvements
have not been completed prior to the A&D Eligibility Date.
-5-
<PAGE>
"ADVANCE" means an advance by Bank to a Borrower hereunder.
"AGREEMENT" means this Loan Agreement, as it may be amended, modified, extended,
renewed, restated, or supplemented from time to time.
"APPROVALS AND PERMITS" means each and all approvals, authorizations, bonds,
consents, certificates, franchises, licenses, permits, registrations,
qualifications, and other actions and rights granted by or filings with any
Persons necessary, or appropriate for acquisition of the A&D Land and/or Lots,
for construction of the A&D Improvements, for construction of Units, for
ownership and use by the Borrower and other Persons of the A&D Land, the A&D
Improvements, and/or the Units, or for the occupancy of the Units, or for the
conduct of the business and operations of the Borrower.
"AVAILABLE COMMITMENT" means, at any time, the lowest of
(i) the applicable Commitment Amount LESS (A) the aggregate of all
Letter of Credit Subcommitment Amounts, LESS (B) the aggregate of all A&D
Subcommitment amounts less the aggregate of the current A&D Collateral
Values for all A&D Projects that constitute Eligible Collateral; or
(ii) the sum of (A) the aggregate of the current Unit Collateral
Values for all Units that constitute Eligible Collateral, PLUS (B) the
aggregate of the current A&D Collateral Values for all A&D Projects that
constitute Eligible Collateral, LESS (C) the aggregate of all Letter of
Credit Subcommitment amounts.
"BORROWERS" means all of the Persons specified in SECTION 1 as Borrowers;
"BORROWER" means any one of the Borrowers.
"BORROWER LOAN DOCUMENTS" means the Loan Documents executed or delivered by any
Borrower from time to time.
"BORROWER'S EQUITY" means the funds of the applicable Borrower expended or to be
expended for costs, expenses, and fees included in the A&D Budget in the
aggregate amount shown as "BORROWER'S EQUITY" in the applicable A&D Budget.
"BORROWING BASE REPORT" means Borrowers' monthly report disclosing the matters
required pursuant to SECTION 6.3.8.
"BUSINESS DAY" means a day of the year on which banks are not required or
authorized to close in Phoenix, Arizona.
"CALENDAR MONTH" shall mean the twelve (12) calendar months of the year. Any
payment or obligation that is due or required to be performed within a specified
number of Calendar Months shall become
-6-
<PAGE>
due on the day in the last of such specified number of Calendar Months that
corresponds numerically to the date on which such payment or obligation was
incurred or commenced, provided, however, that with respect to any obligation
that is incurred or commences on the 29th, 30th, or 31st day of any Calendar
Month and if the Calendar Month in which such payment or obligation would
otherwise be due does not have a numerically corresponding date, such payment or
obligation shall become due on the first day of the next succeeding Calendar
Month.
"CASH COLLATERAL ACCOUNT" and "CASH COLLATERAL ACCOUNTS" mean, respectively,
each and all deposit accounts maintained by Bank, in Bank's name, and subject to
the terms and conditions of the Cash Collateral Agreement.
"CASH COLLATERAL AGREEMENT" and "CASH COLLATERAL AGREEMENTS" mean, respectively,
each and all agreements by and between the respective Borrowers and Bank, in
form and substance satisfactory to Bank, governing the use of monies held in the
respective Cash Collateral Accounts.
"COLLATERAL" means the property, interests in property, and rights to property
securing any or all Obligations from time to time.
"COLLATERAL CERTIFICATE" means the certificate delivered to Bank by Borrower
pursuant to SECTION 6.3.9.
"COMMITMENT" means the agreement by Bank in SECTION 3.1 to issue Letters of
Credit and to make Advances pursuant to the terms and conditions in the Letter
of Credit Agreements and herein.
"COMMITMENT AMOUNT" means the amount specified in SECTION 1.
"CONVERSION DATE" means June 30, 1995; provided, however, that Bank may, in
Bank's absolute and sole discretion, extend the Conversion Date annually for
periods of twelve (12) months each or such other period as the parties may agree
upon, upon such terms and conditions as Bank may require, in its absolute and
sole discretion, and with such changes to this Agreement or the terms and
conditions herein as Bank may require, in its absolute and sole discretion,
including, without limitation, any changes in or additions to required financial
and other covenants; or such other date determined pursuant to SECTION 3.1.2.
"CONVERSION PERIOD" means the period of time following the Conversion Date.
"CONVERTIBLE SUBORDINATED NOTES" means those $28,000,000.00 principal amount of
8 3/4% convertible subordinated notes due 2005 issued by Guarantor as described
in that private placement memorandum dated December 17, 1993.
-7-
<PAGE>
"COVENANT RELATING TO OTHER DEBT" means Guarantor's covenant with respect to
Guarantor's other Debt set forth in SECTION 5.6 of the Guaranty.
"CUSTOM UNIT" means a Unit that is not located in an approved Subdivision where
the estimated Unit Sales Price (if a Spec Unit) or the actual Unit Sales Price
(if a Presold Unit) is greater than $250,000.00.
"DEBT" means, as to any Person, without limitation, (a) any indebtedness of such
Person for borrowed money, (b) all indebtedness of such Person evidenced by
bonds, debentures, notes, letters of credit, drafts or similar instruments,
(c) all indebtedness of such Person to pay the deferred purchase price of
property or services, including accounts payable and accrued expenses arising in
the ordinary course of business, (d) all capitalized lease obligations of such
Person, (e) all Debt of others secured by a lien on any asset of such Person,
whether or not such Debt is assumed by such Person or guaranteed by such Person,
and (f) all Debt of others guaranteed by such Person and all other indebtedness
that would appear as a liability upon a balance sheet of such Person prepared in
accordance with GAAP.
"DEED OF TRUST" and "DEEDS OF TRUST" means respectively, each and all Deeds of
Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing and
Financing Statement securing the Note and the other Obligations, granted from
time to time by a Borrower, as Trustor, for the benefit of Bank, as Beneficiary,
as the same may be amended, modified, extended, renewed, restated, or
supplemented from time to time, each being in the form approved by Bank in its
reasonable discretion, and each and all Mortgages, Assignment of Leases and
Rents, Fixture Filing and Security Agreement, securing the Note and the other
Obligations, granted from time to time, by a Borrower, as Mortgagor, to Bank, as
Mortgagee, as the same may be amended, modified, extended, renewed, restated, or
supplemented from time to time, each being substantially in the form approved by
Bank in its reasonable discretion.
"DRAW REQUEST" means a completed, written request in form and substance
satisfactory to Bank, from a Borrower to Bank for an Advance, together with such
other documents and information as Bank may require or specify from time to
time.
"ELIGIBLE COLLATERAL" means:
(a) Units which satisfy each of the following requirements: (i)
such Units are in a Subdivision approved pursuant to SECTION 4.2 (or such
Units are Custom Units approved by Bank in its absolute and sole
discretion), (ii) Borrower has satisfied the conditions precedent set forth
in
-8-
<PAGE>
SECTION 4.3 with respect to such Units, and (iii) such Units have not
become subject to SECTION 3.5.12.
(b) A&D Projects which satisfy each of the following requirements:
(i) Borrower has satisfied the conditions precedent set forth in SECTION
4.5 with respect to such A&D Projects, and (ii) such A&D Projects have not
become subject to SECTION 3.5.12.
"ENVIRONMENTAL AGREEMENT" and "ENVIRONMENTAL AGREEMENTS" mean, respectively,
each and all Certifications and Agreement Regarding Hazardous Substances, by a
Borrower and Guarantor from time to time for the benefit of Bank, and relating
to the Collateral, as the same may be amended, modified, extended, renewed,
restated, or supplemented from time to time, each being in the form approved by
Bank in its reasonable discretion.
"ERISA" means the Employee Retirement Income Security act of 1974 and the
regulations and published interpretations thereunder, as in effect from time to
time.
"EVENT OF DEFAULT" has the meaning specified in the Note and the other Loan
Documents, and in the Guaranty, and in the Environmental Agreements.
"FINANCIAL COVENANT" means Guarantor's covenant with respect to Guarantor's
Tangible Net Worth set forth in SECTION 5.5 of the Guaranty.
"GAAP" means generally accepted accounting principles consistently applied;
provided, however, that for purposes of this Agreement, financial statements
shall not be deemed to be inconsistent with GAAP solely by reason of a
Borrower's accounting for transfers of land among Borrowers and Guarantor, a
Borrower and one or more other Borrowers, or their respective Subsidiaries at
the lesser of (i) inter company transfer amounts, or (ii) the historical cost of
such land as it appears on the books of a Borrower, Guarantor, or their
respective Subsidiaries.
"GOVERNMENTAL AUTHORITY" means any government, any court, and any agency,
authority, body, bureau, department, or instrumentality of any government.
"GUARANTOR" means the Person specified in SECTION 1.
"GUARANTY" means the Guaranty of Payment executed by Guarantor, for the benefit
of Bank, guaranteeing repayment of the indebtedness under the Note.
"HAZARDOUS SUBSTANCES" has the meaning specified in the Environmental Agreement.
-9-
<PAGE>
"IMPOSITIONS" has the meaning specified in the Deed of Trust.
"INITIAL APPROVED SUBDIVISIONS" means the Subdivisions approved by Bank as of
the date hereof, which are those Subdivisions currently encumbered by deeds of
trust or mortgages in favor of Bank executed pursuant to (i) that Loan Agreement
between Bank and Richmond American Homes of California, Inc., a Colorado
corporation dated October 13, 1993, as amended, or (ii) that Loan Agreement
between Bank and Richmond American Homes, Inc., a Delaware corporation, and
Guarantor dated November 16, 1993, or (iii) that Loan Agreement between Bank and
Richmond Homes, Inc. II, a Delaware corporation, dated May 21, 1993.
"INTANGIBLE ASSETS" means all intangible assets under GAAP, including, without
limitation, copyrights, franchises, goodwill, licenses, non-competition
covenants, organization or formation expenses, patents, service marks, service
names, trademarks, tradenames, write-up in the book value of any asset in excess
of the acquisition cost of the asset to such Person, any amount, however
designated on the balance sheet, representing the excess of the purchase price
paid for assets or stock acquired over the value assigned thereto on the books
of such Person, unamortized leasehold improvements expense not recoverable at
the end of the lease term, and unamortized debt discount.
"INVOLUNTARY LIENS" has the meaning specified in the Deed of Trust.
"LETTER OF CREDIT" means a standby letter of credit in Bank's standard form from
time to time issued pursuant to SECTIONS 3.1 AND 3.2 in conjunction with
Eligible Collateral by the applicable Borrower for the benefit of the
Governmental Authority, utility company, improvement district, or other similar
Person specified as beneficiary of the Letter of Credit in an amount requested
by such Borrower and approved by Bank.
"LETTER OF CREDIT AGREEMENT" means Bank's standard form Application for Standby
Letter of Credit and Standby Letter of Credit Agreement.
"LETTER OF CREDIT SUBCOMMITMENT" means the face amount of each Letter of Credit.
"LIEN OR ENCUMBRANCE" and "LIENS AND ENCUMBRANCES" mean, respectively, each and
all of the following: (i) any lease or other right to use; (ii) any assignment
as security, conditional sale, grant in trust, lien, mortgage, pledge, security
interest, title retention arrangement, other encumbrance, or other interest or
right securing the payment of money or the performance of any other liability or
obligation, whether voluntarily or involuntarily created and whether arising by
agreement, document, or instrument, under any law, ordinance, regulation, or
rule (federal, state, or local), or otherwise; and (iii) any option or right of
first
-10-
<PAGE>
refusal, except for any approved by Bank in its absolute and sole discretion.
"LOAN DOCUMENTS" means this Agreement, the Note, the Deeds of Trust, the Letter
of Credit Agreements executed and delivered by each Borrower in connection with
the Letters of Credit, the Cash Collateral Agreements, and any other agreements,
documents, or instruments evidencing, guarantying or securing any and all
Advances made hereunder, as such agreements, documents, and instruments may be
amended, modified, extended, renewed, or supplemented from time to time. Loan
Documents shall specifically not include the Environmental Agreements or the
Guaranty.
"LOT" means an individual lot designated on the final subdivision plat or filing
for each Subdivision.
"LOT ALLOCATION" means either (i) with respect to all Lots that were NOT A&D
Lots and that are located in California, twenty percent (20%) of the Unit Base
Appraised Value, (ii) with respect to all Lots that were NOT A&D Lots and that
are not located in California, ten percent (10%) of the Unit Base Appraised
Value, or (iii) with respect to all Lots that were A&D Lots, the release price
paid by the applicable Borrower pursuant to SECTION 3.5.11.1(b).
"MATERIAL ADVERSE CHANGE" means any change in the assets, financial condition,
or results of operations of a Borrower or any other event or condition with
respect to a Borrower that in the reasonable opinion of Bank (i) could affect
the likelihood of performance by such Borrower of any of the Obligations or the
obligations under the Environmental Agreements, (ii) could affect the ability of
such Borrower to perform any of the Obligations or any of the obligations under
the Environmental Agreements, (iii) could affect the legality, validity, or
binding nature of any of the Obligations, or the obligations of such Borrower
under the Environmental Agreements, or any Lien or Encumbrance securing any of
the Obligations or any of such Borrower's obligations under the Environmental
Agreements, or (iv) could affect the priority of any Lien or Encumbrance
securing any of the Obligations or any of Borrower's obligations under the
Environmental Agreements.
"MAXIMUM ALLOWED ADVANCE" means:
(a) with respect to each Presold Unit that constitutes Eligible
Collateral and that is NOT located in California, the lesser of (i) eighty
percent (80%) of the respective Unit Base Appraised Value, or (ii) eighty
percent (80%) of the respective Unit Sales Price; PROVIDED, HOWEVER, that
if such Presold Unit is a Custom Unit, then the Maximum Allowed Advance
shall be the lesser of (A) seventy percent (70%) of the respective Unit
Base Appraised Value, or (B) seventy
-11-
<PAGE>
percent (70%) of the respective Unit Sales Price, or (C) $500,000.00; or
(b) with respect to each Presold Unit that constitutes Eligible
Collateral and that IS located in California, the lesser of (i) seventy-
five percent (75%) of the respective Unit Base Appraised Value, or (ii)
seventy-five percent (75%) of the respective Unit Sales Price; PROVIDED,
HOWEVER, that if such Presold Unit is a Custom Unit, then the Maximum
Allowed Advance shall be the lesser of (A) sixty-five percent (65%) of the
respective Unit Base Appraised Value, or (B) sixty-five percent (65%) of
the respective Unit Sales Price, or (C) $500,000.00; or
(c) with respect to each Spec Unit that constitutes Eligible
Collateral, seventy percent (70%) of the respective Unit Base Appraised
Value; PROVIDED, HOWEVER, that if such Spec Unit is a Custom Unit, then the
Maximum Allowed Advance shall be the lesser of (A) sixty percent (60%) of
the respective Unit Base Appraised Value, or (B) $500,000.00; or
(d) with respect to each Model Unit that constitutes Eligible
Collateral, seventy-five percent (75%) of the respective Unit Base
Appraised Value; or
(e) with respect to each A&D Project, the A&D Subcommitment Amount;
PROVIDED, HOWEVER, that the Maximum Allowed Advance, as so determined, may be
adjusted from time to time by Bank pursuant to any applicable Reclassification
Adjustment or Term Adjustment.
"MODEL UNIT" means a Unit constructed initially for inspection by prospective
purchasers that is not intended to be sold until all or substantially all other
Units in the applicable Subdivision are sold.
"NET INCOME" means, for any period, the net income (loss) of any Person for such
period, determined in accordance with GAAP.
"NET SALES PROCEEDS" means the gross sales price of a Unit set forth in the
Purchase Contract for such Unit, less (i) any earnest money deposit, (ii)
customary tax prorations, (iii) real estate brokerage commissions payable to any
Person who is neither (A) employed by any Borrower or Guarantor, nor (B) engaged
in on-site sales at the Subdivision in which the Unit is located, and (iv)
reasonable and customary closing costs, including any "points" payable by the
Borrower.
"NOTE" means that certain Promissory Note of even date herewith, executed by
Borrower and payable to Bank, evidencing Borrowers'
-12-
<PAGE>
indebtedness hereunder, as the same may be amended, modified, extended, renewed,
restated or supplemented from time to time.
"OBLIGATIONS" means the obligations of each Borrower under the Loan Documents
(including, without limitation, the obligation to pay the Reimbursement Amount).
"OPERATING LOSSES" means operating losses of Guarantor and its Subsidiaries,
calculated on a consolidated basis in accordance with GAAP, excluding therefrom
the impact of net realizable value writedowns and accounting changes.
"OPTION AGREEMENT" means a fully executed agreement between a Borrower and the
seller of any Lots providing for periodic purchases of Lots in a Subdivision.
"PERMITTED EXCEPTIONS" has the meaning specified in the Deed of Trust.
"PERSON" means a natural person, a partnership, a joint venture, an
unincorporated association, a limited liability company, a corporation, a trust,
any other legal entity, or any Governmental Authority.
"PRESOLD UNIT" means a Unit that is subject to a Purchase Contract.
"PROJECT" means all of the A&D Projects, Subdivisions, Lots and Units that are
encumbered by Deeds of Trust from time to time.
"PURCHASE CONTRACT" means a bona fide written agreement between a Borrower and a
third Person purchaser for sale in the ordinary course of such Borrower's
business of any Unit and the related Lot, accompanied by a cash earnest money
deposit or down payment in an amount that is customary, and subject only to
ordinary and customary contingencies to the purchaser's obligation to buy the
Unit and related Lot.
"RECLASSIFICATION ADJUSTMENT" means
(a) with respect to a Model Unit or a Spec Unit NOT located in
California that is reclassified as a Presold Unit, an increase in the
otherwise applicable Maximum Allowed Advance to the lesser of (i) eighty
percent (80%) of the respective Unit Base Appraised Value, or (ii) eighty
percent of the respective Unit Sales Price; PROVIDED, HOWEVER, that if such
Spec Unit is a Custom Unit that is reclassified as a Presold Unit, an
increase in the otherwise applicable Maximum Allowed Advance to the lesser
of (A) seventy percent (70%) of the respective Unit Base Appraised Value,
or (B) seventy percent (70%) of the respective Unit Sales Price, or (C)
$500,000.00; or
-13-
<PAGE>
(b) with respect to a Model Unit or a Spec Unit located in California
that is reclassified as a Presold Unit, an increase in the otherwise
applicable Maximum Allowed Advance to the lesser of (i) seventy-five
percent (75%) of the respective Unit Base Appraised Value, or (ii) seventy-
five percent (75%) of the respective Unit Sales Price; PROVIDED, HOWEVER,
that if such Spec Unit is a Custom Unit that is reclassified as a Presold
Unit, an increase in the otherwise applicable Maximum Allowed Advance to
the lesser of (A) sixty-five percent (65%) of the respective Unit Base
Appraised Value, or (B) sixty-five percent (65%) of the respective Unit
Sales Price, or (C) $500,000.00; or
(c) with respect to a Presold Unit or Model Unit reclassified as a
Spec Unit, a decrease in the otherwise applicable Maximum Allowed Advance
to seventy percent (70%) of the respective Unit Base Appraised Value;
PROVIDED, HOWEVER, that if such Presold Unit is a Custom Unit that is
reclassified as a Spec Unit, an decrease in the otherwise applicable
Maximum Allowed Advance to the lesser of (i) sixty percent (60%) of the
respective Unit Base Appraised Value, or (ii) $500,000.00;
(d) with respect to a Presold Unit or Spec Unit reclassified as a
Model Unit, a change in the otherwise applicable Maximum Allowed Advance to
seventy-five percent (75%) of the respective Unit Base Appraised Value;
PROVIDED, HOWEVER, that the Maximum Allowed Advance for all Units, as so
determined, may be adjusted from time to time by Bank pursuant to any applicable
Term Adjustment.
"REIMBURSEMENT AMOUNT" means the amount a Borrower is obligated to pay to Bank
under the Letter of Credit Agreement in respect of a draft drawn or drawn and
accepted under the Letter of Credit, which amount shall be the amount of the
draft or acceptance and all costs, expenses, fees, and other amounts then
payable by such Borrower to Bank under the Letter of Credit Agreement.
"REQUIREMENTS" shall have the meaning specified in the Deed of Trust.
"SENIOR NOTES" means those $190,000,000.00 principal amount of 11 1/8% senior
notes due 2003, issued by Guarantor as described in that private placement
memorandum dated December 17, 1993, including the Exchange Notes, as defined in
such private placement memorandum.
"SHORTAGE" means the amount by which the Maximum Allowed Advance applicable to
a Unit exceeds the Net Sales Proceeds received from the sale of such Unit.
-14-
<PAGE>
"SPEC UNIT" means a Unit constructed for the purpose of addition to a Borrower's
inventory of Units and which is not subject to a Purchase Contract. A Unit that
is not a Presold Unit or a Model Unit shall be deemed a Spec Unit.
"SPECIFIC UNIT BUDGET" means an actual construction budget for each Unit
proposed to be included in Eligible Collateral containing the information
required in the corresponding Unit Budget for that type of Unit.
"STANDARD NUMBER OF DAYS" means the standard number of days established by Bank
from time to time to allow for delivery to Bank of drafts drawn under letters of
credit issued by Bank and presented to financial institutions other than Bank
for delivery to Bank. Bank may change such number of days at any time and from
time to time in its absolute and sole discretion without notice to any Borrower
and may have a different number of days for commercial letters of credit and
standby letters of credit.
"SUBDIVISION" means a group of Lots designated on an individual subdivision plat
or filing; PROVIDED, HOWEVER, that with respect to multiple subdivision plats or
filings that are phases of a larger development and are in reasonable proximity
to each other, then all of the Lots shown on such subdivision plats or filing or
in such phases in which a common product type is being constructed shall be
deemed in the aggregate to constitute a single Subdivision, as approved by Bank
in its reasonable discretion.
"SUBSIDIARY" or "SUBSIDIARIES" means, with respect to any Person, any
corporation of which a majority of the capital stock having ordinary voting
power to elect a majority of the board of directors or other Persons performing
similar functions is at the time directly or indirectly owned by such Person or
one or more of the other Subsidiaries of that Person or a combination thereof.
"TERM ADJUSTMENT" means
(a) with respect to any Model Unit remaining in Eligible Collateral
beyond the first twelve (12) Calendar Months of the Model Unit's Unit Term,
a decrease in the otherwise applicable Maximum Allowed Advance to seventy-
two (72%) of the respective Unit Base Appraised Value; and with respect to
any Model Unit remaining in Eligible Collateral beyond the first eighteen
(18) Calendar Months of the Model Unit's Unit Term, a decrease in the
otherwise applicable Maximum Allowed Advance to sixty-nine percent (69%) of
the respective Unit Base Appraised Value; and with respect to any Model
Unit remaining in Eligible Collateral beyond the first twenty-four (24)
Calendar Months of the Model Unit's Unit Term, a decrease in the otherwise
applicable Maximum Allowed Advance to sixty-six percent (66%) of the
respective Unit Base Appraised Value; or
-15-
<PAGE>
(b) With respect to each A&D Project remaining in Eligible Collateral
on the last day of the eighteenth (18th) Calendar Month after commencement
of the A&D Project's A&D Project Term, a decrease in the otherwise
applicable Maximum Allowed Advance to eighty-eight percent (88%) of the A&D
Subcommitment Amount; with respect to each A&D Project remaining in
Eligible Collateral on the last day of the twenty-first (21st) Calendar
Month after commencement of the A&D Project's A&D Project Term, a decrease
in the otherwise applicable Maximum Allowed Advance to seventy-six percent
(76%) of the A&D Subcommitment Amount; with respect to each A&D Project
remaining in Eligible Collateral on the last day of the twenty-fourth
(24th) Calendar Month after commencement of the A&D Project's A&D Project
Term, a decrease in the otherwise applicable Maximum Allowed Advance to
sixty-four percent (64%) of the A&D Subcommitment Amount; with respect to
each A&D Project remaining in Eligible Collateral on the last day of the
twenty-seventh (27th) Calendar Month after commencement of the A&D
Project's A&D Project Term, a decrease in the otherwise applicable Maximum
Allowed Advance to fifty-two percent (52%) of the A&D Subcommitment Amount;
with respect to each A&D Project remaining in Eligible Collateral on the
last day of the thirtieth (30th) Calendar Month after commencement of the
A&D Project's A&D Project Term, a decrease in the otherwise applicable
Maximum Allowed Advance to forty percent (40%) of the A&D Subcommitment
Amount; or
(c) with respect to any Unit or A&D Project whose Unit Term or A&D
Project Term has expired, a decrease in the otherwise applicable Maximum
Allowed Advance to zero (0) and the exclusion of such Unit or A&D Project
from Eligible Collateral.
"TERMINATION DATE" shall mean the date thirty-six (36) Calendar Months after the
Conversion Date; PROVIDED, HOWEVER, that if Guarantor has breached the Financial
Covenant or the Covenant Relating to Other Debt as more specifically described
in SECTION 3.1.2.3, then the Termination Date shall mean the date twenty-four
(24) Calendar Months after the Conversion Date.
"TITLE COMPANY" means a title insurance company or companies and any reinsurers
or co-insurers satisfactory to Bank in its absolute and sole discretion.
"TITLE POLICY" and "TITLE POLICIES" mean, respectively, each and all title
insurance policies and endorsements thereto and any reinsurance or co-insurance
agreements and endorsements described in this Agreement or the Tri-Party
Agreement insuring the Deeds of Trust.
"TRI-PARTY AGREEMENT" means that certain letter agreement executed in connection
herewith among Bank, Land Title Guarantee Company,
-16-
<PAGE>
and Old Republic National Title Insurance Company, and consented to by Richmond
Homes Inc., I and Richmond Homes, Inc. II, governing, among other things, the
issuance of Title Policies for Collateral in Colorado, as the same may be
amended, modified, extended or renewed.
"UNIT" means a single-family detached dwelling (i) constructed or to be
constructed on a Lot, and (ii) described in a set of Unit Plans and
Specifications, including, without limitation, any furniture, furnishings,
fixtures, and equipment to be installed therein as shown in the respective Unit
Plans and Specifications. Condominiums, townhomes, homes with common walls, and
other forms of "attached" housing shall not be "Units" for the purpose of this
Agreement, unless otherwise agreed to by Bank in its absolute and sole
discretion. For purposes of this Agreement, each Unit is either (A) a Presold
Unit, (B) a Model Unit, or (C) a Spec Unit.
"UNIT BASE APPRAISAL" means, with respect to each type of Unit, an appraisal of
the Unit and a typical Lot in the applicable Subdivision, as selected by Bank
(or, with respect to Custom Units, an appraisal of such Custom Unit and the Lot
upon which the Custom Unit will be constructed), as such Unit will exist upon
completion (i) ordered by Bank, (ii) prepared by an appraiser satisfactory to
Bank, (iii) in compliance with all federal and state standards for appraisals,
(iv) reviewed by Bank, and (v) in form and substance satisfactory to Bank in its
absolute and sole discretion.
"UNIT BASE APPRAISED VALUE" means the value of a Unit and a typical Lot in the
applicable Subdivision, as selected by Bank (or, with respect to Custom Units,
an appraisal of such Custom Unit and the Lot upon which the Custom Unit will be
constructed), without lot premiums, options, and upgrades (except with respect
to Custom Units, which shall include options and upgrades only), as approved or
determined by Bank in its absolute and sole discretion after review of a Unit
Base Appraisal.
"UNIT BUDGET" means, with respect to each type of Unit, the budget of the costs,
expenses, and fees necessary for or related to construction of that type of Unit
approved by Bank in its reasonable discretion, together with any amendments or
modifications thereof consented to by Bank in its reasonable discretion. Such
budget shall include (i) the onsite cost of labor and materials directly related
to construction of the type of Unit, other "hard costs," construction permits,
tap fees and other fees for permits required by any Governmental Authority, and
costs of direct project supervision, (ii) costs and expenses related to
upgrades, options, and decorator items, (iii) insurance costs, advertising and
marketing costs, escrow and title fees, processing and closing fees, wire
transfer fees, legal fees, and appraisal fees, in an amount equal to or less
than $2,000.00; and (iv) a reserve for repair and maintenance. There shall be a
separate
-17-
<PAGE>
budget for each type of Unit. The Unit Budgets shall not include the Lot
Allocation.
"UNIT COLLATERAL VALUE" means the maximum Advances the applicable Borrower may
obtain against a Unit that constitutes Eligible Collateral based upon the Unit's
stage of construction, determined on a cumulative basis in accordance with
EXHIBIT B.
"UNIT COMPLETION DATE" has the meaning specified in SECTION 1.
"UNIT PLANS AND SPECIFICATIONS" means, with respect to each type of Unit, plans
and specifications for construction of that type of Unit, prepared by an
architect, certified by the applicable Borrower to Bank together with any
amendments or modifications thereof.
"UNIT SALES PRICE" means the price at which a Unit is to be sold to a purchaser
under the applicable Purchase Contract.
"UNIT TERM" means the maximum period for which a Unit may continue to qualify as
Eligible Collateral, as set forth in SECTION 3.5.3.
"UNIT TOTAL COSTS" means, with respect to each type of Unit, the total costs,
expenses, and fees included in the respective Unit Budget plus the applicable
Lot Allocation.
"UNMATURED EVENT OF DEFAULT" means any condition or event that with notice,
passage of time, or both would be an Event of Default.
"UTILITY AND SERVICES CHARGES" has the meaning specified in the Deed of Trust.
3. LETTER OF CREDIT AND LOAN FACILITY.
3.1 LOAN FACILITY.
3.1.1 COMMITMENT. Subject to the terms and conditions of this
Agreement, Bank agrees to make Advances to the applicable Borrower with respect
to Eligible Collateral from time to time on or before the Termination Date,
PROVIDED that the aggregate amount of Advances outstanding at any time and from
time to time, shall not exceed the Available Commitment, and PROVIDED FURTHER
that the aggregate amount of Advances outstanding at any time and from time to
time to any individual Borrower shall not exceed the portion of the Available
Commitment calculated with respect to Eligible Collateral owned by such
Borrower. Proceeds of Advances may be used by the applicable Borrower only for
the purpose described in SECTIONS 3.5.1 and 5.1.6. Advances shall be on a
revolving basis. Advances repaid may be re-borrowed subject to the terms and
the conditions herein. Although the outstanding principal of the Note may be
zero from time to time, the Loan Documents and all obligations of Guarantor
under the Guaranty shall
-18-
<PAGE>
remain in full force and effect until the Commitment terminates and all
Obligations of Borrowers under the Loan Documents and all obligations of
Guarantor under the Guaranty are paid and performed in full. If monies (except
monies reflecting an A&D Deficiency Amount in accordance with SECTION 3.5.9) are
being held in a Cash Collateral Account at any time, Bank shall apply such
monies to the outstanding balance of the Advances made against Eligible
Collateral owned by the respective Borrower, in accordance with the terms of
this Agreement. Upon the occurrence of an Event of Default or an Unmatured
Event of Default, Bank, in its absolute and sole discretion and without notice,
may suspend the commitment to make Advances. In addition, upon occurrence of an
Event of Default, Bank, in its absolute and sole discretion and without notice,
may terminate the commitment to make Advances. The obligation of each Borrower
to repay Advances made to such Borrower shall be evidenced by the Note.
3.1.2 CONVERSION PERIOD.
3.1.2.1 CONVERSION PERIOD ESTABLISHED BY BANK. Bank may cause
the Conversation Date to occur and the Conversion Period to commence at any time
in Bank's sole and absolute discretion. If Bank causes the Conversion Date to
occur on any date other than the calendar date or anniversary date thereof set
forth in the definition of Conversion Date in SECTION 2, then Bank will give
Borrowers at least five (5) Business Days notice prior to the Conversion Date.
If Bank causes the Conversion Date to occur and the Conversion Period to
commence pursuant to this SECTION 3.1.2.1, then from and after the first
anniversary of the Conversion Date, the Commitment Amount in effect as of the
Conversion Date shall be reduced on the first day of each quarter-annual period
by a percentage of such Commitment Amount as follows:
Percentage Percentage
of Commitment of Commitment
PERIOD REDUCTION REMAINING
------ ------------- -------------
15 Calendar Months after
Conversion Date 12.5% 87.5%
18 Calendar Months after
Conversion Date 12.5% 75.0%
21 Calendar Months after
Conversion Date 12.5% 62.5%
24 Calendar Months after
Conversion Date 12.5% 50.0%
27 Calendar Months after
Conversion Date 12.5% 37.5%
-19-
<PAGE>
30 Calendar Months after
Conversion Date 12.5% 25.0%
33 Calendar Months after
Conversion Date 12.5% 12.5%
Termination Date 12.5% 0%
3.1.2.2 CONVERSION PERIOD RESULTING FROM OPERATING LOSSES. If
Guarantor's consolidated financial statements submitted to Bank pursuant to
SECTION 6.3.1 show Operating Losses for two (2) consecutive fiscal quarters or
if Guarantor breaches the provisions of SECTION 4.1.4 of the Guaranty, then
unless Bank in its sole and absolute discretion agrees otherwise the
Conversation Date shall automatically occur and the Conversion Period shall
automatically commence, effective as of the first day of the first Calendar
Month immediately following the second such fiscal quarter. If the Conversion
Date occurs and the Conversion Period commences pursuant to this SECTION
3.1.2.2, then from and after the Conversion Date, the Commitment Amount in
effect as of the Conversion Date shall be reduced on the first day of each
quarter-annual period by a percentage of such Commitment Amount as follows:
Percentage Percentage
of Commitment of Commitment
Period Reduction Remaining
------ ------------- -------------
3 Calendar Months after
Conversion Date 5% 95%
6 Calendar Months after
Conversion Date 5% 90%
9 Calendar Months after
Conversion Date 9% 81%
12 Calendar Months after
Conversion Date 9% 72%
15 Calendar Months after
Conversion Date 9% 63%
18 Calendar Months after
Conversion Date 9% 54%
21 Calendar Months after
Conversion Date 9% 45%
24 Calendar Months after
Conversion Date 9% 36%
-20-
<PAGE>
27 Calendar Months after
Conversion Date 9% 27%
30 Calendar Months after
Conversion Date 9% 18%
33 Calendar Months after
Conversion Date 9% 9%
Termination Date 9% 0%
3.1.2.3 CONVERSION PERIOD RESULTING FROM OTHER BREACHES BY
GUARANTOR. If Guarantor breaches the Financial Covenant (except for a breach
that are results solely from accounting changes) or the Covenant Relating to
Other Debt and such breach continues uncured for ninety (90) days, then unless
Bank in its sole and absolute discretion agrees otherwise the Conversation Date
shall automatically occur and the Conversion Period shall automatically
commence, effective as of the first day of the first Calendar Month immediately
following the time period to which the breach relates. If the Conversion Date
occurs and the Conversion Period commences pursuant to this SECTION 3.1.2.3,
then from and after three (3) Calendar Months after the Conversion Date, the
Commitment Amount in effect as of the Conversion Date shall be reduced on the
first day of each quarter-annual period by a percentage of such Commitment
Amount as follows:
Percentage Percentage
of Commitment of Commitment
Period Reduction Remaining
------ ------------- -------------
3 Calendar Months after
Conversion Date 5% 95%
6 Calendar Months after
Conversion Date 10% 85%
9 Calendar Months after
Conversion Date 10% 75%
12 Calendar Months after
Conversion Date 15% 60%
15 Calendar Months after
Conversion Date 15% 45%
18 Calendar Months after
Conversion Date 15% 30%
21 Calendar Months after
Conversion Date 15% 15%
-21-
<PAGE>
Termination Date 15% 0%
3.1.3 VOLUNTARY REDUCTIONS IN COMMITMENT AMOUNT. At any
time, Borrowers may elect to reduce the Commitment Amount in such amounts as
Borrowers may designate; PROVIDED, HOWEVER, Borrowers shall have provided Bank
written notice of Borrowers' desire to reduce the Commitment Amount, and
Borrowers shall have paid to Bank any amount payable pursuant to SECTION 3.7
after giving effect to the reduction in the Commitment Amount.
3.2 LETTER OF CREDIT.
3.2.1 ISSUANCE OF LETTER OF CREDIT. Subject to the terms and
conditions of this Agreement and the applicable Letter of Credit Agreement and
subject to the policies, procedures, and requirements of Bank in effect from
time to time for issuance of Letters of Credit (including, without limitation,
payment of Bank's standard letter of credit fees), Bank agrees to issue, on or
before the Termination Date, Letters of Credit in connection with upon request
by and for the account of any Borrower, provided that Borrower has delivered to
Bank a completed and executed Letter of Credit Agreement, and provided further
that the date that is the Standard Number of Days after the last date for
payment of drafts drawn or drawn and accepted under the requested Letter of
Credit is at least thirty-one (31) days before the scheduled Termination Date.
The terms of any Letter of Credit Agreement will not be inconsistent with the
terms of this Agreement. Each reference in this Agreement to "issue" or
"issuance" or other forms of such words in relation to the Letter of Credit
shall also include any extension or renewal of the Letter of Credit. Upon
occurrence of an Event of Default or an Unmatured Event of Default, Bank, in its
absolute and sole discretion and without notice, may suspend the commitment to
issue any Letters of Credit. In addition, upon occurrence of an Event of
Default, Bank, in its absolute and sole discretion and without notice, may
terminate the commitment to issue any Letters of Credit.
3.2.2 ISSUANCE PROCEDURE. To obtain a Letter of Credit, Borrower
shall complete and execute a Letter of Credit Agreement and submit it to the
letter of credit department of Bank. Upon receipt of a completed and executed
Letter of Credit Agreement, Bank will process the application in accordance with
the policies, procedures, and requirements of Bank then in effect. If the
application meets the requirements of Bank and is within the policies of Bank
then in effect but does not contradict this Agreement, and meets the regulatory
requirements applicable thereto, Bank will issue the requested Letter of Credit.
The Letter of Credit Subcommitment amount will not be part of any A&D Budget or
any Unit Budget. Until the Letter of Credit expires or is drawn in full, and
any drafts drawn or drawn and accepted under the Letter of Credit are paid in
full, the Letter of Credit Subcommitment amount will be deemed to be an Advance,
and will be
-22-
<PAGE>
subject to the restrictions and limitations set forth in this Agreement that
relate to Advances; PROVIDED that such Advance will not bear interest except to
the extent of any drafts drawn or drawn and accepted under the Letter of Credit.
3.2.3 REIMBURSEMENT OF BANK FOR PAYMENT OF DRAFTS DRAWN OR DRAWN
AND ACCEPTED UNDER THE LETTER OF CREDIT. The obligation of the applicable
Borrower to reimburse Bank for payment by Bank of drafts drawn or drawn and
accepted under a Letter of Credit shall be as provided in the Letter of Credit
Agreement. Bank will notify the applicable Borrower of payment by Bank of a
draft drawn or drawn and accepted under a Letter of Credit and of the
Reimbursement Amount and will give such Borrower the election (i) to pay the
Reimbursement Amount pursuant to Letter of Credit Agreement or (ii) to pay the
Reimbursement Amount by Bank making an Advance, subject to the terms and
conditions herein and applying the proceeds of the Advance to pay the
Reimbursement Amount. If such Borrower does not communicate to Bank its
election within two (2) Business Days after notification by Bank of payment of
the draft or acceptance, then such Borrower shall be deemed to have elected to
pay the Reimbursement Amount by Bank making an Advance hereunder, provided that
if the terms and conditions in this Agreement for a such Advance hereunder are
not satisfied, such Borrower shall be deemed to have elected to pay the
Reimbursement Amount pursuant to the Letter of Credit Agreement. The Advance to
pay the Reimbursement Amount will be dated the date that Bank pays the
respective draft or acceptance and will accrue interest from and after such
date.
If a Borrower is to pay the Reimbursement Amount pursuant to the Letter of
Credit Agreement, such Borrower shall also pay to Bank interest on the
Reimbursement Amount from and including the date Bank pays the respective draft
or acceptance at the Variable Rate (as defined in the Note) until the
Reimbursement Amount and such interest are paid in full, provided that if the
Borrower fails to pay the Reimbursement Amount and accrued interest thereon
within five (5) Business Days after notification by Bank to such Borrower of
payment of the respective draft or acceptance, interest thereafter will accrue
at the Default Rate (as such term is defined in the Note). Such interest shall
be computed on the basis of a 360-day year and accrue on a daily basis for the
actual number of days elapsed.
Notwithstanding the above, if a Borrower elects or is deemed to have
elected to pay the Reimbursement Amount pursuant to the Letter of Credit
Agreement and fails to pay the Reimbursement Amount and interest thereon within
five (5) Business Days after notification by Bank to such Borrower, Bank, in its
absolute and sole discretion and without notice to such Borrower and regardless
of whether the terms and conditions in this Agreement for such Advances are
satisfied, may make an Advance under this Agreement in the amount of the
Reimbursement Amount and accrued interest thereon
-23-
<PAGE>
and apply the proceeds of such Advance to pay the Reimbursement Amount and
accrued interest.
3.3 A&D SUBCOMMITMENT FACILITY.
3.3.1 AGREEMENT TO MAKE ADVANCES. Subject to the terms and
conditions of this Agreement, Bank agrees to make Advances to the applicable
Borrower from time to time on or before the Termination Date with respect to A&D
Projects owned by such Borrower that constitute Eligible Collateral, provided
that with respect to A&D Unimproved Lot Projects, if the total costs, expenses,
and fees in the construction contract(s) for A&D Improvements are less than
total amount of the A&D Budget (including the contingency items), Bank, in its
absolute and sole discretion, may reduce the A&D Subcommitment Amount by such
difference.
3.3.2 AMOUNT OF A&D SUBCOMMITMENT. Unless otherwise agreed to by
Bank in its sole and absolute discretion, the A&D Subcommitment amount will be:
(A) with respect to each A&D Project that is not located in California, the
lesser of (i) seventy percent (70%) of the respective A&D Appraisal Review
Market Value, or (ii) seventy percent (70%) of the respective A&D Total Costs;
PROVIDED, HOWEVER, that if such A&D Project includes or is estimated to include
more than 125 A&D Lots, then the percentages in clauses (i) and (ii) shall be
reduced to sixty-five percent (65%); or (B) with respect to each A&D Project
that is located in California, the lesser of (I) sixty-five percent (65%) of the
respective A&D Appraisal Review Market Value, or (II) sixty-five percent (65%)
of the respective A&D Total Costs; PROVIDED, HOWEVER, that if such A&D Project
includes or is estimated to include more than 125 A&D Lots, then the percentages
in clauses (I) and (II) shall be reduced to sixty percent (60%).
3.4 REQUEST FOR LETTERS OF CREDIT AND ADVANCES. A Letter of Credit may be
issued and Advances may be made by Bank to the applicable Borrower at the
written request (in the form of a Draw Request) by the Person or Persons
designated from time to time on Bank's form of signature authorization;
PROVIDED, HOWEVER, that Bank shall have acknowledged receipt of any changes in
the Person or Persons designated by such Borrower, and such Person or Persons
shall have executed a new signature authorization form. Such Person or Persons
are hereby authorized by each Borrower to request Advances not more frequently
than one time per Business Day, and Letters of Credit Letters of Credit at any
time, and to direct the disposition of the proceeds of Advances until written
notice of the revocation of such authority is received from such Borrower by
Bank and Bank has had a reasonable time to act upon such notice. Bank shall
have no duty to monitor for any Borrower or to report to any Borrower the use of
a Letter of Credit or proceeds of Advances. Bank shall not be required to make
any requested Advance before two (2) Business Days after receipt of the Draw
Request; PROVIDED,
-24-
<PAGE>
HOWEVER, that if Bank receives the Draw Request before 3:00 p.m., Phoenix time,
on a Business Day, then Bank will use its best efforts to make the requested
Advance by noon, Phoenix time, on the following Business Day. Advances will be
disbursed directly to the account of the Borrower that owns the Eligible
Collateral, as directed by such Borrower; PROVIDED HOWEVER, that upon an Event
of Default or an Unmatured Event of Default, Advances will be disbursed at
Bank's option (A) directly to the account of the Borrower that owns the Eligible
Collateral, (B) directly to Persons providing labor, materials, and service in
connection with such Eligible Collateral, (C) directly to other Persons entitled
to the funds, or (D) jointly to the applicable Borrower and the Persons
described in (B) or (C).
3.5 ADVANCES.
3.5.1 PURPOSE OF FACILITY AND USE OF ADVANCES. Advances may be
used by the applicable Borrower to pay interest and fees due under the Loan
Documents, and to pay or reimburse costs, expenses, and fees actually incurred
by such Borrower in connection with the construction of Units and A&D Projects
owned by such Borrower constituting Eligible Collateral.
3.5.2 DETERMINATION OF AMOUNT OF ADVANCES AND LIMITATIONS ON
ADVANCES.
3.5.2.1 GENERAL DETERMINATION. The Available Commitment, the
Maximum Allowed Advance, the A&D Collateral Value, the Unit Collateral Value,
and the amount of each Advance shall be determined by Bank based upon: (i) the
Borrowing Base Report and the Collateral Certificate most recently submitted by
the applicable Borrower (adjusted to reflect Units sold, Reclassification
Adjustments, Term Adjustments and other adjustments and limitations pursuant to
this Agreement), and (ii) Bank's inspections made pursuant to SECTION 6.15 AND
6.20 (as such inspections may result in any adjustments to reflect any variance
between (A) the Borrowing Base Report and the Collateral Certificate, and (B)
the results of such inspections or other information available to Bank), and
(iii) such other information as Bank may reasonably require in order to verify
such amounts. Advances will be made against Units and A&D Projects that
constitute Eligible Collateral based on the respective Unit Collateral Values
and A&D Collateral Values, not to exceed in any event the Maximum Allowed
Advance.
3.5.2.2 PERCENTAGE LIMITATIONS. Advances will be further
subject to the following limitations, which shall be calculated with respect to
each Borrowing Base Report:
(a) The total outstanding Advances made against Custom Units shall
not any time exceed four percent (4%) of the then applicable Commitment
Amount.
-25-
<PAGE>
(b) The sum of (i) the aggregate of all A&D Subcommitment amounts
relating to A&D Projects located in Arizona, plus (ii) the aggregate Unit
Collateral Values for all Units located in Arizona, shall not at any time
exceed fifty-five percent (55%) of the then applicable Commitment Amount.
(c) The sum of (i) the aggregate of all A&D Subcommitment amounts
relating to A&D Projects located in Colorado, plus (ii) the aggregate Unit
Collateral Values for all Units located in Colorado, shall not at any time
exceed eighty percent (80%) of the then applicable Commitment Amount.
(d) The sum of (i) the aggregate of all A&D Subcommitment amounts
relating to A&D Projects located in Nevada, plus (ii) the aggregate Unit
Collateral Values for all Units located in Nevada, shall not at any time
exceed forty-five percent (45%) of the then applicable Commitment Amount.
(e) The sum of (i) the aggregate of all A&D Subcommitment amounts
relating to A&D Projects located in California, plus (ii) the aggregate
Unit Collateral Values for all Units located in California, shall not at
any time exceed fifty-five percent (55%) of the then applicable Commitment
Amount.
(f) The aggregate amount of all A&D Subcommitment amounts shall not
at any time exceed 26.66 percent (26.66%) of the then applicable Commitment
Amount.
(g) The aggregate of all A&D Subcommitment amounts relating to
Eligible Collateral located in the same state shall not at any time exceed
twenty percent (20%) of the then applicable Commitment Amount.
(h) At least fifty percent (50%) of the total outstanding Advances
must be made against Model Units and Presold Units (including Custom
Units).
3.5.3 TERM PERIOD. Each Unit and each A&D Project shall
constitute Eligible Collateral only during the applicable Unit Term and A&D
Project Term for such Unit and A&D Project set forth below; PROVIDED, HOWEVER,
that in no event shall any Unit Term or any A&D Project Term extend beyond the
Termination Date:
3.5.3.1 PRESOLD UNITS. A Presold Unit may constitute Eligible
Collateral for not more than twelve (12) Calendar Months from the date an
Advance is first made against Eligible Collateral that includes such Presold
Unit.
-26-
<PAGE>
3.5.3.2 SPEC UNITS. A Spec Unit may constitute Eligible
Collateral for not more than twelve (12) Calendar Months from the date an
Advance is first made against Eligible Collateral that includes such Spec Unit.
3.5.3.2 MODEL UNITS. A Model Unit may constitute Eligible
Collateral for not more than thirty-six (36) Calendar Months from the date an
Advance is first made against Eligible Collateral that includes such Model Unit;
PROVIDED, HOWEVER, (i) any Model Unit remaining as Eligible Collateral for more
than twelve (12) Calendar Months from the date an Advance is first made against
Eligible Collateral that includes such Model Unit shall be subject to a Term
Adjustment for purposes of determining the applicable Maximum Allowed Advance;
(ii) any Model Unit remaining as Eligible Collateral for more than eighteen (18)
Calendar Months from the date an Advance is first made against Eligible
Collateral that includes such Model Unit shall be subject to a Term Adjustment
for purposes of determining the applicable Maximum Allowed Advance; and (iii)
any Model Unit remaining as Eligible Collateral for more than twenty-four (24)
Calendar Months from the date an Advance is first made against Eligible
Collateral that includes such Model Unit shall be subject to a Term Adjustment
for purposes of determining the applicable Maximum Allowed Advance.
3.5.3.4 A&D PROJECTS. An A&D Project may constitute Eligible
Collateral for not more than thirty (30) Calendar Months from the A&D
Eligibility Date for such A&D Project; PROVIDED, HOWEVER, (i) any A&D Project
remaining as Eligible Collateral on the last day of the eighteenth (18th)
Calendar Month after the A&D Eligibility Date for such A&D Project shall be
subject to a Term Adjustment for purposes of determining the applicable Maximum
Allowed Advance; (ii) any A&D Project remaining as Eligible Collateral on the
last day of the twenty-first (21st) Calendar Month after the A&D Eligibility
Date for such A&D Project shall be subject to a Term Adjustment for purposes of
determining the applicable Maximum Allowed Advance; (iii) any A&D Project
remaining as Eligible Collateral on the last day of the twenty-fourth (24th)
Calendar Month after the A&D Eligibility Date for such A&D Project shall be
subject to a Term Adjustment for purposes of determining the applicable Maximum
Allowed Advance; (iv) any A&D Project remaining as Eligible Collateral on the
last day of the twenty-seventh (27th) Calendar Month after the A&D Eligibility
Date for such A&D Project shall be subject to a Term Adjustment for purposes of
determining the applicable Maximum Allowed Advance; (v) any A&D Project
remaining as Eligible Collateral on the last day of the thirtieth (30th)
Calendar Month after the A&D Eligibility Date for such A&D Project shall be
subject to a Term Adjustment for purposes of determining the applicable Maximum
Allowed Advance.
3.5.4 LIMITATION ON ELIGIBLE COLLATERAL. Borrower shall not be
entitled to include in Eligible Collateral:
-27-
<PAGE>
(a) Spec Units in a single Subdivision that exceed (i) six (6) Spec
Units, for Subdivisions in Arizona, (ii) eight (8) Spec Units, for
Subdivisions in Colorado, (iii) six (6) Spec Units, for Subdivisions in
Nevada, and (iv) ten (10) Spec Units, for Subdivisions in California;
(b) an aggregate number of Spec Units exceeding forty percent (40%) of
all Units that constitute Eligible Collateral;
(c) more than four (4) Model Units in any Subdivision;
(d) any Custom Units that are Model Units;
(e) any A&D Unimproved Lot Project where ninety (90) days have lapsed
since the A&D Eligibility Date without commencement of construction of the
A&D Improvements;
(f) any A&D Unimproved Lot Project where ninety (90) days have lapsed
since the A&D Eligibility Date without recordation of a plat map satisfying
the requirements in SECTION 6.21; or
(g) any A&D Unimproved Lot Project where fifteen (15) Calendar Months
have lapsed since the A&D Eligibility Date without completion of
construction of the A&D Improvements.
In the event that Borrowers or a Borrower are in violation of the limitations
set forth in this SECTION 3.5.4, upon notice thereof from Bank, Borrowers or the
Borrower, as applicable, shall select and remove the affected Units or A&D
Projects from Eligible Collateral until such limitations are no longer violated.
3.5.5 CLASSIFICATION AND RECLASSIFICATION OF UNITS. Bank may
classify or reclassify Units as to type from time to time, or change a
Borrower's proposed classification of any and all Units, provided that such
reclassified Unit meets the requirements set forth herein for that type of Unit.
At any time a Unit is reclassified as to type, such reclassification shall give
rise to a Reclassification Adjustment to the Maximum Allowed Advance applicable
to such Unit. In no event shall a reclassification change the commencement date
of any Unit Term.
3.5.6 LIMITATIONS RELATING TO EACH BORROWER. The aggregate amount
of Advances made against Units and A&D Projects owned by a single Borrower shall
not exceed the Maximum Allowed Advances for all Units and A&D Projects owned by
such Borrower.
3.5.7 A&D BUDGET LIMITATIONS AND COVENANTS.
3.5.7.1 GENERAL LIMITATION. The Maximum Allowed Advances for
an A&D Project shall not exceed the A&D Subcommitment amount.
-28-
<PAGE>
3.5.7.2 BORROWER EQUITY. The Maximum Allowed Advances for an
A&D Project will not include any amounts shown as "BORROWER EQUITY" in the A&D
Budget.
3.5.7.3 SPECIFIC LINE ITEM LIMITATIONS. In addition to the
other limitations in this Agreement, with respect to A&D Unimproved Lot
Projects, the following A&D Budget line items are subject to the following
limitations:
3.5.7.3.1 The "ENGINEERING" line item includes the costs,
expenses, and fees of site inspections and related activities by the Engineer.
If the engineer that prepared the A&D Plans and Specifications is not an
independent third party or is no longer under contract with the applicable
Borrower, Bank shall determine, in its absolute and sole discretion, the value,
pro rata or otherwise, that the A&D Plans and Specifications have contributed to
the A&D Project and this value shall be the amount included in the A&D Budget in
the "ARCHITECTURE AND ENGINEERING" line item.
3.5.7.3.2 The "APPROVALS AND PERMITS AND MUNICIPAL FEES"
line item does not include costs, expenses, and fees included in other line
items, for example, property and sales taxes.
3.5.7.3.3 The "BORROWER INSURANCE" line item does not
include insurance included in other line items, for example, title insurance,
contractor bonds, and contractor insurance.
3.5.7.3.4 The "LEGAL" line item, if any, is for costs,
expenses, and fees of such Borrower's counsel and of Bank's in-house and outside
counsel in documenting, negotiating, and closing the A&D Subcommitment. This
line item does not include legal fees and costs and expenses relating to
formation of any Borrower or Guarantor, the negotiation or preparation of any
corporate or partnership agreements, documents, or instruments or the
negotiation and preparation of any agreements with architects, contractors, and
suppliers.
3.5.7.3.5 The "REAL ESTATE TAXES" line item includes all
real estate taxes until the Termination Date and any optional extension thereof.
Each Borrower hereby authorizes Bank to make Advances from time to time with
respect to Eligible Collateral owned by such Borrower to pay real estate taxes
as they become due if such Borrower is not paying such taxes and is not
contesting such taxes in accordance with the Deed of Trust, and also authorizes
Bank to make such payment directly to the taxing Governmental Authority. This
authorization shall be irrevocable, and no further direction or authorization
from any Borrower shall be necessary for Bank to make such Advances.
-29-
<PAGE>
3.5.8 FURTHER LIMITATIONS ON ADVANCES. In addition to the other
terms, conditions, and limitations in this Agreement, Bank's obligation to make
each Advance against Eligible Collateral that includes A&D Projects is subject
to the following limitations:
3.5.8.1 LAND ADVANCE. After the A&D Eligibility Date for an
A&D Unimproved Lot Project, and until commencement of construction of the A&D
Improvements and until recordation or filing of a plat in accordance with
SECTION 6.21, the Maximum Allowed Advance will be the amount set forth in the
"LAND" line item.
3.5.8.2 RETAINAGE. At Bank's option, Bank may not permit
inclusion of the final ten percent (10%) of the original Maximum Allowed Advance
for an A&D Unimproved Lot Project until Bank has inspected the A&D Project and
deemed the A&D Improvements to be completed (subject to correction of minor
punch list items), and until the Borrower that owns such A&D Project has
delivered or caused to be delivered to Bank the following:
(a) TITLE POLICY ENDORSEMENTS. Such additional endorsements to the
Title Policy or such additional policies of title insurance with
endorsements thereto as Bank may require, with a liability limit not less
than the amount of the Title Policy issued by Title Company and with
coverage and in form satisfactory to Bank in its absolute and sole
discretion, insuring Bank's interest under the Deed of Trust as a valid
first lien on the A&D Project, excepting only such items as Bank approves
in writing and providing affirmative insurance therein against mechanics'
liens, materialmen's liens, and claims or liens in the nature thereof on
account of construction of the A&D Improvements.
(b) NOTICE OF COMPLETION. If requested by Bank in its absolute and
sole discretion, a notice of completion on Bank's approved form executed by
Borrower and duly recorded in the county recorder's office where the A&D
Project is located.
(c) AS BUILT PLANS. If requested by Bank in its absolute and sole
discretion, "AS-BUILT" plans and specifications of the A&D Improvements,
showing the final plans and specifications of all A&D Improvements.
(d) ACCEPTANCE BY GOVERNMENTAL AUTHORITIES. A letter of acceptance
or its equivalent from each applicable Governmental Authority regarding
completion of the A&D Improvements.
(e) AFFIDAVITS AND CONSENTS. If requested by Bank in its absolute
and sole discretion and if applicable, completed and executed copies of AIA
Form G706 (Contractor's Affidavit of Payment of Debts and Claims), AIA Form
G706A (Contractor's
-30-
<PAGE>
Affidavit of Release of Liens), and AIA Form G707 (Consent of Surety to
Final Payment).
(f) LIEN WAIVERS. If requested by Bank in its absolute and sole
discretion, unconditional lien waivers on Bank's approved form from each
Person that has recorded a preliminary notice of lien against the A&D
Project and from each other Person that has supplied labor, materials, or
services for the A&D Project.
3.5.8.3 INFORMATION RELATING TO A&D BUDGETS. In connection
with A&D Unimproved Lot Projects, the applicable Borrower will provide to Bank,
upon Bank's request, (i) the actual costs, expenses, and fees incurred by such
Borrower for labor and other work performed on the A&D Improvements and for
materials incorporated in the A&D Improvements or suitably stored on the A&D
Land as indicated by bills, invoices, receipts, statements, vouchers, or other
written evidence satisfactory to Bank showing the costs, expenses, and fees
incurred, (ii) the actual value of such labor, work, and materials, or (iii) the
amounts allocated to such labor, work, and materials in the line items in the
A&D Budget multiplied by the percentage of completion of such labor, work, and
materials. Materials will be "suitably" stored on the A&D Land only if they are
adequately stored and safeguarded to protect against theft and damage and, if
required by Bank, are insured against loss, theft, and damage under insurance
policies naming Bank as loss payee and complying with the requirements of
SECTION 6.7. Bank shall not be required to include in the calculation of A&D
Collateral Value the cost of materials stored away from the A&D Land. However,
Bank, in its absolute and sole discretion, may permit to be included in the A&D
Collateral Value a portion of the costs of such materials if Bank has been
provided with a perfected, first-priority security interest in such materials,
has received evidence satisfactory to Bank that such materials are adequately
stored at a suitable location agreed to by Bank and such Borrower and that all
such materials are inventoried, clearly segregated from materials not to be used
for the Improvements, identified, safeguarded, and, if required by Bank, insured
against loss, damage, and theft (including, without limitation, while in
transit) under insurance policies naming Bank as loss payee and complying with
the requirements in SECTION 6.7.
3.5.8.4 AMOUNT OF ADVANCES FOR SOFT COSTS. The portion of
Maximum Allowed Advances attributable to "SOFT COSTS" line items in the A&D
Budget shall be limited to the lesser of (i) the actual costs, expenses, and
fees incurred by the applicable Borrower as indicated by bills, invoices,
receipts, statements, vouchers, or other written evidence satisfactory to Bank
showing the costs, expenses, and fees incurred, and (ii) the amounts allocated
for such costs, expenses, and fees in the line items in the A&D Budget.
-31-
<PAGE>
3.5.9 DEFICIENCIES. If from time to time Bank makes an A&D
Deficiency Determination, Bank's obligation to continue to include the A&D
Project in Eligible Collateral may be suspended by Bank in its absolute and sole
discretion until either (i) the applicable Borrower deposits into the applicable
Cash Collateral Account funds from or for the benefit of the applicable Borrower
in an amount equal to the respective A&D Deficiency Amount and such amount is
disbursed as provided in this SECTION 3.5.9, or (ii) such Borrower delivers to
Bank paid bills, invoices, receipts, statements, vouchers, or other written
evidence satisfactory to Bank showing that such Borrower has paid from its own
funds costs, expenses, and fees included in the A&D Budget in an amount equal to
the A&D Deficiency Amount, or (iii) the A&D Subcommitment Amount and the amount
of Advances available against the applicable A&D Land (as shown on the A&D
Budget) is reduced by such A&D Deficiency Amount. Borrower shall either make
such deposit of an A&D Deficiency Amount with Bank or deliver to Bank such paid
bills, invoices, receipts, statements, vouchers or other written evidence, or
notify Bank to make the reductions in clause (iii), within thirty (30) days
after written notice by Bank to Borrower. All amounts deposited by Borrower
with Bank shall be disbursed subject to the terms and conditions of this
Agreement applicable to the making of Advances. Any such deposit by a Borrower
shall be effective as an amendment of the A&D Budget. This SECTION 3.5.9 shall
not affect or impair the requirements in SECTION 6.12.
3.5.10 GENERAL. Anything in this SECTION 3 or the Loan Documents
to the contrary notwithstanding, each Borrower agrees that no limitation on any
Advances shall limit or otherwise change any Borrower's obligations and
liabilities under this Agreement, that each Borrower shall remain obligated to
pay all costs, expenses, and fees required to be paid by such Borrower pursuant
to this Agreement and the other Loan Documents and the Environmental Agreements,
and that each Borrower shall remain obligated to pay all costs, expenses, and
fees now or hereafter arising in connection with acquisition, development,
maintenance, occupancy, operation, and use of the Eligible Collateral owned by
such Borrower and construction of the A&D Improvements and Units by such
Borrower.
3.5.11 RELEASES OF COLLATERAL.
3.5.11.1 RELEASE OF CERTAIN COLLATERAL AT REQUEST OF BORROWER.
So long as no Event of Default has occurred and is continuing, a Borrower may
request releases of Units, Lots and A&D Lots from the lien and encumbrance of a
Deed of Trust from time to time; PROVIDED, HOWEVER, Bank shall be under no
obligation to release any Unit, Lot or A&D Lot unless each of the following
conditions precedent is satisfied:
(a) in the case of any Unit that is being released for the purpose of
sale, (i) such Borrower shall have paid to
-32-
<PAGE>
Bank, from its own funds (including Net Sales Proceeds) and not from
proceeds of Advances, the greater of (A) the applicable Maximum Allowed
Advance or (B) the Net Sales Proceeds (PROVIDED, HOWEVER, that if the Lot
or Unit to be released is not included in Eligible Collateral, such
Borrower shall not be required to pay to Bank any amounts pursuant to this
clause (i)); (ii) such Borrower shall have delivered to Bank a closing
report pursuant to SECTION 6.3.3; and (iii) both before and after giving
effect to such release and any payments to be made pursuant to
CLAUSE (a)(i) of this sentence, the outstanding Advances do not exceed the
Available Commitment or the portion of the Available Commitment
attributable to Eligible Collateral owned by such Borrower, and such
Borrower has made any payments then required pursuant to SECTION 3.7; or
(b) with respect to releases of A&D Lots, such Borrower shall have
paid to Bank, from the its own funds (including sales proceeds), either (i)
if more than one A&D Lot in a single A&D Project is sold to a single
purchaser (other than another Borrower), then the release price shall be
the A&D Collateral Value DIVIDED BY the number of A&D Lots in the A&D
Project then subject to Bank's Deed of Trust (including the A&D Lots to be
released) MULTIPLIED BY the number of A&D Lots to be released MULTIPLIED BY
either (A) 130% (for A&D Projects containing more than 150 A&D Lots) or by
(B) 125% (for A&D Projects containing more than 100 A&D Lots, but not more
than 150 A&D Lots) or by (C) 120% (for A&D Projects containing 100 or fewer
A&D Lots); or (ii) for releases of individual A&D Lots or for releases of
A&D Lots in connection with transfers to another Borrower, the release
price shall be the A&D Collateral Value DIVIDED BY the number of A&D Lots
in the A&D Project then subject to Bank's Deed of Trust (including the A&D
Lot to be released) MULTIPLIED BY the number of A&D Lots to be released;
and
(c) with respect to releases of Lots or Units for purposes other than
sale, both before and after giving effect to such release, the outstanding
Advances do not exceed the Available Commitment and Borrower has made any
payments required pursuant to SECTION 3.7; and
(d) Borrower shall have paid Bank, from its own funds, the Release Fee
identified in SECTION 1.
Any amounts paid to Bank under subparagraphs (a), (b) and (c) including, without
limitation, Net Sales Proceeds, shall be applied to the outstanding principal
balance of all Advances made with respect to Collateral owned by such Borrower,
and if no unpaid Advances are then outstanding, for deposit into the Cash
Collateral Account established with respect to such Borrower. Any amounts paid
to Bank under subparagraphs (c) or (d) shall be applied
-33-
<PAGE>
against, and shall reduce, the A&D Subcommitment Amount and the A&D Collateral
Value for such A&D Project.
Notwithstanding the foregoing, if an Event of Default or Unmatured Event of
Default has occurred and is continuing, a Borrower may request releases of Lots
or Units or A&D Lots that are not included in Eligible Collateral from the lien
and encumbrance of a Deed of Trust from time to time; PROVIDED, HOWEVER, Bank
shall be under no obligation to release any Lot or Unit unless each of the
conditions precedent set forth in subparagraphs (a) through (d) have been
satisfied. For purposes of subparagraph (a)(i), such Borrower shall be required
to pay to Bank, from its own funds (including Net Sales Proceeds) and not from
proceeds of Advances, the greater of (I) the appraised value of such Lot or Unit
or A&D Lot, as determined by Bank in its absolute and sole discretion, based on
an appraisal provided by such Borrower to Bank, at such Borrower's expense, or
(II) the Net Sales Proceeds (if the release is requested in connection with a
sale).
3.5.11.2 MANDATORY RELEASES BY BORROWER. During the time
periods set forth below, each Borrower shall satisfy the conditions for release
set forth in SECTION 3.5.11.1 and obtain the release of, or remove from Eligible
Collateral, the specified number of A&D Lots in each A&D Project. If a Borrower
fails to obtain such releases or remove such A&D Lots from Eligible Collateral,
then Bank in its absolute and sole discretion and without notice, may suspend or
terminate the applicable A&D Subcommitment.
Months After A&D Cumulative Lots to be
Approval Date Released
---------------- ----------------------
Last day of 15th
Calendar Month 0
Last day of 18th
Calendar Month 12% of original number of A&D Lots
Last day of 21st
Calendar Month 24% of original number of A&D Lots
Last day of 24th
Calendar Month 36% of original number of A&D Lots
Last day of 27th
Calendar Month 48% of original number of A&D Lots
Last day of 30th
Calendar Month 60% of original number of A&D Lots
-34-
<PAGE>
After the last day
of the 30th Calendar
Month 100% of original number of A&D Lots
3.5.11.3 RELEASE OF FINANCING STATEMENTS. In connection with
any release of Collateral by Borrower pursuant to this SECTION 3.5, Bank will
execute and deliver to Borrower partial releases of Bank's financing statements
as Borrower may reasonably request.
3.5.12 EXTRAORDINARY EVENTS AFFECTING COLLATERAL. Upon the
occurrence of any of the following events, Units or A&D Projects, as applicable,
at any time constituting Eligible Collateral may be declared by Bank to no
longer be Eligible Collateral:
3.5.12.1 MATERIAL DAMAGE, DESTRUCTION, OR CONDEMNATION. Any
Unit is materially damaged, destroyed, or becomes subject to any condemnation
proceeding.
3.5.12.2 DEFAULT REGARDING TITLE INSURANCE. Any Title Company
fails to perform its obligations under the Tri-Party Agreement with respect to
any Unit or A&D Project or the requirements of the Loan Documents for title
insurance with respect to any Unit or A&D Project are not satisfied.
3.5.13 ADVANCES DURING CONVERSION PERIOD. Borrowers may continue
to request Advances and Letters of Credit during the Conversion Period. Such
Advances may be made and such Letters of Credit may be issued by Bank pursuant
to the terms and conditions of this Agreement; PROVIDED, HOWEVER,
(a) If the Conversion Date occurs and the Conversion Period is
commenced pursuant to SECTION 3.1.2.1, (i) a Borrower may not request Bank
to approve any new A&D Projects after the first eighteen (18) Calendar
Months of the Conversion Period, (ii) a Borrower may not request Bank to
approve any new Subdivisions after the first twenty-four (24) Calendar
Months of the Conversion Period, and (iii) a Borrower may not add any new
Units to Eligible Collateral after the first twenty-seven (27) Calendar
Months of the Conversion Period;
(b) If the Conversion Date occurs and the Conversion Period is
commenced pursuant to SECTION 3.1.2.2, (i) a Borrower may not request Bank
to approve any new A&D Projects after the first six (6) Calendar Months of
the Conversion Period, (ii) a Borrower may not request Bank to approve any
new Subdivisions after the first eighteen (18) Calendar Months of the
Conversion Period, and (iii) a Borrower may not add any new Units to
Eligible Collateral after the first twenty-seven (27) Calendar Months of
the Conversion Period; and
-35-
<PAGE>
(c) If the Conversion Date occurs and the Conversion Period is
commenced pursuant to SECTION 3.1.2.3, (i) a Borrower may not request Bank
to approve any new A&D Projects or any new Subdivisions after the first six
(6) Calendar Months of the Conversion Period, and (ii) a Borrower may not
add any new Units to Eligible Collateral after the first fifteen (15)
Calendar Months of the Conversion Period.
3.6 FEES. As additional consideration for the Commitment, each Borrower
agrees to pay to Bank the following fees, from such Borrower's own funds, which
shall be earned by Bank on the date due under the Loan Documents and shall be
non-refundable to such Borrower:
3.6.1 COMMITMENT FEES.
3.6.1.1 QUARTERLY COMMITMENT FEE. On the date hereof and on
the last day of each three (3) month period thereafter, Borrowers shall pay a
Quarterly Commitment Fee at the rates set forth in SECTION 1 on the applicable
portions of the Commitment Amount in effect in the upcoming three (3) month
period, after giving effect to any reductions thereof pursuant to SECTIONS 3.1.2
and 3.1.3; PROVIDED HOWEVER, that each Borrower shall be responsible to pay a
portion of such fee calculated as follows: the total fee DIVIDED by the number
of Borrowers EQUALS the portion of the fee to be paid by each Borrower. For
purposes of this SECTION 3.6.1.1, any reductions in the Commitment Amount
pursuant to SECTIONS 3.1.2 and 3.1.3 shall be made first to the Upper
$25,000,000.00 of the Commitment Amount. If the date hereof is a date other
than the first day of a calendar quarter (I.E., January 1, April 1, July 1 or
October 1), then on the date hereof Borrowers shall pay a Quarterly Commitment
Fee at the rates set forth in SECTION 1 on the applicable portions of the
Commitment Amount in effect in the upcoming calendar quarter plus the portion of
a calendar quarter (if any) occurring between the date hereof and the first day
of the first calendar quarter occurring after the date hereof.
3.6.1.2 EXTENSION FEE. As a condition precedent to any
extension of the Conversion Date (and without in any way obligating Bank to
extend the Conversion Date, which is intended to be in the absolute and sole
discretion of Bank), Borrowers shall pay to Bank a fee determined by Bank in its
absolute and sole discretion; PROVIDED HOWEVER, that each Borrower shall be
responsible to pay a portion of such fee calculated as follows: the total fee
DIVIDED by the number of Borrowers EQUALS the portion of the fee to be paid by
each Borrower.
3.6.2 UNUSED COMMITMENT FEE. An Unused Commitment Fee computed at
the rate per annum set forth in SECTION 1 on the unused portion of the
Commitment Amount, calculated from the date hereof and payable monthly in
arrears; PROVIDED HOWEVER, that each
-36-
<PAGE>
Borrower shall be responsible to pay a portion of such fee calculated as
follows: the total fee DIVIDED by the number of Borrowers EQUALS the portion of
the fee to be paid by each Borrower. For each month (or portion thereof), the
unused commitment fee shall be equal to (A) the Commitment Amount (as in effect
at the beginning of such month) MINUS (B) the "average monthly outstandings" for
the month (or portion thereof) with respect to which the Unused Commitment Fee
is being computed, with the resulting number multiplied by (C) one-twelfth
(1/12th) of the rate per annum set forth in SECTION 1. As used herein, "average
monthly outstandings" means the sum of the outstanding amount of the Advances on
each day during the month (or portion thereof for which the fee is being
computed) with respect to which the Unused Commitment Fee is being computed,
divided by the number of days in that month (or portion thereof). If the Unused
Commitment Fee is being computed for less than a full month, the percentage used
in clause (C) above shall be computed on a daily basis for the number of days
for which the fee is being computed. Such fee shall continue to be payable
monthly during the Conversion Period.
3.6.3 PROCESSING FEE. A processing fee for the Bank's ongoing
processing of Deeds of Trust in the amount specified in SECTION 1, payable
monthly during the term of the Commitment by the fifteenth (15th) day of each
Calendar Month. One-half of the processing fees for Colorado shall be paid by
each Richmond Homes, Inc. I and Richmond Homes, Inc. II.
3.6.4 ATTORNEYS' COSTS, EXPENSES, AND FEES. Attorneys costs,
expenses, and fees for Bank's counsel as provided in the Loan Documents, the
Guaranty and the Environmental Agreements, payable on or before the date hereof
and during the term of the Advances, from time to time upon the presentation by
Bank of statements therefor.
3.6.5 APPRAISAL FEES, TITLE INSURANCE PREMIUM, AND OTHER COSTS,
EXPENSES, AND FEES. Appraisal fees, appraisal review fees, title insurance
premium, and other costs, expenses, and fees that each Borrower is obligated to
pay pursuant to the Loan Documents, including, without limitation, all fees and
costs associated with periodic inspections of the Eligible Collateral owned by
such Borrower, in the amounts specified by Bank, payable on or before the date
hereof, and monthly thereafter during the term of the Commitment by the
fifteenth (15th) day of each Calendar Month.
3.7 MANDATORY PREPAYMENTS. If for any reason at any time the outstanding
principal amount of Advances exceeds the Available Commitment, or if the
outstanding principal amount of Advances exceeds any of the limitations set
forth in SECTIONS 3.5.2.2 OR 3.5.6, Borrowers or the applicable Borrower shall,
within five (5) Business Days after notice from Bank, make a payment to Bank
from the funds of the Borrower or Borrowers owning the affected
-37-
<PAGE>
Collateral in an amount equal to such excess principal amount; PROVIDED,
HOWEVER, that if such payment results from Bank's disapproval of Subdivision or
an A&D Project pursuant to SECTION 4.2 OR SECTION 4.5 following preliminary
approval, then the applicable Borrower shall have fifteen (15) calendar days
after notice from Bank to make such payment. If Bank terminates an A&D
Subcommitment pursuant to this Agreement, the applicable Borrower shall, within
five (5) Business Days after notice from Bank, make a payment to Bank from its
own funds all interest and principal, if any, owed to Bank in connection with
such A&D Subcommitment.
4. CONDITIONS PRECEDENT
4.1 CONDITIONS PRECEDENT TO EFFECTIVENESS OF THIS AGREEMENT AND TO THE
EFFECTIVENESS OF THE COMMITMENT. This Agreement and the Commitment shall become
effective only upon satisfaction of the following conditions precedent, in each
case as determined by Bank in its absolute and sole discretion:
4.1.1 REPRESENTATIONS AND WARRANTIES ACCURATE. The
representations and warranties by Borrowers and Guarantor in the Loan Documents,
the Environmental Agreements and the Guaranty are correct on and as of the date
of this Agreement as though made on and as of each such date.
4.1.2 DEFAULTS. No Event of Default or Unmatured Event of Default
shall have occurred and be continuing.
4.1.3. DOCUMENTS. Bank shall have received the following
agreements, documents, and instruments and Environmental Agreements, each duly
executed by the parties thereto and in form and substance satisfactory to Bank
in its absolute and sole discretion:
4.1.3.2 LOAN AND OTHER DOCUMENTS. The Loan Documents and
Guaranty and financing statements and Environmental Agreements, which shall
include all agreements, documents, and instruments specified by Bank.
4.1.3.2 CORPORATION, LIMITED LIABILITY COMPANY, OR PARTNERSHIP
DOCUMENTS. If a Borrower and/or Guarantor is a corporation, a limited liability
company, or a partnership, certified copies of (i) resolutions of its board of
directors or, if all members or all general partners do not sign the Loan
Documents, Environmental Agreements and Guaranty, resolutions of the members of
the limited liability company or partners of the partnership, as the case may
be, authorizing such Borrower or Guarantor, as applicable, to execute, deliver,
and perform its obligations under the Loan Documents, Environmental Agreements
and Guaranty, and to grant to Bank the Liens and Encumbrances on the Collateral
in the Loan Documents and certifying the names and signatures of the officer(s),
member(s), manager(s), or partner(s),
-38-
<PAGE>
as the case may be, of the Borrower or Guarantor, as applicable, authorized to
execute the Loan Documents, Environmental Agreements and Guaranty and, in the
case of the Borrower, to request Advances on behalf of the Borrower, (ii) the
certificate of incorporation and bylaws, limited liability company operating
agreement, or partnership agreement, as the case may be, of the Borrower or
Guarantor, as applicable, and all amendments thereto, (iii), if a Borrower
and/or Guarantor is a general partnership or joint venture, the filed or
recorded fictitious name certificate for the Borrower and/or Guarantor and all
amendments thereto, (iv), if a Borrower and/or Guarantor is a limited
partnership, the filed or recorded certificate of limited partnership of the
Borrower and/or Guarantor and all amendments thereto, and (v) a certificate of
good standing as a corporation, limited liability company, or limited
partnership, as the case may be, from the jurisdiction of formation or
organization of the Borrower and/or Guarantor, and (A) with respect to each
Borrower, if such jurisdiction is not the State where the Eligible Collateral
owned by such Borrower is located and where Borrower's principal office is
located, or (B) with respect to Guarantor, if such jurisdiction is not the State
where Guarantor's principal office is located, a certificate of qualification
as a foreign corporation, limited liability company, or limited partnership, as
the case may be, authorized to transact business in such foreign state.
4.1.3.3 INSURANCE POLICIES. A certificate of insurance or
other evidence thereof satisfactory to Bank, and at Bank's request, certified
copies of the policies of insurance required under the Loan Documents.
4.1.3.4 OPINION LETTER. A favorable opinion from a law firm
representing Borrowers and Guarantor covering such matters as Bank may require.
4.1.3.5 FINANCIAL STATEMENTS. Audited financial statements
prepared by independent certified public accountants acceptable to Bank,
including, without limitation, a balance sheet, cash flow statement,
reconciliation of net worth, and a profit and loss statement, of Borrowers and
Guarantor, for Borrowers' and Guarantor's three (3) most recent fiscal years.
4.1.3.6 CONTRACTS. If requested by Bank, all executed
contracts relating to design and construction of the Units between a Borrower
and any other Person (including, without limitation, the architect and each
contractor or subcontractor for labor, material, or services).
4.1.4 COMPLETION OF FILINGS AND RECORDINGS. Bank shall have
received evidence of the completion of all recordings and filings to establish
or maintain the perfection and priority of the Liens and Encumbrances on the
Collateral granted in the Loan
-39-
<PAGE>
Documents and required by Bank to be in effect prior to the effectiveness of
this Agreement and the Commitment.
4.1.5 PAYMENT OF COSTS, EXPENSES, AND FEES. All costs, expenses,
and fees to be paid by any Borrower under the Loan Documents and the
Environmental Agreements on or before the effectiveness of this Agreement, the
effectiveness of the Commitment, or the making of Advances shall have been paid
in full, including, without limitation, applicable fees set forth in
SECTION 3.3.
4.1.6 OTHER ITEMS OR ACTIONS. Bank shall have received such other
agreements, documents, and instruments, and Borrowers and Guarantor shall have
performed such other actions as Bank may reasonably require.
4.1.7 TRI-PARTY AGREEMENT. If required by Bank, Bank shall have
received a fully executed original of the Tri-Party Agreement.
4.2 CONDITIONS PRECEDENT TO APPROVAL OF SUBDIVISIONS. Each Borrower may,
from time to time, request Bank to approve additional Subdivisions. Approval of
new Subdivisions shall be at Bank's absolute and sole discretion and Bank shall
have no obligation to grant preliminary or final approval of any such
Subdivisions. In any event, Bank will only consider approval of Subdivisions
owned by such Borrower that are located in Arizona, California, Colorado and
Nevada. Subdivisions approved by Bank shall receive either preliminary approval
or final approval; Subdivisions will be deemed to be Eligible Collateral upon
receipt of preliminary approval. In order for a Borrower to obtain preliminary
approval, such Borrower shall have delivered to Bank the completed subdivision
checklist and all other items described in this SECTION 4.2. If a Borrower
receives preliminary approval of a Subdivision, and Bank neither approves nor
disapproves Borrower's request for final approval within ninety (90) days after
Bank grants preliminary approval, then Bank will be deemed to have granted final
approval for the Subdivision. If Bank grants preliminary approval, but does not
grant final approval, then the Subdivision shall be automatically removed from
Eligible Collateral.
When requesting consideration of a new Subdivision, a Borrower shall
deliver to Bank a completed subdivision checklist in form and substance
satisfactory to Bank, supported by such documentation as Bank may require, and
each of the following conditions precedent shall have been satisfied in Bank's
absolute and sole discretion, and each of the following deliveries shall have
been approved by Bank in its absolute and sole discretion:
4.2.1 PLAT AND/OR SURVEY. The Borrower shall have delivered to
Bank one or more recorded plats, covering the Subdivision. Each plat must
contain a legal description of the
-40-
<PAGE>
land covered by the plat, must describe and show all boundaries of and lot lines
within such land, all streets and other dedications, and all easements affecting
such land. In addition, if requested by Bank as a condition to final approval,
Borrower shall provide Bank an ALTA survey for such Subdivision, in form and
substance acceptable to Bank.
4.2.2 CC&RS. The Borrower shall have provided Bank all CC&Rs,
easements and other rights that exist or are contemplated with respect to the
Subdivision.
4.2.3 TYPES OF UNITS. The Borrower shall have provided Bank a
description of the types of Units to be constructed within such Subdivision
together with Unit Budgets for each such type of Unit, and a pro forma for the
Subdivision in a form satisfactory to Bank showing such Borrower's expected
profit from the Subdivision.
4.2.4 UNIT BASE APPRAISALS. Bank shall have received and approved
a Unit Base Appraisal with respect to each Custom Unit and each of the Unit
types referred to in SECTION 4.2.3.
4.2.5 LOT INFORMATION. The Borrower shall have provided Bank
documentation relating to such Borrower's acquisition of Lots, including,
without limitation, the identity of the seller of such Lots. The Borrower also
shall have provided to Bank documentation establishing the acquisition price of
such Lots, including, without limitation, a copy of the applicable Option
Agreement or other agreement for purchase of such Lots, and settlement
statements for Lots previously purchased. If any Lots in the Subdivision have
been sold, the Borrower shall have provided to Bank the date of the first sale,
and the number of sales to date.
4.2.6 COMPLETION. Borrower shall have provided to Bank evidence
that all offsite improvements in the Subdivision are complete and ready for use,
that all permits for the use of the Subdivision required from any Governmental
Authorities have been obtained, that all streets and other areas intended for
public use have been appropriately dedicated, and that all homeowners' and
property owners' associations have been established, or are in the process of
being established.
4.2.7 APPROVALS. The Borrower shall have provided to Bank
evidence of appropriate zoning and existence of all approvals of Governmental
Authorities and other third parties necessary to permit the construction and
sale of Units in the Subdivision; including, without limitation, all applicable
public reports, architectural committee approvals and any other approvals
required under the CC&Rs.
-41-
<PAGE>
4.2.8 SOILS TESTS. At Bank's request, the Borrower shall have
provided a soils test report prepared by a licensed soils engineer satisfactory
to Bank showing the location of, and containing boring logs from, all borings,
together with recommendations for the design of the foundations, paved areas and
underground utilities for the Subdivision. At Bank's request, the Borrower
shall also provide such soils test reports for individual Lots within each
Subdivision as a condition to final approval.
4.2.9 ENVIRONMENTAL ASSESSMENT. The Borrower shall have delivered
to Bank a report of an environmental assessment (including a fifty (50) year
chain of title review) of each Subdivision (or applicable phase thereof)
addressed to Bank by an environmental engineer acceptable to Bank containing
such information, results, and certifications as Bank may require, in its
absolute and sole discretion, and dated not earlier than six (6) Calendar Months
before the Borrower's request. Depending upon the results of the environmental
assessment, the Borrower shall also provide such follow up testing, reports, and
other actions as may be required by Bank in its absolute and sole discretion.
The contents of the environmental assessment report and any follow up must be
satisfactory to Bank in its absolute and sole discretion. If such reports are
not addressed to Bank, the Borrower shall cause a reliance letter, in form and
substance satisfactory to Bank, to be provided to Bank.
4.2.10 ENVIRONMENTAL INDEMNITY. Borrower shall have delivered to
Bank, Bank's form of environmental questionnaire, fully completed and duly
executed by the Borrower. The answers to the questions in the questionnaire
must be satisfactory to Bank.
4.2.11 UTILITIES. The Borrower shall have provided to Bank
evidence, which may be in the form of letters from local utility companies or
local authorities, that (a) telephone service, electric power, storm sewer,
sanitary sewer and water facilities are available to the Subdivision and to the
boundary of each Lot therein; (b) such utilities are adequate to serve the Lots
in such Subdivision and exist at the boundary of the Subdivision; and (c) no
conditions exist to affect such Borrower's right to connect into and have
adequate use of such utilities except for the payment of a normal connection
charge or tap charges and except for the payment of subsequent charges for such
services to the utility supplier.
4.2.12 PRELIMINARY TITLE REPORT. The Borrower shall have provided
to Bank a preliminary title report for the Subdivision, prepared by the Title
Company, together with a legible copy of each Schedule B item requested by Bank.
4.2.13 DRAINAGE; FLOOD REPORT. The Borrower shall have provided to
Bank a drainage report by an engineer acceptable to Bank containing such
information, results, and certifications as
-42-
<PAGE>
Bank may require, in its absolute and sole discretion. The Borrower shall have
provided to Bank evidence satisfactory to Bank, as to whether (a) the
Subdivision is located in an area designated by the Department of Housing and
Urban development as having special flood or mudslide hazards, and (b) the
community in which the Subdivision is located is participating in the National
Flood Insurance Program.
4.2.14 DEED OF TRUST/MODIFICATION TO DEED OF TRUST. The Borrower
shall have executed, delivered, acknowledged, and recorded a Deed of Trust
covering the Subdivision; PROVIDED, HOWEVER, that if such Borrower does not own
all Lots within a Subdivision or will acquire the Lots in the Subdivision under
an Option Agreement, such Deed of Trust will only cover the Lots owned by such
Borrower.
4.2.15 TITLE INSURANCE. The Borrower shall have provided to Bank
an American Land Title Association loan policy or policies of title insurance or
an irrevocable and unconditional commitment to issue such policy or policies, or
an endorsement to an existing title policy or policies in form satisfactory to
Bank, issued by the Title Company and a commitment by the Title Company to issue
disbursement endorsements at Bank's request insuring the Deed of Trust. Such
policy or policies shall have a liability limit in an amount to be determined by
Bank in its absolute and sole discretion shall provide coverage and otherwise be
in form and substance satisfactory to Bank (including, without limitation,
mechanic's lien coverage) insuring Bank's interest under the applicable Deed of
Trust as a valid first lien on the property encumbered by the Deed of Trust.
Such policy shall be accompanied by such reinsurance and co-insurance agreements
and endorsements as Bank may require. Such policy must contain only such
exceptions as are satisfactory to Bank and must have attached such endorsements
as Bank may require.
4.2.16 ASSESSMENTS, CHARGES, AND TAXES. For Impositions that Bank
has approved in writing for payment in installments pursuant to the Deed of
Trust, the Borrower shall have delivered to Bank evidence that such installments
are current. For all other Impositions, the Borrower shall have delivered to
Bank evidence that such Impositions have been paid in full.
4.2.17 ASSIGNMENTS. The Borrower shall have delivered to Bank
copies of the Unit Plans and Specifications and all contracts shall have been
delivered to Bank relating to the construction of Units in the Subdivision.
4.2.18 OTHER. The Borrower shall provide such other documents and
information that Bank may reasonably request.
4.3 ADDITIONAL CONDITIONS PRECEDENT TO THE INCLUSION OF EACH UNIT IN
ELIGIBLE COLLATERAL. In addition to the conditions
-43-
<PAGE>
precedent for approval of a Subdivision, a Borrower may include and maintain a
Unit in Eligible Collateral only if the following conditions precedent are
satisfied, in each case as determined by Bank in its absolute and sole
discretion.
4.3.1 REPRESENTATIONS AND WARRANTIES ACCURATE. The
representations and warranties by all Borrowers and Guarantor shall be correct
in all material respects on and as of the date that each Unit becomes Eligible
Collateral, as though made on and as of each such date, other than matters
disclosed by Borrowers or Guarantor to Bank and approved by Bank in its absolute
and sole discretion.
4.3.2 DEFAULTS. No Event of Default shall have occurred and be
continuing.
4.3.3 SATISFACTION OF OTHER CONDITIONS. Borrowers or the
applicable Borrower shall have satisfied the conditions precedent set forth in
SECTIONS 4.1 AND 4.2; PROVIDED, HOWEVER, that with respect to Custom Units, Bank
may in Bank's absolute and sole discretion require the applicable Borrower to
satisfy some or all of the conditions precedent for approval of a Subdivision
with respect to the Subdivision in which the Custom Unit is located.
4.3.4 DOCUMENTS. Bank shall have received the following
agreements, documents, and instruments, each duly executed by the parties
thereto and in form and substance satisfactory to Bank in its absolute and sole
discretion:
4.3.4.1 UNIT BASE APPRAISAL. A Unit Base Appraisal for the
type of Unit in question dated within 364 days of the date of the requested
Advance and, if requested by Bank, an updated Unit Base Appraisal for the
respective type of Unit. The Unit Base Appraised Value for the type of Unit
shall have been approved by Bank in its absolute and sole discretion.
4.3.4.2 UNIT BUDGET. If requested by Bank, a Specific Unit
Budget for the respective Unit.
4.3.4.3 UNIT PLANS AND SPECIFICATIONS. Unit Plans and
Specifications for the respective type of Unit.
4.3.4.4 PURCHASE CONTRACT. If such Unit is a Presold Unit, a
copy of a Purchase Contract for such Unit if requested by Bank.
4.3.4.5 DEED OF TRUST/MODIFICATION TO DEED OF TRUST. If the
Lot on which the Unit is to be constructed has not previously been encumbered by
a Deed of Trust, a Deed of Trust, duly executed, acknowledged, delivered and
recorded. In addition, if the Lot on which the Unit is to be constructed has
not previously been encumbered by a Deed of Trust, the Borrower shall provide a
policy of title insurance, which policy shall have a
-44-
<PAGE>
liability limit in an amount to be determined by Bank in its absolute and sole
discretion, and shall provide coverage and otherwise be in form and substance
satisfactory to Bank (including, without limitation, mechanic's lien coverage)
insuring Bank's interest under the applicable Deed of Trust as a valid first
lien on the property encumbered by the Deed of Trust. Such policy shall be
accompanied by such reinsurance and co-insurance agreements and endorsements as
Bank may require. Such policy must contain only such exceptions as are
satisfactory to Bank and must have attached such endorsements as Bank may
require. Bank may accept such Deeds of Trust from time to time; however, Bank
shall be under no obligation to accept and include in Eligible Collateral such
Units or Lots proposed by any Borrower more frequently than twice in each
Calendar Month.
4.3.4.6 ASSESSMENTS, CHARGES, AND TAXES. Evidence that all
real property taxes, assessments, water, sewer, and other charges levied or
assessed prior to delinquency against the respective Lot which are then due and
payable have been paid in the amount required.
4.3.4.7 COMPLETION OF FILINGS AND RECORDINGS. Evidence of the
completion of all recordings and filings to establish or maintain the perfection
and priority of the Liens and Encumbrances on such Lot and Unit granted in the
Loan Documents.
4.3.4.8 CONTRACTS. If requested by Bank, all executed
contracts relating to design and construction of the Unit between the Borrower
and any other Person (including, without limitation, the architect and each
contractor or subcontractor for labor, materials, or services).
4.3.5 LIMITATIONS. After giving effect to the addition of such
Unit to Eligible Collateral, the provisions of SECTIONS 3.5.2.2 AND 3.5.4 shall
not have been violated.
4.3.6 START OF CONSTRUCTION. The Unit shall have commenced
construction and the foundation for the Unit shall have been completed.
4.3.7 DISTRESSED IMPROVEMENT DISTRICTS. Any improvement or
assessment district in which the Unit is located shall not (i) be insolvent
under applicable law or subject to any bankruptcy or similar proceedings; or
(ii) directly or indirectly cause the Subdivision in which the Unit is to be
built to be subject to any suspension, disqualification, or disapproval by FHA,
FNMA, VA, FHLMC, or any similar governmental or quasi-governmental agency that
originates, purchases, insures or guarantees home mortgage loans.
-45-
<PAGE>
4.3.8 OTHER ITEMS. The Borrower shall have provided to Bank such
other agreements, documents, and instruments as Bank may reasonably require.
4.3.9 OTHER ACTIONS. Borrowers and Guarantor have performed such
other actions as Bank may reasonably require.
4.4 ADDITIONAL CONDITIONS PRECEDENT TO ALL ADVANCES AGAINST ELIGIBLE
COLLATERAL THAT INCLUDES UNITS. Bank shall be obligated to make Advances
against Eligible Collateral that includes Units only upon satisfaction of the
following additional conditions precedent, as determined by Bank in its absolute
and sole discretion:
4.4.1 REPRESENTATIONS AND WARRANTIES ACCURATE. The
representations and warranties by Borrowers and Guarantor are correct in all
material respects on and as of the date of such Advance, both before and after
giving effect to such Advance, other than matters disclosed by Borrowers or
Guarantor to Bank and approved by Bank in its absolute and sole discretion.
4.4.2 DEFAULTS. No Event of Default or Unmatured Event of Default
shall have occurred and be continuing on the date of such Advance, both before
and after giving effect thereto.
4.4.3 OTHER CONDITIONS PRECEDENT. Borrowers or the Borrower that
owns the Units shall have satisfied all conditions precedent in SECTIONS 4.1,
4.2 AND 4.3.
4.4.4 INSPECTION REPORT. Bank shall not have received written
evidence from Bank's inspector(s) or from Bank's employee(s) performing
inspections for Bank (i) that construction of each Unit constituting Eligible
Collateral does not comply with the respective Unit Plans and Specifications in
all material respects, and (ii) that the applicable Borrower has not completed
each such Unit to the stage reported on the most recent Borrowing Base Report
received by Bank.
4.4.5 LOT LOCATION SURVEY. If requested by Bank in its absolute
and sole discretion, the Borrower shall have obtained and delivered to Bank a
lot location survey for any Unit or Units constituting Eligible Collateral.
4.4.6 APPROVALS AND INSPECTIONS BY GOVERNMENTAL AUTHORITIES. If
requested by Bank, all inspections and approvals by Governmental Authorities
required for the stage of completion of each Unit shall have been obtained and
Bank shall have received evidence thereof satisfactory to Bank, or shall have
obtained such evidence upon inspection of the Subdivision.
4.4.7 TITLE POLICY ENDORSEMENTS. If required by Bank in its
reasonable discretion, Bank has received (i) such continuation endorsements and
date-down endorsements to the Title
-46-
<PAGE>
Policy, in form and substance satisfactory to Bank in its absolute and sole
discretion, as Bank determines necessary to insure the priority of the Deed of
Trust as a valid first lien on the Units as of the date of and including the
amount covered by the requested Advance, or (ii) an unconditional, irrevocable
written commitment by the Title Company to issue such endorsements. Borrower
has furnished to the Title Company such surveys and other documents and
information as Bank or the Title Company may require for the Title Company to
issue such endorsements.
4.4.8 PAYMENT OF COSTS, EXPENSES, AND FEES. All costs, expenses,
and fees to be paid by any Borrower on or before the date of the Advance under
the Loan Documents, the Environmental Agreement or the Guaranty have been paid
in full.
4.5 CONDITIONS PRECEDENT TO APPROVAL OF A&D PROJECTS. Each Borrower may,
from time to time, request Bank to approve A&D Projects. Approval of new A&D
Projects shall be at Bank's absolute and sole discretion and Bank shall have no
obligation to grant preliminary or final approval of any A&D Projects. In any
event, Bank will only consider approval of A&D Projects located in Arizona,
California, Colorado and Nevada. A&D Projects approved by Bank shall receive
either preliminary approval or final approval; A&D Projects will be deemed to be
Eligible Collateral upon receipt of preliminary approval, which shall also be
the A&D Eligibility Date. In order for a Borrower to obtain preliminary
approval, such Borrower shall have delivered to Bank the items described in
SECTIONS 4.5.1, 4.5.2(ii), 4.5.4, 4.5.5, 4.5.11 AND 4.5.21. If a Borrower
receives preliminary approval of an A&D Project and thereafter delivers to Bank
all of the items and information described below and Bank neither approves nor
disapproves Borrower's request for final approval of the A&D Project within
ninety (90) days after the A&D Eligibility Date, then Bank will be deemed to
have granted final approval of the A&D Project. If Bank grants preliminary
approval, but does not grant final approval, then the A&D Project shall be
automatically removed from Eligible Collateral.
When requesting consideration of a new A&D Project, the Borrower shall
deliver to Bank a completed A&D Project checklist in form and substance
satisfactory to Bank, supported by such documentation as Bank may require, and
each of the following conditions precedent shall have been satisfied in Bank's
absolute and sole discretion, and each of the following deliveries shall have
been approved by Bank in its absolute and sole discretion:
4.5.1 APPRAISAL. Bank shall have received a current A&D
Appraisal.
4.5.2 PLAT OR SURVEY. The Borrower shall have delivered to Bank
either (i) a recorded plat of the A&D Land containing a legal description of the
A&D Land, describing and
-47-
<PAGE>
showing all boundaries of and lot lines within the A&D Land, and describing and
showing all easements affecting the A&D Land, or (ii) a preliminary plat and a
current survey of the A&D Land by a surveyor or civil engineer licensed in the
State in which the A&D Land is located satisfactory to Bank stamped with the
professional seal of the surveyor or civil engineer, satisfying the requirements
for an American Land Title Association survey and such additional requirements
as Bank may prescribe in its absolute and sole discretion.
4.5.3 ENVIRONMENTAL ASSESSMENT. The Borrower shall have delivered
to Bank a report of an environmental assessment (including a fifty (50) year
chain of title review) of the A&D Project addressed to Bank by an environmental
engineer acceptable to Bank containing such information, results, and
certifications as Bank may require, in its absolute and sole discretion, and
dated not earlier than six (6) Calendar Months before the Borrower's request.
Depending upon the results of the environmental assessment, Borrower will also
provide such follow up testing, reports, and other actions as may be required by
Bank in its absolute and sole discretion. The contents of the environmental
assessment report and any follow up must be satisfactory to Bank in its absolute
and sole discretion. If such reports are not addressed to Bank, Borrower shall
cause a reliance letter, in form and substance satisfactory to Bank, to be
provided to Bank.
4.5.4 ENVIRONMENTAL INDEMNITY. Borrower shall have delivered to
Bank, Bank's form of environmental questionnaire, fully completed and duly
executed by Borrower. The answers to the questions in the questionnaire must be
satisfactory to Bank.
4.5.5 DEED OF TRUST/TITLE POLICY. If the A&D Project has not
previously been encumbered by a Deed of Trust, a Deed of Trust, duly executed by
such Borrower, acknowledged, delivered and recorded. In addition, if the A&D
Project has not previously been encumbered by a Deed of Trust, Borrower shall
provide a policy of title insurance, which policy shall have a liability limit
in an amount to be determined by Bank in its absolute and sole discretion, and
shall provide coverage and otherwise be in form and substance satisfactory to
Bank (including, without limitation, mechanic's lien coverage) insuring Bank's
interest under the applicable Deed of Trust as a valid first lien on the
property encumbered by the Deed of Trust. Such policy shall be accompanied by
such reinsurance and co-insurance agreements and endorsements as Bank may
require shall include a commitment by the Title Company to issue disbursement
endorsements at Bank's request insuring the Deed of Trust. Such policy must
contain only such exceptions as are satisfactory to Bank and must have attached
such endorsements as Bank may require. Bank shall accept such Deeds of Trust as
proposed by the Borrowers from time to time; notwithstanding the foregoing, Bank
shall be under no obligation to accept into Eligible Collateral any such A&D
Projects proposed by any
-48-
<PAGE>
individual Borrower more frequently than twice in each Calendar Month.
4.5.6 DRAINAGE; FLOOD ZONE. The Borrower shall have provided to
Bank a drainage report by an engineer acceptable to Bank containing such
information, results and certifications as Bank may require, in its absolute and
sole discretion. The Borrower shall have provided to Bank evidence satisfactory
to Bank, as to whether (i) the A&D Land is located in an area designated by the
United States Department of Housing and Urban Development as having special
flood or mudslide hazards, and (ii) the community in which the A&D Land is
located is participating in the National Flood Insurance Program.
4.5.7 SERVICES. Evidence, which may be in the form of letters
from local utility companies or local Governmental Authorities, that (i)
telephone service, electric power, storm sewer, sanitary sewer, and water
facilities are available to the A&D Project, (ii) such utilities are adequate to
serve the A&D Project, (iii) such utilities exist at the boundary of the A&D
Project, and (iv) no conditions exist to affect such Borrower's or any A&D Lot
owner's right to connect to, to obtain, and to have adequate use of such
utilities, except for the payment of a normal connection charge or tap charges
and except for payment of subsequent charges for such services and utilities to
the utility supplier.
4.5.8 ASSESSMENTS, CHARGES, AND TAXES. For Impositions that Bank
has approved in writing for payment in installments pursuant to the Deed of
Trust, evidence that such installments are current. For all other Impositions,
the Borrower shall have delivered to Bank evidence that they have been paid in
full.
4.5.9 SOILS TESTS. At Bank's request, the Borrower shall have
provided a soils test report prepared by a licensed soils engineer satisfactory
to Bank showing the locations of, and containing boring logs for, all borings,
together with recommendations for the design of the paved areas, and underground
utilities for the A&D Improvements.
4.5.10 PLANS AND SPECIFICATIONS. The Borrower shall have provided
the A&D Plans and Specifications.
4.5.11 BUDGET. The Borrower shall have provided the A&D Budget.
4.5.12 CONSTRUCTION CONTRACTS. If requested by Bank, the Borrower
shall have provided an executed contract for construction of the A&D
Improvements between such Borrower and the A&D Contractor (if applicable).
Also, if requested by Bank, the Borrower shall have provided a certified copy of
each construction
-49-
<PAGE>
subcontract, purchase agreement, architectural agreement, engineering agreement,
and other agreements, documents, and instruments relating to construction of the
A&D Improvements. The contract price in each such agreement, document, and
instrument must be within the budgeted amount in the A&D Budget.
4.5.13 BORROWER'S EQUITY. The Borrower shall have provided
evidence that such Borrower has paid from its funds costs, expenses, and fees
included in the A&D Budget equal to the total amount in the A&D Budget for the
"BORROWER'S EQUITY." Alternatively, such Borrower has deposited into its Cash
Collateral Account such "BORROWER'S EQUITY" amount from funds of such Borrower,
which amount shall be subject to SECTION 3.5.9 as if such funds were a deposit
with Bank of a Deficiency Amount.
4.5.14 ZONING. The Borrower shall have provided evidence of final,
appropriate zoning approval of the A&D Project and all other approvals of
Governmental Authorities and other third parties necessary to permit the
construction of the A&D Improvements, provided that the Borrower may not have
obtained all of the approvals necessary for construction of the A&D Improvements
to the extent such approvals are not yet necessary.
4.5.15 PRELIMINARY TITLE REPORT. The Borrower shall have provided
a preliminary title report for the A&D Project, prepared by the Title Company,
together with a legible copy of each Schedule B item requested by Bank.
4.5.16 DISTRESSED IMPROVEMENT DISTRICTS. Any improvement or
assessment district in which the A&D Project is located shall not (i) be
insolvent under applicable law or subject to any bankruptcy or similar
proceedings; or (ii) directly or indirectly cause the A&D Project to be subject
to any suspension, disqualification, or disapproval by FHA, FNMA, VA, FHLMC, or
any similar governmental or quasi-governmental agency that originates,
purchases, insures or guarantees home mortgage loans.
4.5.17 PURCHASE DOCUMENTS. The Borrower shall have provided copies
of the purchase agreement, settlement statement and other documentation relating
to such Borrower's purchase of the A&D Project.
4.5.18 CONSTRUCTION SCHEDULE. The Borrower shall have provided the
construction schedule for the completion of the A&D Improvements.
4.5.19 MARKETING INFORMATION. If available, the Borrower shall
have provided marketing information with respect to the Units to be constructed
on the A&D Project, including floor plans, square footage, anticipated
absorption, estimated Unit mix, Unit cost breakdown, subdivision pro formas,
number of Model Units, and plans for Model Units.
-50-
<PAGE>
4.5.20 PRO FORMA CASH FLOW. The Borrower shall have provided a pro
forma balance sheet for the A&D Project, showing the projected cash flow from
the A&D Project. Such pro forma will include information relating to the
anticipated construction and sales time for Units to be built on the A&D
Project, the types of Units to be constructed at the A&D Project, and the
estimated cash flow and profit relating to the A&D Project.
4.5.21 TERM SHEET. The Borrower and Bank shall have executed the
A&D Term Sheet for the A&D Project.
4.5.22 OTHER ITEMS. The Borrower shall have provided such other
agreements, documents, and instruments as Bank may reasonably require.
4.5.23 OTHER ACTIONS BY LOAN PARTIES. Borrowers and Guarantor have
performed such other actions as Bank may reasonably require.
4.6 ADDITIONAL CONDITIONS PRECEDENT TO ALL ADVANCES AGAINST ELIGIBLE
COLLATERAL CONTAINING A&D PROJECTS. Bank shall be obligated to make Advances
against Eligible Collateral that includes an A&D Project only upon satisfaction
of the following additional conditions precedent, as determined by Bank in its
absolute and sole discretion:
4.6.1 REPRESENTATIONS AND WARRANTIES ACCURATE. The
representations and warranties by Borrowers and Guarantor are correct in all
material respects on and as of the date of such Advance, both before and after
giving effect to such Advance, other than matters disclosed by a Borrower or
Guarantor to Bank and approved by Bank in its absolute and sole discretion.
4.6.2 DEFAULTS. No Event of Default or Unmatured Event of Default
shall have occurred and be continuing on the date of such Advance, both before
and after giving effect thereto.
4.6.3 OTHER CONDITIONS. Borrowers or the Borrower that owns the
A&D Project shall have satisfied the conditions precedent set forth in SECTIONS
4.1 AND 4.5.
4.6.4 INSPECTION REPORT. Bank shall not have received written
evidence from Bank's inspector(s) or from Bank's employee(s) performing
inspections for Bank (i) that construction of the A&D Improvements does not
comply with the respective A&D Plans and Specifications in all material
respects, and (ii) that the applicable Borrower has not completed the A&D
Improvements to the stage set forth on the most recent Borrowing Base Report.
4.6.5 APPROVALS AND INSPECTIONS BY GOVERNMENTAL AUTHORITIES. If
requested by Bank, all inspections and approvals by Governmental Authorities
required for the stage of completion of
-51-
<PAGE>
the A&D Improvements shall have been obtained and Bank shall have received
evidence thereof satisfactory to Bank, or shall have obtained such evidence upon
inspection of the A&D Project.
4.6.6 TITLE POLICY ENDORSEMENTS. If required by Bank in its
absolute and sole discretion, Bank has received (i) such continuation
endorsements and date-down endorsements to the Title Policy, in form and
substance satisfactory to Bank in its absolute and sole discretion (including
with limitation affirmative coverage as to mechanics' and materialmen's liens),
as Bank determines necessary to insure the priority of the Deed of Trust as a
valid first lien on the A&D Project as of the date of and including the amount
covered by the requested Advance, or (ii) an unconditional, irrevocable written
commitment by the Title Company to issue such endorsements. The applicable
Borrower has furnished to the Title Company such surveys and other documents and
information as Bank or the Title Company may require for the Title Company to
issue such endorsements.
4.6.7 PAYMENT OF COSTS, EXPENSES, AND FEES. All costs, expenses,
and fees to be paid by any Borrower on or before the date of the Advance under
the Loan Documents, the Environmental Agreement or the Guaranty have been paid
in full.
4.7 RIGHT TO WAIVE. Each Borrower hereby authorizes Bank, and Bank
reserves the right in its absolute and sole discretion, to verify any documents
and information submitted to Bank in connection with this Agreement. Bank may
elect, in its absolute and sole discretion, to waive any of the foregoing
conditions precedent. Any such waiver shall be limited to the condition(s)
precedent therein and the requirements therein. Delay or failure by Bank to
insist on satisfaction of any condition precedent shall not be a waiver of such
condition precedent or any other condition precedent. The making of an Advance
by Bank shall not be deemed a waiver by Bank of the occurrence of an Event of
Default or an Unmatured Event of Default.
5. BORROWER REPRESENTATIONS AND WARRANTIES.
5.1 CLOSING REPRESENTATIONS AND WARRANTIES. Each Borrower represents and
warrants to Bank as to itself and not as to any other Borrower, as of the date
of this Agreement:
5.1.1 CORPORATE, LIMITED LIABILITY COMPANY, OR PARTNERSHIP
EXISTENCE AND AUTHORIZATION. If such Borrower is a corporation, a limited
liability company, or a partnership, Borrower is validly existing, and in the
case of a corporation or limited liability company is in good standing, under
the laws of the jurisdiction of its formation or organization and has the
requisite power and authority to execute, deliver, and perform the Borrower Loan
Documents and the Environmental Agreements. The execution, delivery, and
performance by such Borrower of the
-52
<PAGE>
Borrower Loan Documents and Environmental Agreements have been duly authorized
by all requisite action by or on behalf of such Borrower and will not conflict
with, or result in a violation of or a default under, the certificate of
incorporation and bylaws, the limited liability company operating agreement, or
the partnership agreement of such Borrower, as the case may be. Such Borrower
is qualified to do business as a foreign corporation, limited liability company,
or partnership, as the case may be, and in the case of a corporation or limited
liability company is in good standing, under the law of the each state where
such Borrower is doing business.
5.1.2 NO APPROVALS, ETC. No approval, authorization, bond,
consent, certificate, franchise, license, permit, registration, qualification,
or other action or grant by or filing with any Person is required in connection
with the execution, delivery, or performance by such Borrower of the Borrower
Loan Documents or Environmental Agreements, which has not already been obtained.
5.1.3 NO CONFLICTS. The execution, delivery, and performance by
such Borrower of the Borrower Loan Documents and the Environmental Agreements
will not conflict with, or result in a violation of or a default under: any
applicable law, ordinance, regulation, or rule (federal, state, or local); any
judgment, order, or decree of any arbitrator, other private adjudicator, or
Governmental Authority to which such Borrower is a party or by which such
Borrower or any of the assets or property of such Borrower is bound; any of the
Approvals and Permits; or any agreement, document, or instrument to which such
Borrower is a party or by which such Borrower or any of the assets or property
of such Borrower is bound.
5.1.4 EXECUTION AND DELIVERY AND BINDING NATURE OF DOCUMENTS. The
Borrower Loan Documents and the Environmental Agreements have been duly executed
and delivered by or on behalf of such Borrower. The Borrower Loan Documents and
the Environmental Agreements are legal, valid, and binding obligations of such
Borrower, enforceable in accordance with their terms against such Borrower,
except as such enforceability may be limited by bankruptcy, insolvency,
moratorium, reorganization, or similar laws and by equitable principles of
general application.
5.1.5 ACCURATE INFORMATION.
5.1.5.1 FINANCIAL STATEMENTS. All information in any loan
application, financial statement, certificate, or other document, and all other
information delivered by or on behalf of such Borrower to Bank in obtaining the
Commitment is correct and complete in all material respects as of the date
thereof, and there are no omissions therefrom that result in any such
information being materially incomplete, incorrect, or misleading as of the
-53-
<PAGE>
date thereof. All financial statements heretofore delivered to Bank by Borrower
were prepared in accordance with the requirements in SECTION 1 and accurately
present the financial conditions and results of operations as at the dates
thereof and for the periods covered thereby in all material respects. The
fiscal year of such Borrower is as set forth in SECTION 1.
5.1.5.2 MATERIAL ADVERSE CHANGE. There has been no Material
Adverse Change relative to such Borrower since the date of any information
provided to Bank pursuant to SECTION 5.1.5.1.
5.1.6 PURPOSE OF ADVANCES. The purpose of Advances is a business
purpose and not a personal, family, or household purpose.
5.1.7 LEGAL PROCEEDINGS; HEARINGS, INQUIRIES, AND INVESTIGATIONS.
Except as disclosed to Bank in writing prior to the date of this Agreement, (i)
no legal proceeding is pending or, to best knowledge of Borrower, threatened
before any arbitrator, other private adjudicator, or Governmental Authority to
which such Borrower is a party or by which such Borrower or any assets or
property of such Borrower may be bound or affected that if resolved adversely to
such Borrower could result in a Material Adverse Change and (ii) no hearing,
inquiry, or investigation relating to such Borrower or any assets or property of
such Borrower is pending or, to the best knowledge of such Borrower, threatened
by any Governmental Authority that if resolved adversely to such Borrower could
result in a Material Adverse Change (other than in connection with customary
zoning, platting, and building inspection corrections).
5.1.8 NO EVENT OF DEFAULT OR UNMATURED EVENT OF DEFAULT. No Event
of Default and no Unmatured Event of Default has occurred and is continuing.
5.1.9 APPROVALS AND PERMITS; ASSETS AND PROPERTY. Such Borrower
has obtained and there are in full force and effect all Approvals and Permits
necessary for the conduct of the business of said Borrower, provided that
Borrower may not have obtained all of the Approvals and Permits necessary for
construction of Units or A&D Improvements to the extent such Approvals and
Permits are not yet necessary. Such Borrower owns, leases, or licenses all
assets and property necessary for conduct of the business and operations of
Borrower (including, without limitation, any Option Agreement). The Eligible
Collateral owned by such Borrower not subject to any Liens and Encumbrances,
other than the Permitted Exceptions.
5.1.10 TAXES. Such Borrower has filed or caused to be filed all
tax returns (federal, state, and local) required to be filed by such Borrower
and has paid all taxes and other amounts shown thereon to be due (including,
without limitation, any interest or penalties).
-54-
<PAGE>
5.1.11 ERISA. Such Borrower and Guarantor are in compliance with
ERISA. No Reportable Event or Prohibited Transaction (as defined in ERISA) or
termination of any plan has occurred and no notice of termination has been filed
with respect to any plan established or maintained by such Borrower or Guarantor
and subject to ERISA. Neither such Borrower nor Guarantor has incurred any
material funding deficiency within the meaning of ERISA or any material
liability to the Pension Benefit Guarantee Corporation in connection with any
such plan established or maintained by such Borrower or Guarantor. Neither such
Borrower nor Guarantor is a party to any Multiemployer Plan (as defined in
ERISA).
5.1.12 COMPLIANCE WITH LAW. Other than noncompliance with
applicable building and/or land use development codes which is not unusual and
is correctable by such Borrower and without substantial expense, neither such
Borrower nor the Eligible Collateral owned by such Borrower is in violation of
any law, ordinance, regulation, or rule (federal, state, or local).
5.1.13 UNIT BUDGETS AND PLANS AND SPECIFICATIONS. Each Unit Budget
and Specific Unit Budget contains all costs, expenses, and fees anticipated to
be incurred by such Borrower in connection with respective type of Unit. Each
set of Unit Plans and Specifications and related working drawings are an
accurate and complete description of the respective Unit type.
5.1.14 BUDGETS, PLANS AND SPECIFICATIONS, AND CONSTRUCTION
CONTRACT(S). Each A&D Budget contains all costs, expenses, and fees anticipated
to be incurred by such Borrower in connection with acquisition of the A&D Land
and construction of the A&D Improvements. The A&D Plans and Specifications and
related working drawings are an accurate and complete description of the A&D
Improvements. The construction contract(s) relating to the construction of the
A&D Improvements provide for all work and materials anticipated to be necessary
to construct and all payments necessary to pay for the construction of the A&D
Improvements.
5.1.15 ENVIRONMENTAL MATTERS. To the best of such Borrower's
knowledge, neither such Borrower nor any of the Eligible Collateral owned by
such Borrower is in violation of any Environmental Laws or subject to any
existing, pending, or to such Borrower's knowledge any threatened investigation
by any Governmental Agency under any Environmental Laws. Such Borrower hereby
acknowledges that Bank has made a written request of such Borrower for
information concerning the environmental condition of the Eligible Collateral
owned by such Borrower, including, without limitation, (i) the presence, alleged
presence or threatened presence, and (ii) the release, alleged release or
threatened release, of Hazardous Substances on, under, in, from, or about the
Project. Such Borrower hereby represents, warrants and certifies to Bank that
such Borrower has no actual knowledge or notice of the
-55-
<PAGE>
presence, alleged presence, threatened presence, release, alleged release, or
threatened release of Hazardous Substances on, under, in, from, or about the
Eligible Collateral owned by such Borrower, except as has been disclosed to Bank
in writing. As used herein, the term "release" has the meaning assigned to such
term in any applicable state or federal law.
5.2 REPRESENTATIONS AND WARRANTIES UPON REQUESTS FOR ADVANCES. Each
request for an Advance shall be a representation and warranty by each Borrower
to Bank that the representations and warranties by such Borrower in this SECTION
5 are correct and complete as of the date the Advance except as otherwise
disclosed and that the conditions precedent in SECTION 4 are satisfied as of the
date of the Advance.
5.3 REPRESENTATIONS AND WARRANTIES UPON DELIVERY OF FINANCIAL STATEMENTS,
DOCUMENTS, AND OTHER INFORMATION. Each delivery by a Borrower to Bank of
financial statements, other documents, or information after the date of this
Agreement (including, without limitation, documents and information delivered in
obtaining an Advance) shall be a representation and warranty by such Borrower
that such financial statements, other documents, or information is correct and
complete in all material respects, that there are no material omissions
therefrom that result in such financial statements, other documents, or
information being materially incomplete, incorrect, or misleading as of the date
thereof, and that such financial statements accurately present the financial
condition and results of operations of such Borrower as at the dates thereof and
for the periods covered thereby.
6. BORROWER AFFIRMATIVE COVENANTS. Until the Commitment terminates in full
and the obligations under the Loan Documents and the Guaranty are paid and
performed in full, each Borrower agrees that, unless Bank otherwise agrees in
writing in Bank's absolute and sole discretion:
6.1 CORPORATE EXISTENCE. Such Borrower shall continue to be validly
existing, and in good standing, under the law of the jurisdiction of its
organization or formation. If such Borrower is not formed or organized under
the laws of each state where such Borrower is doing business, such Borrower
shall continue to be qualified to do business as a foreign corporation, in good
standing, under the law of each such state.
6.2 BOOKS AND RECORDS; ACCESS BY BANK. Such Borrower will maintain a
single, standard, modern system of accounting, in accordance with the
requirements in SECTION 1 (including, without limitation, a single, complete,
and accurate set of books and records of its assets, business, financial
condition, operations, property, prospects, and results of operations) in
accordance with GAAP. During business hours such Borrower will give
representatives of Bank access to all assets, property, books,
-56-
<PAGE>
records, and documents of such Borrower and will permit such representatives to
inspect such assets and property and to audit, copy, examine, and make excerpts
from such books, records, and documents. Prior to the occurrence of an Event of
Default, Bank shall provide reasonable prior notice of such inspections and
shall conduct such inspections during normal business hours.
6.3 INFORMATION AND STATEMENTS. Borrowers shall furnish to Bank each of
the following, which shall be segregated for each Borrower and shall be
cumulated for all Borrowers so as to include information for all Borrowers and
all Eligible Collateral, as applicable:
6.3.1 FISCAL PERIOD FINANCIAL STATEMENTS. As soon as available
and in any event within the number of days set forth in SECTION 1 after the end
of each fiscal period of Borrowers and Guarantor set forth in SECTION 1, except
the last period in each fiscal year of Borrowers and Guarantor:
6.3.1.1 STATEMENTS. Copies of the balance sheet of Borrowers
and Guarantor as of the end of such fiscal period and statements of income and
retained earnings and a statement of cash flow of Borrowers and Guarantor for
such fiscal period and for the portion of the fiscal year of Borrowers and
Guarantor ending with such fiscal period, all in reasonable detail, prepared in
accordance with the requirements in SECTION 1, containing the certifications
specified in SECTION 1, and signed on behalf of Borrowers and Guarantor by the
person(s) named in SECTION 1. All such balance sheets shall set forth in
comparative form figures for the preceding year end. All such income statements
and statements of cash flow shall reflect current period and year-to-date
figures.
6.3.1.2 PROJECTION. Within forty-five (45) days after the end
of each calendar quarter, a twelve (12) month projection of cash flow for
Borrowers and Guarantor, in reasonable detail, prepared in accordance with the
requirements in SECTION 1, and signed on behalf of Borrowers and Guarantor by
the person(s) named in SECTION 1.
6.3.2 ANNUAL FINANCIAL STATEMENTS. As soon as available and in
any event within the number of days set forth in SECTION 1 after the end of each
fiscal year of Borrowers and Guarantor, copies of the balance sheet of Borrowers
and Guarantor as of the end of such fiscal year and statements of income and
retained earnings and a statement of cash flow of Borrowers and Guarantor for
such fiscal year, in each case setting forth in comparative form the figures for
the preceding fiscal year of Borrower and Guarantor, all in reasonable detail
and prepared in accordance with the requirements in SECTION 1, containing the
certifications specified in SECTION 1. Borrowers' annual financial statements
shall also be accompanied by Borrowers' consolidated budget and business plan
for each of the upcoming fiscal year, and
-57-
<PAGE>
Guarantor's annual financial statements shall also be accompanied by Guarantor's
consolidated budget and business plan for each of the upcoming two (2) fiscal
years, all in reasonable detail and containing such information as Bank may
request. The consolidated budget and business plan shall be signed on behalf of
Borrowers and Guarantor, as applicable, by the person(s) named in SECTION 1.
6.3.3 CLOSING REPORT. On each Business Day, a report of all Unit
sales closed on the previous Business Day, in form and substance satisfactory to
Bank, which report shall be supported by settlement statements given to Bank
within five (5) days thereafter relating to each Unit sale, together with a
reconciliation of the most recently submitted Inventory Report and recalculation
of Eligible Collateral after giving effect to such closings. For purposes of
this SECTION 6.3.3, a sale will be deemed to have closed when the escrow agent
for the sale has received all funds necessary to close the sale and pay to Bank
all sums owed to Bank pursuant to SECTION 3.5.11 and is unconditionally prepared
to record the deed conveying title to such Unit.
6.3.4 COMPLIANCE CERTIFICATES. Monthly commencing on July 15,
1994 and on the fifteenth day of each Calendar Month thereafter, a certificate,
in form and substance satisfactory to Bank, signed on behalf of each Borrower
and Guarantor by the persons named in SECTION 1, stating that each Borrower and
Guarantor is in compliance with all covenants, terms, and conditions applicable
to each of Borrower and Guarantor under or pursuant to the Loan Documents, the
Guaranty and the Environmental Agreements and that, to the best of their
respective knowledge, neither any Borrower nor Guarantor are in default under or
pursuant to any other Debt owing by any Borrower or Guarantor to any Person in a
principal amount of $500,000.00 or more (including without limitation the Senior
Notes), and disclosing any noncompliance therewith and describing the status of
such Borrower's or Guarantor's actions to correct such noncompliance, if
applicable.
6.3.5 SALES AND INVENTORY REPORTS. As soon as the same are
available and in any event within fifteen (15) days after the end of each
Calendar Month, (i) a report showing sales and cancellation of sales of Units
during the preceding Calendar Month, and (ii) a report showing (A) the inventory
of completed Units as of the end of the preceding Calendar Month, and (B) Units
in progress as of the end of the preceding Calendar Month. Such report shall
contain such detailed information as Bank may reasonably require.
6.3.6 GROSS PROFIT ANALYSIS. Within forty-five (45) days after
the end of each calendar quarter, an analysis of gross profit for each
Subdivision, as of the end of such calendar quarter, and cumulatively for the
calendar year.
-58-
<PAGE>
6.3.7 BACKLOG REPORT. Within forty-five (45) days after the end
of each calendar quarter, a backlog report, effective as of the end of such
calendar quarter, reflecting the number of Units then under construction
pursuant to contracts for sale, the anticipated delivery date of all such Units,
and the aggregate value of such Units upon completion thereof.
6.3.8 BORROWING BASE REPORT. Within fifteen (15) days after the
end of each Calendar Month, a Borrowing Base Report in form and content
satisfactory to Bank, showing for each Unit in Eligible Collateral, among other
things, the following: (i) the street address of the Lot; (ii) the name of the
Subdivision; (iii) the Lot number as indicated on the recorded plat of the
Subdivision; (iv) the Unit plan type; (v) whether the Unit is a Presold Unit, a
Spec Unit or a Model Unit and whether the Unit is also a Custom Unit; (vi) the
Specific Unit Budget; (vii) percentage of completion; (viii) the Unit Base
Appraised Value; (ix) the selling price of the Unit or the amount of the
Purchase Contract, as applicable; (x) the date of the first Advance against the
Unit in Eligible Collateral; (xi) the actual closing date of the sale of the
Unit, if the Unit is a Presold Unit; (xii) the maximum Advance against the Unit
based upon the stage of completion and the Maximum Allowed Advance for such
Unit. With respect to A&D Projects, the Borrowing Base Report will also show
whether the A&D Project is an Improved Lot Project or an Unimproved Lot Project.
With respect to Unimproved Lot Projects, the Borrowing Base Report shall also
set forth such information concerning construction of the A&D Improvements as
Bank may require, including, without limitation, the status of construction of
the A&D Improvements, a detailed breakdown of the costs of the various phases of
construction of the A&D Improvements showing the amounts expended to date for
such construction, an itemized estimate of the amount necessary to complete
construction of the A&D Improvements in their entirety. Borrowers may submit a
Borrowing Base Report no more than twice in a Calendar Month; each Borrowing
Base Report shall be accompanied by a Collateral Certificate. Units and A&D
Projects may be added as Eligible Collateral only upon receipt of the Borrowing
Base Report and Collateral Certificate which include such Unit or A&D Project.
6.3.9 COLLATERAL CERTIFICATE. Within fifteen (15) days after the
end of each Calendar Month, a Collateral Certificate (which accompanies the
Borrowing Base Report for such month) in form and substance satisfactory to Bank
setting forth the following:
(a) the information required to be shown on the Borrowing Base
Report;
(b) the total number of Letter of Credit Subcommitments, and the
amount of each Letter of Credit Subcommitment;
(c) the total number of Presold Units, Spec Units, Model Units,
Custom Units, A&D Unimproved Lot Projects and A&D Improved Lot Projects
that constitute Eligible Collateral;
-59-
<PAGE>
(d) the A&D Collateral Value and the A&D Subcommitment amount for
each A&D Project that constitutes Eligible Collateral;
(e) the total value for all Collateral, including Eligible Collateral
and Collateral that is not Eligible Collateral;
(f) the amount of Loan proceeds that are available for Advances
against Eligible Collateral based on the terms of this Agreement;
(g) a statement that Borrowers are in compliance with the terms and
conditions of the Loan Documents and the Environmental Agreements; and
(h) a statement that Guarantor is in compliance with the Financial
Covenant and the Covenant Relating to Other Debt.
6.3.10 LAND HOLDINGS. Quarterly commencing on July 1, 1994 and
within forty-five (45) days after the end of each quarter thereafter, a detailed
schedule of all land owned by each Borrower and Guarantor, setting forth,
without limitation, the location and book value of all such holdings.
6.3.11 UNIT BUDGETS. On each anniversary of the date of this
Agreement, and at such other time as requested by Bank, updated Unit Budgets.
6.3.12 OTHER CONSTRUCTION INFORMATION. If requested by Bank in
connection with each A&D Unimproved Lot Project:
(i) A list of the names and addresses of all contractors, subcontractors,
material suppliers, other vendors, artisans, and laborers performing work or
providing materials or supplies for the A&D Project.
(ii) Invoices or bills of sale for amounts included in the A&D Collateral
Value for such A&D Project, and unconditional partial releases and waivers of
lien (on forms approved by Bank) for all work performed and materials supplied
payment for which was included in the A&D Collateral Value for such A&D Project.
(iii) Evidence that any required inspection by any Governmental Authority
having or exercising jurisdiction over all or any part of the A&D Project has
been satisfactorily completed.
-60-
<PAGE>
(iv) Such other bills, invoices, receipts, statements, and other documents
and information as Bank may require in order to substantiate the amount of the
A&D Collateral Value and the appropriateness of including the A&D Project as
Eligible Collateral under the terms and conditions of this Agreement.
6.3.13 OTHER ITEMS AND INFORMATION. Such other information
(including without limitation supporting schedules for financial statements)
concerning any Borrower and Guarantor, the Project, and the assets, business,
financial condition, operations, property, prospects, and results of operations
of any Borrower and Guarantor as Bank reasonably requests from time to time.
Promptly upon filing thereof, the applicable Borrower shall deliver to Bank
copies of all reports and information filed by Guarantor with the Securities and
Exchange Commission and any other government agency. Additionally, promptly
upon request of Bank, the applicable Borrower shall deliver to Bank counterparts
and/or conditional assignments as security of any and all construction
contracts, receipted invoices, bills of sale, statements, conveyances, and other
agreements, documents, and instruments of any nature relating to the Eligible
Collateral owned by such Borrower or under which such Borrower claims title to
any materials or supplies used or to be used in the Eligible Collateral. Also,
in this regard, promptly upon request of Bank, each Borrower shall deliver to
Bank a complete list of all contractors, subcontractors, material suppliers,
other vendors, artisans, and laborers performing work or services or providing
materials or supplies for the Eligible Collateral owned by such Borrower.
6.4 LAW; JUDGMENTS; MATERIAL AGREEMENTS; APPROVALS AND PERMITS. Except
for normal construction corrections occasioning temporary noncompliance which
are corrected by the Borrower with diligence and without substantial expense,
each Borrower shall comply with all laws, ordinances, regulations, and rules
(federal, state, and local) and all judgments, orders, and decrees of any
arbitrator, other private adjudicator, or Governmental Authority relating to
such Borrower, the Eligible Collateral owned by the Borrower, or the assets,
business, operations, or property of such Borrower; PROVIDED, HOWEVER, that such
Borrower may, in good faith, contest the applicability of such matters to the
extent such matters do not affect title to any Unit, Lot or Subdivision or the
validity or enforceability of any Deed of Trust. Each Borrower shall comply in
all material respects with all material agreements, documents, and instruments
to which such Borrower is a party or by which Borrower, the Eligible Collateral
owned by such Borrower, or any of the other assets or property of such Borrower
is bound or affected. Each Borrower shall comply with all Requirements
(including, without limitation, as applicable, requirements of the Federal
Housing Administration and the Veterans Administration) and all conditions and
requirements of all Approvals and Permits. Each Borrower shall obtain and
maintain in effect from time to time all Approvals and Permits required for the
business activities and
-61-
<PAGE>
operations then being conducted by such Borrower in the Subdivisions.
6.5 TAXES AND OTHER INDEBTEDNESS. Except for (i) Involuntary Liens and
Impositions being contested in accordance with the Deed of Trust, (ii) income
taxes or franchise taxes for which no lien has been filed, which are contested
in good faith and for which the applicable Borrower or Guarantor is maintaining
adequate reserves, and (iii) Impositions that Bank has agreed in its absolute
and sole discretion may be paid in installments as provided in the Deed of
Trust, each Borrower shall pay and discharge (A) before delinquency all taxes,
assessments, and governmental charges or levies imposed upon said Borrower, upon
its income or profits, or upon any property belonging to it, (B) when due all
lawful claims (including, without limitation, claims for labor, materials, and
supplies), which, if unpaid, might become a Lien or Encumbrance upon any of the
assets or property of such Borrower, other than such claims which such Borrower
may contest pursuant to the terms and conditions of a Deed of Trust, and (C) all
its other indebtedness.
6.6 ASSETS AND PROPERTY. Each Borrower will maintain, keep, and preserve
all of its assets and property (tangible and intangible) (including, without
limitation, Eligible Collateral) necessary or useful in the proper conduct of
their respective business and operations in good working order and condition,
ordinary wear and tear excepted.
6.7 INSURANCE. The following insurance shall be obtained and maintained
and all related premiums shall be paid as they become due:
6.7.1 PROPERTY. Insurance of the Eligible Collateral against
damage or loss by fire, lightning, and other perils, on an all-risks basis, such
coverage to be in an amount not less than the amount set forth in SECTION 1.
During the period of construction of the Units or A&D Projects, such policy
shall be written on an all-risks basis, with no coinsurance requirement, and
shall contain a provision granting the insured permission to complete and/or
occupy the Units or A&D Projects, as applicable.
6.7.2 LIABILITY. Commercial general liability insurance
protecting Borrowers and Bank against loss or losses from standard liability,
including contractual liability, and arising from bodily injury, death, or
property damage with a limit of liability of not less than the respective
amounts specified in SECTION 1 per occurrence and general aggregate. Also,
"UMBRELLA" excess liability insurance in an amount not less than the amount set
forth in SECTION 1. Such policies must be written on an occurrence basis so as
to provide blanket contractual liability, broad form property damage coverage,
and coverage for products and completed operations. In addition, there shall be
obtained and
-62-
<PAGE>
maintained business motor vehicle liability insurance protecting Borrowers and
Bank against loss or losses from liability relating to motor vehicles owned,
non-owned, or hired used by a Borrower with a limit of liability of not less
than the amount set forth in SECTION 1 (combined single limit for personal
injury (including bodily injury and death) and property damage).
6.7.3 FLOOD. A policy or policies of flood insurance in the
maximum amount of flood insurance available with respect to each Lot or Unit
under the Flood Disaster Protection Act of 1973, as amended. This requirement
will be waived with respect to a Unit upon presentation of evidence satisfactory
to the Bank that no portion of the Unit in question is located within an area
identified by the U.S. Department of Housing and Urban Development as having
special flood hazards.
6.7.4 WORKER'S COMPENSATION. Worker's compensation insurance,
disability benefits insurance, and such other forms of insurance as required by
law covering loss resulting from injury, sickness, disability, or death of
employees of each Borrower. Borrowers shall cause each contractor and each
subcontractor having employees located on or assigned to the Project to obtain
and maintain this same coverage for all eligible employees.
6.7.5 ADDITIONAL INSURANCE. Each Borrower shall obtain and
maintain such other policies of insurance as Bank may reasonably request in
writing.
6.7.6 OTHER. All policies for required insurance shall be in form
and substance satisfactory to Bank in its absolute and sole discretion. Such
insurance may be carried under blanket policies, so long as such policy provides
the coverage for each Unit as provided in SECTION 6.7.1 and otherwise complies
with this SECTION 6.7. All required insurance shall be procured and maintained
in financially sound and generally recognized responsible insurance companies
selected by Borrowers and approved by Bank. Such companies must be authorized
to write such insurance in the State where the Collateral is located. Each
company shall be rated "A" or better by A.M. Best Co., in Bests' Key Guide, or
such other rating acceptable to Bank in Bank's absolute and sole discretion.
All property policies evidencing required insurance shall name Bank as first
mortgagee and loss payee. All liability policies evidencing required insurance
shall name Bank as additional insured. The policies shall not be cancelable as
to the interests of the Bank due to the acts of any Borrower or Guarantor. The
policies shall provide for at least thirty (30) days prior written notice of the
cancellation or modification thereof to Bank.
6.7.7 EVIDENCE. A certificate and, if requested by Bank, a
certified copy of each insurance policy or, if acceptable to Bank in its
absolute and sole discretion, certificates of insurance evidencing that such
insurance is in full force and
-63-
<PAGE>
effect, shall be delivered to Bank, together with proof of the payment of the
premiums thereof. At least ten (10) days prior to the expiration of each such
policy, Borrowers shall furnish Bank evidence that such policy has been renewed
or replaced in the form of the original or a certified copy of the renewal or
replacement policy or, if acceptable to Bank in its absolute and sole
discretion, a certificate reciting that there is in full force and effect, with
a term covering at least the next succeeding calendar year, insurance of the
types and in the amounts required in this SECTION 6.7.
6.8 ERISA. Each Borrower and Guarantor will fund each Defined Benefit
Plan and Defined Contribution Plan (as such terms are defined in ERISA)
established or maintained by such Borrower and Guarantor, as applicable, so that
there is never an Accumulated Funding Deficiency (as defined in SECTION 412 of
the Internal Revenue Code of 1986, as amended).
6.9 UNIT BASE APPRAISALS. Bank shall have the right to order Unit Base
Appraisals from time to time. Each Unit Base Appraisal is subject to review and
approval by Bank and shall be accompanied by the following documents and
information: (i) one (1) set of Unit Plans and Specifications for the type of
Unit covered by the Unit Base Appraisal; (ii) the proposed sales price for the
type of Unit; (iii) the final Unit Budget (or the estimated Unit Budget, if the
final Unit Budget is not approved) for the type of Unit covered by the Unit Base
Appraisal; (iv) mini floor plans, square footage, anticipated absorption,
estimated unit mix, and number of models (by floor plan), all for the applicable
Subdivision; and (v) a complete legal description of the specific lots in the
Subdivision, together with applicable recording information.
The Borrower that owns the appraised Units agrees, within fifteen (15) days
after demand by Bank, to pay to Bank the cost and expense for such Unit Base
Appraisals and a fee prescribed by Bank for review of each such Unit Base
Appraisal by Bank. All FNMA appraisals or other appraisals of Units accepted by
Bank that do not have a specific expiration date shall be updated at Bank's
request. Based on the updated, respective Unit Base Appraised Value approved or
determined by Bank in its absolute and sole discretion, Bank shall have the
right to revise the Unit Collateral Values and/or Maximum Allowed Advances
applicable to each type of Unit. If the outstanding principal amount of
Advances exceeds the Available Commitment or exceeds the limitations in SECTION
3.5.2.2 or SECTION 3.5.6 as a result of such revision, then Borrower shall be
required to make a mandatory prepayment to Bank pursuant to SECTION 3.7.
6.10 A&D APPRAISALS. Bank shall have the right to order A&D Appraisals of
the A&D Project from time to time, but not more frequently than once during any
twelve (12) Calendar Month period. Each A&D Appraisal is subject to review and
approval by Bank. The
-64-
<PAGE>
Borrower that owns the appraised A&D Project agrees, within fifteen (15) days
after demand by Bank, to pay to Bank the cost and expense incurred by Bank for
such A&D Appraisals and a fee prescribed by Bank for review of each A&D
Appraisal by Bank. Based on the updated, respective A&D Appraisal Review Market
Value approved or determined by Bank in its absolute and sole discretion, Bank
shall have the right to revise the A&D Collateral Values and/or A&D
Subcommitment Amount applicable to such A&D Project. If the outstanding
principal amount of Advances exceeds the Available Commitment or exceeds the
limitations in SECTION 3.5.2.2 or SECTION 3.5.6 as a result of such revision,
then Borrower shall be required to make a mandatory prepayment to Bank pursuant
to SECTION 3.7.
6.11 COMMENCEMENT AND COMPLETION OF A&D IMPROVEMENTS. The applicable
Borrower shall cause construction of the A&D Improvements to be prosecuted and
completed in good faith, with due diligence, and without delay subject to acts
of God, labor strikes and other force majeure events beyond the reasonable
control of such Borrower. The construction of the A&D Improvements shall be
commenced no later than the Commencement Date set forth in the A&D Term Sheet
and shall be fully completed on or before the Completion Date set forth in the
A&D Term Sheet, except for correction of minor punch list items. Such Borrower
shall obtain the issuance of a letter of acceptance or other equivalent from
each applicable Governmental Authority regarding completion of the A&D
Improvements and deliver a copy thereof to Bank within a reasonable time after
the A&D Completion Date. Such Borrower shall cause the A&D Improvements to be
constructed (i) in a good and workmanlike manner, (ii) in compliance with all
applicable Requirements, and (iii), unless otherwise consented to by Bank in
advance in writing in the absolute and sole discretion of Bank, in accordance
with the A&D Plans and Specifications without material deviation and within the
limitations of the A&D Budget. Upon demand by Bank, such Borrower shall correct
any defect in the A&D Improvements or any material departure from any applicable
Requirements or, to the extent not theretofore approved in writing by Bank, the
A&D Plans and Specifications. Each Borrower understands and agrees that the
inspection of the A&D Improvements by or on behalf of Bank, the review by Bank
of A&D Draw Requests and related documents and information, the making of
Advances by Bank, any actions by Bank under SECTION 6.15, and any other actions
by Bank shall not be a waiver of Bank's right to require compliance with this
SECTION 6.11.
6.12 CHANGE ORDERS. Without Bank's prior written consent in its absolute
and sole discretion, a Borrower shall not (i) amend or modify the A&D Budget, or
(ii) make or permit any material amendments or modifications of the construction
contract(s) for construction of the A&D Project, the A&D Plans and
Specifications, or any other agreements, documents, or instruments relating to
construction of the A&D Project. Notwithstanding the provisions of this SECTION
6.12, a Borrower shall not be required to obtain
-65-
<PAGE>
Bank's consent to any individual amendment or modification of such construction
contract(s), the A&D Plans and Specifications, or any other agreements,
documents, or instruments relating to construction of the A&D Project if the
result is an increase of the A&D Budget equal to or less $50,000.00. Regardless
of whether Bank's consent to any such amendments or modifications is required
under this Agreement, if any such modification or amendment creates an A&D
Deficiency Amount, Borrower shall pay or deposit such Deficiency Amount or take
such other action as provided in SECTION 3.5.9 and if any such funds are so
deposited, then such funds will be disbursed by Bank as provided in SECTION
3.5.9.
6.13 COMMENCEMENT AND COMPLETION OF UNITS. Each Borrower shall cause
construction of its respective Units to be prosecuted and completed in good
faith, with due diligence, and without delay subject to acts of God, labor
strikes and other force majeure events beyond the reasonable control of such
Borrower. A Borrower may commence construction of Units at any time. On or
before the Unit Completion Date, (i) each Model Unit shall be completed, and
(ii) all other Unit types shall be completed through Stage 4 (as set forth in
the definition of "Unit Collateral Value"). Each Borrower shall cause its
respective Units to be constructed (i) in a good and workmanlike manner, (ii) in
compliance with all applicable Requirements, and (iii), unless otherwise
consented to by Bank in advance in writing in the absolute and sole discretion
of Bank, in substantial accordance with the respective Unit Plans and
Specifications. Upon demand by Bank, each Borrower shall correct any defect in
its respective Units or any material departure from any applicable Requirements
or, to the extent not theretofore approved in writing by Bank, the respective
Unit Plans and Specifications. Each Borrower understands and agrees that
inspection of the Units by or on behalf of Bank, the review by Bank of Draw
Requests and related documents and information, the making of Advances by Bank,
any actions by Bank under SECTION 6.15, and any other actions by Bank shall not
be a waiver of Bank's right to require compliance with this SECTION 6.13. If
Bank shall ever be required to complete the construction of any Units, whether
occasioned by the occurrence of an Event of Default or for any other reason, any
sums expended by Bank in constructing such Units shall be treated as Advances to
the applicable Borrower hereunder and shall be deemed the legal, valid and
binding obligations of such Borrower to Bank.
6.14 TRI-PARTY AGREEMENT AND TITLE INSURANCE.
6.14.1 TRI-PARTY AGREEMENT. Richmond Homes, Inc. I and Richmond
Homes, Inc. II at all times shall cause the Title Company to comply with the
Tri-Party Agreement. From and after termination of the Tri-Party Agreement,
Richmond Homes, Inc. I and Richmond Homes, Inc. II shall at all times cause to
be obtained Title Insurance in conformity with this Agreement and any agreements
replacing the Tri-Party Agreement. Prior to the
-66-
<PAGE>
termination of the Tri-Party Agreement and so long as Title Company is not in
violation thereof, Title Policies and endorsements issued pursuant to the Tri-
Party Agreement shall satisfy SECTIONS 4.2.15 AND 4.3.4.5.
6.14.2 TITLE INSURANCE CLAIMS. If Title Company pays any claims
under any Title Policies, the applicable Borrower will take any and all action
necessary to cause the total liability under the Title Policies to remain at or
to be increased to the original liability notwithstanding the payment of such
claim or claims, including without limitation, providing any supplemental Title
Policies or endorsements or reinsurance agreements if requested by Bank, the
cost of which shall be paid by such Borrower. Upon payment of any such claims,
such Borrower will obtain and provide to Bank any and all documentation
reasonably requested by Bank to ensure that the maximum coverage provided for
hereunder shall not have been diminished as a result of the payment of such
claims.
6.15 RIGHTS OF INSPECTION; CORRECTION OF DEFECTS; AGENCY. Bank and its
agents, employees, and representatives shall have the right at any time and from
time to time to enter upon the Project in order to inspect the Project;
PROVIDED, HOWEVER, any Person entering upon the Project shall observe and comply
with the applicable Borrower's safety requirements. So long as no Event of
Default has occurred and is continuing, Bank shall inspect each Unit and each
A&D Project no less frequently than once in any calendar quarter; PROVIDED,
HOWEVER, that if the results of any such inspection disclose (i) with respect to
Units, errors in the information provided by the applicable Borrower with
respect to Units that constitute, in the aggregate, three percent (3%) or more
of the total Units owned by such Borrower that constitute Eligible Collateral,
or (ii) with respect to A&D Projects, errors in the A&D Collateral Value
provided by the applicable Borrower that exceed, in the aggregate, an amount
equal to three percent (3%) of the total A&D Collateral Value for all A&D
Projects owned by such Borrower that constitute Eligible Collateral, then Bank
may, in is sole and absolute discretion, (A) increase the frequency of all
inspections conducted with respect to all Units or A&D Projects, as applicable,
that are Eligible Collateral, and/or (B) increase the frequency of all
inspections conducted with respect to all Units and A&D Projects owned by the
such Borrower.
If Bank, in its judgment, determines that any materials or work do not
conform with the respective Unit Plans and Specifications or the A&D Plans and
Specifications, as applicable, in all material respects or with any applicable
Requirements or are otherwise not in conformity with sound building practice,
Bank shall have the right to stop the work (unless, with respect to any Unit,
such Unit is removed from Eligible Collateral) and to order replacement or
correction of any such materials or work regardless of whether or not such
materials or work have theretofore been
-67-
<PAGE>
incorporated in the Units, regardless of whether Bank's representatives have
previously inspected such work or materials, and regardless of whether Bank has
previously made Advances to pay for such work or materials. The Borrower that
owns the Unit or A&D Project shall promptly make such replacement or correction.
Inspection by Bank or by Bank's inspectors of the A&D Project or the Units is
for the sole purpose of protecting the security of Bank and is not to be
construed as a representation by Bank that there has been compliance with the
Unit Plans and Specifications or the A&D Plans and Specifications, the
applicable Requirements or that the Units or A&D Projects are free of defects in
materials or workmanship. Borrowers may make or cause to be made such other
independent inspections as Borrowers may desire for their own protection.
6.16 MISCELLANEOUS. Any inspections or determinations made by Bank or lien
waivers, receipts, or other agreements, documents, and instruments obtained by
Bank are made or obtained solely for Bank's own benefit and not in any way for
the benefit or protection of any Borrower. Bank may accept and rely on any
information from an architect, any other Person providing labor, materials, or
services for Units or A&D Projects, Borrower, or any other Person as to labor or
materials furnished or incorporated in the Units or the A&D Projects and the
cost and payment therefor and as to all other matters relating to construction
of the Units and the A&D Improvements without the necessity of verifying such
information. Bank has no obligation to any Borrower or Guarantor to ensure
compliance by contractor, engineer, or any other Person in carrying out
construction of the Units or A&D Improvements.
6.17 VERIFICATION OF COSTS. Bank shall have the right at any time and
from time to time to review and verify all costs, expenses, and fees in each
Unit Budget and each A&D Budget. Based on its review and verification of costs,
expenses, and fees in each Unit Budget, Bank shall have the right to adjust any
and all such budgeted amounts. Based on its review and verification of costs,
expenses, and fees in the A&D Budget, Bank shall have the right to (i) reduce or
increase the total amount of the A&D Collateral Value, or (ii) suspend or
terminate Bank's approval of the A&D Budget, which action under (II) shall have
the effect of the condition precedent for Advances in SECTION 4.5.11 not being
satisfied. If any such action by Bank creates an A&D Deficiency Amount,
Borrower shall pay or deposit such A&D Deficiency Amount or take such other
action as provided in SECTION 3.5.9 and if any funds are so deposited, such
funds will be disbursed by Bank as provided in SECTION 3.5.9.
6.18 USE OF PROCEEDS OF ADVANCES. Each Borrower shall use proceeds of
Advances only for the purposes described in SECTIONS 3.5.1 and 5.1.6.
-68-
<PAGE>
6.19 CROSS-COLLATERALIZATION. At Bank's request at any time and from time
to time, each Borrower agrees to execute or obtain the execution of and deliver
such additional agreements, documents, and instruments as Bank determines to be
necessary or appropriate so that all Collateral provided by such Borrower shall
also secure any or all (as determined by Bank) other obligations of such
Borrower to Bank (so long as Bank One, Arizona, NA and its corporate successors
are "Bank" under this Agreement) and/or so that any or all property, interests
in property, and rights to property selected by Bank securing other obligations
of such Borrower to Bank also secure the Obligations. Borrower agrees to pay
all costs, expenses, and fees incurred by Bank in connection with any and all
such cross-collateralization requests by Bank (including, without limitation,
costs, expenses, and fees of Bank's attorneys).
6.20 BANK'S INSPECTOR(S). Each Borrower agrees that during construction of
Units and the A&D Improvements, Bank shall have the right to employ an outside
inspector or inspectors who shall review as agent for Bank all construction
activities undertaken in regard to Units and A&D Improvements and who shall
prepare reports of such reviews. Alternatively, Bank may elect to have
employees of Bank perform such reviews and prepare such reports. In addition,
the employees of Bank will review the inspection reports of any outside
inspector(s), will review Draw Requests, will perform other activities related
to Draw Requests, and will perform other activities in administering and
monitoring the Advances.
6.21 PLAT MAP. In the event that a plat map of the A&D Land approved by
Bank in its absolute and sole discretion is not recorded on or prior to the A&D
Eligibility Date relating thereto, the Borrower that owns such A&D Land shall
prepare and record a plat map of the A&D Land within ninety (90) calendar days
after the A&D Eligibility Date, or such other day as Bank may approve in its
absolute and sole discretion. Such plat map must comply with all Requirements
and must be satisfactory in form and substance to Bank in its absolute and sole
discretion. Such plat map must be approved by Bank prior to its being recorded.
Prior to evaluation by Bank of the plat map for approval, such Borrower shall
deliver to Bank such certifications, maps, surveys, and other documents and
information as Bank requires. Also prior to approval of the plat map by Bank,
such Borrower will deliver to Bank such title endorsements insuring the
continued priority of the Deed of Trust after recording of the plat map as Bank
may require. Within five (5) days after recording of the approved plat map,
such Borrower shall notify Bank of the recording and shall deliver to Bank a
copy of the recorded plat map. Such Borrower agrees to take such steps as Bank
may require in (i) either re-recording the Deed of Trust or amending the Deed of
Trust to reflect the new plat legal description, and (ii) obtaining an
endorsement to the Title Policy to amend the legal description therein.
-69-
<PAGE>
6.22 FURTHER ASSURANCES. Each Borrower shall promptly execute,
acknowledge, and deliver such additional agreements, documents, and instruments
and do or cause to be done such other acts as Bank may reasonably request from
time to time to better assure, preserve, protect, and perfect the interest of
Bank in the Collateral of such Borrower and the rights and remedies of Bank
under the Loan Documents and the Environmental Agreements.
6.23 COSTS AND EXPENSES OF BORROWER'S PERFORMANCE OF COVENANTS AND
SATISFACTION OF CONDITIONS. Each Borrower will perform all of its obligations
and satisfy all conditions under the Loan Documents and the Environmental
Agreements at its sole cost and expense.
6.24 PAYMENT OF NET SALES PROCEEDS. Each Borrower shall, upon the closing
of a sale of any Unit, pay to Bank from its own funds for application to the
outstanding unpaid aggregate amount of Advances against Eligible Collateral
owned by such Borrower, an amount equal to the Net Sales Proceeds from such Unit
sale, and, if applicable, any Shortage. To the extent that such Net Sales
Proceeds are held by Title Company or any other Person, such Borrower shall take
all action requested by Bank to cause such Net Sales Proceeds to be paid
directly to Bank. If a Borrower collects or receives any such Net Sales
Proceeds, such Borrower will forthwith, upon receipt, transmit and deliver to
Bank, in the form received, all cash, checks, drafts, chattel paper, and other
instruments or writings for the payment of money (endorsed without recourse,
where required, so that such items may be collected by Bank).
6.25 CONSTRUCTION AND SALES RECORDS. Each Borrower shall, at all times,
maintain complete and accurate records of its construction and sales activities
and shall, upon prior notice thereof by Bank, permit Bank to review such records
upon request by Bank at any time and from time to time during regular business
hours. Such records shall include, without limitation, (i) any and all
documents, instruments, contracts and agreements relating to the construction or
sale of Units entered into by such Borrower with or for the benefit of
purchasers, contractors, subcontractors, or other Persons, as applicable,
(ii) lien waivers and releases with respect to all construction in place,
(iii) requests for disbursement and vouchers submitted by contractors,
subcontractors, or other Persons, and (iv) all permits, licenses and approvals
necessary for the continuation and completion of construction.
7. BORROWER NEGATIVE COVENANTS. Until the Commitment terminates in full and
the Obligations are paid and performed in full and such Borrower's obligations
under the Environmental Agreements are paid and performed in full, each Borrower
agrees that, unless Bank otherwise agrees in writing in Bank's absolute and sole
discretion:
7.1 CORPORATE RESTRICTIONS. Such Borrower shall not issue any capital
stock or other securities in such Borrower or grant any
-70-
<PAGE>
option, right-of-first-refusal, warrant, or other right to purchase any capital
stock or other securities in such Borrower (except to Guarantor or any
Subsidiary of Guarantor). Such Borrower shall not be dissolved or liquidated.
Such Borrower shall not amend, modify, restate, supplement, or terminate its
certificate of incorporation or bylaws in any manner that would materially
affect the validity or enforceability of the Obligations or such Borrower's
obligations under the Environmental Agreements or such Borrower's ability to
borrow hereunder, or that would materially impair any security for the
Obligations. Such Borrower shall not reorganize itself or consolidate with or
merge into any other corporation or permit any other corporation to be merged
into such Borrower (except for (i) mergers of any Subsidiary of such Borrower
into such Borrower pursuant to which such Borrower is the surviving entity, (ii)
mergers of such Borrower into another Borrower, or (iii) mergers of such
Borrower into Guarantor, and which do not in any event otherwise constitute an
Event of Default).
7.2 CHANGE IN OR REACQUISITION OF OWNERSHIP INTERESTS. In addition to any
requirement in any other Loan Document, a Borrower will not repurchase any
capital stock of such Borrower or any option, right-of-first refusal, warrant or
other right to purchase any capital stock or other securities of such Borrower.
In addition, a Borrower will not suffer to occur or exist, whether occurring
voluntarily or involuntarily, after the date of this Agreement (i) any change in
the legal or beneficial ownership of any capital stock of Borrower (except for
changes which result in Guarantor having legal or beneficial ownership of such
stock), (ii) any pledge, hypothecation, or transfer to any trust (including,
without limitation, voting trusts) of any such stock, except as security for the
Senior Notes, or (iii) any grant of a proxy with respect to such stock to any
other Person, except in connection with the Senior Notes, without the prior
written consent of Bank in its absolute and sole discretion.
7.3 LIMITATION ON UPSTREAMING. Each Borrower will not, directly or
indirectly, make any payment or transfer of funds or other consideration
(including without limitation, any Dividend [as defined in the Guaranty],
advances, or repayments of Debt) to Guarantor after an Event of Default shall
have occurred and be continuing.
8. ADDITIONAL RIGHTS OF BANK. Bank shall have the following rights in
addition to its other rights set forth in the Deed of Trust and in the other
Loan Documents and the Environmental Agreements and the Guaranty, and Bank may,
without notice to or demand upon any Borrower, without releasing any Borrower
from any obligation under any of the Loan Documents and the Environmental
Agreements and the Guaranty and in addition to and without waiving its other
rights under the Deed of Trust and the other Loan Documents and the
Environmental Agreements and the Guaranty:
-71-
<PAGE>
(a) WAIVER OF SECURITY. In accordance with California Code of Civil
Procedure Section 726.5, as such Section may be amended from time to time, Bank
may waive the security of the Deed of Trust and the other Loan Documents as to
any parcel of the Project which is real property that is "environmentally
impaired" or is an "affected parcel" (as such terms are defined in such
Section), and as to any property which is personal property attached to such
parcel, and thereafter exercise against the applicable Borrower, to the extent
permitted by such Section 726.5, the rights and remedies of an unsecured
creditor, including reduction of Bank's claim against any Borrower to judgment,
and any other provisions of California Code of Civil Procedure Section 726.5(c),
as such Section may be amended from time to time. Each Borrower hereby waives
the provisions of California Code of Civil Procedure Section 726.5(c), as such
Section may be amended from time to time, and acknowledges and agrees that this
waiver was signed by such Borrower for good and valuable consideration, as such
Borrower's informed and voluntary act. Each Borrower shall pay all expenses,
costs and other amounts incurred by Bank in connection with any proceeding under
California Code of Civil Procedure Section 726.5.
(1) Each Borrower and Bank acknowledge that pursuant to
California Code of Civil Procedure Section 726.5, Bank's rights under such
Section are limited to instances in which such Borrower or any affiliate, agent,
cotenant, partner or joint venturer of such Borrower either (i) caused,
contributed to, permitted or acquiesced in the release (as defined in such
Section 726.5) or threatened release of toxic or hazardous waste or waste
products, or (ii) had actual knowledge or notice of such release or threatened
release prior to the execution and delivery of this Agreement and failed to
disclose such release or threatened release to Bank in writing after Bank's
written request for information concerning the environmental condition of the
Project, unless Bank otherwise obtained actual knowledge of such release or
threatened release prior to the execution and delivery of this Agreement.
(b) ENVIRONMENTAL CLAIMS. In accordance with California Code of
Civil Procedure Section 736, as such Section may be amended from time to time,
Bank may bring an action for breach of contract against the applicable Borrower
for breach of any "environmental provision" (as such term is defined in such
Section) made by each Borrower herein, in any other Loan Document, or in any
Environmental Agreement for the recovery of damages (including attorneys' fees
and costs) and/or for the enforcement of the environmental provision (including
without limitation to recover all costs and expenses incurred by Bank in
connection with any Remedial Work (as such term is defined in the Environmental
Agreement and in the Deed of Trust)) without foreclosing the Deed of Trust
judicially or nonjudicially or accepting a deed or assignment in lieu of
foreclosure. Each Borrower agrees to pay to Bank, upon Bank's demand, all
expenses, costs and other amounts
-72-
<PAGE>
incurred by Bank in connection with any such action under California Code of
Civil Procedure Section 736.
(c) ENVIRONMENTAL INSPECTIONS. Bank shall have all rights of a Bank
under California Code of Civil Procedure Section 2929.5, as such Section may be
amended from time to time. Each Borrower agrees to pay to Bank, upon Bank's
demand, all expenses, costs and other amounts incurred by Bank in performing any
inspection and/or testing for the purposes set forth in such Section 2929.5.
(d) RIGHT TO APPOINTMENT OF A RECEIVER. Bank shall have all rights
of a Bank under California Code of Civil Procedure Section 564, as such Section
may be amended from time to time. The applicable Borrower agrees to pay to
Bank, upon Bank's demand, all expenses, costs and other amounts incurred by Bank
in connection with any appointment of a receiver under California Code of Civil
Procedure Section 564.
9. BANK'S OBLIGATIONS TO BORROWER ONLY AND DISCLAIMER BY BANK. No Person,
other than Borrowers and Bank, shall have any rights hereunder or be a third-
party beneficiary hereof. Bank is not a joint venturer or a partner with any
Borrower. Prior to an Event of Default and thereafter until Bank elects in
writing to assume specific obligations of the applicable Borrower, Bank shall
not be obligated to any Person providing labor, materials, or other services for
the Project and payment of funds from Advances directly to any such Persons
shall not give or be a recognition of any third-party beneficiary status.
10. PUBLICITY. Bank shall have the right, in accordance with applicable laws,
to place one or more signs on the Lots and the A&D Projects at location(s)
visible from public street(s) indicating that Bank has provided financing for
the Project.
11. NO BROKERS. Except as disclosed by Borrower to Bank in writing prior to
the date of this Agreement, each of Borrower and Bank represent and warrant to
the other that it knows of no broker's or finder's fee due in respect of the
transaction described in this Agreement and that it has not used the services of
a broker or a finder in connection with this transaction.
12. PROVISIONS IN THE NOTE GOVERN THIS AGREEMENT. This Agreement is subject to
certain terms and provisions in the Note, to which reference is made for a
statement of such terms and provisions.
13. CHOICE OF LAW. Except as otherwise expressly provided in this Agreement,
the parties agree and intend that this Agreement, and the respective rights and
obligations of the parties hereto, shall be governed by and construed according
to the internal laws of the State of Arizona (without regard to its conflict of
laws principles). The parties agree and stipulate that this Agreement
-73-
<PAGE>
was negotiated primarily in Arizona, that this Agreement was executed, delivered
and accepted by Bank in Arizona, all payments shall be made to Bank in Arizona,
and that Arizona has a substantial relationship to the parties and to the
underlying transaction contemplated by this Agreement. Notwithstanding the
foregoing, the parties agree that:
(i) With respect to any collateral given by any Borrower to Bank, the
perfection and priority of Bank's security interests in personal property
collateral or liens on real property collateral shall be governed by the law of
the respective states where the respective collateral is located.
(ii) The procedures governing the enforcement by Bank of provisional
remedies against any Borrower or Guarantor, including by way of illustration,
but not limited to, actions for claim and delivery of property, for injunctive
relief or for the appointment of a receiver, shall be governed by the law of the
state in which such provisional remedies or relief are sought.
(iii) With respect to any collateral given by any Borrower to Bank,
the procedures for foreclosing on the security interests or liens of Bank shall
be governed by the laws of the state in which the collateral is located and in
which the foreclosure is carried out; provided, however, that this subparagraph
shall in no event be construed to provide that the substantive law of such state
shall apply to this Agreement, the parties intending that the substantive law of
the State of Arizona shall govern this Agreement and all nonprocedural incidents
of foreclosure, including but not limited to the right of Bank to obtain a
judgment for any deficiency following foreclosure.
Notwithstanding that various provisions of this Agreement, the Note, the
other Loan Documents, the Guaranty, and the Environmental Agreements have been
drafted to address or waive the laws of other states, in the event of any
foreclosure by Bank on any collateral, regardless of where the collateral is
located, the parties agree and intend that the laws of the State of Arizona
shall govern the right of Bank to collect and obtain a judgment for any
deficiency following foreclosure, and the parties specifically intend that the
laws of other states, including but not limited to Sections 580a, 580b, 580c,
580d and 726 of the California Code of Civil Procedure, and Nevada Revised
Statutes Section 40.430, shall not be applicable. In such connection, the
parties further agree that:
(a) Bank may enforce its rights under the Loan Documents, the
Guaranty, and the Environmental Agreements, to collect any outstanding
indebtedness, or to obtain a judgment against any Borrower or Guarantor in
California, Nevada, Arizona or other states (including without limitation a
judgment for any deficiency following foreclosure), in accordance with
Arizona law, and if Bank obtains a judgment
-74-
<PAGE>
(including without limitation a deficiency judgment) in a state other than
in California or Nevada, then Bank shall have the right to enforce such
judgment in California and Nevada, as well as in other states;
(b) California's and Nevada's antideficiency, one-action, and
security-first rules (including, without limitation, California Code of
Civil Procedure Sections 580a, 580c, and 580d and Nevada Revised Statutes
Section 40.430) are inapplicable to the obligations and indebtedness
secured by the Deeds of Trust and other Loan Documents and to the
enforcement or realization by Bank of its rights and remedies relating
thereto; and
(c) Section 726 of the California Code of Civil Procedure shall not
apply (i) to prevent or limit exercise or enforcement of any other rights
or remedies of Bank (including, but not limited to, Bank's right to obtain
a deficiency judgment) either prior to or following foreclosure, or (ii) to
prevent or limit Bank's right to foreclosure judicially or nonjudicially
following any exercise or enforcement of any other rights or remedies of
Bank.
14. COUNTERPART EXECUTION. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same document. Signature pages may be
detached from the counterparts and attached to a single copy of this Agreement
to physically form one document.
DATED as of the date first above stated.
Richmond American Homes, Inc.,
a Delaware corporation
By: /s/ John J. Heaney
-------------------------------------
Name: John J. Heaney
----------------------------------
Title: Vice President
---------------------------------
By: /s/ Kenneth J. Ryerson
------------------------------------
Name: Kenneth J. Ryerson
----------------------------------
Title: Vice President
---------------------------------
-75-
<PAGE>
Richmond American Homes of
California, Inc., a Colorado
corporation
By: /s/ John J. Heaney
------------------------------------
Name: John J. Heaney
----------------------------------
Title: Vice President
---------------------------------
By: /s/ Kenneth J. Ryerson
------------------------------------
Name: Kenneth J. Ryerson
----------------------------------
Title: Vice President
---------------------------------
Richmond Homes, Inc. I, a Delaware
corporation
By: /s/ John J. Heaney
------------------------------------
Name: John J. Heaney
----------------------------------
Title: Vice President
---------------------------------
By: /s/ Kenneth J. Ryerson
------------------------------------
Name: Kenneth J. Ryerson
----------------------------------
Title: Vice President
---------------------------------
Richmond Homes, Inc. II, a Delaware
corporation
By: /s/ John J. Heaney
------------------------------------
Name: John J. Heaney
----------------------------------
Title: Vice President
---------------------------------
By: /s/ Kenneth J. Ryerson
------------------------------------
Name: Kenneth J. Ryerson
----------------------------------
Title: Vice President
---------------------------------
-76-
<PAGE>
Richmond American Homes of Nevada,
Inc., a Colorado corporaration
By: /s/ John J. Heaney
------------------------------------
Name: John J. Heaney
----------------------------------
Title: Vice President
---------------------------------
By: /s/ Kenneth J. Ryerson
------------------------------------
Name: Kenneth J. Ryerson
----------------------------------
Title: Vice President
---------------------------------
BANK ONE, ARIZONA, NA, a national
banking association
By: /s/ Carol R. Grimley
------------------------------------
Name: Carol R. Grimley
----------------------------------
Title: Vice President
---------------------------------
BANK
-77-
<PAGE>
EXHIBIT "A" TO LOAN AGREEMENT
-----------------------------
A&D TERM SHEET
Name of Project: ____________________________________________________________
Location of Project: ______________________________________________________
Approved A&D Subcommitment Amount: $__________________
A&D Appraisal Review Market Value: $_________________
Approved Budget: See Schedule 1 attached
Maximum aggregate changes in Budget without Bank's consent: $50,000.00
A&D Commencement Date: Not later than ninety (90) days after A&D Eligibility
Date
A&D COmpletion Date: Fifteen (15) Calendar Months after A&D Eligibility Date
Date Preliminary A&D Approval Expires (if applicable): _________________
Date A&D Term Expires: ___________________________________
A&D Contractor: ____________________________________________________________
A&D Engineer: ______________________________________________________________
A&D Eligibility Date (date A&D Project is deemed Eligible Collateral): ________
BANK ONE, ARIZONA, NA, a ________________________________,
national banking association a ___________ corporation
By: ________________________________ By: _____________________________
Name: _______________________________ Name: ____________________________
Title: ____________________________ Title: __________________________
By: _____________________________
Name: ____________________________
Title: _________________________
<PAGE>
SCHEDULE "1" TO TERM SHEET
BUDGET
------
<TABLE>
<CAPTION>
BORROWER'S TOTAL
ADVANCES EQUITY BUDGET
-------- ---------- ------
<S> <C> <C> <C>
Land (______sf @_______psf) $_______ $_________ $_______
Hard Costs:
Grading
Sewers
Paving
Landscape
Perimeter Fencing
Utilities
Municipal Set Asides
and Assurances
Hard Cost Contingency
_______________
_______________
Sub-total Hard Costs $_______ $________
Soft Costs:
Engineering
Approvals and Permits
and Municipal Fees
Contractor Bonds
Borrower Insurance
Bank Inspection and Review
Commitment Fee
Document Fee
Legal
Title and Closing
Real Estate Taxes
Soils Report
Environmental Assessment
Report and Follow up
Appraisal
Appraisal Reveiw Fees
Soft Cost Contingency
_______________
_______________
Sub-Total Soft Costs $_______ $________
TOTALS $_______ $_________ $________
</TABLE>
<PAGE>
EXHIBIT B TO LOAN AGREEMENT
UNIT COLLATERAL VALUES
FOR UNITS IN COLORADO:
(i) STAGE 1. The sum of (a) twenty-five percent (25%) of the applicable
Specific Unit Budget, plus (b) the applicable Lot Allocation, if excavation,
backfill and foundation are complete, and all required permits, tap fees, and up
front municipal and school district fees have been paid by Borrower;
(ii) STAGE 2. The sum of (a) forty-five percent (45%) of the Specific Unit
Budget, plus (b) the applicable Lot Allocation, if the rough framing of the Unit
is complete;
(iii) STAGE 3. The sum of (a) sixty percent (60%) of the Specific Unit
Budget, plus (b) the applicable Lot Allocation, if the roof, windows, exterior
trim and temporary exterior doors are complete;
(iv) STAGE 4. The sum of (a) eighty percent (80%) of the Specific Unit
Budget, plus (b) the applicable Lot Allocation, if the rough-in (mechanical,
plumbing top-out and electrical), insulation and drywall are complete;
(v) STAGE 5. The sum of (a) ninety-five percent (95%) of the Specific Unit
Budget, plus (b) the applicable Lot Allocation, if the Unit interior and
exterior have been finished with the exception of floor coverings, final
cleaning, and landscaping; and
(vi) STAGE 6. The sum of (a) one hundred percent (100%) of the Specific Unit
Budget, plus (b) the applicable Lot Allocation, if the Unit is finished,
including floor coverings, and a certificate of occupancy or its equivalent has
been obtained;
PROVIDED, HOWEVER, if the sum of the total of the construction costs set forth
in the applicable Specific Unit Budget and the applicable Lot Allocation exceeds
the Maximum Allowed Advance for the Unit, then for purposes of calculating the
Unit Collateral Value pursuant hereto, the Lot Allocation shall be reduced so
that the sum of the total Specific Unit Budget and the Lot Allocation do not
exceed the applicable Maximum Allowed Advance.
<PAGE>
EXHIBIT B TO LOAN AGREEMENT
UNIT COLLATERAL VALUES
FOR UNITS IN ARIZONA:
(i) STAGE 1. The sum of (a) fifteen percent (15%) of the applicable
Specific Unit Budget, plus (b) the applicable Lot Allocation, if the floor slab
is poured, and all required permits, tap fees, and up front municipal and school
district fees have been paid by Borrower;
(ii) STAGE 2. The sum of (a) forty-five percent (45%) of the Specific Unit
Budget, plus (b) the applicable Lot Allocation, if the rough framing of the Unit
is complete;
(iii) STAGE 3. The sum of (a) fifty percent (50%) of the Specific Unit
Budget, plus (b) the applicable Lot Allocation, if the roof dry in, windows,
exterior trim and temporary exterior doors are complete;
(iv) STAGE 4. The sum of (a) sixty-five percent (65%) of the Specific Unit
Budget, plus (b) the applicable Lot Allocation, if the rough-in (mechanical,
plumbing top-out and electrical), insulation and drywall are complete;
(v) STAGE 5. The sum of (a) ninety-five percent (95%) of the Specific Unit
Budget, plus (b) the applicable Lot Allocation, if the Unit interior and
exterior have been finished with the exception of floor coverings, final
cleaning, and landscaping; and
(vi) STAGE 6. The sum of (a) one hundred percent (100%) of the Specific Unit
Budget, plus (b) the applicable Lot Allocation, if the Unit is finished,
including floor coverings, and a certificate of occupancy or its equivalent has
been obtained;
PROVIDED, HOWEVER, if the sum of the total of the construction costs set forth
in the applicable Specific Unit Budget and the applicable Lot Allocation exceeds
the Maximum Allowed Advance for the Unit, then for purposes of calculating the
Unit Collateral Value pursuant hereto, the Lot Allocation shall be reduced so
that the sum of the total Specific Unit Budget and the Lot Allocation do not
exceed the applicable Maximum Allowed Advance.
<PAGE>
EXHIBIT B TO LOAN AGREEMENT
UNIT COLLATERAL VALUES
FOR UNITS IN NEVADA:
(i) STAGE 1. The sum of (a) fifteen percent (15%) of the applicable
Specific Unit Budget, plus (b) the applicable Lot Allocation, if the floor slab
is poured, and all required permits, tap fees, and up front municipal and school
district fees have been paid by Borrower;
(ii) STAGE 2. The sum of (a) forty-five percent (45%) of the Specific Unit
Budget, plus (b) the applicable Lot Allocation, if the rough framing of the Unit
is complete;
(iii) STAGE 3. The sum of (a) fifty-five percent (55%) of the Specific Unit
Budget, plus (b) the applicable Lot Allocation, if the roof dry in, windows,
exterior trim and temporary exterior doors are complete;
(iv) STAGE 4. The sum of (a) seventy percent (70%) of the Specific Unit
Budget, plus (b) the applicable Lot Allocation, if the rough-in (mechanical,
plumbing top-out and electrical), insulation and drywall are complete;
(v) STAGE 5. The sum of (a) ninety-seven percent (97%) of the Specific Unit
Budget, plus (b) the applicable Lot Allocation, if the Unit interior and
exterior have been finished with the exception of floor coverings, final
cleaning, and landscaping; and
(vi) STAGE 6. The sum of (a) one hundred percent (100%) of the Specific Unit
Budget, plus (b) the applicable Lot Allocation, if the Unit is finished,
including floor coverings, and a certificate of occupancy or its equivalent has
been obtained;
PROVIDED, HOWEVER, if the sum of the total of the construction costs set forth
in the applicable Specific Unit Budget and the applicable Lot Allocation exceeds
the Maximum Allowed Advance for the Unit, then for purposes of calculating the
Unit Collateral Value pursuant hereto, the Lot Allocation shall be reduced so
that the sum of the total Specific Unit Budget and the Lot Allocation do not
exceed the applicable Maximum Allowed Advance.
<PAGE>
EXHIBIT B TO LOAN AGREEMENT
UNIT COLLATERAL VALUES
FOR UNITS IN CALIFORNIA:
(i) STAGE 1. The sum of (a) twenty percent (20%) of the applicable Specific
Unit Budget, plus (b) the applicable Lot Allocation, if the floor slab is
poured, and all required permits, tap fees, and up front municipal and school
district fees have been paid by Borrower;
(ii) STAGE 2. The sum of (a) fifty percent (50%) of the Specific Unit
Budget, plus (b) the applicable Lot Allocation, if the rough framing of the Unit
is complete;
(iii) STAGE 3. The sum of (a) sixty percent (60%) of the Specific Unit
Budget, plus (b) the applicable Lot Allocation, if the roof dry in, windows,
exterior trim and exterior doors are complete;
(iv) STAGE 4. The sum of (a) seventy percent (70%) of the Specific Unit
Budget, plus (b) the applicable Lot Allocation, if the rough-in (mechanical,
plumbing top-out and electrical), insulation and drywall are complete;
(v) STAGE 5. The sum of (a) ninety-five percent (95%) of the Specific Unit
Budget, plus (b) the applicable Lot Allocation, if the Unit interior and
exterior have been finished with the exception of floor coverings, countertops,
final cleaning, and landscaping; and
(vi) STAGE 6. The sum of (a) one hundred percent (100%) of the Specific Unit
Budget, plus (b) the applicable Lot Allocation, if the Unit is finished,
including floor coverings, and a certificate of occupancy or its equivalent has
been obtained;
PROVIDED, HOWEVER, if the sum of the total of the construction costs set forth
in the applicable Specific Unit Budget and the applicable Lot Allocation exceeds
the Maximum Allowed Advance for the Unit, then for purposes of calculating the
Unit Collateral Value pursuant hereto, the Lot Allocation shall be reduced so
that the sum of the total Specific Unit Budget and the Lot Allocation do not
exceed the applicable Maximum Allowed Advance.
<PAGE>
GUARANTY OF PAYMENT
DATE: June 13, 1994
PARTIES: GUARANTOR: M.D.C. HOLDINGS, INC., a Delaware
corporation
GUARANTOR 3600 South Yosemite, Suite 900
ADDRESS: Denver, Colorado 80237
Attn: Vice President - Treasury
Department
with a
copy to: 3600 South Yosemite, Suite 900
Denver, Colorado 80237
Attn: General Counsel
BANK: BANK ONE, ARIZONA, NA,
a national banking association
BANK P.O. Box 29542
ADDRESS: Phoenix, Arizona 85038
Attention: Dept. A-383
AGREEMENT: For good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, Guarantor agrees for the benefit of Bank as
follows:
SCHEDULE OF TERMS.
Borrowers: RICHMOND AMERICAN HOMES OF CALIFORNIA, INC., a Colorado
corporation
RICHMOND HOMES, INC. I, a Delaware corporation
RICHMOND HOMES, INC. II, a Delaware corporation
RICHMOND AMERICAN HOMES, INC., a Delaware corporation
RICHMOND AMERICAN HOMES OF NEVADA, INC., a Colorado
corporation
Borrower Obligations:
Promissory note, dated of even date herewith, of Borrowers
payable to Bank, in the original principal amount of
$75,000,000.00, as it may be amended, modified, extended,
renewed, restated, or supplemented from time to time.
<PAGE>
2. DEFINITIONS. In this Guaranty, the following terms shall have the
following meanings:
"ADVANCES" shall have the meaning set forth in the Loan Agreement.
"A.R.S." means Arizona Revised Statutes, as amended from time to time. Each
reference to any provision in A.R.S. shall be a reference to any successor or
replacement provision.
"BORROWERS" means the Persons specified in SECTION 1, "BORROWER" means any of
the Borrowers.
"BORROWER OBLIGATIONS" means the following:
(i) Payment of principal, interest, costs, expenses, fees, and other
amounts under the promissory note of Borrowers payable to Bank described in
SECTION 1, as such principal amount may be increased from time to time by any
additional advances in excess of the original principal amount thereof or as the
result of any accrued and unpaid interest becoming principal under the Note;
(ii) Payment of each Reimbursement Amount;
(iii) Payment of all other amounts payable from time to time by each
and all Borrowers under the Loan Documents.
"COLLATERAL" means any and all property, interests in property, and rights to
property from time to time securing any or all Obligations.
"COMMITMENT" means any and all obligations of Bank from time to time to make
advances to any Borrower, to issue letters of credit requested by any Borrower,
or to make other financial accommodations for any Borrower.
"COVENANT RELATING TO OTHER DEBT" means Guarantor's covenant set forth in
SECTION 5.6 of this Guaranty.
"DEBT" has the meaning set forth in the Loan Agreement.
"DEFAULT RATE" means a rate per annum of interest equal to the sum of (i) four
percent (4%) per annum, and (ii) the Interest Rate in effect prior to a default
or an event of default under the promissory note described in SECTION 1.
"DIVIDENDS" means with respect to any Person (i) any dividend or other
distribution on any shares of such Person's capital stock, (ii) any purchase,
retirement or redemption of any shares of such Person's capital stock, or
(iii) any other distribution, by reduction of capital or otherwise, in respect
of such Person's capital stock.
-2-
<PAGE>
"ENVIRONMENTAL AGREEMENTS" has the meaning set forth in the Loan Agreement.
"EVENT OF DEFAULT" means the occurrence of an Event of Default in any Loan
Document.
"FINANCIAL COVENANT" means Guarantor's covenant set forth in SECTION 5.5 of this
Guaranty.
"GAAP" has the meaning set forth in the Loan Agreement.
"GOVERNMENTAL AUTHORITY" means any government, any court, and any agency,
authority, body, bureau, department, or instrumentality of any government.
"GUARANTOR" means the Person that has executed this Guaranty.
"GUARANTOR DOCUMENTS" means this Guaranty and the Environmental Agreements
executed by Guarantor.
"GUARANTOR OBLIGATIONS" means the obligations of Guarantor under the Guarantor
Documents.
"GUARANTY" means this Guaranty, as it may be amended, modified, extended,
renewed, restated, and supplemented from time to time.
"INTANGIBLE ASSETS" has the meaning set forth in the Loan Agreement.
"LIEN OR ENCUMBRANCE" and "LIENS AND ENCUMBRANCES" mean, respectively, each and
all assignments as security, grants in trust, liens, mortgages, security
interests, other encumbrances, and other interests and rights from time to time
securing any or all of the Obligations.
"LOAN AGREEMENT" means the Loan Agreement, dated of even date herewith, between
Borrowers and Bank, as it may be amended, modified, extended, renewed, restated,
or supplemented from time to time.
"LOAN DOCUMENTS" has the meaning set forth in the Loan Agreement.
"MATERIAL ADVERSE CHANGE" means any change in the assets, financial condition,
or results of operations of Guarantor or any other event or condition that in
the reasonable opinion of Bank (i) could affect the likelihood of performance by
Guarantor of any of the Guarantor Obligations, (ii) could affect the ability of
Guarantor to perform any of the Guarantor Obligations, or (iii) could affect the
legality, validity, or binding nature of any of the Guarantor Obligations.
-3-
<PAGE>
"OBLIGATIONS" means the Borrower Obligations, the obligations of Borrower under
the Environmental Agreements and the Guarantor Obligations.
"PERSON" means a natural person, a partnership, a joint venture, an
unincorporated association, a limited liability company, a corporation, a trust,
any other legal entity, or any Governmental Authority.
"PROJECT" has the meaning set forth in the Deed of Trust.
"REIMBURSEMENT AMOUNT" has the meaning set forth in the Loan Agreement.
"SUBSIDIARY" has the meaning set forth in the Loan Agreement.
"TANGIBLE NET WORTH" means the sum of all capital accounts (including, without
limitation, any paid-in capital, capital surplus, and retained earnings), less
the sum of (i) the value on Guarantor's books of all Intangible Assets, and
(ii) loans and advances to directors, officers and employees of Guarantor but
excluding any arms-length mortgage loans made by any Subsidiary of Guarantor in
the ordinary course of such Subsidiary's business, and excluding any advances
made to employees in the ordinary course of business for travel and other items.
3. GUARANTY. Guarantor unconditionally and irrevocably guarantees the full
payment when due, by acceleration or otherwise, of each and all Borrower
Obligations, including the payment of the indebtedness evidenced thereunder, and
promises to pay when due, by acceleration or otherwise, each and all Borrower
Obligations. Guarantor agrees that immediately upon the failure in payment when
due of any or all Borrower Obligations, Guarantor will pay to Bank the full
amount of such Borrower Obligations. All payments under this Guaranty shall be
made to Bank in lawful money of the United States of America at the address of
Bank at the beginning of this Guaranty or such other location in the continental
United States as Bank may designate in writing. Any amount payable under this
Guaranty not paid when due and any judgment for such an amount and interest
thereon shall bear interest at the Default Rate from the due date or such
judgment date, respectively, until such amount and interest thereon are paid in
full. Guarantor agrees to pay such interest on demand. All Guarantor
Obligations will be paid by Guarantor without counterclaim (provided that they
are not mandatory under the applicable rules of procedure), deduction, defense
(provided that Guarantor does not hereby waive any bona fide defense regarding
the failure of any Borrower to pay any of the Borrower Obligations or any of
such Borrower's or Guarantor's obligations under the Environmental Agreements),
deferment, reduction, or set-off.
-4-
<PAGE>
4. GUARANTOR REPRESENTATIONS AND WARRANTIES.
4.1 CLOSING REPRESENTATIONS AND WARRANTIES. Guarantor represents and
warrants to Bank as of the date of this Agreement:
4.1.1 CORPORATE EXISTENCE AND AUTHORIZATION. Guarantor is a
validly existing corporation in good standing under the laws of the jurisdiction
of its formation or organization and under the jurisdiction of each state where
the conduct of its business requires such existence and good standing and has
the requisite power and authority to execute, deliver, and perform the Guarantor
Documents. The execution, delivery, and performance by Guarantor of the
Guarantor Documents have been duly authorized by all requisite action by or on
behalf of Guarantor and will not conflict with, or result in a violation of or a
default under, the certificate of incorporation and bylaws of Guarantor.
4.1.2 EXECUTION AND DELIVERY AND BINDING NATURE OF GUARANTOR
LOAN DOCUMENTS. The Guarantor Documents have been duly executed and delivered
by or on behalf of Guarantor. The Guarantor Documents are legal, valid, and
binding obligations of Guarantor, enforceable in accordance with their terms
against Guarantor, except as such enforceability may be limited by bankruptcy,
insolvency, moratorium, reorganization, or similar laws and by equitable
principles of general application.
4.1.3 ACCURATE INFORMATION. All information in any loan
application, financial statement, certificate, or other document, and all other
information previously delivered to Bank by or on behalf of Guarantor in
connection with this Guaranty was correct and complete in all material respects
as of the date thereof, and there were no omissions therefrom that result in any
such information being incomplete, incorrect, or misleading in any material
respect as of the date thereof. All financial statements heretofore delivered
to Bank by Guarantor were prepared in accordance with the requirements
prescribed by Bank and accurately present the financial condition and results of
operations in all material respects as at the dates thereof and for the periods
covered thereby.
4.1.4 NO CHANGE. There has been no Material Adverse Change as
to Guarantor since the date of the information provided pursuant to SECTION
4.1.3.
4.1.5 LEGAL PROCEEDINGS; HEARINGS, INQUIRIES, AND
INVESTIGATIONS. Except as disclosed to Bank in writing prior to the date of
this Agreement, (i) no legal proceeding is pending or, to best knowledge of
Guarantor, threatened before any arbitrator, other private adjudicator, or
Governmental Authority to which Guarantor is a party or by which Guarantor or
any assets or property of Guarantor may be bound or affected that if resolved
adversely to Guarantor could result in a Material Adverse Change,
-5-
<PAGE>
and (ii) no hearing, inquiry, or investigation relating to Guarantor or any
assets or property of Guarantor is pending or, to the best knowledge of
Guarantor, threatened by any Governmental Authority that if resolved adversely
to Guarantor could result in a Material Adverse Change.
4.1.6 TAXES. Guarantor has filed or caused to be filed all tax
returns (federal, state, or local) required to be filed by Guarantor and has
paid all taxes and other amounts shown thereon to be due (including, without
limitation, any interest or penalties).
4.1.7 INFORMATION ABOUT BORROWER AND TRANSACTION. Guarantor
understands the Borrower Obligations and the Guarantor Obligations and has had
access to information about the financial condition of each Borrower and the
ability of each Borrower to perform the Borrower Obligations.
4.1.8 INDUCEMENT. Guarantor is providing this Guaranty at the
request of Borrowers in order to induce Bank to extend or continue financial
accommodations to Borrowers.
4.2 REPRESENTATIONS AND WARRANTIES UPON DELIVERY OF FINANCIAL STATEMENTS,
DOCUMENTS, AND OTHER INFORMATION. Each delivery by Guarantor to Bank of
financial statements, other documents, or information after the date of this
Guaranty shall be a representation and warranty that such financial statements,
other documents, or information is correct and complete in all material respects
as of the date thereof, that there are no omissions therefrom that result in
such financial statements, other documents, or information being incomplete,
incorrect, or misleading in any material respect as of the date thereof, and
that such financial statements accurately present the financial condition and
results of operations of Guarantor as at the dates thereof and for the periods
covered thereby.
5. GUARANTOR COVENANTS. Until any Commitment terminates in full, any letters
of credit issued by Bank for any Borrower expire or are drawn in full, any
drafts drawn or drawn and accepted under any such letters of credit are paid in
full, and until the Borrower Obligations and the obligations of Guarantor under
this Guaranty are paid and performed in full, Guarantor agrees that, unless Bank
otherwise agrees in writing in Bank's absolute and sole discretion:
5.1 CORPORATE, LIMITED LIABILITY COMPANY, OR PARTNERSHIP EXISTENCE. If
Guarantor is a corporation, a limited liability company, or a partnership,
Guarantor shall continue to be validly existing, and in the case of a
corporation or a limited liability company in good standing, under the law of
the jurisdiction of its organization or formation, and under the law of each
jurisdiction where the conduct of its business requires such existence and good
standing. Guarantor shall not be dissolved or liquidated. Guarantor shall not
amend, modify, restate, supplement, or
-6-
<PAGE>
terminate its certificate of incorporation or bylaws in any manner that would
materially affect the validity or enforceability of the Obligations. Guarantor
shall not reorganize itself or consolidate with or merge into any other
corporation or permit any other corporation to be merged into such Guarantor
(except for mergers of any Subsidiary of Guarantor or any other Person into
Guarantor pursuant to which Guarantor is the surviving entity, and which do not
in any event otherwise constitute an Event of Default or a breach of any of
Guarantor's covenants, representations or warranties in this Guaranty).
5.2 INFORMATION AND STATEMENTS. Guarantor shall furnish to Bank the
financial statements and other information required with respect to Guarantor
under the Loan Agreement, including, without limitation, complete and accurate
records evidencing transfers of funds between Borrower to Guarantor.
5.3 TAXES. Except for taxes being contested in good faith and for which
adequate reserves are maintained as required by GAAP, Guarantor shall pay before
delinquency all taxes, assessments, and governmental charges and levies imposed
upon Guarantor, upon Guarantor's income or profits, or upon any property
belonging to Guarantor.
5.4 KEEPING INFORMED ABOUT BORROWER AND TRANSACTION. Guarantor will keep
itself informed concerning performance of the Borrower Obligations, the
financial condition of each Borrower, and the ability of each Borrower to
perform the Borrower Obligations.
5.5 TANGIBLE NET WORTH COVENANT. Initially, Guarantor shall maintain at
all times Tangible Net Worth in an amount not less than $144,000,000.00.
Commencing on January 1, 1995 and continuing on January 1 of each year
thereafter, the minimum Tangible Net Worth required herein shall be increased
(but never decreased) by a number that is one-half of Guarantor's annual net
income for the preceding calendar year, as determined in accordance with GAAP,
but excluding therefrom the impact of accounting changes.
5.6 COVENANT RELATING TO OTHER DEBT. Guarantor will not suffer to occur
any condition or event that is a default or is designated as a default, an event
of default, or an Event of Default in any other instrument, document or
agreement relating to any Debt (whether now existing or hereafter created) of
any Borrower or Guarantor to any other Person in a principal amount of
$500,000.00 or more (but not more than $5,000,000.00) and the expiration of any
contractual cure or grace periods with respect to such occurrence, including,
without limitation, any event of default under or in connection with the Senior
Notes or Convertible Subordinated Notes (as defined in the Loan Agreement) or
any indenture or guaranty executed in connection therewith; PROVIDED, HOWEVER,
for purposes of this paragraph and SECTION 5.7 only, the term "DEBT" shall
exclude any Nonrecourse Debt. "NONRECOURSE DEBT"
-7-
<PAGE>
shall mean indebtedness secured by a lien on property of any Borrower or
Guarantor, if and only if the liability for such indebtedness (and any interest
thereon) is limited to the security of such Borrower's or Guarantor's rights in
such property and its income and rents, without direct or indirect liability on
the part of such Borrower or Guarantor or any Affiliate of Borrower or Guarantor
for such indebtedness. "AFFILIATE" means any and all Subsidiaries of Guarantor,
including each Borrower.
5.7 GREATER INDEBTEDNESS. Neither Guarantor nor Borrower has received a
notice declaring a default or an event of default, or an Event of Default from
the holder under any other instrument, document or agreement (including without
limitation any indenture or guaranty executed in connection with the Senior
Notes or the Convertible Subordinated Notes) relating to any Other Debt and (i)
any contractual cure or grace periods with respect thereto have expired, and/or
(ii) the holder of such Other Debt has accelerated such Other Debt, and/or (iii)
the holder thereof has commenced exercising its remedies in connection
therewith. For purposes hereof, "OTHER DEBT" means any Debt (whether now
existing or hereafter created) of any Borrower or Guarantor to any other Person
in a principal amount of more than $5,000,000.00, and shall include without
limitation the Senior Notes and the Convertible Subordinated Notes.
5.8 NOTIFICATION OF DEFAULTS. Guarantor shall immediately disclose to
Bank the occurrence of any default by Guarantor under or pursuant to the terms
and conditions of any indebtedness in excess of $500,000.00 owed by Guarantor to
any Person, whether now existing or hereafter arising.
5.9 CHANGE IN MANAGEMENT. Guarantor shall not suffer to occur any change
in Guarantor's chairman and chief executive officer (other than a change due to
death or disability of the then existing chairman and chief executive officer)
without the prior written consent of Bank in its absolute and sole discretion.
In the event of any change in Guarantor's chairman and chief executive officer
due to death or disability of the then existing chairman and chief executive
officer, Guarantor will not appoint or elect a replacement without the prior
written consent of Bank in its reasonable discretion.
5.10 LIMITATION ON DIVIDENDS. Guarantor will not, directly or indirectly,
make or declare any Dividend, if, after giving effect thereto an Event of
Default shall have occurred and be continuing.
6. SPECIAL PROVISIONS.
6.1 NATURE OF GUARANTY. This Guaranty is absolute, continuing,
irrevocable, and unconditional. This Guaranty is a guaranty of payment and
performance when due and not of collection. This Guaranty shall be effective
and remain in full force and
-8-
<PAGE>
effect until any Commitment terminates, any letters of credit issued by Bank for
any Borrower expire or are drawn in full, any drafts drawn or drafts drawn and
accepted under any such letters of credit are paid in full, and all Obligations
are paid in full, regardless of (i) the genuineness, regularity, legality,
validity, or enforceability of any or all of the Liens and Encumbrances, the
Loan Documents, this Guaranty, or the Obligations, (ii) any law, regulation, or
rule (federal, state, or local) or any action by any Governmental Authority
discharging, reducing, varying the terms of payment, or otherwise modifying any
of the Obligations or any of the Liens and Encumbrances, or (iii) the
dissolution or liquidation of any Borrower or Guarantor.
6.2 ENFORCEMENT AGAINST GUARANTOR WITHOUT OTHER ACTION. Bank may enforce
the Guarantor Documents against any Guarantor without first having sought
enforcement of any Loan Documents or Environmental Agreements against any
Borrower, any other Guarantor, or any Collateral.
6.3 EVENTS NOT AFFECTING GUARANTOR OBLIGATIONS OR LIENS AND ENCUMBRANCES
GRANTED BY GUARANTOR. The following shall not affect, impair, or delay the
enforcement of any or all Guarantor Obligations or any or all Liens and
Encumbrances granted by Guarantor, regardless of the impact upon any
contribution, exoneration, indemnification, reimbursement, subrogation, and
other rights of Guarantor:
6.3.1 The bankruptcy, dissolution, insolvency, liquidation, or
reorganization of any or all Borrowers or Guarantor.
6.3.2 Any defense of any or all Borrowers or Guarantor to payment or
performance of any or all Obligations or enforcement of any or all Liens and
Encumbrances (other than a bona fide dispute regarding the failure of any or all
Borrowers or Guarantor to perform any of the Obligations).
6.3.3 The discharge, modification of the terms of, reduction in the
amount of, or stay of enforcement of any or all Liens and Encumbrances or any or
all Obligations (except with respect to such specific Guarantor Obligations) in
any bankruptcy, insolvency, reorganization, or other legal proceeding or by any
law, ordinance, regulation, or rule (federal, state, or local).
6.3.4 The cessation of liability of any or all Borrowers for any or
all Obligations.
6.4 ACTS AND OMISSIONS OF BANK NOT AFFECTING GUARANTOR OBLIGATIONS OR
LIENS AND ENCUMBRANCES GRANTED BY GUARANTOR. Bank may do the following acts and
omissions from time to time in its absolute and sole discretion and in doing
such acts and omissions act in its absolute and sole discretion without notice
to or
-9-
<PAGE>
consent of Guarantor and with or without receiving payment or other value. The
following acts and omissions shall not affect, delay, or impair any or all
Guarantor Obligations or any or all Liens and Encumbrances granted by any
Borrower or Guarantor, regardless of the impact upon any contribution,
exoneration, indemnification, reimbursement, subrogation, and other rights of
Guarantor:
6.4.1 Bank may obtain Collateral or additional Collateral.
6.4.2 Bank may substitute for any or all Collateral, regardless of
whether the same type or greater or lesser value.
6.4.3 Bank may release any or all Collateral.
6.4.4 Bank may compromise, delay enforcement, fail to enforce,
release, settle, or waive any rights and remedies of Bank as to any or all
Collateral.
6.4.5 Except for any requirements provided by law that may not be
waived by Guarantor, Bank may sell or otherwise dispose of any Collateral in any
manner and order Bank determines in its absolute and sole discretion and
disposition may be for less than fair market value of the Collateral in the
absolute and sole discretion of Bank. With respect to any Collateral that is
personal property, Bank shall give Guarantor five (5) business days' prior
written notice of any sale of other disposition, except for personal property
Collateral that is perishable, threatens to decline speedily in value, is of a
type customarily sold on a recognized market, or is cash, cash equivalents,
certificates of deposit or the like and except as to Bank's right of set-off.
Guarantor's sole right with respect to all Collateral shall be to bid at a sale
thereof in accordance with applicable law.
6.4.6 Bank may fail to perfect, fail to protect the priority of, and
fail to insure any or all Liens and Encumbrances.
6.4.7 Bank may fail to inspect, insure, maintain, preserve, or
protect any or all Collateral.
6.4.8 Bank may obtain additional obligors for any or all Obligations.
6.4.9 Bank may increase or decrease any or all Borrower Obligations
or otherwise change the terms of any or all Borrower Obligations (including,
without limitation, increases or decreases in the interest rate, additional
advances within or in excess of any Commitment, increases or decreases in any
Commitment, changes in the maturity date of any or all Borrower Obligations, and
changes in the amount and timing of payments). Upon occurrence of an Event of
Default, Bank may declare all Obligations immediately
-10-
<PAGE>
due and payable or performable, whereupon the Obligations shall be immediately
due and payable or performable.
6.4.10 Bank may substitute for any or all Borrowers or Guarantor,
regardless of the same creditworthiness.
6.4.11 Bank may release any and all Borrowers or Guarantor.
6.4.12 Bank may compromise, delay enforcement, fail to enforce,
release, settle, or waive any or all Borrower Obligations, obligations of any
Borrower under the Environmental Agreements, obligations of Guarantor or any or
all rights and remedies of Bank against any and all Borrowers and Guarantor.
6.4.13 Bank may make advances, issue letters of credit, or grant
other financial accommodations for any Borrower without requiring satisfaction
of all conditions precedent in the Loan Documents.
6.4.14 Bank may fail to file or pursue a claim in any bankruptcy,
insolvency, probate, reorganization, or other proceeding as to any or all Liens
and Encumbrances or any or all Obligations.
6.4.15 Bank may subordinate (i) any or all Liens and Encumbrances, or
(ii) any or all Obligations.
6.4.16 Bank may amend, modify, extend, renew, restate, supplement, or
terminate in whole or in part any or all Loan Documents, Environmental
Agreements or Guaranty.
6.4.17 Bank may take or fail to take any other action with respect to
any or all Loan Documents, Environmental Agreements, Guaranty, any or all
Obligations, Borrowers and/or Guarantor, any or all Collateral, any or all Liens
and Encumbrances, or any or all rights and remedies of Bank.
6.4.18 Bank may assign any or all of its rights and delegate its
obligations under the Loan Documents, Environmental Agreements, and/or Guaranty,
in whole or in part (including, without limitation, participation).
6.4.19 Bank may do any other acts and make any other omissions that
result in extinguishment of any or all of the Obligations and any or all Liens
and Encumbrances.
6.4.20 Bank may do any other act or make any other omission that
might otherwise constitute a legal or equitable discharge of, or defense by,
Guarantor.
-11-
<PAGE>
6.5 GUARANTOR WAIVERS.
6.5.1 NOTE AND NOTICE WAIVERS. Guarantor waives, to the full extent
permitted by law, presentment, notice of dishonor, protest, notice of protest,
notice of intent to accelerate, notice of acceleration, notice of dishonor, and
all other notices or demands of any kind (including, without limitation, notice
of the acceptance by Bank of this Guaranty, notice of the existence, creation,
non-payment, or non-performance of any or all Obligations, and notice of the
acts or omissions described in SECTION 6.4), excepting only notices specifically
provided for in the Guarantor Loan Documents.
6.5.2 WAIVER OF ACTS AND OMISSIONS OF BANK. Guarantor waives any
defense to enforcement of the Guarantor Obligations or any Liens and
Encumbrances granted by Guarantor based on acts and omissions of Bank described
in SECTION 6.4.
6.5.3 WAIVER OF STATUTORY PROVISIONS. Guarantor waives to the full
extent permitted by law any and all rights and benefits under A.R.S. Sections
12-1641, 12-1642, 12-1643, 12-1644, 44-142, and 47-3606, 16 A.R.S. Rules of
Civil Procedure, Rule 17(f), and any other similar or replacement statutes or
rules now or hereafter in effect and any other statutes or rules now or
hereafter in effect that purport to confer specific rights upon, or make
specific defenses or procedures available to, guarantors.
6.5.4 WAIVER OF STATUTE OF LIMITATIONS. To the full extent permitted
by law, Guarantor waives any and all statutes of limitations as a defense to any
or all Obligations.
6.5.5 WAIVER OF LAW AND EQUITABLE PRINCIPLES CONFLICTING WITH THIS
GUARANTY. To the full extent permitted by law, Guarantor waives any and all
provisions of law and equitable principles that conflict with this Guaranty.
6.5.6 WAIVER OF ANY OBLIGATION OF BANK TO INFORM GUARANTOR.
Guarantor waives any right to require Bank, and Bank shall have no obligation,
to provide to Guarantor any information concerning performance of the Borrower
Obligations or Borrowers' obligations under the Environmental Agreements, the
ability of any Borrower to perform the Borrower Obligations or any Borrower's
obligations under the Environmental Agreements, or any other matter relating to
any Borrower, regardless of what information Bank may have from time to time.
6.5.7 WAIVER OF CONTRIBUTION, EXONERATION, INDEMNIFICATION,
REIMBURSEMENT, SUBROGATION, AND OTHER RIGHTS AGAINST BORROWER AND OTHER LOAN
PARTIES. Guarantor authorizes Bank, at its sole option, without notice or
demand and without affecting the obligations or the liability of Guarantor under
this Guaranty, to foreclose the Deed of Trust and the interests in the
-12-
<PAGE>
Project secured thereby by nonjudicial sale, or to exercise any other right or
remedy with respect to the Deed of Trust or the Project covered thereby, and to
exercise any right or remedy with respect to the Loan Agreement or the Personal
Property covered thereby. No such action by Bank shall release or limit the
obligations or the liability of Guarantor hereunder, even if the effect of that
action is to deprive Guarantor of any right of subrogation or of the right to
reimbursement from Borrower for any sums paid by Guarantor to Bank with respect
to the Obligations. Guarantor specifically agrees that Guarantor shall not be
released from liability hereunder by any action taken by Bank, including,
without limitation, a nonjudicial sale under any deed of trust, that would
afford any Borrower a defense based on any anti-deficiency laws, including
without limitation, Sections 580 and 726 of the California Code of Civil
Procedure and Nevada Revised Statutes Section 40.430. A deficiency is the
amount owing if the entire outstanding loan balance is not paid off following a
sale of the security for the Obligations. GUARANTOR EXPRESSLY WAIVES (I) ANY
DEFENSE TO THE RECOVERY OF A DEFICIENCY AGAINST GUARANTOR AFTER SUCH A
NONJUDICIAL SALE, (II) ANY DEFENSE OR BENEFITS THAT MAY BE DERIVED FROM
CALIFORNIA CODE OF CIVIL PROCEDURE SECTION 580A (LIMITATIONS ON DEFICIENCY
JUDGMENTS), SECTION 580D (THE PROTECTION AGAINST AN ANTI-DEFICIENCY) OR SECTION
726 (REQUIRING THE LENDER TO PROCEED AGAINST THE REAL PROPERTY SECURITY FIRST),
OR CALIFORNIA UNIFORM COMMERCIAL CODE SECTION 9504 (SECURED PARTY'S RIGHT TO
DISPOSE OF COLLATERAL AFTER DEFAULT), (III) ALL SURETYSHIP DEFENSES IT WOULD
OTHERWISE HAVE UNDER CALIFORNIA OR ANY OTHER LAW, AND (IV) ANY DEFENSE OR
BENEFITS THAT MAY BE DERIVED FROM NEVADA REVISED STATUTES SECTION 40.430.
GUARANTOR UNDERSTANDS AND AGREES THAT IF THERE IS A DEFICIENCY OWING AFTER BANK
COMPLETES A NONJUDICIAL FORECLOSURE OF THE REAL PROPERTY SECURITY DESCRIBED IN
THE DEED OF TRUST, BANK MAY, BECAUSE OF THE WAIVERS CONTAINED IN THIS PARAGRAPH,
BRING A LEGAL ACTION AGAINST GUARANTOR AND OBTAIN A JUDGMENT IN FAVOR OF BANK
AND AGAINST GUARANTOR TO RECOVER THAT DEFICIENCY. Guarantor waives any right to
receive notice of any judicial or nonjudicial sale or foreclosure of any real or
personal property securing the Borrower Obligations, and Guarantor's failure to
receive any such notice shall not impair nor affect Guarantor's Obligations
hereunder. Without limiting the generality of the foregoing, under current
California law (Section 580d of the California Code of Civil Procedure as
interpreted in UNION BANK V. GRADSKY, 265 Cal. App. 2d 40 (1968)), Guarantor may
be entitled to assert a defense to liability under this Guaranty if Bank
forecloses nonjudicially against real property security for the Loan. By
executing this Guaranty, Guarantor hereby: (1) waives and relinquishes that
defense; (2) agrees that it will not assert that defense in any action or
proceeding which Bank may commence to enforce this Guaranty; and (3)
acknowledges and agrees that Bank is relying on this waiver in making the Loan,
and that this waiver is a material party of the consideration which Bank is
receiving for making the Loan. Guarantor hereby waives any and all benefits
under
-13-
<PAGE>
California Civil Code Sections 2809, 2810, 2819, 2845, 2847, 2848, 2849 and
2850.
7. SUBORDINATION.
7.1 SUBORDINATED INDEBTEDNESS. If from time to time any Borrower shall
have liabilities or obligations to Guarantor, whether absolute or contingent,
joint, several, or joint and several, such liabilities and obligations (the
"SUBORDINATED INDEBTEDNESS") and any and all assignments as security, grants in
trust, liens, mortgages, security interests, other encumbrances, and other
interests and rights securing such liabilities and obligations shall at all
times be fully subordinate to payment and performance in full of the Obligations
and the right of Bank to realize upon any or all Collateral. Guarantor agrees
that such liabilities and obligations of any Borrower to Guarantor shall not be
secured by any assignment as security, grant in trust, lien, mortgage, security
interest, other encumbrance or other interest or right in any property,
interests in property, or rights to property of such Borrower, except with
respect to the existing security for (A) that Amended and Restated Promissory
Note dated November 30, 1992 in the face amount of $22,500,000 executed by
Richmond Homes, Inc. I, and payable to Richmond American Homes of Colorado,
Inc., (n.k.a. M.D.C. Pipeline and Development Company) and (B) Secured
Promissory Note in the face amount of $121,105,234 dated December 28, 1989
executed by Richmond American Homes of Colorado, Inc. (II) (n.k.a. Richmond
Homes, Inc. I) to the order of M.D.C. Holdings, Inc., M.D.C. Land Corporation,
Richmond Homes Limited, Richmond American Homes of Colorado, Inc. (n.k.a. M.D.C.
Pipeline and Development Company), Richmond American Homes of Texas, Inc. and
Yosemite Financial, Inc.; and (C) Secured Promissory Note in the face amount of
$11,564,085 dated January 11, 1990 executed by Richmond American Homes of
Colorado, Inc. (II) (n.k.a. Richmond Homes, Inc. I) to the order of Richmond
Homes Limited. Guarantor and, by its acceptance of this Guaranty, Bank agree
that (i) so long as no Event of Default has occurred and is continuing, payments
of principal and interest on the Subordinated Indebtedness may be made by the
applicable Borrower and accepted by Guarantor as such payments become due; and
(ii) after the occurrence and during the continuation of an Event of Default,
such Borrower shall not make and Guarantor shall not accept any payments with
respect to the Subordinated Indebtedness. If, notwithstanding the foregoing,
subsequent to an Event of Default, Guarantor receives any payment from a
Borrower, such payment shall be held in trust by Guarantor for the benefit of
Bank, shall be segregated from the other funds of Guarantor, and shall forthwith
be paid by Guarantor to Bank and applied to payment of the Borrower Obligations
and payment of such Borrower's obligations under the Environmental Agreements,
whether or not then due.
-14-
<PAGE>
7.2 BANKRUPTCY, INSOLVENCY, ETC. In the event of any distribution,
division, or application, partial or complete, voluntary or involuntary, by
operation of law or otherwise, of all or any part of the assets of any Borrower,
or the proceeds thereof, to creditors of such Borrower, by reason of the
liquidation, dissolution, or other winding up of such Borrower's business, or in
the event of any receivership, insolvency or bankruptcy proceedings by or
against any Borrower, or assignment for the benefit of creditors, or of any
proceedings by or against any Borrower for any relief under any bankruptcy or
insolvency laws, or relating to the relief of debtors, readjustment of
indebtedness, reorganizations, arrangements, compositions or extensions, or of
any other event whereby it becomes necessary or desirable to file or present
claims against any Borrower for the purpose of receiving payment thereof, or on
account thereof, then and in any such event, any payment or distribution of any
kind or character, either in cash or other property, which shall be made or
shall be payable with respect to any Subordinated Indebtedness shall be paid
over to Bank for application to the payment of the Obligations, whether due or
not due, and no payments shall be made upon or in respect of Subordinated
Indebtedness unless and until the Obligations shall have been paid and satisfied
in full. In any such event, all claims of the Bank and all claims of the
Guarantor shall, at the option of the Bank, forthwith become due and payable
without demand or notice.
7.3 ATTORNEY-IN-FACT. In the event of any distribution, division, or
application, partial or complete, voluntary or involuntary, by operation of law
or otherwise, of all or any part of the assets of any Borrower, or the proceeds
thereof, to creditors of such Borrower, by reason of the liquidation,
dissolution, or other winding up of such Borrower's business, or in the event of
any receivership, insolvency or bankruptcy proceedings by or against any
Borrower, or assignment for the benefit of creditors, or of any proceedings by
or against any Borrower for any relief under any bankruptcy or insolvency laws,
or relating to the relief of debtors, readjustment of indebtedness,
reorganizations, arrangements, compositions or extensions, or of any other event
whereby it becomes necessary or desirable to file or present claims against any
Borrower for the purpose of receiving payment thereof, or on account thereof,
Guarantor irrevocably authorizes and empowers Bank, or any person Bank may
designate, to act as attorney for Guarantor with full power and authority in the
name of Guarantor, or otherwise, to make and present such claims or proofs of
claims against such Borrower on account of the Subordinated Indebtedness as
Bank, or its appointee, may deem expedient and proper and, if necessary, to vote
such claims in any proceedings and to receive and collect any and all dividends
or other payments and disbursements made thereon in whatever form they may be
paid or issued, and to give acquittance therefor and to apply same to the
Obligations, and Guarantor hereby agrees, from time to time and upon request, to
make, execute and deliver to Bank such powers of
-15-
<PAGE>
attorney, assignments, endorsements, proofs of claim, pleadings, verifications,
affidavits, consents, agreements or other instruments as may be requested by
Bank in order to enable the Bank to enforce any and all claims upon, or with
respect to, the Subordinated Indebtedness, and to collect and receive any and
all payments or distributions which may be payable or deliverable at any time
upon or with respect to the Subordinated Indebtedness.
7.4 DISTRIBUTIONS, ETC. Except as otherwise permitted herein, should any
payment or distribution or security or proceeds thereof be received by Guarantor
upon or with respect to the Subordinated Indebtedness prior to the satisfaction
of the Obligations, Guarantor will forthwith deliver the same to Bank in
precisely the form as received except for the endorsement or assignment of
Guarantor where necessary for application on the Obligations, whether due or not
due, and until so delivered the same shall be held in trust by Guarantor as
property of the Bank. In the event of the failure of Guarantor to make any such
endorsement or assignment, the Bank, or any of its officers or employees, on
behalf of the Bank, is hereby irrevocably authorized to make the same.
7.5 BOOKS OF ACCOUNT. Guarantor agrees to maintain in its books of
account notations satisfactory to Bank of the rights and priorities of Bank
hereunder, and from time to time, upon request, to furnish Bank with sworn
financial statements. Bank may inspect the books of account and any records of
Guarantor at any time during business hours. Guarantor agrees that any
promissory note now or hereafter evidencing the Subordinated Indebtedness shall
be nonnegotiable and shall be marked with a specific statement that the
indebtedness thereby evidenced is subject to the provisions of this Guaranty.
8. RIGHTS AND REMEDIES OF BANK. The rights and remedies of Bank shall be
cumulative and non-exclusive. Delay, discontinuance, or failure to exercise any
right or remedy of Bank shall not be a waiver thereof, of any other right or
remedy of Bank, or of the time of the essence provision. Exercise of any right
or remedy of Bank shall not cure or waive any Event of Default or invalidate any
act done in response to any Event of Default.
9. LIMIT OF LIABILITY OF BANK. In exercising rights and remedies, neither
Bank nor any stockholder, director, officer, employee, agent, or representative
of Bank shall have any liability for any injury to the assets, business,
operations, or property of Guarantor or any other liability to Guarantor, other
than for its own gross negligence or willful misconduct.
10. SURVIVAL. The representations, warranties, and covenants of Guarantor in
the Guarantor Documents shall survive the execution and delivery of this
Guaranty.
-16-
<PAGE>
11. INTEGRATION, ENTIRE AGREEMENT, CHANGE, DISCHARGE, TERMINATION, WAIVER,
APPROVAL, CONSENT, ETC. The Guarantor Documents contain the complete
understanding and agreement of Guarantor and Bank and supersede all prior
representations, warranties, agreements, arrangements, understandings, and
negotiations. No provision of the Guarantor Documents may be changed,
discharged, supplemented, terminated, or waived except in a writing signed by
the parties thereto. Delay or failure by Bank to insist on performance of any
obligation when due or compliance with any other term or condition in the
Guarantor Documents shall not operate as a waiver thereof or of any other
obligation, term, or condition or of the time of the essence provision.
Acceptance of late payments or performance shall not be a waiver of the time of
the essence provision, the right of Bank to require that subsequent payments or
performance be made when due, or the right of Bank to declare an Event of
Default if subsequent payments or performance are not made when due. Any
approval, consent, or statement that a matter is satisfactory by Bank under the
Guarantor Documents must be in writing executed by Bank and shall apply only to
the Person(s) and facts specifically set forth in the writing.
12. BINDING EFFECT. The Guarantor Documents shall be binding upon Guarantor
and shall inure to the benefit of Bank and their successors and assigns and the
executors, legal administrators, personal representatives, heirs, devisees, and
beneficiaries of Guarantor, provided, however, that Guarantor may not delegate
any of its obligations under the Guarantor Documents and any purported
delegation shall be void. Bank may from time to time in its absolute and sole
discretion assign it rights and delegate its obligations under the Loan
Documents and/or the Guarantor Documents, in whole or in part, without notice to
or consent by Guarantor (including, without limitation, participation). In
addition to any greater or lesser limitation provided by law, Guarantor shall
not assert against any assignee of Bank any claims or defenses Guarantor may
have against Bank except claims and defenses, if any, arising under the Loan
Documents or Guarantor Documents or the Environmental Agreements.
13. COSTS, EXPENSES, AND FEES. Guarantor agrees to pay within ten (10) days of
demand, and with respect to clauses (ii) through (v), inclusive, immediately
upon demand, all external and internal costs, expenses, and fees (including,
without limitation, as applicable, inside and outside attorneys, paralegals, and
document clerks and specialists, appraisal, appraisal review, environmental
assessment, environmental testing, environmental cleanup, other inspection,
processing, title, filing, and recording costs, expenses, and fees) of Bank (i)
in the negotiation, execution, and delivery of the Guarantor Documents, (ii) in
enforcement of the Guarantor Documents and exercise of the rights and remedies
of Bank, (iii) in defense of the legality, validity, binding nature, and
enforceability of the Guarantor Documents and the perfection and priority of the
Liens and Encumbrances granted in the Loan
-17-
<PAGE>
Documents, (iv) in gaining possession of, holding, repairing, maintaining,
preserving and protecting any Collateral (as defined in the Loan Agreement), (v)
in selling or otherwise disposing of any Collateral, (vi) otherwise in relation
to the Guarantor Documents, or relating to the Collateral or the rights and
remedies of Bank under the Guarantor Documents or relating to the Collateral,
and (vii) in preparing for the foregoing, whether or not any legal proceeding is
brought or other action is taken. Such costs, expenses, and fees shall include,
without limitation, all such costs, expenses, and fees incurred in connection
with any bankruptcy, receivership, replevin, or other court proceedings (whether
at the trial or appellate level). Guarantor agrees to pay interest on such
costs, expenses, and fees at the Default Rate from the date incurred by Bank
until paid in full with respect to clauses (ii) through (iv), inclusive, and
with respect to all other clauses, from the date due.
14. SEVERABILITY. If any provision or any part of any provision of the
Guarantor Documents is unenforceable, the enforceability of the other provisions
or the other provisions and the remainder of the subject provision,
respectively, shall not be affected and they shall remain in full force and
effect.
15. CHOICE OF LAW. Except as otherwise expressly provided in this Guaranty,
the parties agree and intend that the Guarantor Documents, and the respective
rights and obligations of the parties thereto, shall be governed by and
construed according to the internal laws of the State of Arizona (without regard
to its conflict of laws principles). The parties agree and stipulate that the
Guarantor Documents were negotiated primarily in Arizona, that the Guarantor
Documents were executed, delivered and accepted by Bank in Arizona, all payments
shall be made to Bank in Arizona, and that Arizona has a substantial
relationship to the parties and to the underlying transaction contemplated by
the Guarantor Documents. Notwithstanding the foregoing, the parties agree that:
(i) With respect to any collateral given by any Borrower or Guarantor
to Bank, the perfection and priority of Bank's security interests in personal
property collateral or liens on real property collateral shall be governed by
the law of the respective states where the respective collateral is located.
(ii) The procedures governing the enforcement by Bank of provisional
remedies against any Borrower or Guarantor, including by way of illustration,
but not limited to, actions for claim and delivery of property, for injunctive
relief or for the appointment of a receiver, shall be governed by the law of the
state in which such provisional remedies or relief are sought.
(iii) With respect to any collateral given by any Borrower or
Guarantor to Bank, the procedures for foreclosing on the security interests or
liens of Bank shall be governed by the
-18-
<PAGE>
laws of the state in which the collateral is located and in which the
foreclosure is carried out; provided, however, that this subparagraph shall in
no event be construed to provide that the substantive law of such state shall
apply to this Agreement, the parties intending that the substantive law of the
State of Arizona shall govern this Agreement and all nonprocedural incidents of
foreclosure, including but not limited to the right of Bank to obtain a judgment
for any deficiency following foreclosure.
Notwithstanding that various provisions of this Guaranty, the Loan
Documents and the Environmental Agreements have been drafted to address or waive
the laws of other states, in the event of any foreclosure by Bank on any
collateral, regardless of where the collateral is located, the parties agree and
intend that the laws of the State of Arizona shall govern the right of Bank to
collect and obtain a judgment for any deficiency following foreclosure, and the
parties specifically intend that the laws of other states, including but not
limited to Sections 580a, 580b, 580c, 580d and 726 of the California Code of
Civil Procedure, and Nevada Revised Statutes Section 40.430, shall not be
applicable. In such connection, the parties, further agree that:
(a) Bank may enforce its rights under the Loan Documents and
this Guaranty and the Environmental Agreements, including but not limited to its
right to sue Guarantor, to collect any outstanding indebtedness, or to obtain a
judgment against any Borrower or Guarantor in California, Arizona, Nevada or
other states (including without limitation a judgment for any deficiency
following foreclosure), in accordance with Arizona law, and if Bank obtains a
judgment (including without limitation a deficiency judgment) in a state other
than in California or Nevada, then Bank shall have the right to enforce such
judgment in California or Nevada, as well as in other states;
(b) California's and Nevada's antideficiency, one-action, and
security-first rules (including, without limitation, California Code of Civil
Procedure Sections 580a, 580b, 580c and 580d, and Nevada Revised Statutes
Section 40.430) are inapplicable to the obligations and indebtedness secured by
the Deeds of Trust and the other Loan Documents and to the enforcement or
realization by Bank of its rights and remedies relating thereto; and
(c) Section 726 of the California Code of Civil Procedure shall
not apply (i) to prevent or limit exercise or enforcement of any other rights or
remedies of Bank (including, but not limited to, Bank's right to obtain a
deficiency judgment) either prior to or following foreclosure or (ii) to prevent
or limit Bank's right to foreclosure judicially or nonjudicially following any
exercise or enforcement of any other rights or remedies of Bank.
-19-
<PAGE>
16. TIME OF THE ESSENCE. Time is of the essence with regard to each provision
of the Guarantor Documents as to which time is a factor.
17. NOTICES AND DEMANDS. All demands or notices under the Guarantor Documents
shall be in writing (including, without limitation, telecopy) and mailed,
telecopied, or delivered to the respective party hereto at the address specified
at the beginning of this Guaranty or such other address as shall have been
specified in a written notice. Any demand or notice mailed shall be mailed
first-class mail, postage-prepaid, return-receipt-requested and shall be
effective upon the earlier of (i) actual receipt by the addressee, and (ii) the
date shown on the return-receipt. Any demand or notice not mailed will be
effective upon the earlier of (i) actual receipt by the addressee, and (ii) the
time the receipt of the telecopy, telegram, telex, or cable is mechanically
confirmed. Bank shall give to Guarantor copies of any notices given by Bank to
any Borrower under the Loan Documents and Environmental Agreements.
18. JOINT AND SEVERAL OBLIGATIONS. All obligations in any of the Guarantor
Documents executed by more than one Person shall be the joint and several
obligations of each such Person.
19. BANK'S RIGHT OF SET-OFF. Guarantor grants to Bank (i) the right at any
time and from time to time after any Event of Default, in the absolute and sole
discretion of Bank and without demand or notice to Guarantor, to set-off and
apply deposits (whether certificates of deposit, demand, general, savings,
special, time, or other, and whether provisional or final) held and any other
liabilities or other obligations of Bank to Guarantor, other than any trust or
custodial accounts administered by Guarantor for the benefit of others
("DEPOSITS, LIABILITIES, AND OBLIGATIONS") against or to the Guarantor
Obligations, regardless of whether the Deposits, Liabilities, or Obligations are
contingent, matured, or unmatured, and (ii) a security interest in the Deposits,
Liabilities, and Obligations to secure the Guarantor Obligations. In addition,
Guarantor grants to Bank the right upon occurrence of an event that with notice,
passage of time, or both would be an Event of Default to segregate all Deposits,
Liabilities, and Obligations into an account or otherwise undo the sole control
of Bank. Bank shall notify Guarantor within a reasonable period of time after
Bank's exercise of any of the rights set forth in this paragraph.
20. INDEMNIFICATION OF BANK. Guarantor agrees to indemnify, hold harmless, and
on demand defend Bank and its shareholders, directors, officers, employees,
agents, and representatives for, from, and against any and all damages, losses,
liabilities, penalties, costs, and expenses (including, without limitation,
costs and expenses of litigation and attorneys' fees) arising from any claim or
demand in respect of the Environmental Agreements (as
-20-
<PAGE>
defined in the Loan Agreement) and arising at any time, whether before or after
termination of any Commitment, any letters of credit issued by Bank for any
Borrower expire or are drawn in full, any drafts drawn or drawn and accepted
under any such letters of credit are paid in full, and payment of the
Obligations in full. The obligations of Guarantor and the rights of Bank under
this SECTION 20 shall survive termination of any Commitment, the expiration or
drawing in full of any letters of credit issued by Bank to any Borrower, the
payment in full of any drafts drawn or drawn and accepted under any such letters
of credit, and payment of the Obligations in full.
21. RESCISSION OR RETURN OF PAYMENTS. If at any time or from time to time,
whether before or after termination of any Commitment, any letters of credit
issued by Bank for any Borrower expire or are drawn in full, any drafts drawn or
drawn and accepted under any such letters of credit are paid in full, and
payment and performance of the Obligations in full, all or any part of any
amount received by Bank in payment of, or on account of, any Obligation is or
must be, or is claimed to be, avoided, rescinded, or returned by Bank to
Guarantor or any other Person for any reason whatsoever (including, without
limitation, bankruptcy, insolvency, or reorganization of Guarantor or any other
Person), such Obligation shall be deemed to have continued in existence or shall
be reinstated, as the case may be, all as though such payment had not been
received, and Guarantor shall execute and deliver to Bank such documents as are
reasonably required to reinstate any liens, security interests, and other
encumbrances that secured such Obligations at the time such avoided, rescinded,
or returned payment was received by Bank.
22. NO CONSTRUCTION AGAINST BANK OR GUARANTOR. The Guarantor Documents are the
result of negotiations between Guarantor and Bank. Accordingly, the Guarantor
Documents shall not be construed for or against Guarantor or Bank, regardless of
which party drafted the Guarantor Documents or any part thereof.
23. HEADINGS. The headings at the beginning of each section of the Guarantor
Documents are solely for convenience and are not part of the Guarantor
Documents.
24. NUMBER AND GENDER. In the Guarantor Documents the singular shall include
the plural and vice versa and each gender shall include the other genders.
-21-
<PAGE>
DATED as of the date first above stated.
M.D.C. HOLDINGS, INC., a Delaware
corporation
By: /s/ John J. Heaney
-------------------------------------
Name: John J. Heaney
-----------------------------------
Title: Vice President
----------------------------------
STATE OF ARIZONA )
) ss.
County of Maricopa )
The above instrument was acknowledged before me this 13th day of June, 1994, by
/s/ John Heaney
---------------------------------------------, the
Vice President
------------------------------------- of M.D.C. HOLDINGS, INC., a Delaware
corporation, on behalf of the corporation.
/s/ Ellen Schenkler
-------------------------------------
Notary Public
My commission expires:
June 19, 1997 [Seal]
------------------
-22-
<PAGE>
MANAGEMENT AGREEMENT
THIS AGREEMENT, dated as of January 1, 1993, by and between ASSET INVESTORS
CORPORATION, a Maryland corporation (hereinafter referred to as the "Company"),
and FINANCIAL ASSET MANAGEMENT CORPORATION, a Delaware corporation (hereinafter
referred to as the "Manager").
W I T N E S S E T H
WHEREAS, the Company owns Mortgage Assets and qualifies for the tax benefits
accorded by Sections 856 through 860 of the Internal Revenue Code of 1986; and
WHEREAS, the Company has engaged and desires to continue to engage the Manager
to manage the assets of the Company and to perform administrative services for
the Company in the manner and on the terms set forth herein;
NOW,THEREFORE, in consideration of the mutual agreements herein set forth, the
parties hereto agree as follows:
SECTION 1. The Management Agreement, dated as of January 1, 1992, by and
between the Company and the Manager is hereby renewed as of the date hereof and
extended through December 31, 1993, and shall be deemed in full force and effect
as if set forth herein in full.
SECTION 2. This Agreement shall be binding upon and inure to the benefit of
the parties hereto and their successors and assigns as provided herein, and
contains the entire agreement and understanding between the parties hereto with
respect to the subject matter hereof. This Agreement and all questions relating
to its validity, interpretation, performance and enforcement shall be governed
by and construed, interpreted and enforced in accordance with the laws of the
State of Colorado, notwithstanding any Colorado or other conflict-of-law
provisions to the contrary.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement, and this
Agreement shall be effective, as of the date first written above.
ASSET INVESTORS CORPORATION
By: /s/ Spencer I. Browne
----------------------------------
Name: Spencer L. Browne
Title: President and Chief Executive Officer
FINANCIAL ASSET MANAGEMENT
CORPORATION
By: /s/ John C. Singer
----------------------------------
Name: John C. Singer
Title: Vice President
<PAGE>
AMENDMENT TO MANAGEMENT AGREEMENT
AMENDMENT to the Management Agreement, dated as of January 1, 1993,
between ASSET INVESTORS CORPORATION, a Maryland corporation (the "Company"), and
FINANCIAL ASSET MANAGEMENT CORPORATION, a Delaware corporation (the "Manager"),
dated as of October 12, 1993.
WHEREAS, the Company and the Manager entered into the Management
Agreement providing for the Manager to undertake the duties and responsibilities
set forth in the Management Agreement subject to the supervision of the
Company's Board of Directors; and
WHEREAS, the Company, effective October 12, 1993, distributed to its
stockholders approximately 70% of the outstanding shares of Commercial Assets,
Inc., another real estate investment trust managed by the Manager.
NOW, THEREFORE, in consideration for the mutual agreements herein set
forth, the parties hereto agree as follows:
1. The Management Agreement is, effective as of the date hereof,
hereby amended as follows:
(a) Section 1(d) is amended and restated as follows:
"(d) "Average Invested Assets" for any period means the average
of the aggregate book value of the consolidated assets of the Company, its
trusts and subsidiaries, computed in accordance with GAAP, invested, directly or
indirectly, in equity interests in and loans secured by real estate, including
assets that are pledged to secure Mortgage-Backed Obligations, after reserves
for depreciation or bad debts or other similar noncash reserves, less the book
value of minority interest (the portion of equity interest in Mortgage-Backed
Obligations not owned by the Company) and the liabilities associated with issued
and outstanding Mortgage-Backed Obligations of the Company, its trusts and
subsidiaries, computed for any period by adding the Average Invested Assets at
the end of each month during such period and dividing by the number of months in
the periods (provided that the Average Invested Assets shall not include (A)
investments in any other REIT for which the Manager or an Affiliate of the
Manager acts as a manager and (B) cash, certificates of deposit, treasury
instruments and other non-real estate related assets);"
<PAGE>
2
(b) Section l(e) is amend and restated as follows:
"(e) "Average Net Worth" means for any period, the difference
between (1) the gross proceeds of all offerings of equity securities of the
Company and (2) the $75,000,000 of capital contributed to CAI in 1993 times the
number of calendar days during such period that the proceeds of each such
offering or capital contribution were available for use by the Company divided
by the total number of calendar days in such period, together with (A) for the
first quarter of the current fiscal year, the Company's Tax Retained Earnings
(Losses) at the beginning of the first quarter or (B) for each subsequent year-
to-date cumulative quarterly period of the year for which a calculation is
required pursuant to Section 9(b) hereof, the average of the Company's Tax
Retained Earnings (Losses) computed by adding the Company's Tax Retained
Earnings (Losses) as of the beginning of each fiscal quarter during such year-
to-date period divided by the number of quarters in such period. A sample
calculation of the Average Net Worth is shown in Exhibit A;"
(c) Section l(f) is amended and restated as follows:
"(f) (A) "Board of Directors" means the Board of Directors of the
Company;
"(f) (B) "CAI" means Commercial Assets, Inc.;"
(d) Section i(i) is amended and restated as follows:
(A) "Commitment" means with respect to any Mortgage
Instrument, the agreement containing the terms pursuant to which the Company
agrees to acquire on a forward basis such Mortgage Instrument from any person;
"(i) (B) "Commercial Mortgage-Backed Obligations" means debt
obligations which are secured and funded as to the payment of interest and
principal by a specific group of mortgage loans on multi-family or other
commercial real estate, accounts and other collateral;"
(e) Section 1(gg) is amended and restated as follows:
"(gg) "Net Income" means the Company's taxable income including
capital gains and capital losses arising from the Company's operations in the
year they are
<PAGE>
3
generated before (i) the Manager's incentive compensation, (ii) net operating
loss deductions arising from losses in prior periods, (iii) dividends from CAI,
(iv) special deductions permitted by the Internal Revenue Code in calculating
taxable income for a REIT and (v) the deduction arising from the exercise of
stock options permitted under the Code Section 83 and the deduction for dividend
equivalent rights. In addition, taxable income, for this computation, will also
be adjusted for all mortgage derivative interests in which the Company's basis
is different from the current reportable tax basis in such mortgage derivative
interests. In such situations, GAAP income will be substituted for taxable
income. In addition, taxable income will also be reduced by 25% of the expense
otherwise deductible for tax purposes relating to the exercise of stock options
and the issuance of Common Stock relating to dividend equivalent rights;"
(f) Section 1(kk) is amended and restated as follows:
"(kk) (A) "REIT" means a real estate investment trust under the
Internal Revenue Code;
"(kk) (B) "Residential Mortgage-Backed Obligation" means debt
obligations which are secured and funded as to the payment of interest and
principal by a specific group of mortgage loans on single-family (one to four
units) real estate;"
(g) Section 1(qq) is amended by adding before the phrase "see
Exhibit A" the following:
"provided, however, that such calculation shall exclude the
effects, if any, of "excess inclusion" on Net Income, dividend distributions or
otherwise;"
(h) Section 2(i) is amended by adding the following before the
semi-colon at the end of such paragraph:
"(for purposes of this subsection, full-time shall mean full-time
obligation to the Company and CAI)"
(i) Section 2(o) is amended by adding the following after the
word "REIT" at the end of such paragraph:
"PROVIDED, HOWEVER, that the Company shall not invest in
Commercial Mortgage-Backed Obligations;"
(j) The first sentence of Section 3 is amended and restated as
follows:
<PAGE>
4
"Nothing herein shall prevent or restrict the Manager or any of its
officers, employees or Affiliates from engaging in any business rendering
services of any kind to any other Person, including investment in, or advisory
service to others investing in, any type of real estate assets, including assets
which meet the principal portfolio objectives of the Company, except that,
without the consent of the Board of Directors, which consent shall not be
unreasonably withheld, the Manager shall not provide general management services
to any REIT or similar entity other than the Company and its subsidiaries and
affiliates other than acting as Manager to CAI."
(k) The last paragraph of Section 11 is amended and restated as
follows:
"If any of the expenses set out above total $5,000 or more
individually, or $15,000 or more in the aggregate and are incurred by the
Manager in part for the purposes of the Company and in part for purposes
unrelated to the Company (including expenses incurred on behalf of CAI), the
Manager shall submit an accounting to the Company's Audit Committee of the Board
of Directors on a quarterly basis to show the allocation of such expenses."
(l) Section 12(t) is amended by deleting the word "5,000" and
inserting in its place the word "$10,000".
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the date first written above.
[Corporate ASSET INVESTORS CORPORATION
Seal]
Attest: /s/ Stephen L. Weiman By: /s/ Spencer I. Browne
---------------------- -------------------------
Name: Spencer I. Browne
Title: President and Chief
Executive Officer
FINANCIAL ASSET MANAGEMENT
CORPORATION
By: /s/ John C. Singer
-------------------------
Name: John C. Singer
Title: Vice President
<PAGE>
EXECUTION COPY
MANAGEMENT AGREEMENT
THIS AGREEMENT, dated as of January 1, 1994 by and between ASSETS
INVESTORS CORPORATION, a Maryland corporation (hereinafter referred to as the
"Company"), and FINANCIAL ASSET MANAGEMENT CORPORATION, a Delaware corporation
(hereinafter referred to as the "Manager").
W I T N E S S E T H:
--------------------
WHEREAS, the Company owns Mortgage Assets and qualifies for the tax
benefits accorded by Section 856 through 860 of the Internal Revenue Code of
1986; and
WHEREAS, the Company has engaged and desires to continue to retain the
Manager to manage the assets of the Company and to perform administrative
services for the Company in the manner and on the terms set forth herein;
NOW, THEREFORE, in consideration of the mutual agreements herein set
forth, the parties hereto agree as follows:
Section 1. DEFINITIONS. Capitalized terms used but not defined
herein shall have the respective meanings assigned them below.
(a) "Affiliate" means, when used with reference to a specified
person, (i) any person that directly or indirectly controls or is controlled by
or is under common control with the specified person, (ii) any person that is an
officer, director or employee of, partner in or trustee
<PAGE>
2
of, or serves in a similar capacity with respect to, the specified person, or of
which the specified person is an officer, director or employee of, partner in or
trustee of or with respect to which the specified person serves in a similar
capacity, (iii) any person that, directly or indirectly, is the beneficial owner
of 5% or more of any class of equity securities issued by the specified person,
or any person 5% or more of whose equity securities are, directly or indirectly
beneficially owned by such other person, or (iv) any person that has a material
business or professional relationship with the specified person, PROVIDED,
however, that a person shall not be deemed to be an Affiliate of the Manager or
of any person that is an Affiliate of the Manager solely by reason of serving as
a director of one or more investment companies of which the Manager or an
Affiliate of the Manager serves as investment advisor or in any other capacity;
(b) "Affiliated Issuer" means any Person that issues Mortgage-
Backed Obligations and which is organized by or on behalf of the Company;
(c) "Agreement" means this Management Agreement, as amended from
time to time;
(d) "Average Invested Assets" for any period means the average
of the aggregate book value of the consolidated assets of the Company, its
trusts and subsidiaries, computed in accordance with GAAP, invested, directly or
indirectly, in equity interests in and loans secured by real
<PAGE>
3
estate, including assets that are pledged to secure Mortgage-Backed Obligations,
after reserves for depreciation or bad debts or other similar noncash reserves,
less the book value of minority interest (the portion of equity interest in a
Mortgage-Backed Obligation not owned by the Company) and the liabilities
associated with issued and outstanding Mortgage-Backed Obligations of the
Company, its trusts and subsidiaries, computed for any period by adding the
Average Invested Assets at the end of each month during such period and dividing
by the number of months in the period (provided that Average Invested Assets
shall not include (A) investments in any other REIT for which the Manager or an
Affiliate of the Manager acts as a manager and (B) cash, certificates of
deposit, treasury instruments and other non-real estate related assets);
(e) "Board of Directors" means the Board of Directors of the
Company;
(f) "CAI" means Commercial Assets, Inc., a Maryland corporation;
(g) "Cash Distribution" means any cash distribution other than
those resulting from a complete or partial liquidation of the assets of the
Company as determined by the Independent Directors;
(h) "CMO" means Collateralized Mortgage Obligations which are
secured and funded as to the payment of interest and principal by a specific
group of residential mortgage loans;
<PAGE>
4
(i) "Commercial Mortgage-Backed Obligations" means debt
Obligations which are secured and funded as to the payment of interest and
principal by a specific group of mortgage loans on multi-family or other
commercial real estate, accounts and other collateral;
(j) "Commitment" means, with respect to any Mortgage Asset, the
agreement containing the terms pursuant to which the Company agrees to acquire
on a forward basis such Mortgage Asset from any Person;
(k) "Company" means Asset Investors Corporation, a Maryland
corporation, for all purposes; provided, however, that with respect to
references to Series of Mortgage-Backed Obligations issued by the Company, the
term "Company" shall include subsidiaries of the Company which issue such
Mortgage-Backed Obligations;
(l) "Conforming Mortgage Loan" means a mortgage loan that
complies with the requirements for inclusion in a guaranty or purchase program
sponsored by any of FNMA, FHLMC or GNMA;
(m) "Direct Issuance Costs" means all fees and expenses incurred
in connection with the issuance of Mortgage-Backed Obligations issued or caused
to be issued by the Company, including trustee, accounting, consulting, legal,
rating agency, registration, printing and engraving, tax advisory and tax
preparation (but not including preparation of annual tax returns) fees and
expenses, underwriting
<PAGE>
5
discounts, up-front master servicing fees, and up-front costs of credit
enhancements;
(n) "FDIC" means the Federal Deposit Insurance Corporation or
any successor or assign or any resulting, surviving or transferee entity;
(o) "FHLMC" means the Federal Home Loan Mortgage Corporation, a
corporation organized and existing under the laws of the United States of
America, or any successor or assign or any resulting, surviving or transferee
entity;
(p) "FHLMC Certificate" means a FHLMC mortgage participation
certificate;
(q) "FNMA" means the Federal National Mortgage Association, a
corporation organized and existing under the laws of the United States of
America, or any successor or assign or any resulting, surviving or transferee
entity;
(r) "FNMA Certificate" means a FNMA mortgage pass-through
certificate;
(s) "GAAP" means generally accepted accounting principles;
(t) "GNMA" means the Government National Mortgage Association, a
corporation organized and existing under the laws of the United States of
America, or any successor or assign or any resulting, surviving or transferee
entity;
<PAGE>
6
(u) "GNMA Certificate" means a fully-modified pass-through
mortgage-backed certificate guaranteed by GNMA;
(v) "Governing Instruments" means, the Company's Articles of
Incorporation, as amended, By-Laws, as amended, and any resolutions duly adopted
by the Board of Directors;
(w) "Independent Directors" shall have the meaning ascribed to
that term in the By-Laws of the Company, as the same may be amended or
supplemented from time to time;
(x) "Internal Revenue Code" or "Code" means the Internal Revenue
Code of 1986, as amended;
(y) "Mortgage Assets" means, collectively, Mortgage Instruments,
Residual Interests, Mortgage-Backed Obligations and Non-Agency MBS Bonds;
(z) "Mortgage-Backed Obligations" means, collectively,
collateralized mortgage obligations, mortgage-backed bonds and mortgage
collateralized debt, mortgage pass-through obligations or other instruments
collateralized by, or representing interests in, mortgage debt or Mortgage
Instruments;
(aa) "Mortgage Certificates" means, collectively (i) GNMA
Certificates, (ii) FHLMC Certificates, (iii) FNMA Certificates and (iv) any
other mortgage certificates; including private label pass-through certificates,
<PAGE>
7
and other mortgage instruments as reasonably determined by the Company;
(bb) "Mortgage Instruments" means, collectively, Mortgage
Certificates and Mortgage Loans;
(cc) "Mortgage Loans" means, collectively, Conforming Mortgage
Loans and Non-conforming Mortgage Loans;
(dd) "Net Income" means the Company's taxable income including
capital gains and capital losses arising from the Company's operations in the
year they are generated before (i) the Manager's incentive compensation,
(ii) net operating loss deductions arising from losses in prior periods,
(iii) dividends from CAI, (iv) special deductions permitted by the Internal
Revenue Code in calculating taxable income for a REIT, and (v) the deduction
arising from the exercise of stock options permitted under Code Section 83 and
the deduction for dividend equivalent rights. In addition, taxable income will
also be reduced by 25% of the expense otherwise deductible for tax purposes
relating to the exercise of stock options and the issuance of Common Stock
relating to dividend equivalent rights;
(ee) "Non-Agency MBS Bonds" means interests issued in residential
mortgage loan securitizations supported by pools of non-conforming (non-agency
guaranteed) mortgage loans.
(ff) "Non-conforming Mortgage Loan" means a mortgage loan that
meets the requirements of the guaranty programs of either FNMA, FHLMC or GNMA;
except for the
<PAGE>
8
requirements with respect to the maximum original outstanding principal amounts
of such mortgage loans and such other particular requirements of such programs
presented to and approved by the Board of Directors;
(gg) "Other Mortgage Assets" means (i) interest-only
certificates, (ii) principal-only certificates, (iii) subordinated interests in
mortgage pass-through transactions and (iv) other mortgage-derivative assets;
(hh) "Person" means a natural person, corporation, partnership,
association, trust (including any beneficiary thereof), company, joint venture,
joint stock company, unincorporated organization or other entity;
(ii) "REIT" means a real estate investment trust under the
Internal Revenue Code;
(jj) "REIT Income" means taxable income computed as prescribed
for REITs under the Code prior to the "dividends paid deduction" (including the
dividends paid deduction for dividends related to capital gains) and any net
operating loss carryover;
(kk) "Residual Interests" means interests in Mortgage-Backed
Obligations that entitle the holder to receive excess cash flow from the
collateral pledged to secure such obligations;
(ll) "Repurchase Agreement" means a financing transaction
pursuant to which the Company would sell Mortgage Assets for cash and
simultaneously agree to repurchase them at a specified date for the same amount
of cash
<PAGE>
9
plus an interest component;
(mm) "Series of Mortgage-Backed Obligations" means a separate
series of Mortgage-Backed Obligations issued or caused to be issued by the
Company or an Affiliated Issuer or other person pursuant to an indenture or
other agreement;
(nn) "Servicing Agreement" means a servicing agreement between
the Company and any servicer of the Company's Mortgage Loans;
(oo) "Stockholders" means the registered owners of the shares of
common stock of the Company;
(pp) "Stockholders Equity" means GAAP Stockholders Equity;
(qq) "Ten Year U.S. Treasury Rate" for any period means the
arithmetic average of the weekly average yield to maturity for actively traded
current coupon U.S. Treasury fixed interest rate securities (adjusted to con-
stant maturities of ten years) published by the Federal Reserve Board during
such period, or, if such rate is not published by the Federal Reserve Board,
then any Federal Reserve Bank or agency or department of the federal government
selected by the Company; or, if the Company determines in good faith that for
any reason the Company cannot determine the Ten Year U.S. Treasury Rate for any
period as provided above, then the Ten Year U.S. Treasury Rate for such period
shall be the arithmetic average of the per annum average yields to maturity,
based upon the closing asked
<PAGE>
10
price on each business day during such period, as chosen and quoted in New York
City for each business day (or less frequently if daily quotations shall not be
generally available) by at least three recognized dealers in U.S. government
securities selected by the Company, for each actively traded marketable U.S.
Treasury fixed interest rate security (other than securities which can, at the
option of the holder, be surrendered at face value in payment of any federal
estate tax) with a final maturity date not less than eight nor more than twelve
years from the date of such closing asked price;
(rr) "Total Operating Expenses" means the expenses indicated in
Section 9(c)(iii);
Section 2. GENERAL DUTIES OF THE MANAGER.
The Manager undertakes to use its best efforts to (i) present to the
Company asset acquisition opportunities consistent with the policies and
objectives of the Company and (ii) furnish the Board of Directors with
information concerning the making, acquisition, holding and disposing of assets.
Subject to the supervision and control of the Board of Directors, the Manager
shall provide services to the Company and, to the extent directed by the Board
of Directors, shall provide similar services to any Affiliated Issuer, if any,
or subsidiary of the Company as follows:
(a) serve as the Company's consultant with respect to the
formulation of asset acquisition criteria and
<PAGE>
11
policy guidelines for recommendation to the Board of Directors;
(b) counsel the Company in connection with policy decisions to
be made by the Board of Directors;
(c) issue Commitments on behalf of the Company to acquire
Mortgage Assets;
(d) represent the Company in connection with the acquisition and
accumulation of Mortgage Assets;
(e) furnish reports and statistical and economic research to the
Company regarding the Company's portfolio activities and the services performed
for the Company by the Manager as reasonably requested by the Board of
Directors;
(f) monitor and provide to the Board of Directors, on an on-
going basis, rate information and other data regarding Repurchase Agreements and
alternative lending sources;
(g) negotiate and enter into agreements on behalf of the Company
with banking institutions and other lenders to provide for the borrowing of
funds by the Company;
(h) monitor and provide to the Board of Directors, on an on-
going basis, price information and other data obtained from certain nationally
recognized dealers that maintain markets in Mortgage Assets and Other Mortgage
Assets identified by the Board of Directors from time to
<PAGE>
12
time, and provide data and advice to the Board of Directors in connection with
the identification of such dealers;
(i) provide a full time chief operating officer of the Company,
a full time chief accounting officer of the Company, provide the personnel to
perform or supervise the duties of the computer programmer and analyst
(including necessary computer support staff), senior investment officer,
controller, shareholder relations, press officer, cash manager, tax manager
(including necessary support staff) (any of which functions may be performed by
the same person or persons) and other personnel necessary to manage the Company
on a day-to-day basis and provide to the Company, commencing as of the date
hereof and thereafter on a semi-annual basis, a list of all the full time and
part time employees of the Manager and a description of the functions of such
employees (for purposes of this subsection, full-time shall mean full time
obligation to both CAI and the Company);
(j) administer the day-to-day operations of the Company and
perform or supervise the performance of such other administrative functions
necessary in the management of the Company as may be agreed upon by the Manager
and the Board of Directors, including the collection of revenues and the payment
of the Company's expenses, debts and obligations and maintenance of appropriate
computer services to perform such administrative functions;
<PAGE>
13
(k) communicate on behalf of the Company with the holders of the
equity and debt securities of the Company as required to satisfy the continuous
reporting and other requirements of any governmental bodies or agencies, securi-
ties exchanges and bond indentures and to maintain effective relations with such
holders;
(l) prepare, draft and file all the Company's filings with the
Securities and Exchange Commission, PROVIDED THAT filing fees, legal fees,
accounting fees and any other third-party fees shall be the responsibility of
the Company;
(m) to the extent not otherwise subject to an agreement executed
by the Company, designate a servicer for those Mortgage Loans sold to the
Company by originators that have elected not to service such loans and arrange
for the monitoring and administering of such servicers;
(n) monitor and administer the servicing of the Company's
Mortgage Loans, other than Mortgage Loans pooled to back Mortgage Certificates
or pledged to secure Mortgage-Backed Obligations or Non-Agency MBS Bonds,
including serving as the Company's consultant with respect to the servicing of
loans; collecting information and submitting reports pertaining to the Mortgage
Loans and to moneys remitted to the Manager or the Company by servicers;
periodically reviewing and evaluating the performance of each servicer to
determine its compliance with the terms and conditions of the servicing
agreement and, if deemed
<PAGE>
14
appropriate, recommending to the Company the termination of such servicing
agreement; acting as a liaison between servicers and the Company and working
with servicers to the extent necessary to improve their servicing performance;
reviewing recommendations as to fire losses, easement problems and condemnation,
delinquency and foreclosure procedures with regard to the Mortgage Loans;
reviewing servicers' delinquency, foreclosure and other reports on Mortgage
Loans; supervising claims filed under any mortgage insurance policies; and
enforcing the obligation of any servicer to repurchase Mortgage Loans from the
Company;
(o) in accordance with criteria set up by the Board of
Directors, invest or reinvest the Company's cash consistent with the Company's
status as a REIT provided, however, that the Company shall not invest in
Commercial Mortgage-Backed Obligations;
(p) provide to the Company itself or through another appropriate
party (but the Manager shall not charge for the services of such an appropriate
party unless authorized by the Board of Directors) all services in connection
with the issuance of each Series of Mortgage-Backed Obligations or Non-Agency
MBS Bonds issued by the Company or any Affiliated Issuer, including:
(i) representing the Company with respect to the
structuring of each such Series of Mortgage-Backed Obligations or Non-
Agency MBS Bonds;
<PAGE>
15
(ii) negotiating the rating requirements with rating
agencies with respect to the rating of each such Series of Mortgage-Backed
Obligations or Non-Agency MBS Bonds;
(iii) representing the Company in connection with the
acquisition and accumulation of any Mortgage Instruments and the pooling
and exchange of Mortgage Loans into Mortgage Certificates in connection
with each Series of Mortgage-Backed Obligations or Non-Agency MBS Bonds
issued by the Company or any Affiliated Issuer;
(iv) issuing Commitments on behalf of the Company to acquire
Mortgage Instruments to be used to secure or constitute the mortgage pool
for each such Series of Mortgage-Backed Obligations or Non-Agency MBS
Bonds;
(v) with respect to the issuance of each such Series of
Mortgage-Backed Obligations or Non-Agency MBS Bonds for which the
underlying collateral consists of Mortgage Instruments owned by the Company
or an Affiliated Issuer, accumulating and reviewing all Mortgage Instru-
ments which may secure or constitute the mortgage pool for each such Series
of Mortgage-Backed Obligations or Non-Agency MBS Bonds;
(vi) with respect to the issuance of each such Series of
Mortgage-Backed Obligations or Non-Agency MBS Bonds for which the
underlying collateral
<PAGE>
16
does not consist of Mortgage Instruments owned by the Company or an Affili-
ated Issuer, reviewing interest rates, maturity dates and other attributes
of the Mortgage Instruments;
(vii) negotiating all agreements and credit enhancements with
respect to each such Series of Mortgage-Backed Obligations or Non-Agency
MBS Bonds;
(viii) organizing and administering all activities in
connection with the closing of each such Series of Mortgage-Backed
Obligations or Non-Agency MBS Bonds including all negotiations and
agreements with underwriters, trustees, servicers, master servicers and
other parties; and
(ix) performing such other services as may be required from
time to time for completing the issuance of each such Series of Mortgage-
Backed Obligations or Non-Agency MBS Bonds.
(q) provide to the Company itself or through another appropriate
party (but the Manager shall not charge for the services of such an appropriate
party unless authorized by the Board of Directors) all services in connection
with the administration of each Series of Mortgage-Backed Obligations or Non-
Agency MBS Bonds issued by the Company or any Affiliated Issuer, including:
(i) communicating on behalf of the Company with the holders
of each such Series of Mortgage-Backed Obligations or Non-Agency MBS Bonds
as
<PAGE>
16
required to satisfy the reporting and tax informational requirements of any
governmental bodies or agencies with respect to holders of each such Series
of Mortgage-Backed Obligations or Non-Agency MBS Bonds and as required to
satisfy any governmental bodies and the provisions of any indenture,
pooling and servicing agreement or other agreement with respect to each
such Series of Mortgage-Backed Obligations or Non-Agency MBS Bonds;
(ii) determining the amount of, and making, all payments
with respect to each such Series of Mortgage-Backed Obligations or Non-
Agency MBS Bonds and directing the reinvestment of principal and interest
from the Mortgage Instruments in accordance with the terms of any inden-
ture, pooling and servicing agreement or other agreement relating to each
such Series of Mortgage-Backed Obligations or Non-Agency MBS Bonds;
(iii) furnishing all reports and statistical information
required with respect to the administration of each such Series of
Mortgage-Backed Obligations or Non-Agency MBS Bonds;
(iv) working with the Company and with accountants, counsel,
trustees, servicers, master servicers and other parties with respect to the
administration of each such Series of Mortgage-Backed Obligations or Non-
Agency MBS Bonds;
<PAGE>
18
(v) assisting trustees and paying agents in distributing
all excess or residual payments with respect to each such Series of
Mortgage-Backed Obligations or Non-Agency MBS Bonds as directed by the
Company or any indenture, pooling and servicing agreement or other
agreement with respect to each such Series of Mortgage-Backed Obligations
or Non-Agency MBS Bonds;
(vi) monitoring and providing, on an on-going basis,
information with respect to each such Series of Mortgage-Backed Obligations
or Non-Agency MBS Bonds as is required by the Company;
(vii) advising the Company with respect to the administration
of each such Series of Mortgage-Backed Obligations or Non-Agency MBS Bonds;
and
(viii) performing such other services as may be required from
time to time in connection with the administration of each such Series of
Mortgage-Backed Obligations or Non-Agency MBS Bonds as the Company shall
deem appropriate under the particular circumstances.
(r) provide to the Company itself or through another appropriate
party (but the Manager shall not charge for the services of such an appropriate
party unless authorized by the Board of Directors) services in connection with
reviewing and monitoring the administration of each series of Mortgage-Backed
Obligations or Non-Agency MBS Bonds
<PAGE>
19
managed by a party other than the Manager or any of its Affiliates, including:
(i) reviewing monthly financial statements and/or other
financial data prepared by the third-party bond administrator and
distributed to the Company;
(ii) reviewing bond payment information and verifying
the excess cash flow payment received by the Company;
(iii) monitoring on-going expenses related to each series of
Mortgage-Backed Obligations or Non-Agency MBS Bonds, where expense
information has been provided to the Company;
(iv) reviewing federal income tax reports prepared by the
third-party bond administrator and distributed to the Company, including
but not limited to, reports for real estate mortgage investment conduits;
and
(v) providing and preparing for Residual Interests in
Mortgage-Backed Obligations or Non-Agency MBS Bonds which are accounted for
under a level-yield method: (A) necessary services for computing monthly
income in accordance with GAAP; and (B) the necessary calculations to
compute the carrying amount adjustment in accordance with the Company's
accounting principles.
<PAGE>
20
(s) monitor the Company's portfolio with regard to interest rate
risk and recommend to the Board of Directors, and negotiate and enter into on
behalf of the Company, transactions to reduce interest rate risk including, but
not limited to, interest rate swap agreements, forward rate agreements, interest
rate cap agreements, interest rate floor agreements and financial futures and
option contracts in accordance with the criteria established by the Board of
Directors;
(t) perform such other services as may be required from time to
time for management and other activities relating to the assets of the Company
as the Board of Directors shall deem appropriate under the particular cir-
cumstances;
(u) provide tax planning and advisory services and prepare and
file on behalf of the Company all filings required by federal, state and local
governments, including but not limited to, federal and state REIT income tax
returns (including the preparation of the related REIT qualification
calculations), personal property tax returns, sales tax returns, payroll tax
returns, franchise tax returns, annual reports and federal and state information
returns; and
(v) provide the executive, administrative and other personnel,
office space and services required in rendering services to the Company listed
in this Section 2.
<PAGE>
21
The Manager agrees to use its best efforts at all times in performing
services for the Company hereunder.
Section 3. ADDITIONAL ACTIVITIES OF MANAGER. Nothing herein shall
prevent or restrict the Manager or any of its officers, employees or Affiliates
from engaging in any business or rendering services of any kind to any other
Person, including investment in, or advisory service to others investing in, any
type of real estate assets, including assets which meet the principal portfolio
objectives of the Company, except that, without the consent of the Board of
Directors, which consent shall not be unreasonably withheld, the Manager shall
not provide general management services to any REIT or similar entity other than
the Company and its subsidiaries and affiliates other than acting as a manager
to CAI. Directors, officers, employees and agents of the Manager or Affiliates
of the Manager may serve as directors, officers, employees, agents, nominees or
signatories for the Company or any subsidiary of the Company, to the extent
permitted by their Governing Instruments, as from time to time amended, or by
any resolutions duly adopted by the Board of Directors pursuant to its Governing
Instruments. When executing documents or otherwise acting in such capacities
for the Company, such persons shall use their respective titles in the Company.
Section 4. COMMITMENTS. In order to meet the portfolio requirements
of the Company, as determined by the Board of Directors from time to time, the
Manager agrees to
<PAGE>
22
issue on behalf of the Company Commitments on such terms as are established by
the Board of Directors, including a majority of the Independent Directors, for
the acquisition of Mortgage Assets originated by, or acquired from, any Person.
Section 5. BANK ACCOUNTS. At the direction of the Board of
Directors, the Manager may establish and maintain one or more bank accounts in
the name of the Company or any subsidiary of the Company, and may collect and
deposit into any such account or accounts, and disburse funds from any such
account or accounts, under such terms and conditions as the Board of Directors
may approve; and the Manager shall from time to time render appropriate
accountings of such collections and payments to the Board of Directors and, upon
request, to the auditors of the Company or any subsidiary of the Company. Such
accounts shall be insured by the FDIC.
Section 6. RECORDS; CONFIDENTIALITY. The Manager shall maintain
appropriate books of account and records relating to services performed
hereunder, and such books of account and records shall be accessible for inspec-
tion by representatives of the Company or any subsidiary of the Company at any
time during normal business hours. The Manager shall keep confidential any and
all information obtained in connection with the services rendered hereunder and
shall not disclose any such information to nonaffiliated
<PAGE>
23
third parties except with the prior written consent of the Board of Directors.
Section 7. OBLIGATIONS OF MANAGER.
(a) The Manager shall require each seller or transferor of
Mortgage Assets to the Company to make such representations and warranties
regarding such Mortgage Assets as may, in the judgment of the Manager, be
necessary and appropriate. In addition, the Manager shall take such other
action as it deems necessary or appropriate with regard to the protection of the
Company's assets. Notwithstanding any other provision herein, the Manager shall
act in accordance with any portfolio management guidelines that may be
established by the Board of Directors and, in the absence of specific
guidelines, in accordance with industry standards.
(b) The Manager shall refrain from any action which would
adversely affect the status of the Company as a REIT or, if applicable, any
subsidiary of the Company as a REIT or as a qualified REIT subsidiary or which
would violate any law, rule or regulation of any governmental body or agency
having jurisdiction over the Company or any such subsidiary or which would
otherwise not be permitted by the Company's or such subsidiary's Governing
Instruments. If the Manager is ordered to take any such action by the Board of
Directors, the Manager shall promptly notify the Board of Directors of the
Manager's judgment that such action would adversely affect such status or
violate any
<PAGE>
24
such law, rule or regulation or the Governing Instruments and refrain from
taking such action pending further clarification from the Board of Directors.
If the Manager receives further clarification or instructions expressly ordering
that the action be taken, the Manager shall act as instructed by the Board of
Directors and shall have no liability for such action. Notwithstanding the
foregoing, the Manager, its directors, officers, stockholders and employees
shall not be liable to the Company, any Affiliated Issuer, any subsidiary of the
Company, the Independent Directors or the Company's or its subsidiary's
stockholders for any act or omission by the Manager, its directors, officers,
stockholders or employees except as provided in Section 13 of this Agreement.
Section 8. INVESTMENT COMPANY STATUS.
Notwithstanding any other provision of this Agreement to the contrary,
the Company and the Manager each shall use its best efforts to refrain from
taking any action which, in its judgment made in good faith and with the
exercise of reasonable care, would cause the Company or any subsidiary of the
Company to be required to register as an investment company under the Investment
Company Act of 1940, as amended (the "Investment Company Act"). It shall be the
duty of the Manager to perform such calculations necessary to insure that the
Company or any subsidiary of the Company shall not be required to register under
the Investment Company Act. If an action is ordered by the Board of Direc-
<PAGE>
25
tors, which in the Manager's judgment might cause such registration to be
required, the Manager shall promptly notify the Board of Directors and shall
refrain from taking such action pending further clarification or instructions
from the Board of Directors. If the Manager receives further clarification or
instructions expressly ordering that the action be taken, the Manager shall act
as instructed by the Board of Directors and shall have no liability for such
action.
Section 9. COMPENSATION.
(a) BASE FEE. Subject to Sections 9(c) and 9(e) hereof, the
Company shall pay to the Manager, for services rendered under this Agreement, a
base management fee in an amount equal to 3/8 of 1% per annum of the Average
Invested Assets of the Company during each fiscal year. An amount equal to 3/32
of 1% of the Average Invested Assets for each fiscal quarter (pro rata based on
the number of days elapsed during any partial fiscal quarter), shall be paid to
the Manager, as provided by, and subject to adjustment under, Section 9(e) of
this Agreement.
(b) INCENTIVE COMPENSATION. The Company shall pay the Manager
as incentive compensation a yearly fee, in an amount equal to 20% of the dollar
amount, if any, by which the Cash Distributions of the Company for each fiscal
year exceeds an amount equal to the Stockholders Equity multiplied by the Ten
Year U.S. Treasury Rate plus one percentage point. If the Cash Distributions of
the
<PAGE>
26
Company are less than the amount equal to the Stockholders Equity multiplied by
the Ten Year U.S. Treasury Rate plus one percentage point, the Manager shall
refund to the Company the net year-to-date incentive compensation previously
paid to the Manager during the current fiscal year, if any.
The quarterly payment of such amount by the Company to the Manager, or
refund to the Company from the Manager in the event the incentive compensation
for any year-to-date period is less than the incentive compensation computed and
paid to the Manager as of the previous year-to-date period, shall be computed
each fiscal quarter on a cumulative year-to-date basis in an amount equal to
(A) 20% of the dollar amount, if any, by which the year-to-date Cash
Distributions applicable to such fiscal quarter, exceeds an amount equal to the
Stockholders Equity for such year-to-date period multiplied by the year-to-date
Ten Year U.S. Treasury Rate plus one percentage point multiplied by the number
of quarters during such year-to-date period divided by four; and (B) minus the
year-to-date incentive compensation computed for the prior fiscal quarter. If
the year-to-date incentive compensation computed through such fiscal quarter of
the Company is less than the net year-to-date incentive compensation computed
for the previous year-to-date fiscal quarter, the Manager shall refund to the
Company the lesser of (i) the difference between the net year-to-date incentive
compensation computed for the
<PAGE>
27
previous year-to-date fiscal quarter and the net year-to-date incentive
compensation computed for the current fiscal quarter or (ii) the net year-to-
date incentive compensation computed for the previous year-to-date fiscal
quarter, if any. Such quarterly payment shall be paid to the Manager, or
refunded to the Company, as provided by, and subject to adjustment under,
Section 9(e) of this Agreement. A sample calculation of the incentive
compensation is shown in Exhibit A.
(c) LIMITATION ON BASE FEE AND INCENTIVE COMPENSATION.
(i) REDUCTION OF BASE FEE AND INCENTIVE COMPENSATION.
During any fiscal quarter, the base management fee described in
Section 9(a) above and incentive compensation described in Section 9(b)
above shall be reduced by the amount, up to the total amount of such base
management fee and incentive compensation, by which the year-to-date Total
Operating Expenses (as defined below) of the Company and its subsidiaries
exceed the greater of 2% of its Average Invested Assets multiplied by the
number of quarters during such year-to-date period divided by four or 25%
of its year-to-date Cash Distributions through such fiscal quarter,
provided, however, that a majority of the Independent Directors may waive
part or all of any such reduction to the extent that they determine, based
upon unusual or nonrecurring factors which they deem sufficient,
<PAGE>
28
that a higher level of expenses is justified for such year.
(ii) RECOVERY OF BASE FEE AND INCENTIVE COMPENSATION. If at
the close of any fiscal year the limitation on the base management fee and
incentive compensation pursuant to Section 9(c)(i) above is imposed, the
Manager shall be entitled to recover without interest any reduction of fees
during such fiscal year pursuant to Section 9(c)(i) when, if, and to the
extent that, the Total Operating Expenses of the Company and its
subsidiaries in any future calendar year, including the recovery of the
base management fee and incentive compensation or any portion thereof, are
less than the greater of 2% of the Company's Average Invested Assets or 25%
of its Cash Distributions for such year.
(iii) TOTAL OPERATING EXPENSES. For the purposes of Section
9(c) only, "Total Operating Expenses" for any period means the aggregate
year-to-date expenses for such period of every character payable by the
Company which constitute ordinary operating expenses of the Company,
exclusive of:
(1) expenses relating to raising capital and all
interest and discounts;
(2) taxes and license fees;
(3) expenses connected directly with the issuance,
sale and distribution, and of list-
<PAGE>
29
ing on any stock exchange, of securities of the Company including, but not
limited to, underwriting and brokerage discounts and commissions, private
placement fees and expenses, legal and accounting costs, printing,
engraving and mailing costs, and listing and registration fees;
(4) expenses connected directly with the acquisition,
disposition, operation, maintenance, management (including the Administra-
tive fee) or ownership of the Company's assets, including but not limited
to costs of foreclosure, maintenance, repair and improvement of property,
maintenance and protection of the lien of mortgages, property management
fees, loan origination fees, servicing and master servicing fees, legal
fees, premiums for insurance on property owned by or mortgaged to the
Company, taxes, brokerage and acquisition fees and commissions, appraisal
fees, title insurance and abstract expenses, provisions for depreciation,
depletion and amortization, disposition fees and subordinated real estate
commissions, and losses on the disposition of assets and provisions for
such losses;
(5) fees and expenses payable to public accountants,
consultants, or persons employed for the Company directly by the Board of
Directors;
(6) legal, accounting and other expenses incurred in
connection with (a) formal or
<PAGE>
30
informal administrative actions or legal proceedings which involve a
challenge of the status of the Company as a REIT, (b) advice regarding
obtaining or maintaining such status, (c) determination by the Company of
its taxable income as computed in accordance with the REIT provisions of
the Internal Revenue Code or (d) a claim that the activities of the Company
or of any member of the Board of Directors, officer or stockholder of the
Company were improper;
(7) expenses of organizing, reorganizing or
terminating the Company;
(8) non cash expenditures (including depreciation,
amortization and bad debt reserves);
(9) fees and expenses of transfer agents, registrars,
warrant agents, right agents, dividend payment and dividend reinvestment
agents, escrow holders and indenture trustees;
(10) all expenses connected with communications to
holders of securities of the Company and other bookkeeping and clerical
work necessary in maintaining relations with holders of securities,
including the costs of printing and mailing certificates for securities,
proxy solicitation materials and reports to such holders and the cost of
holding meetings of holders of securities of the Company; and
(11) legal, accounting, printing and other costs,
including clerical costs, of reports
<PAGE>
31
required to be filed with state or federal governmental agencies.
(d) ADMINISTRATIVE FEE. Unless otherwise agreed by the parties
hereto, in addition to any other fee payable to the Manager under this
Agreement, the Manager shall be paid:
(i) for each Series of CMOs issued or owned by the Company
or any subsidiary of the Company and with respect to which the Manager or
any Affiliate of the Manager serves as manager, in the case of CMOs sold or
intended to be sold primarily to institutional investors, the lesser of
(A) $35,000 annually and (B) an annual amount equal to $35,000 multiplied
by the percentage ownership of the Company or such subsidiary of the
Company in such CMO, or in the case of CMOs sold or intended to be sold
primarily to retail investors, the lesser of (C) $10,000 annually and
(D) an annual amount equal to $10,000 multiplied by the percentage
ownership of the Company or such subsidiary of the Company in such CMO;
(ii) for each Series of CMOs issued or owned by the Company
or any subsidiary of the Company and with respect to which the Manager or
any Affiliate of the Manager does not serve as manager, in the case of CMOs
sold or intended to be sold primarily to institutional investors, the
lesser of (A) $10,000 annually and (B) an annual amount equal to $10,000
<PAGE>
32
multiplied by the percentage ownership of the Company or such subsidiary of
the Company in such CMO, or in the case of CMOs sold or intended to be sold
primarily to retail investors, the lesser of (C) $5,000 annually and (D) an
annual amount equal to $5,000 multiplied by the percentage ownership of the
Company or such subsidiary of the Company in such CMOs; or
(iii) for each Series of Non-Agency MBS Bonds issued or owned
by the Company or any subsidiary of the Company with respect to the first
class of such Series the lesser of (A) $2,500 annually and (B) an annual
amount equal to $2,500 multiplied by the percentage ownership of the
Company or such subsidiary of the Company in such Non-Agency MBS Bonds,
and, for each additional class of such Series (C) $625 annually and (D) an
annual amount equal to $625 multiplied by the percentage ownership of the
Company or such subsidiary of the Company in such Non-Agency MBS Bond.
With respect to any series of CMOs or Non-Agency MBS Bonds issued
or acquired on any day other than the first day of the month, the applicable
portion of such fees shall be calculated as if such CMOs or Non-Agency MBS Bonds
were issued or acquired on the first day of the month following the month in
which they were issued or acquired.
Where the Manager serves as manager for a Series of CMOs issued
by the Company or any subsidiary of the Company, such fees shall be compensation
to the Manager
<PAGE>
33
for bond administration, reinvestment direction, computer operations, special
redemption calculations, preparation in sending bondholder notices and like
functions. Where the Manager serves as manager for a Series of CMOs owned by
but not issued by the Company or any subsidiary of the Company, compensation to
the Manager shall be agreed upon between the issuer of such CMOs and the
Manager. Where the Manager does not serve as manager for a Series of CMOs
issued or owned by the Company or any subsidiary of the Company, such fees shall
be compensation for related accounting functions and overseeing the third-party
management and administration. Notwithstanding any other provision of this
Agreement, the Manager shall be entitled to reimbursement for its actual costs
in providing servicing functions for any pool of Mortgage Loans.
(e) ADJUSTMENT AND PAYMENT. The Manager shall compute the
estimated compensation payable or refundable under Sections 9(a), 9(b), 9(c) and
9(d) hereof as soon as practicable after the end of each fiscal quarter, but no
later than 50 days after the end of each such quarter. A copy of such computa-
tions shall be thereafter promptly submitted to the Company. Such compensation
shall be paid to the Manager, or refunded to the Company, on the first business
day of the third month after such fiscal quarter as payment on account, subject
to adjustment under this Section 9(e) of this Agreement. The aggregate amount
of the Manager's compensation under Sections 9(a), 9(b), 9(c) and
<PAGE>
34
9(d) for each fiscal year shall be adjusted within: (x) 120 days after the end
of such fiscal year; or (y) 120 days after the filing of the Company's federal
income tax return for such fiscal year, whichever is later. Such adjustment
shall be made to reflect additional information provided by the Company's tax
return for such fiscal year. Any excess owed to, or refund owed by, the Manager
shall be paid to the Manager or remitted by the Manager to the Company within
ten days of presentment of the adjustment.
Section 10. COMPENSATION FOR ADDITIONAL SERVICES. If the Company
requests the Manager (or any Affiliate or any officer or employee thereof) to
render services for the Company other than those required to be rendered by the
Manager hereunder, such additional services, if performed, shall be compensated
separately on terms to be agreed upon between such party and the Board of
Directors from time to time. To the extent that the Manager or any Affiliate of
the Manager performs any brokerage, leasing, loan servicing, loan
administration, property management or other similar services for the Company
other than as required hereunder, the rate of compensation for such services
shall be either (a) the rate at which the Manager or such Affiliate of the
Manager is then performing similar services for unaffiliated parties in the same
geographic area or (b) the rate at which qualified unaffiliated persons are then
performing such services for similar investors in the same geographic area.
<PAGE>
35
Section 11. EXPENSES OF THE MANAGER. Without regard to the
compensation received hereunder by the Manager, the Manager shall bear the
following expenses (unless agreed otherwise by the Board of Directors):
(a) Employment expenses of the personnel employed by the
Manager, including, but not limited to, salaries, wages, payroll taxes, and the
cost of employee benefit plans for such employees;
(b) Rent, telephone, utilities, office furniture, equipment,
machinery (including computers), subscriptions and such other overhead expenses
incurred in connection with the conduct of the Manager's business;
(c) Travel and other expenses of directors, officers and
employees of the Manager, except expenses of such persons incurred in connection
with attending meetings, conferences or conventions that relate solely to the
business affairs of the Company or any subsidiary of the Company;
(d) Legal, accounting and auditing fees, and tax advisory and
tax preparation fees, relating to the corporate affairs of the Manager;
(e) If the Manager or an Affiliate acts as bond administrator
for a Series of Mortgage-Backed Obligations, all expenses relating to the
performance of the services set forth in Sections 2(p) and 2(q) of this Agree-
ment for such Series of Mortgage-Backed Obligations;
<PAGE>
36
(f) Expenses incurred (including personnel) in preparation of
the Company's monthly financial statements; and
(g) Miscellaneous administrative expenses incurred in
supervising and monitoring the Company's assets or any subsidiary's assets or
relating to performance by the Manager of its functions hereunder.
If any of the expenses set out above total $5,000 or more
individually, or $15,000 or more in the aggregate and are incurred by the
Manager in part for the purposes of the Company and in part for purposes
unrelated to the Company (including expenses incurred on behalf of CAI), the
Manager shall submit an accounting to the Company's Audit Committee of the Board
of Directors on a quarterly basis to show the allocation of such expenses. The
Manager shall also submit a quarterly schedule of its allocation of expenses
between the Company and CAI.
Section 12. EXPENSES OF THE COMPANY. The Company or any subsidiary
of the Company shall pay all of its expenses, except those that are the
responsibility of the Manager pursuant to Section 11 of this Agreement or other
provisions of this Agreement, and without limiting the generality of the
foregoing, the following expenses of the Company or any subsidiary of the
Company shall be paid by the Company or such subsidiary and shall not be paid by
the Manager:
<PAGE>
37
(a) Expenses related to raising capital, including the cost of
borrowed money, interest payments, discounts, loan and commitment fees, points
and any other related charges;
(b) All license fees and all taxes applicable to the Company or
any subsidiary of the Company, including interest and penalties thereon;
(c) Legal, audit, accounting, underwriting, brokerage, listing,
rating agency, registration and other fees, printing, engraving and other
expenses and taxes incurred in connection with the issuance, sale, distribution,
transfer, registration and stock exchange listing of the securities of the
Company or of any subsidiary of the Company;
(d) Employment expenses, fees and out-of-pocket costs of the
Company and fees and expenses paid to employees, agents, advisers and
independent contractors, consultants, managers, and other agents (other than the
Manager) employed directly by the Company or any subsidiary of the Company or by
the Manager at the request of the Company or such subsidiary for the account of
the Company or the subsidiary;
(e) Expenses connected with the acquisition, disposition,
operation (except for those duties performed by the Manager) and ownership of
the assets of the Company or any subsidiary of the Company, including, without
limitation, commitment, appraisal, guaranty and hedging fees,
<PAGE>
38
brokerage and acquisition fees and commissions, ad valorem taxes, costs of
foreclosure, maintenance, repair and improvement of property, maintenance and
protection of the lien of mortgages, property management fees, loan origination
fees, servicing and master servicing fees, legal fees, premiums for insurance on
property owned by the Company or any subsidiary of the Company and insurance and
abstract expenses; PROVIDED, that with regard to brokerage fees, unless approved
by a majority of the Independent Directors, neither the Manager nor any of its
Affiliates shall charge a brokerage commission or similar fee to the Company or
any subsidiary of the Company in connection with the acquisition, disposition or
ownership of the assets of the Company or the subsidiary;
(f) Expenses of organizing, reorganizing, dissolving or winding-
up the Company or any subsidiary of the Company;
(g) All insurance costs not included in paragraph (e) hereof and
incurred by the Company or any subsidiary of the Company, including without
limitation, the cost of officer and director liability insurance;
(h) Expenses connected with payments of dividends or interest or
distributions in cash or any other form made or caused to be made by the Board
of Directors to holders of the securities of the Company or any subsidiary of
the Company;
(i) Direct Issuance Costs;
<PAGE>
39
(j) All expenses connected with communications to holders of
equity securities or debt securities of the Company or any subsidiary of the
Company and with governmental agencies and the other bookkeeping and clerical
work necessary in maintaining relations with holders of such securities and in
complying with the continuous reporting and other requirements of governmental
bodies or agencies, including, without limitation, the cost of printing and
mailing certificates for such securities and proxy solicitation materials and
reports to holders of the Company's or any subsidiary's securities and reports
to third-parties required under any indenture to which the Company or any
subsidiary of the Company is a party, except such expenses that are the
responsibility of the Manager as set forth in Section 11 hereof, including but
not limited to the expenses listed in Sections 11(a) and 11(b) incurred by the
Manager in connection with this Section 12(j);
(k) Fees and charges of any transfer agent or registrar;
(l) Fees and expenses paid to directors of the Company or any
subsidiary of the Company, except, in each case, directors who are Affiliates of
the Manager;
(m) Legal, accounting and auditing fees, and tax advisory and
tax preparation fees, relating to the operations of the Company or any
subsidiary;
(n) Legal, accounting and auditing fees, tax advisory and tax
preparation fees, consulting fees and
<PAGE>
40
expenses relating to the administration of Mortgage-Backed Obligations issued or
caused to be issued by the Company;
(o) Any judgment rendered against the Company or any subsidiary
of the Company, or against any officer or director of the Company or any
subsidiary of the Company in his capacity as such by any court or governmental
agency;
(p) If the Manager or an Affiliate does not act as bond
administrator for a Series of Mortgage-Backed Obligations issued by an
Affiliated Issuer by or on behalf of the Company, all fees charged by the bond
administrator who performs the services set forth in Sections 2(p) and 2(q) of
this Agreement for such Series of Mortgage-Backed Obligations;
(q) Fees paid to the Manager with the approval of a majority of
the Independent Director for participation by the Company in programs operated
by the Manager for the pricing and acquisition of Mortgage Loans;
(r) Amounts payable by the Company to the Manager under Section
13 of this Agreement;
(s) Third-party fees and expenses incurred by the Manager under
Section 14 of this Agreement; and
(t) Other miscellaneous expenses in connection with the
operation of the Company or any subsidiary of the Company which are not expenses
of the Manager under Section 11 of this Agreement, provided that any such single
expense in excess of $10,000 shall be submitted to the
<PAGE>
41
Company's Audit Committee of the Board of Directors on a quarterly basis.
Section 13. LIMITS OF RESPONSIBILITY OF THE MANAGER.
(a) The Company shall indemnify the Manager and its Affiliates
with respect to all expenses, losses, damages, liabilities, demands, charges or
claims of any nature in respect of acts or omissions of the Manager made in good
faith and in accordance with the standards set forth in this Agreement.
(b) Notwithstanding subsection (a) of this Section 13, the
Company shall not be responsible for any and all losses, damages, costs,
charges, counsel fees, payments, expenses and liabilities arising out of or
attributable to the Manager's failure to comply with the terms of this Agreement
or any action or failure or omission to act by the Manager as a result of the
gross negligence, willful misconduct or lack of good faith of the Manager or any
of its agents or as a result of its or any of their reckless disregard of its
duties and any obligations hereunder, or which arise out of the willful breach
of any representation or warranty of the Manager hereunder.
(c) The Manager shall indemnify and hold harmless the Company
with respect to all expenses, losses, damages, liabilities, demands, charges or
claims of any nature in respect of acts or omissions of the Manager not in
accordance with the standards set forth in this Agreement.
<PAGE>
42
(d) The Manager shall promptly notify the Board of Directors of
any litigation or governmental investigation involving the Company and shall
keep the Board of Directors fully informed of the status of any such litigation
or governmental investigation.
Section 14. POOLING OF MORTGAGE LOANS; ISSUANCE OF MORTGAGE
CERTIFICATES. If the Manager determines it to be in the best interests of the
Company and consistent with the portfolio criteria approved by the Board of
Directors of the Company, the Manager shall, directly or indirectly and on
behalf of the Company, pool Mortgage Loans acquired by the Company and use its
best efforts to have Mortgage Certificates issued backed by such Mortgage Loans
which meet all underwriting and other requirements for such issuance. In
connection therewith, the Manager shall, directly or indirectly and on behalf of
the Company, apply to the respective issuer for a commitment to issue the
related Mortgage Certificates and, once such commitment has been approved,
contract to pool such Mortgage Loans and cause to be issued Mortgage
Certificates backed by such Mortgage Loans, which Mortgage Certificates shall be
owned by and registered in the name, or deposited into a depository institution
for the account, of the Company. After the issuance of such Mortgage
Certificates, unless otherwise specified by the Company, the servicer of the
related Mortgage Loans shall have all responsibilities and duties to the issuer
of such Mortgage Certificates with respect to
<PAGE>
43
such Mortgage Loans and Mortgage Certificates, and shall service such Mortgage
Loans after the issuance of the Mortgage Certificates which they back in
accordance with the requirements of the issuer of such Mortgage Certificates.
In connection therewith, the Manager shall apply conditions of the
Servicing Agreement, and, if deemed appropriate, recommend to the Company the
termination of such Servicing Agreement; acting as a liaison between servicers
and the Company and working with servicers to the extent necessary to improve
their servicing performance; review of and recommendations as to fire losses,
easement problems and condemnation, delinquency and foreclosure procedures with
regard to the Mortgage Loans; review of servicers' delinquency, foreclosing and
other reports on Mortgage Loans; supervising claims filed under any mortgage
insurance policies; and enforcing the obligation of any servicer to repurchase
Mortgage Loans from the Company.
Section 15. NO JOINT VENTURE. The Company and the Manager are not
partners or joint venturers with each other and nothing herein shall be
construed to make them such partners or joint venturers or impose any liability
as such on either of them.
Section 16. TERM. This Agreement shall continue in force until
December 31, 1994 unless otherwise renewed or extended.
<PAGE>
44
Section 17. TERMINATION OF AGREEMENT.
(a) Notwithstanding any other provision of this Agreement to the
contrary, this Agreement may be terminated by either party with or without cause
upon 60 days' written notice. In addition, this Agreement may be terminated at
any time by a majority vote of (i) the Independent Directors or (ii) the holders
of the Common Stock of the Company.
(b) This Agreement may be immediately terminated by the Company
by written notice of termination from the Company to the Manager upon the
occurrence of any of the following events:
(i) if the Manager shall violate any material provision of
this Agreement which, after written notice of such violation, is not cured
within 30 days;
(ii) if the Manager or any of its Affiliates shall be
adjudged bankrupt or insolvent by a court of competent jurisdiction, or any
order shall be made by a court of competent jurisdiction for the
appointment of a receiver, liquidator or trustee of the Manager or any of
its Affiliates or of all or substantially all of its property by reason of
the foregoing or approving any petition filed against the Manager or any of
its Affiliates for its reorganization and such adjudication, order or
petition has not been stayed or discharged pending appeal within 60 days of
its entry;
<PAGE>
45
(iii) if the Manager or any of its Affiliates shall
institute proceedings for voluntary bankruptcy or shall file a petition
seeking reorganization under the federal bankruptcy laws, or for relief
under any law for the relief of debtors, or shall consent to the appoint-
ment of a receiver, or shall make a general assignment for the benefit of
its creditors, or shall admit in writing its inability to pay its debts
generally as they become due;
(iv) if any governmental authority, court or self-regulatory
authority shall withdraw, suspend or revoke or declare invalid any license,
charter, authorization or, registration required or necessary for the con-
duct by the Manager or any of its Affiliates of any material portion of its
business or businesses and such adjudication, order or petition has not
been stayed or discharged pending appeal within 60 days of its entry; or
(v) if any event or circumstances shall occur which
materially impairs the financial condition of the Manager or any of its
Affiliates or the ability of the Manager to perform its obligations
hereunder.
The Manager agrees that if any of the events specified in
subsection (b) of this Section 17 shall occur, it will give written notice
thereof to the Board of Directors within five days after the occurrence of such
event.
<PAGE>
46
Section 18. ASSIGNMENTS.
(a) Except as set forth in Section 18(b) of this Agreement, this
Agreement shall terminate automatically in the event of its assignment, in whole
or in part, by the Manager, unless such assignment is consented to in writing by
the Company with the consent of a majority of the Independent Directors. Any
such assignment shall bind the assignee hereunder in the same manner as the
Manager is bound. In addition, the assignee shall execute and deliver to the
Company a counterpart of this Agreement naming such assignee as Manager. This
Agreement shall not be assigned by the Company without the prior written consent
of the Manager, except in the case of assignment by the Company to a REIT or
other organization which is a successor (by merger, consolidation or purchase of
assets) to the Company, in which case such successor organization shall be bound
hereunder and by the terms of such assignment in the same manner as the Company
is bound hereunder.
(b) Notwithstanding any provision of this Agreement, the Manager
may subcontract and assign any or all of its responsibilities at no additional
cost to the Company under Sections 2(p), 2(q) and 2(r) of this Agreement to any
of its Affiliates, and the Company hereby consents to any such assignment and
subcontracting.
<PAGE>
47
Section 19. ACTION UPON TERMINATION.
(a) Except as provided in Section 19(b) of this Agreement, from
and after the effective date of termination of this Agreement, pursuant to
Sections 16, 17 or 18 of this Agreement, the Manager shall not be entitled to
compensation for further services hereunder, but shall be paid all compensation
accruing to the date of termination. Upon such termination, the Manager shall
forthwith:
(i) Pay over to the Company or any subsidiary of the
Company all money collected and held for the account of the Company or any
subsidiary of the Company pursuant to this Agreement;
(ii) Deliver to the Board of Directors a full accounting,
including a statement showing all payments collected by it and a statement
of all money held by it, covering the period following the date of the last
ended fiscal quarter;
(iii) Deliver to the Board of Directors all property and
documents of the Company or any subsidiary of the Company then in the
custody of the Manager;
(iv) Present an accounting to the Independent Directors of
any accrued compensation pursuant to Section 9 above and an accounting of
any expenses for which it seeks reimbursement; and
(v) If the Company so requests, sell the items listed on
Exhibit B back to the Company at a
<PAGE>
48
price equal to the net book value of such items, computed in accordance
with GAAP, as of the date of termination.
(b) Notwithstanding any provisions of this Agreement, if the
Manager is terminated pursuant to Section 17(a) of this Agreement within twelve
months after the occurrence of any of the events set forth in Section 19(c)
hereunder, the Manager shall be entitled to compensation as follows:
(i) The Manager shall be paid all compensation to the date
of termination; and
(ii) On the final day of each fiscal quarter after the date
of termination and ending one year thereafter, the Manager shall receive an
amount equal to one-quarter of the average of the annual aggregate of all
compensation incurred under this Agreement and its predecessors during the
three fiscal years prior to the fiscal year in which termination occurred.
(c) The events referred to in Section 19(b) are as follows:
(i) Any corporation, person or other entity (other than the
Company, the Manager or their respective affiliates) makes a tender or
exchange offer for shares of the Company's Common Stock pursuant to which
such corporation, person or other entity acquires
<PAGE>
48
15% or more of the issued and outstanding shares of the Company's Common
Stock;
(ii) The stockholders of the Company approve a definitive
agreement to merge or consolidate the Company with or into another
corporation or to sell or otherwise dispose of all or substantially all of
its assets, except in the case of a merger or consolidation with, or sale
to, the Manager or an affiliate of the Manager; or
(iii) Any person, within the meaning of Section 3(a)(9) or
Section 13(d)(3) of the Securities Exchange Act of 1934, acquires more than
15% (30% in the case of a passive investor) of the Company's issued and
outstanding voting securities.
Section 20. RELEASE OF MONEY OR OTHER PROPERTY UPON WRITTEN REQUEST.
The Manager agrees that any money or other property of the Company or any
subsidiary of the Company held by the Manager under this Agreement shall be held
by the Manager as custodian for the Company or such subsidiary, and the
Manager's records shall be appropriately marked clearly to reflect the ownership
of such money or other property by the Company or such subsidiary. Upon the
receipt by the Manager of a written request signed by a duly authorized officer
of the Company requesting the Manager to release to the Company or any
subsidiary of the Company any money or other property then held by the Manager
for the account of the Company or any subsidiary of the Company
<PAGE>
50
under this Agreement, the Manager shall forthwith release such money or other
property to the Company or such subsidiary. The Manager shall not be liable to
the Company, any subsidiary of the Company, the Independent Directors, or the
Company's or its subsidiary's stockholders for any acts performed or omissions
to act by the Company or any subsidiary of the Company in connection with the
money or other property released to the Company or any subsidiary of the Company
in accordance with this Section. The Company and any subsidiary of the Company
shall indemnify the Manager, its directors, officers and employees against any
and all expenses, losses, damages, liabilities, demands, charges and claims of
any nature whatsoever, which arise in connection with the Manager's release of
such money or other property to the Company or any subsidiary of the Company in
accordance with the terms of this Section 20 of this Agreement, except insofar
as such expenses, losses, damages, liabilities, demands, charges and claims
arise out of acts of the Manager, its directors, officers and employees
constituting bad faith, willful misconduct, gross negligence or reckless
disregard of their duties. Indemnification pursuant to this provision shall be
in addition to any right of the Manager to indemnification under Section 13 of
this Agreement.
<PAGE>
51
Section 21. REPRESENTATIONS AND WARRANTIES.
(a) The Company hereby represents and warrants to the Manager as
follows:
(i) The Company has been duly organized and is validly
existing and in good standing under the laws of the State of Maryland; the
Company has the corporate power to own its assets and to transact the
business in which it is now engaged and is duly qualified as a foreign
corporation and in good standing under the laws of each jurisdiction where
its ownership or lease of property or the conduct of its business requires
such qualification, except for failures to be so qualified, authorized or
licensed that could not in the aggregate have a material adverse effect on
the business operations, assets or financial condition of the Company and
its subsidiaries, taken as a whole. The Company does not do business under
any fictitious business name.
(ii) The Company has the corporate power and authority to
execute, deliver and perform this Agreement and all obligations required
hereunder and has taken all necessary corporate action to authorize the
execution, delivery and performance of this Agreement and all obligations
required hereunder. No consent of any other person including, without
limitation, directors, stockholders and creditors of the Company, and no
license, permit, approval or authoriza-
<PAGE>
52
tion of, exemption by, notice or report to, or registration, filing or
declaration with, any governmental authority is required by the Company in
connection with this Agreement or the execution, delivery, performance,
validity or enforceability of this Agreement and all obligations required
hereunder. This Agreement has been, and each instrument or document
required hereunder will be, executed and delivered by a duly authorized
officer of the Company, and this Agreement constitutes, and each instrument
or document required hereunder when executed and delivered hereunder will
constitute, the legally valid and binding obligation of the Company
enforceable against the Company in accordance with its terms.
(iii) The execution, delivery and performance of this
Agreement and the documents or instruments required hereunder will not
violate any provision of any existing law or regulation binding on the
Company, or any order, judgment, award or decree of any court, arbitrator
or governmental authority binding on the Company, or the Governing
Instruments of, or any securities issued by, the Company or of any
mortgage, indenture, lease, contract or other agreement, instrument or
undertaking to which the Company is a party or by which the Company or any
of its assets may be bound, the violation of which would have a material
adverse effect on the business operations, assets or
<PAGE>
53
financial condition of the Company and its subsidiaries, taken as a whole,
and will not result in, or require, the creation or imposition of any lien
on any of its property, assets or revenues pursuant to the provisions of
any such mortgage, indenture, lease, contract or other agreement,
instrument or undertaking.
(b) The Manager hereby represents and warrants to the Company as
follows:
(i) The Manager is duly organized, validly existing and in
good standing under the laws of the State of Delaware; the Manager has the
power to own its assets and to transact the business in which it is now
engaged and is duly qualified to do business and is in good standing under
the laws of each jurisdiction where its ownership or lease of property or
the conduct of its business requires such qualification, except for
failures to be so qualified, authorized or licensed that could not in the
aggregate have a material adverse effect on the business operations, assets
or financial condition of the Manager and its subsidiaries, taken as a
whole. The Manager does not do business under any fictitious business
name.
(ii) The Manager has the power and authority to execute,
deliver and perform this Agreement and all obligations required hereunder
and has taken all necessary corporate action to authorize the execution,
delivery and performance of this
<PAGE>
54
Agreement and all obligations required hereunder. No consent of any other
person including, without limitation, directors and creditors of the
Manager, and no license, permit, approval or authorization of, exemption
by, notice or report to, or registration, filing or declaration with, any
governmental authority is required by the Manager in connection with this
Agreement or the execution, delivery, performance, validity or enforcea-
bility of this Agreement and all obligations required hereunder. This
Agreement has been, and each instrument or document required hereunder will
be, executed and delivered by a duly authorized agent of the Manager, and
this Agreement constitutes, and each instrument or document required here-
under when executed and delivered hereunder will constitute, the legally
valid and binding obligation of the Manager enforceable against the Manager
in accordance with its terms.
(iii) The execution, delivery and performance of this
Agreement and the documents or instruments required hereunder, will not
violate any provision of any existing law or regulation binding on the
Manager, or any order, judgment, award or decree of any court, arbitrator
or governmental authority binding on the Manager, or the Governing
Instruments of, or any securities issued by, the Manager or of any mort-
gage, indenture, lease, contract or other agreement,
<PAGE>
55
instrument or undertaking to which the Manager is a party or by which the
Manager or any of its assets may be bound, the violation of which would
have a material adverse effect on the business operations, assets or
financial condition of the Manager and its subsidiaries, taken as a whole,
and will not result in, or require, the creation or imposition of any lien
on any of its property, assets or revenues pursuant to the provisions of
any such mortgage, indenture, lease, contract or other agreement,
instrument or undertaking.
Section 22. NOTICES. Unless expressly provided otherwise herein, all
notices, requests, demands and other communications required or permitted under
this Agreement shall be in writing and shall be deemed to have been duly given,
made and received when delivered against receipt or upon actual receipt of
registered or certified mail, postage prepaid, return receipt requested,
addressed as set forth below:
(a) If to the Company:
3600 South Yosemite Street
Suite 900
Denver, Colorado 80237
Attention: President
with a copy given in the manner prescribed above, to the
Chief Operating Officer/Chief Financial Officer, Chief
Accounting Officer and each member of the Board of Directors
at their addresses as set forth in the records of the
Company.
If to the Manager:
<PAGE>
56
3600 South Yosemite Street
Suite 900
Denver, Colorado 80237
Attention: President
with a copy given in the manner prescribed above, to the
General Counsel at the same address.
Either party may alter the address to which communications or copies
are to be sent by giving notice of such change of address in conformity with the
provisions of this Section 22 for the giving of notice.
Section 23. BINDING NATURE OF AGREEMENT; SUCCESSORS AND ASSIGNS.
This Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective heirs, personal representatives, successors and
assigns as provided herein.
Section 24. ENTIRE AGREEMENT. This Agreement contains the entire
agreement and understanding between the parties hereto with respect to the
subject matter hereof. The express terms hereof control and supersede any
course of performance and/or usage of the trade inconsistent with any of the
terms hereof. This Agreement may not be modified or amended other than by an
agreement in writing.
Section 25. CONTROLLING LAW. This Agreement and all questions
relating to its validity, interpretation, performance and enforcement shall be
governed by and construed, interpreted and enforced in accordance with the laws
of the State of Colorado, notwithstanding any Colorado or other conflict-of-law
provisions to the contrary.
<PAGE>
57
Section 26. COUNTERPARTS. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
shall constitute one and the same instrument.
Section 27. COMPUTATION OF INTEREST. Interest will be computed on
the basis of a 360-day year consisting of twelve months of thirty days each.
Section 28. INDULGENCES, NOT WAIVERS. Neither the failure nor any
delay on the part of a party to exercise any right, remedy, power or privilege
under this Agreement shall operate as a waiver thereof, nor shall any single or
partial exercise of any right, remedy, power or privilege preclude any other or
further exercise of the same or of any other right, remedy, power or privilege,
nor shall any waiver of any right, remedy, power or privilege with respect to
any occurrence be construed as a waiver of such right, remedy, power or
privilege with respect to any other occurrence. No waiver shall be effective
unless it is in writing and is signed by the party asserted to have granted such
waiver.
Section 29. COSTS AND EXPENSES. Each party hereto shall bear its own
costs and expenses (including the fees and disbursements of counsel and
accountants) incurred in connection with the negotiations and preparation of and
the closing under this Agreement, and all matters incident thereto.
<PAGE>
58
Section 30. SCHEDULES AND EXHIBITS. All Schedules and Exhibits
referred to herein or attached hereto are hereby incorporated by reference into,
and made a part of, this Agreement.
<PAGE>
59
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
ASSETS INVESTORS CORPORATION
By:
----------------
------------
Spencer I. Browne
President and Chief
Executive Officer
FINANCIAL ASSET MANAGEMENT
CORPORATION
By:
----------------
------------
<PAGE>
MANAGEMENT AGREEMENT
THIS AGREEMENT, dated as of August __, 1993 by and between Commercial
Assets, Inc., a Maryland corporation (the "Company"), and Financial Asset
Management Corporation, a Delaware corporation (the "Manager").
W I T N E S S E T H:
WHEREAS, the Company desires to retain the Manager to manage the
assets of the Company and to perform administrative services for the Company in
the manner and on the terms set forth herein;
NOW, THEREFORE, in consideration of the mutual agreements herein set
forth, the parties hereto agree as follows:
SECTION 1. DEFINITIONS. Capitalized terms used but not defined
herein shall have the respective meanings assigned them below.
(a) "Affiliate" means, when used with reference to a specified
person, (i) any person that directly or indirectly controls or is controlled by
or is under common control with the specified person, (ii) any person that is an
officer, director or employee of, partner in or trustee of, or serves in a
similar capacity with respect to, the specified person, or of which the
specified person is an officer, director or employee of, partner in or trustee
of or with respect to which the specified person serves in a similar capacity,
(iii) any person that, directly or indirectly, is the beneficial owner of 5% or
more of any class of equity securities issued by the specified person, or any
person 5% or more of whose equity securities are, directly or indirectly
beneficially owned by such other person, or (iv) any person that has a material
business or professional relationship with the specified person, PROVIDED,
however, that a person shall not be deemed to be an Affiliate of the Manager or
of any person that is an Affiliate of the Manager solely by reason of servicing
as a director of one or more investment companies of which the Manager
<PAGE>
or an Affiliate of the Manager serves as investment advisor or in any other
capacity;
(b) "Affiliated Issuer" means any Person that issues Mortgage-Backed
Obligations and which is organized by or on behalf of the Company;
(c) "Agreement" means this Management Agreement, as amended from time
to time;
(d) "Average Invested Assets" for any period means the average of the
aggregate book value of the consolidated assets of the Company, its trusts and
subsidiaries, computed in accordance with GAAP, invested, directly or
indirectly, in equity interests in and loans secured by real estate, including
assets that are pledged to secure Mortgage-Backed Obligations, after reserves
for depreciation or bad debts or other similar noncash reserves, less the book
value of a minority interest (the portion of equity interest in a Mortgage-
Backed Obligation not owned by the Company) and the liabilities associated with
issued and outstanding Mortgage-Backed Obligations of the Company, its trusts
and subsidiaries, computed for any period by adding the Average Invested Assets
at the end of each month during such period and dividing by the number of months
in the period (provided that Average Invested Assets shall not include cash,
certificates of deposit, treasury instruments and other non-real estate related
assets);
(e) "Average Net Worth" means for any period, the gross proceeds of
all offerings of equity securities of the Company times the number of calendar
days during such period that the proceeds of each such offering were available
for use by the Company divided by the total number of calendar days in such
period, together with (a) for the first quarter of the current fiscal year, the
Company's Tax Retained Earnings (Losses) at the beginning of the first quarter
or (b) for each subsequent year-to-date cumulative quarterly period of the year
for which a calculation is required pursuant to Section 9(b) hereof, the average
of the Company's Tax Retained Earnings (Losses) computed by adding the Company's
Tax Retained Earnings (Losses) as of the beginning of each fiscal quarter during
such year-to-date period divided by the number of quarters in such period. A
sample calculation of Average Net Worth is shown in Exhibit A;
2
<PAGE>
(f) "Board of Directors" means the Board of Directors of the Company;
(g) "CMO Administration Services" means the services provided by the
Manager pursuant to Section 2(q) hereof;
(h) "CMO Issuance Services" means the services provided by the
Manager pursuant to Section 2(p) hereof;
(i) "Commitment" means, with respect to any Mortgage Instrument, the
agreement containing the terms pursuant to which the Company agrees to acquire
on a forward basis such Mortgage Instrument from any Person;
(j) "Company" means Commercial Assets, Inc., a Delaware corporation,
for all purposes; provided, however, that with respect to references to Series
of Mortgage-Backed Obligations issued by the Company, the term "Company" shall
include subsidiaries of the Company which issue such Mortgage-Backed
Obligations;
(k) "Conforming Mortgage Loan" means a mortgage loan that complies
with the requirements for inclusion in a guaranty or purchase program sponsored
by any of FNMA, FHLMC or GNMA;
(l) "Conventional Mortgage Loan" means a mortgage loan that is not
insured by the FHA or guaranteed by the VA;
(m) "Direct Issuance Costs" means all fees and expenses incurred in
connection with the issuance of Mortgage-Backed Obligations issued or caused to
be issued by the Company, including trustee, accounting, consulting, legal,
rating agency, registration, printing and engraving, tax advisory and tax
preparation (but not including preparation of annual tax returns) fees and
expenses, underwriting discounts, up-front master servicing fees, and up-front
costs of credit enhancements;
(n) "FDIC" means the Federal Deposit Insurance Corporation or any
successor or assign or any resulting, surviving or transferee entity;
(o) "FHA" means the Federal Housing Administration of the Department
of Housing and Urban Develop-
3
<PAGE>
ment of the United States of America or any successor or assign or any
resulting, surviving or transferee entity;
(p) "FHA Loan" means a mortgage loan insured by the FHA;
(q) "FHLMC" means the Federal Home Loan Mortgage Corporation, a
corporation organized and existing under the laws of the United States of
America, or any successor or assign or any resulting, surviving or transferee
entity;
(r) "FHLMC Certificate" means a FHLMC mortgage participation
certificate;
(s) "FNMA" means the Federal National Mortgage Association, a
corporation organized and existing under the laws of the United States of
America, or any successor or assign or any resulting, surviving or transferee
entity;
(t) "FNMA Certificate" means a FNMA mortgage pass-through
certificate;
(u) "GAAP" means generally accepted accounting principles;
(v) "GNMA" means the Government National Mortgage Association, a
corporation organized and existing under the laws of the United States of
America, or any successor or assign or any resulting, surviving or transferee
entity;
(w) "GNMA Certificate" means a fully-modified pass-through mortgage-
backed certificate guaranteed by GNMA;
(x) "Governing Instruments" means, the Company's Certificate of
Incorporation, as amended, By-Laws, as amended, and any resolutions duly adopted
by the Board of Directors;
(y) "Internal Revenue Code" or "Code", means the Internal Revenue
Code of 1986, as amended;
4
<PAGE>
(z) "Mortgage Assets" means, collectively, Mortgage Instruments,
Residual Interests and Mortgage-Backed Obligations;
(aa) "Mortgage-Backed Obligations" means, collectively,
collateralized mortgage obligations, mortgage-backed bonds and mortgage
collateralized debt, mortgage pass-through obligations or other instruments
collateralized by, or representing interests in, mortgage debt or Mortgage
instruments;
(bb) "Mortgage Certificates" means, collectively (i) GNMA
Certificates, (ii) FHLMC Certificates, (iii) FNMA Certificates and (iv) any
other mortgage certificates; including private label pass-through certificates,
and other mortgage instruments as reasonably determined by the Company;
(cc) "Mortgage Finance Companies" means entities which own and
finance Mortgage Instruments;
(dd) "Mortgage Instruments" means, collectively, Mortgage
Certificates and Mortgage Loans;
(ee) "Mortgage Interests" means an equity interest in Mortgage
Finance Companies;
(ff) "Mortgage Loans" means, collectively, Conforming Mortgage
Loans and Non-conforming Mortgage Loans;
(gg) "Net Income" means the Company's taxable income including
capital gains and capital losses arising from the Company's operations before
(i) the manager's incentive compensation, (ii) net operating loss deductions
arising from losses in prior periods, (iii) special-deductions permitted by the
Internal Revenue Code in calculating taxable income for a REIT, and (iv) the
deduction arising from the exercise of stock options permitted under Code
Section 83 and the deduction for dividend equivalent rights. In addition,
taxable income, for this computation, will also be adjusted for all mortgage
derivative interests in which the Company's basis is different from the current
reportable tax basis in such mortgage derivative interests. In such situations,
GAAP income will be substituted for taxable in-
5
<PAGE>
come. In addition, taxable income will also be reduced by 25% of the expense
otherwise deductible for tax purposes relating to the exercise of stock options
and the issuance of Common Stock relating to dividend equivalent rights;
(hh) "Non-conforming Mortgage Loan" means a mortgage loan that
meets the requirements of the guaranty programs of either FNMA, FHLMC or GNMA;
except for the requirements with respect to the maximum original outstanding
principal amounts of such mortgage loans and such other particular requirements
of such programs presented to and approved by the Board of Directors;
(ii) "Other Mortgage Assets" means (i) interest-only
certificates, (ii) principal-only certificates, (iii) subordinated interests in
mortgage pass-through transactions and (iv) other mortgage-derivative assets;
(jj) "Person" means a natural person, corporation, partnership,
association, trust (including any beneficiary thereof), company, joint venture,
joint stock company, unincorporated organization or other entity;
(kk) "REIT" means a real estate investment trust under the
Internal Revenue Code;
(ll) "Residual Interests" mean interests in Mortgage-Backed
Obligations that entitle the holder to receive excess cash flow from the
collateral pledged to secure such obligations;
(mm) "Repurchase Agreement" means a financing transaction
pursuant to which the Company would sell Mortgage Assets for cash and
simultaneously agree to repurchase them at a specified date or the same amount
of cash plus an interest component;
(nn) "Series of Mortgage-Backed Obligations" means a separate
series of Mortgage-Backed Obligations issued or caused to be issued by the
Company or an Affiliated Issuer or other person pursuant to an indenture or
other agreement;
6
<PAGE>
(oo) "Servicing Agreement" means a servicing agreement between
the Company and any servicer of the Company's Mortgage Loans;
(pp) "Stockholders" means the registered owners of the shares of
common stock of the Company;
(qq) "Tax Retained Earnings (Losses)" for purposes of computing
the incentive compensation pursuant to section 9(b) of this Agreement, shall be
commuted as follows: (a) at the beginning of the first quarter of the current
fiscal year, the sum of the tax retained earnings at the beginning of the fourth
quarter of the prior fiscal year plus net income for the fourth quarter of the
prior fiscal year computed in accordance with the management agreement in effect
during such prior fiscal year minus dividends declared during the fourth quarter
of the prior fiscal year; or (b) at the beginning of each subsequent quarter of
the current fiscal year, the sum of the Tax Retained Earnings (Losses) at the
beginning of the prior fiscal quarter plus Net Income for the prior fiscal
quarter minus dividends declared during the prior fiscal quarter. [An estimate
of Tax Retained Earnings for 1993 is shown in Exhibit A];
(rr) "Ten Year U.S. Treasury Rate" for any period means the
arithmetic average of the weekly average yield to maturity for actively traded
current coupon U.S. Treasury fixed interest rate securities (adjusted to
constant maturities of ten years) published by the Federal Reserve Board during
such period, or, if such rate is not published by the Federal Reserve Board,
then any Federal Reserve Bank or agency or department of the federal government
selected by the Company; or, if the Company determines in good faith that for
any reason the Company cannot determine the Ten Year U.S. Treasury Rate for any
period as provided above, then the Ten Year U.S. Treasury Rate for such period
shall be the arithmetic average of the per annum average yields to maturity,
based upon the closing asked price on each business day during such period, as
chosen and quoted in New York City for each business day (or less frequently if
daily quotations shall not be generally available) by at least three recognized
dealers in U.S. government securities selected by the Company, for each actively
traded marketable U.S. Treasury fixed interest rate security (other than securi-
7
<PAGE>
ties which can, at the option of the holder, be surrendered at face value in
payment of any federal estate tax) with a final maturity date not less than
eight nor more than twelve years from the date of such closing asked price;
(ss) "Total Operating Expenses" means the expenses indicated in
Section 9(c)(iii);
(tt) "Independent Directors" shall have the meaning ascribed to
that term in the By-Laws of the Company, as the same may be amended or
supplemented from time to time;
(uu) "VA" means the Veterans Administration of the United States
of America, or any successor or assign or any resulting, surviving or transferee
entity; and
(vv) "VA Loan" means a mortgage loan partially guaranteed by the
VA.
SECTION 2. GENERAL DUTIES OF THE MANAGER.
The Manager undertakes to use its best efforts (i) present to the
Company asset acquisition opportunities consistent with the policies and
objectives of the Company and (ii) furnish the Board of Directors with
information concerning the making, acquisition, holding and disposing of assets.
Subject to the supervision and control of the Board of Directors, the Manager
shall provide services to the Company and, to the extent directed by the Board
of Directors, shall provide similar services to any Affiliated Issuer, if any,
or subsidiary of the Company as follows:
(a) serve as the Company's consultant with respect to the formulation
of asset acquisition criteria and policy guidelines for recommendation to the
Board of Directors;
(b) counsel the Company in connection with policy decisions to be
made by the Board of Directors;
(c) issue commitments on behalf of the Company to acquire Mortgage
Assets;
8
<PAGE>
(d) represent the company in connection with the acquisition and
accumulation of Mortgage Assets;
(e) furnish reports and statistical and economic research to the
Company regarding the Company's portfolio activities and the services performed
for the Company by the Manager as reasonably requested by the Board of
Directors;
(f) monitor and provide to the Board of Directors, on an on-going
basis, rate information and other data regarding Repurchase Agreements and
alternative lending sources;
(g) negotiate and enter into agreements on behalf of the Company with
banking institutions and other leaders to provide for the borrowing of funds by
the Company;
(h) monitor and provide to the Board of Directors, on an on-going
basis, price information and other data obtained from certain nationally
recognized dealers that maintain markets in Mortgage Assets and Other Mortgage
Assets identified by the Board of Directors from time to time, and provide data
and advise to the Board of Directors in connection with the identification of
such dealers;
(i) provide a full time chief operating officer/chief financial
officer of the Company, a full time chief accounting officer of the Company,
provide the personnel to perform or supervise the duties of the computer
programmer and analyst (including necessary computer support staff), senior
investment officer, controller, shareholder relations, press officer, cash
manager, tax manager (including necessary support staff) (any of which functions
may be performed by the same person or persons) and other personnel necessary to
manage the Company on a day-to-day basis and provide to the Company, commencing
as of the date hereof and thereafter on a semi-annual basis, a list of all the
full time and part time employees of the Manager and a description of the
functions of such employees;
(j) administer the day-to-day operations of the Company and perform
or supervise the performance of such other administrative functions necessary in
the
9
<PAGE>
management of the Company as may be agreed upon by the Manager and the Board of
Directors, including the collection of revenues and the payment of the Company's
expenses, debts and obligations and maintenance of appropriate computer services
to perform such administrative functions;
(k) communicate on behalf of the Company with the holders of the
equity and debt securities of the company as required to satisfy the continuous
reporting and other requirements of any governmental bodies or agencies,
securities exchanges and bond indentures and to maintain effective relations
with such holders;
(l) prepare, draft and file all the Company's filings with the
Securities and Exchange Commission, PROVIDED THAT filing fees, legal fees,
accounting fees and any other third-party fees shall be the responsibility of
the Company;
(m) to the extent not otherwise subject to an agreement executed by
the Company, designate a servicer for those Mortgage Loans sold to the Company
by originators that have elected not to service such loans and arrange for the
monitoring and administering of such servicers;
(n) monitor and administer the servicing of the Company's Mortgage
Loans, other than Mortgage Loans pooled to back Mortgage Certificates or pledged
to secure Mortgage-Backed obligations, including serving as the Company's
consultant with respect to the servicing of loans; collecting information and
submitting reports pertaining to the Mortgage Loans and to moneys remitted to
the Manager or the Company by servicers; periodically reviewing and evaluating
the performance of each servicer to determine its compliance with the terms and
conditions of the servicing agreement and, if deemed appropriate, recommending
to the Company the termination of such servicing agreement; acting as a liaison
between servicers and the Company and working with servicers to the extent
necessary to improve their servicing performance; reviewing recommendations as
to fire losses, easement problems and condemnation, delinquency and foreclosure
procedures with regard to the Mortgage Loans; reviewing servicers, delinquency,
foreclosing and other reports on Mortgage Loans; supervising claims filed under
10
<PAGE>
any mortgage insurance policies; and enforcing the obligation of any servicer to
repurchase Mortgage Loans from the Company;
(o) in accordance with criteria set up by the Board of Directors,
invest or reinvest the Company's cash consistent with the Company's status as a
REIT;
(p) provide to the Company itself or through another appropriate
party (but the Manager shall not charge for the services of such an appropriate
party unless authorized by the Board of Directors) all services in connection
with the issuance of each Series of Mortgage-Backed Obligations issued by the
Company or any Affiliated Issuer, including:
(i) representing the Company with respect to the structuring of
each such Series of Mortgage-Backed Obligations;
(ii) negotiating the rating requirements with rating agencies
with respect to the rating of each such Series of Mortgage-Backed Obligations;
(iii) representing the Company in connection with the acquisition
and accumulation of any Mortgage Instruments and the pooling and exchange of
Mortgage Loans into Mortgage Certificates in connection with each Series of
Mortgage-Backed obligations issued by the Company or any Affiliated Issuer;
(iv) issuing Commitments on behalf of the Company to acquire
Mortgage Instruments to be used to secure or constitute the mortgage pool for
each such Series of Mortgage-Backed Obligations;
(v) with respect to the issuance of each such series of
Mortgage-Backed Obligations for which the underlying collateral consists of
Mortgage Instruments owned by the Company or an Affiliated Issuer, accumulating
and reviewing all Mortgage Instruments which may secure or constitute the
mortgage pool for each such Series of Mortgage-Backed Obligations;
(vi) with respect to the issuance of each such Series of
Mortgage-Backed Obligations for which the underlying collateral does not consist
of Mortgage In-
11
<PAGE>
struments owned by the Company or an Affiliated Issuer, reviewing interest
rates, maturity dates and other attributes of the Mortgage Instruments;
(vii) negotiating all agreements and credit enhancements with
respect to each such Series of Mortgage-Backed Obligations;
(viii) organizing and administering all activities in connection
with the closing of each such Series of Mortgage-Backed Obligations including
all negotiations and agreements with underwriters, trustees, servicers, master
servicers and other parties; and
(ix) performing such other services as may be required from time
to time for completing the issuance of each such Series of Mortgage-Backed
Obligations.
(q) provide to the Company itself or through another appropriate
party (but the Manager shall not charge for the services of such an appropriate
party unless authorized by the Board of Directors) all services in connection
with the administration of each Series of Mortgage-Backed Obligations issued by
the Company or any Affiliated Issuer, including:
(i) communicating on behalf of the Company with the holders of
each such Series of Mortgage-Backed Obligations as required to satisfy the
reporting and tax informational requirements of any governmental bodies or
agencies with respect to holders of each such Series of Mortgage-Backed
obligations and as required to satisfy any governmental bodies and the
provisions of any indenture, pooling and servicing agreement or other agreement
with respect to each such Series of Mortgage-Backed Obligations;
(ii) determining the amount of, and making, all payments with
respect to each such Series of Mortgage-Backed Obligations and directing the
reinvestment of Principal and interest from the Mortgage Instruments in
accordance with the terms of any indenture, pooling and servicing agreement or
other agreement relating to each such Series of Mortgage-Backed Obligations;
12
<PAGE>
(iii) furnishing all reports and statistical information
required with respect to the administration of each such Series of Mortgage-
Backed obligations;
(iv) working with the Company and with accountants, counsel,
trustees, servicers, master servicers and other parties with respect to the
administration of each such Series of Mortgage-Backed Obligations;
(v) assisting trustees and paying agents in distributing all
excess or residual payments with respect to each such Series of Mortgage-Backed
Obligations as directed by the Company or any indenture, pooling and servicing
agreement or other agreement with respect to each such Series of Mortgage-Backed
Obligations;
(vi) monitoring and providing, on an ongoing basis, information
with respect to each such Series of Mortgage Backed Obligations as is required
by the Company;
(vii) advising the Company with respect to the administration of
each such Series of Mortgage-Backed Obligations; and
(viii) performing such other services as may be required from
time to time in connection with the administration of each such Series of
Mortgage-Backed Obligations as the Company shall deem appropriate under the
particular circumstances.
(r) provide to the Company itself or through another appropriate
party (but the Manager shall not charge for the services of such an appropriate
party unless authorized by the Board of Directors) services in connection with
reviewing and monitoring the administration of each series of Mortgage-Backed
Obligations managed by a party other than the Manager or any of its Affiliates,
including:
(i) reviewing monthly financial statements and/or other
financial data prepared by the third-party bond administrator and distributed to
the Company;
13
<PAGE>
(ii) reviewing bond payment information and verifying the excess
cash flow payment received by the Company;
(iii) monitoring on-going expenses related to each series of
Mortgage-Backed Obligations, where expense information has been provided to the
Company;
(iv) reviewing federal income tax reports prepared by the third-
party bond administrator and distributed to the Company, including but not
limited to, reports for real estate mortgage investment conduits; and
(v) providing and preparing for Residual Interests in Mortgage-
Backed Obligations which are accounted for under a level-yield method: (A)
necessary services for computing monthly income in accordance with GAAP; and (B)
the necessary calculations to compute the carrying amount adjustment in
accordance with the Company's accounting principles.
(s) monitor the Company's portfolio with regard to interest rate risk
and recommend to the Board of Directors, and negotiate and enter into on behalf
of the Company, transactions to reduce interest rate risk including, but not
limited to, interest rate swap agreements, forward rate agreements, interest
rate cap agreements, interest rate floor agreements and financial futures and
option contracts in accordance with the criteria established by the Board of
Directors;
(t) perform such other services as may be required from time to time
for management and other activities relating to the assets of the Company as the
Board of Directors shall deem appropriate under the particular circumstances;
(u) provide tax planning and advisory services and prepare and file
on behalf of the Company all filings required by federal, state and local
governments, including but not limited to, federal and state REIT income tax
returns (including the preparation of the related REIT qualification
calculations), personal property tax returns, sales tax returns, payroll tax
returns, franchise tax returns, annual reports and federal and state information
returns; and
14
<PAGE>
(v) provide the executive, administrative and other personnel, office
space and services required in rendering services to the Company listed in this
Section 2.
The Manager agrees to use its best efforts at all times in performing
services for the Company hereunder.
SECTION 3. ADDITIONAL ACTIVITIES OF MANAGER. Nothing herein shall
prevent or restrict the Manager or any of its officers, employees or Affiliates
from engaging in any business or rendering services of any kind to any other
Person, including investment in, or advisory service to others investing in, any
type of real estate assets, including assets which meet the principal portfolio
objectives of the Company, except that, without the consent of the Board of
Directors, which consent shall not be unreasonably withheld, the Manager shall
not provide general management services to any REIT or similar entity.
Notwithstanding the foregoing, the Manager may provide general management
services, including all of the services contemplated hereby or listed in this
Section 3: (1) to any subsidiary or Affiliate of the Company, and (2) to Asset
Investors Corporation ("AIC"), and its subsidiaries and Affiliates. Directors,
officers, employees and agents of the Manager or Affiliates of the Manager may
serve as directors, officers, employees, agents, nominees or signatories for the
Company or any subsidiary of the Company, to the extent permitted by their
Governing Instruments, as from time to time amended, or by any resolutions duly
adopted by the Board of Directors pursuant to its Governing Instruments. When
executing documents or otherwise acting in such capacities for the Company, such
persons shall use their respective titles in the Company.
SECTION 4. COMMITMENTS. In order to meet the portfolio requirements
of the Company, as determined by the Board of Directors from time to time, the
Manager agrees to issue on behalf of the Company Commitments on such terms as
are established by the Board of Directors, including a majority of the
Unaffiliated Directors, for the acquisition of Mortgage Instruments originated
by, or acquired from, any Person.
15
<PAGE>
SECTION 5. BANK ACCOUNTS. At the direction of the Board of
Directors, the Manager may establish and maintain one or more bank accounts in
the name of the Company or any subsidiary of the Company, and may collect and
deposit into any such account or accounts, and disburse funds from any such
account or accounts, under such terms and conditions as the Board of Directors
may approve; and the Manager shall from time to time render appropriate
accountings of such collections and payments to the Board of Directors and, upon
request, to the auditors of the Company or any subsidiary of the Company. Such
accounts shall be insured by the FDIC.
SECTION 6. RECORDS; CONFIDENTIALITY. The Manager shall maintain
appropriate books of account and records relating to services performed
hereunder, and such books of account and records shall be accessible for
inspection by representatives of the Company or any subsidiary of the Company at
any time during normal business hours. The Manager shall keep confidential any
and all information obtained in connection with the services rendered hereunder
and shall not disclose any such information to nonaffiliated third parties
except with the prior written consent of the Board of Directors.
SECTION 7. OBLIGATIONS OF MANAGER.
(a) The Manager shall require each seller or transferor of Mortgage
Assets to the Company to make such representations and warranties regarding such
Mortgage Assets as may, in the judgment of the Manager, be necessary and
appropriate. In addition, the Manager shall take such other action as it deems
necessary or appropriate with regard to the protection of the Company's assets.
Notwithstanding any other provision herein, the Manager shall act in accordance
with the Portfolio Management Guidelines established by the Board of Directors
dated as of the date hereof (the "Guidelines"), as such Guidelines may be
amended or supplemented from time to time with the consent of the Manager. The
Manager shall act, in the absence of specific provisions in the Guidelines, in
accordance with industry standards.
(b) The Manager shall refrain from any action which would adversely
affect the status of the Company as a REIT or, if applicable, any subsidiary of
the Company as a REIT or as a qualified REIT subsidiary or which
16
<PAGE>
would violate any law, rule or regulation of any governmental body or agency
having jurisdiction over the Company or any such subsidiary or which would
otherwise not be Permitted by the Company's or such subsidiary's Governing
Instruments. If the Manager is ordered to take any such action by the Board of
Directors, the Manager shall promptly notify the Board of Directors of the
Manager's judgment that such action would adversely affect such status or
violate any such law, rule or regulation or the Governing Instruments and
refrain from taking such action pending further clarification from the Board of
Directors. If the Manager receives further clarification or instructions
expressly ordering that the action be taken, the Manager shall act as instructed
by the Board of Directors and shall have no liability for such action.
Notwithstanding the foregoing, the Manager, its directors, officers,
stockholders and employees shall not be liable to the Company, any Affiliated
Issuer, any subsidiary of the Company, the Unaffiliated Directors or the
Company's or its subsidiary's stockholders for any act or omission by the
Manager, its directors, officers, stockholders or employees except as provided
in Section 13 of this Agreement.
SECTION 8. INVESTMENT COMPANY STATUS.
Notwithstanding any other provision of this Agreement to the contrary,
the Company and the Manager each shall use its best efforts to refrain from
taking any action which, in its judgment made in good faith and with the
exercise of reasonable care, would cause the Company or any subsidiary of the
Company to be required to register as an investment company under the Investment
Company Act of 1940, as amended (the "Investment Company Act"). It shall be the
duty of the Manager to perform such calculations necessary to insure that the
Company or any subsidiary of the Company shall not be required to register under
the Investment Company Act. If an action is ordered by the Board of Directors,
which in the Manager's judgment might cause such registration to be required,
the Manager shall promptly notify the Board of Directors and shall refrain from
taking such action pending further clarification or instructions from the Board
of Directors. If the Manager receives further clarification or instructions
expressly ordering that the action be taken, the Manager shall act as instructed
by
17
<PAGE>
the Board of Directors and shall have no liability for such action.
SECTION 9. COMPENSATION.
(a) BASE FEE. Subject to Sections 9(c) and 9(e) hereof, the Company
shall pay to the Manager, for services rendered under this Agreement, a base
management fee in an amount equal to 3/8 of 1% per annum of the Average Invested
Assets of the Company during each fiscal year. An amount equal to 3/32 of 1% of
the Average Invested Assets for each fiscal quarter (pro rata based on the
number of days elapsed during any partial fiscal quarter), shall be paid to the
Manager, as provided by, and subject to adjustment under, Section 9(e) of this
Agreement.
(b) INCENTIVE COMPENSATION. The Company shall pay the Manager as
incentive compensation a yearly fee, in an amount equal to 25% of the dollar
amount, if any, by which the annual Net Income of the Company for each fiscal
year exceeds an amount equal to the Average Net Worth multiplied by the Ten Year
U.S. Treasury Rate plus one percentage point. If the annual Net Income of the
Company is less than the amount equal to the Average Net Worth multiplied by the
Ten Year U.S. Treasury Rate plus one percentage point, the Manager shall refund
to the Company the net year-to-date incentive compensation previously paid to
the Manager during the current fiscal year, if any.
The quarterly payment of such amount by the Company to the Manager, or
refund to the Company from the Manager in the event the incentive compensation
for any year-to-date period is less than the incentive compensation computed and
paid to the Manager as of the previous year-to-date period, shall be computed
each fiscal quarter on a cumulative year-to-date basis in an amount equal to (A)
25% of the dollar amount, if any, by which the year-to-date Net income through
such fiscal quarter, exceeds an amount equal to the Average Net Worth for such
year-to-date period multiplied by the year-to-date Ten Year U.S. Treasury Rate
plus one Percentage point multiplied by the number of quarters during such year-
to-date period divided by four; and (B) minus the year-to-date incentive
compensation computed for the prior fiscal quarter. If the year-to-date
incentive compensation
18
<PAGE>
computed through such fiscal quarter of the Company is less than the net year-
to-date incentive compensation computed for the previous year-to-date fiscal
quarter, the Manager shall refund to the Company the lesser of (i) the
difference between the net year-to-date incentive compensation computed for the
previous year-to-date fiscal quarter and the net year-to-date incentive
compensation computed for the current fiscal quarter or (ii) the net year-to-
date incentive compensation computed for the previous year-to-date fiscal
quarter, if any. Such quarterly payment shall be paid to the Manager, or
refunded to the Company, as provided by, and subject to adjustment under,
Section 9(e) of this Agreement. A sample calculation of the incentive
compensation is shown in Exhibit A.
(c) LIMITATION ON BASE FEE AND INCENTIVE COMPENSATION.
(i) REDUCTION OF BASE FEE AND INCENTIVE COMPENSATION. During
any fiscal quarter, the base management fee described in Section 9(a) above and
incentive compensation described in Section 9(b) above shall be reduced by the
amount, up to the total amount of such base management fee and incentive
compensation, by which the year-to-date Total Operating Expenses (as defined
below) of the Company and its subsidiaries exceed the greater of 2% of its
Average Invested Assets multiplied by the number of quarters during such year-
to-date period divided by four or 25% of its year-to-date Net Income through
such fiscal quarter, provided, however, that a majority of the Unaffiliated
Directors may waive part or all of any such reduction to the extent that they
determine, based upon unusual or nonrecurring factors which they deem
sufficient, that a higher level of expenses is justified for such year.
(ii) RECOVERY OF BASE FEE AND INCENTIVE COMPENSATION. If at the
close of any fiscal year the limitation on the base management fee and incentive
compensation pursuant to Section 9(c)(i) above is imposed, the Manager shall be
entitled to recover without interest any reduction of fees during such fiscal
year pursuant to Section 9(c)(i) when, if, and to the extent that, the Total
Operating Expenses of the Company and its subsidiaries in any future calendar
year, including the recovery of the base management fee and incentive compen-
19
<PAGE>
sation or any portion thereof, are less than the greater of 2% of the Company's
Average Invested Assets or 25% of its Net income for such year.
(iii) TOTAL OPERATING EXPENSES. For the purposes of Section
9(c) only, "Total Operating expenses" for any period means the aggregate year-
to-date expenses for such period of every character payable by the Company which
constitute ordinary operating expenses of the Company, exclusive of:
(A) expenses relating to raising capital and all interest
and discounts;
(B) taxes and license fees;
(C) expenses connected directly with the issuance, sale and
distribution, and of listing on any stock exchange, of securities of the Company
including, but not limited to, underwriting and brokerage discounts and
commissions, private placement fees and expenses, legal and accounting costs,
printing, engraving and mailing costs, and listing and registration fees;
(D) expenses connected directly with the acquisition,
disposition, operation, maintenance, management (including the CMO fee) or
ownership of the Company's assets, including but not limited to costs of
foreclosure, maintenance, repair and improvement of property, maintenance and
protection of the lien of mortgages, property management fees, loan origination
fees, servicing and master servicing fees, legal fees, premiums for insurance on
property owned by or mortgaged to the Company, taxes, brokerage and acquisition
fees and commissions, appraisal fees, title insurance and abstract expenses,
provisions for depreciation, depletion and amortization, disposition fees and
subordinated real estate commissions, and losses on the disposition of assets
and provisions for such losses;
(E) fees and expenses payable to public accountants,
consultants, or persons employed for the Company directly by the Board of
Directors;
(F) legal, accounting and other expenses incurred in
connection with (a) formal or informal administrative actions or legal
proceedings which
20
<PAGE>
involve a challenge of the status of the Company as a REIT, (b) advice regarding
obtaining or maintaining such status, (c) determination by the Company of its
taxable income as computed in accordance with the REIT provisions of the
Internal Revenue Code or (d) a claim that the activities of the Company or of
any member of the Board of Directors, officer or stockholder of the Company were
improper;
(G) expenses of organizing, reorganizing or terminating the
Company;
(H) non cash expenditures (including depreciation,
amortization and bad debt reserves);
(I) fees and expenses of transfer agents, registrars,
warrant agents, right agents, dividend payment and dividend reinvestment agents,
escrow holders and indenture trustees;
(J) all expenses connected with communications to holders
of securities of the Company and other bookkeeping and clerical work necessary
in maintaining relations with holders of securities, including the costs of
printing and mailing certificates for securities, proxy solicitation materials
and reports to such holders and the cost of holding meetings of holders of
securities of the Company; and
(K) legal, accounting, printing and other costs, including
clerical costs, of reports required to be filed with state or federal
governmental agencies.
(d) CMO FEE. Unless otherwise agreed by the parties hereto, in
addition to any other fee payable to the Manager under this Agreement, the
Manager shall be paid:
(i) For each Series of Mortgage-Backed Obligations issued by the
Company or any subsidiary of the Company and with respect to which the Manager
or any Affiliate of the Manager serves as manager, in the case of Mortgage-
Backed Obligation sold or intended to be sold primarily to institutional
investors, the lesser of (A) $35,000 annually and (B) an annual amount equal to
$35,000 annually multiplied by the percentage ownership
21
<PAGE>
of the Company or such subsidiary of the Company in such Mortgage-Backed
Obligation, or in the case of Mortgage-Backed Obligations sold or intended to be
sold primarily to retail investors the lesser of (C) $10,000 annually and (D) an
annual amount equal to $10,000 multiplied by the percentage ownership of the
Company or such subsidiary of the Company in such Mortgage-Backed Obligation;
(ii) For each Series of Mortgage-Backed Obligations issued or
owned by the Company or any subsidiary of the Company and with respect to which
the Manager or any Affiliate of the Manager does not serve as manager, in the
case of Mortgage-Backed Obligations sold or intended to be sold primarily to
institutional investors, the lesser of (A) $10,000 annually and (B) an annual
amount equal to $10,000 multiplied by the percentage ownership of the Company or
such subsidiary of the Company in such Mortgage-Backed Obligation, or in the
case of Mortgage-Backed Obligations sold or intended to be sold primarily to
retail investors, the lesser of (C) $5,000 annually and (D) an annual amount
equal to $5,000 multiplied by the percentage ownership of the Company or such
subsidiary of the Company in such Mortgage-Backed Obligation; or
(ii) For each multi-participant Series of Mortgage-Backed
Obligations, which is not issued by the Company or an Affiliated Issuer, in
which the Company or any subsidiary of the Company participates, $5,000
annually.
With respect to any series of Mortgage-Backed Obligations issued or
acquired during a fiscal quarter, the applicable portion of such fees shall be
calculated pro rata based on the number of days such Mortgage-Backed Obligations
were outstanding during such quarter; provided, however, that series of
Mortgage-Backed Obligations issued or acquired after the 20th day of a month
shall not be considered outstanding during such month.
Where the Manager serves as manager for a Series of Mortgage-Backed
Obligations issued by the Company or any subsidiary of the Company, such fees
shall be compensation to the Manager for bond administration, reinvestment
direction, computer operations, special redemption calculations, preparation in
sending bond-holder notices and like functions. Where the Manager serves
22
<PAGE>
as manager for a Series of Mortgage-Backed Obligations owned by but not issued
by the Company or any subsidiary of the Company, compensation to the Manager
shall be as agreed upon between the issuer of such Mortgage-Backed Obligations
and the Manager. Where the Manager does not serve as manager for a Series of
Mortgage-Backed Obligations issued or owned by the Company or any subsidiary of
the Company, such fees shall be compensation for related accounting functions
and overseeing the third-party management and administration. Notwithstanding
any other Provision of this Agreement, the Manager shall be entitled to
reimbursement for its actual costs in providing servicing functions for any pool
of Mortgage Loans.
(e) ADJUSTMENT AND PAYMENT. The Manager shall compute the estimated
compensation payable or refundable under Sections 9(a), 9(b), 9(c) and 9(d)
hereof as soon as practicable after the end of each fiscal quarter, but no later
than 50 days after the end of each such quarter. A copy of such computations
shall be thereafter promptly submitted to the Company and each member of the
Board of Directors. Such compensation shall be paid to the Manager, or refunded
to the Company, on the first business day of the third month after such fiscal
quarter as payment on account, subject to adjustment under this Section 9(e) of
this Agreement. The aggregate amount of the Manager's compensation under
Sections 9(a), 9(b), 9(c) and 9(d) for each fiscal year shall be adjusted
within: (x) 120 days after the end of such fiscal year; or (y) 120 days after
the filing of the Company's federal income tax return for such fiscal year,
whichever is later. Such adjustment shall be made to reflect additional
information provided by the Company's tax return for such fiscal year. Any
excess owed to, or refund owed by, the Manager shall be paid to the Manager or
remitted by the Manager to the Company within ten days of presentment of the
adjustment.
SECTION 10. COMPENSATION FOR ADDITIONAL SERVICES. If the Company
requests the Manager (or any Affiliate or any officer or employee thereof) to
render services for the Company other than those required to be rendered by the
Manager hereunder, such additional services, if performed, shall be compensated
separately on terms to be agreed upon between such party and the Board of
Directors from time to time. To the extent that the Manager or any Affiliate of
the Manager performs any brokerage, leasing, loan servicing, loan
administration,
23
<PAGE>
property management or other similar services for the Company other than as
required hereunder, the rate of compensation for such services shall be either
(a) the rate at which the Manager or such Affiliate of the Manager is then
performing similar services for unaffiliated parties in the same geographic area
or (b) the rate at which qualified unaffiliated persons are then performing such
services for similar investors in the same geographic area.
SECTION 11. EXPENSES OF THE MANAGER. Without regard to the
compensation received hereunder by the Manager, the Manager shall bear the
following expenses (unless agreed otherwise by the Board of Directors):
(a) Employment expenses of the personnel employed by the Manager,
including, but not limited to, salaries, wages, payroll taxes, and the cost of
employee benefit plans for such employees;
(b) Rent, telephone, utilities, office furniture, equipment,
machinery (including computers), subscriptions and such other overhead expenses
incurred in connection with the conduct of the Manager's business;
(c) Travel and other expenses of directors, officers and employees of
the Manager, except expenses of such persons incurred in connection with
attending meetings, conferences or conventions that relate solely to the
business affairs of the Company or any subsidiary of the Company;
(d) Legal, accounting and auditing fees, and tax advisory and tax
preparation fees, relating to the corporate affairs of the Manager;
(e) If the Manager or an Affiliate acts as bond administrator for a
Series of Mortgage-Backed Obligations, all expenses relating to the performance
of the services set forth in Sections 2(p) and 2(q) of this Agreement for such
Series of Mortgage-Backed Obligations;
(f) Expenses incurred (including personnel) in preparation of the
Company's monthly financial statements; and
24
<PAGE>
(g) Miscellaneous administrative expenses incurred in supervising and
monitoring the Company's assets or any subsidiary's assets or relating to
performance by the Manager of its functions hereunder.
If any of the expenses set out above are incurred by the Manager in
part for the purposes of the Company and in part for purposes unrelated to the
Company, the Manager shall submit an accounting to the Company's Audit Committee
of the Board of Directors on a quarterly basis to show the allocation of such
expenses.
SECTION 12. EXPENSES OF THE COMPANY. The Company or any subsidiary
of the Company shall pay all of its expenses, except those that are the
responsibility of the Manager pursuant to Section 11 of this Agreement or other
provisions of this Agreement, and without limiting the generality of the
foregoing, the following expenses of the Company or any subsidiary of the
Company shall be paid by the Company or such subsidiary and shall not be paid by
the Manager:
(a) Expenses related to raising capital, including the cost of
borrowed money, interest payments, discounts, loan and commitment fees, points
and any other related charges;
(b) All license fees and all taxes applicable to the Company or any
subsidiary of the Company, including interest and penalties thereon;
(c) Legal, audit, accounting, underwriting, brokerage, listing,
rating agency, registration and other fees, printing, engraving and other
expenses and taxes incurred in connection with the issuance, sale, distribution,
transfer, registration and stock exchange listing of the securities of the
Company or of any subsidiary of the Company;
(d) Employment expenses, fees and out-of-pocket costs of the Company
and fees and expenses paid to employees, agents, advisers and independent
contractors, consultants, managers, and other agents (other than the Manager)
employed directly by the Company or any subsidiary of the Company or by the
Manager at the request of the Company or such subsidiary for the account of the
Company or the subsidiary;
25
<PAGE>
(e) Expenses connected with the acquisition, disposition, operation
(except for those duties performed by the Manager) and ownership of the assets
of the Company or any subsidiary of the Company, including, without limitation,
commitment, appraisal, guaranty and hedging fees, brokerage and acquisition fees
and commissions, ad valorem taxes, costs of foreclosure, maintenance, repair and
improvement of property, maintenance and protection of the lien of mortgages,
property management fees, loan origination fees, servicing and master servicing
fees, legal fees, premiums for insurance on property owned by the Company or any
subsidiary of the Company and insurance and abstract expenses; PROVIDED, that
with regard to brokerage fees, unless approved by a majority of the Unaffiliated
Directors, neither the Manager nor any of its Affiliates shall charge a
brokerage commission or similar fee to the Company or any subsidiary of the
Company in connection with the acquisition, disposition or ownership of the
assets of the Company or the subsidiary;
(f) Expenses of organizing, reorganizing, dissolving or winding-up
the Company or any subsidiary of the Company;
(g) All insurance costs not included in paragraph (e) hereof and
incurred by the Company or any subsidiary of the Company, including without
limitation, the cost of officer and director liability insurance;
(h) Expenses connected with payments of dividends or interest or
distributions in cash or any other Form made or caused to be made by the Board
of Directors to holders of the securities of the Company or any subsidiary of
the Company;
(i) Direct Issuance Costs;
(j) All expenses connected with communications to holders of equity
securities or debt securities of the Company or any subsidiary of the Company
and with governmental agencies and the other bookkeeping and clerical work
necessary in maintaining relations with holders of such securities and in
complying with the continuous reporting and other requirements of governmental
bodies or agencies, including, without limitation, the cost of printing and
mailing certificates for such securities and
26
<PAGE>
proxy solicitation materials and reports to holders of the Company's or any
subsidiary's securities and reports to third-parties required under any
indenture to which the Company or any subsidiary of the Company is a party,
except such expenses that are the responsibility of the manager as set forth in
Section 11 hereof, including but not limited to the expenses listed in Sections
11(a) and 11(b) incurred by the Manager in connection with this Section 12(j);
(k) Fees and charges of any transfer agent or registrar;
(l) Fees and expenses paid to directors of the Company or any
subsidiary of the Company, except, in each case, directors who are Affiliates of
the Manager;
(m) Legal, accounting and auditing fees, and tax advisory and tax
preparation fees, relating to the, operations of the Company or any subsidiary;
(n) Legal, accounting and auditing fees, tax advisory and tax
preparation fees, consulting fees and expenses relating to the administration of
Mortgage-Backed obligations issued or caused to be issued by the Company;
(o) Any judgment rendered against the Company or any subsidiary of
the Company, or against any officer or director of the Company or any subsidiary
of the Company in his capacity as such by any court or governmental agency;
(p) If the Manager or an Affiliate does not act as bond administrator
for a Series of Mortgage-Backed obligations issued by an Affiliated Issuer by or
on behalf of the Company, all fees charged by the bond administrator who
performs the services set forth in Sections 2(p) and 2(q) of this Agreement for
such Series of Mortgage-Backed Obligations;
(q) Fees paid to the Manager with the approval of a majority of the
Unaffiliated Directors for participation by the Company in programs operated by
the Manager for the pricing and acquisition of Mortgage Loans;
27
<PAGE>
(r) Amounts payable by the Company to the Manager under Section 13 of
this Agreement;
(s) Third-party fees and expenses incurred by the Manager under
Section 14 of this Agreement; and
(t) Other miscellaneous expenses in connection with the operation of
the Company or any subsidiary of the Company which are not expenses of the
Manager under Section 11 of this Agreement, provided that any such single
expense in excess of $5,000 shall be submitted to the Company's Audit Committee
of the Board of Directors on a quarterly basis.
SECTION 13. LIMITS OF RESPONSIBILITY OF THE MANAGER.
(a) The Company shall indemnify the Manager and its Affiliates with
respect to all expenses, losses, damages, liabilities, demands, charges or
claims of any nature in respect of acts or omissions of the Manager made in good
faith and in accordance with the standards set forth in this Agreement.
(b) Notwithstanding subsection (a) of this Section 13, the Company
shall not be responsible for any and all losses, damages, costs, charges,
counsel fees, payments, expenses and liabilities arising out of or attributable
to the Manager's failure to comply with the terms of this Agreement or any
action or failure or omission to act by the Manager as a result of the gross
negligence, willful misconduct or lack of good faith of the Manager or any of
its agents or as a result of its or any of their reckless disregard of its
duties and any obligations hereunder, or which arise out of the willful breach
of any representation or warranty of the Manager hereunder.
(c) The Manager shall indemnify and hold harmless the Company with
respect to all expenses, losses, damages, liabilities, demands, charges or
claims of any nature in respect of acts or omissions of the Manager not in
accordance with the standards set forth in this Agreement.
(d) The Manager shall promptly notify the Board of Directors of any
litigation or governmental
28
<PAGE>
investigation involving the Company and shall keep the Board of Directors fully
informed of the status of any such litigation or governmental investigation.
SECTION 14. POOLING OF MORTGAGE LOANS; ISSUANCE OF MORTGAGE
CERTIFICATES. If the Manager determines it to be in the best interests of the
Company and consistent with the portfolio criteria approved by the Board of
Directors of the Manager shall, directly or indirectly and on behalf of the
Company, pool Mortgage Loans acquired by the Company and use its best efforts to
have Mortgage Certificates issued backed by such Mortgage Loans which meet all
underwriting and other requirements for such issuance. In connection therewith,
the Manager shall, directly or indirectly and on behalf of the Company, apply to
the respective issuer for a commitment to issue the related Mortgage
Certificates and, once such commitment has been approved, contract to Pool such
Mortgage Loans and cause to be issued Mortgage Certificates back by such
Mortgage Loans, which Mortgage Certificates shall be owned by and registered in
the name, or deposited into a depository institution for the account, of the
Company. After the issuance of such Mortgage Certificates, unless otherwise
specified by the Company, the servicer of the related Mortgage Loans shall have
all responsibilities and duties to the issuer of such Mortgage Certificates with
respect to such Mortgage Loans and Mortgage Certificates, and shall service such
Mortgage Loans after the issuance of the Mortgage Certificates which they back
in accordance with the requirements of the issuer of such Mortgage Certificates.
In connection therewith, the Manager shall apply conditions of the
Servicing Agreement, and, if deemed appropriate, recommend to the Company the
termination of such Servicing Agreement; acting as a liaison between servicers
and the Company and working with servicers to the extent necessary to improve
their servicing performance; review of and recommendations as to fire losses,
easement problems and condemnation, delinquency and foreclosure procedures with
regard to the Mortgage Loans; review of servicers' delinquency, foreclosing and
other reports on Mortgage Loans; supervising claims filed under any mortgage
insurance policies; and enforcing the obligation of any servicer to repurchase
Mortgage Loans from the Company.
29
<PAGE>
SECTION 15. NO JOINT VENTURE. The Company and the Manager are not
partners or joint venturers with each other and nothing herein shall be
construed to make them such partners or joint venturers or impose any liability
as such on either of them.
SECTION 16. TERM. This Agreement shall continue in force until
December 31, 1993 unless otherwise renewed or extended.
SECTION 17. TERMINATION OF AGREEMENT.
(a) Notwithstanding any other provision of this Agreement to the
contrary, this Agreement may be terminated by either party with or without cause
upon 60 days' written notice. In addition, this Agreement may be terminated at
any time by a majority vote of (i) the Unaffiliated Directors or (ii) the
holders of the Common Stock of the Company.
(b) This Agreement may be immediately terminated by the Company by
written notice of termination from the Company to the Manager upon the
occurrence of any of the following events:
(i) if the Manager shall violate any material provision of this
Agreement which, after written notice of such violation, is not cured within 30
days;
(ii) if the Manager or any of its Affiliates shall be adjudged
bankrupt or insolvent by a court of competent jurisdiction, or any order shall
be made by a court of competent jurisdiction for the appointment of a receiver,
liquidator or trustee of the Manager or any of its Affiliates or of all or
substantially all of its property by reason of the foregoing or approving any
petition filed against the Manager or any of its Affiliates for its
reorganization and such adjudication, order or petition has not been stayed or
discharged pending appeal within 60 days of its entry;
(iii) if the Manager or any of its Affiliates shall institute
proceedings for voluntary bankruptcy or shall file a petition seeking
reorganization under the federal bankruptcy laws, or for relief under any law of
the relief of debtors, or shall consent to the appointment of a receiver, or
shall make a general assign-
30
<PAGE>
ment for the benefit of its creditors, or shall admit in writing its inability
to pay its debts generally as they become due;
(iv) if any governmental authority, court or self-regulatory
authority shall withdraw, suspend or revoke or declare invalid any license,
charter, authorization or, registration required or necessary for the conduct by
the Manager or any of its Affiliates of any material portion of its business or
businesses and such adjudication, order or petition has not been stayed or
discharged pending appeal within 60 days of its entry; or
(v) if any event or circumstances shall occur which materially
impairs the financial condition of the Manager or any of its Affiliates or the
ability of the Manager to perform its obligations hereunder.
The Manager agrees that if any of the events specified in subsection
(b) of this Section 17 shall occur, it will give written notice thereof to the
Board of Directors within five days after the occurrence of such event.
SECTION 18. ASSIGNMENTS.
(a) Except as set forth in Section 18(b) of this Agreement, this
Agreement shall terminate automatically in the event of its assignment, in whole
or in part, by the Manager, unless such assignment is consented to in writing by
the Company with the consent of a majority of the Unaffiliated Directors. Any
such assignment shall bind the assignee hereunder in the same manner as the
Manager is bound. In addition, the assignee shall execute and deliver to the
Company a counterpart of this Agreement naming such assignee as Manager. This
Agreement shall not be assigned by the Company without the prior written consent
of the Manager, except in the case of assignment by the Company to a REIT or
other organization which is a successor (by merger, consolidation or purchase of
assets) to the Company, in which case such successor organization shall be bound
hereunder and by the terms of such assignment in the same manner as the Company
is bound hereunder.
(b) Notwithstanding any provision of this Agreement, the Manager may
subcontract and assign any or
31
<PAGE>
all of its responsibilities at no additional cost to the Company under Sections
2(p), 2(q) and 2(r) of this Agreement to any of its affiliates, and the Company
hereby consents to any such assignment and subcontracting.
SECTION 19. ACTION UPON TERMINATION.
(a) Except as provided in Section 19(b) of this Agreement, from and
after the effective date of termination of this Agreement, pursuant to Sections
16, 17 or 18 of this Agreement, the Manager shall not be entitled to
compensation for further services hereunder, but shall be paid all compensation
accruing to the date of termination. Upon such termination, the Manager shall
forthwith:
(i) Pay over to the Company or any subsidiary of the Company all
money collected and held for the account of the Company or any subsidiary of the
Company pursuant to this Agreement;
(ii) Deliver to the Board of Directors a full accounting,
including a statement showing all payments collected by it and a statement of
all money held by it, covering the period following the date of the last ended
fiscal quarter;
(iii) Deliver to the Board of Directors all property and
documents of the Company or any subsidiary of the Company then in the custody of
the Manager; and
(iv) Present an accounting of any accrued compensation pursuant
to Section 9 above and an accounting of any expenses for which it seeks
reimbursement to the Board of Directors.
(b) Notwithstanding any provisions of this Agreement, if the Manager
is terminated pursuant to Section 17(a) of this Agreement within twelve months
after the occurrence of any of the events set forth in Section 19(c) hereunder,
the Manager shall be entitled to compensation as follows:
(i) The Manager shall be paid all compensation to the date of
termination; and
32
<PAGE>
(ii) on the final day of each fiscal quarter after the date of
termination and ending one year thereafter, the Manager shall receive an amount
equal to one-quarter of the average of the annual aggregate of all compensation
incurred under this Agreement and its predecessors during the three fiscal years
prior to the fiscal year in which termination occurred.
(c) The events referred to in Section 19(b) are as follows:
(i) Any corporation, person or other entity (other than the
Company, the Manager or their respective affiliates) makes a tender or exchange
offer for shares of the Company's Common Stock pursuant to which such
corporation, person or other entity acquires 15% or more of the issued and
outstanding shares of the Company's Common Stock;
(ii) The stockholders of the Company approve a definitive
agreement to merge or consolidate the Company with or into another corporation
or to sell or otherwise dispose of all or substantially all of its assets,
except in the case of a merger or consolidation with, or sale to, the Manager or
an affiliate of the Manager; or
(iii) Any person, within the meaning of Section 3(a)(9) or
Section 13(d)(3) of the Securities Exchange Act of 1934, acquires more than 15%
(30% in the case of a passive investor) of the Company's issued and outstanding
voting securities.
SECTION 20. RELEASE OF MONEY OR OTHER PROPERTY UPON WRITTEN REQUEST.
The Manager agrees that any money or other property of the Company or any
subsidiary of the Company held by the Manager under this Agreement shall be held
by the Manager as custodian for the Company or such subsidiary, and the
Manager's records shall be appropriately marked clearly to reflect the ownership
of such money or other property by the Company or such subsidiary. Upon the
receipt by the Manager of a written request signed by a duly authorized officer
of the Company requesting the Manager to release to the Company or any
subsidiary of the Company any money or other property then held by the Manager
for the account of the Company or any subsidiary of the Company under this
Agreement,
33
<PAGE>
the Manager shall forthwith release such money or other property to the Company
or such subsidiary. The Manager shall not be liable to the Company, any
subsidiary of the Company, the Unaffiliated Directors, or the Company's or its
subsidiary's stockholders for any acts performed or omissions to act by the
Company or any subsidiary of the Company in connection with the money or other
property released to the Company or any subsidiary of the Company in accordance
with this Section. The Company and any subsidiary of the Company shall
indemnify the Manager, its directors, officers and employees against any and all
expenses, losses, damages, liabilities, demands, charges and claims of any
nature whatsoever, which arise in connection with the Manager's release of such
money or other property to the Company or any subsidiary of the Company in
accordance with the terms of this Section 20 of this Agreement, except insofar
as such expenses, losses, damages, liabilities, demands, charges and claims
arise out of acts of the Manager, its directors, officers and employees
constituting bad faith, willful misconduct, gross negligence or reckless
disregard of their duties. Indemnification pursuant to this provision shall be
in addition to any right of the Manager to indemnification under Section 13 of
this Agreement.
SECTION 21. REPRESENTATIONS AND WARRANTIES.
(a) The Company hereby represents and warrants to the Manager as
follows:
(i) The Company has been duly organized and is validly existing
and in good standing under the laws of the State of Delaware; the Company has
the corporate power to own its assets and to transact the business in which it
is now engaged and is duly qualified as a foreign corporation and in good
standing under the laws of each jurisdiction where its ownership or lease of
property or the conduct of its business requires such qualification, except for
failures to be so qualified, authorized or licensed that could not in the
aggregate have a material adverse effect on the business operations, assets or
financial condition of the Company and its subsidiaries, taken as a whole. The
Company does not do business under any fictitious business name.
(ii) The Company has the corporate power and authority to
execute, deliver and perform this Agree-
34
<PAGE>
ment and all obligations required hereunder and has taken all necessary
corporate action to authorize the execution, delivery and performance of this
Agreement and all obligations required hereunder. No consent of any other
person including, without limitation, directors, stockholders and creditors of
the Company, and no license, permit, approval or authorization of, exemption by,
notice or report to, or registration, filing or declaration with, any
governmental authority is required by the Company in connection with this
Agreement or the execution, delivery, performance, validity or enforceability of
this Agreement and all obligations required hereunder. This Agreement has been,
and each instrument or document required hereunder will be, executed and
delivered by a duly authorized officer of the Company, and this Agreement
constitutes, and each instrument or document required hereunder when executed
and delivered hereunder will constitute, the legally valid and binding
obligation of the Company enforceable against the Company in accordance with its
terms.
(iii) The execution, delivery and performance of this Agreement
and the documents or instruments required hereunder will not violate any
provision of any existing law or regulation binding on the Company, or any
order, judgment, award or decree of any court, arbitrator or governmental
authority binding on the Company, or the Governing Instruments of, or any
securities issued by, the Company or of any mortgage, indenture, lease, contract
or other agreement, instrument or undertaking to which the Company is a party or
by which the Company or any of its assets may be bound, the violation of which
would have a material adverse effect on the business operations, assets or
financial condition of the Company and its subsidiaries, taken as a whole, and
will not result in, or require, the creation or imposition of any lien on any of
its property, assets or revenues pursuant to the provisions of any such
mortgage, indenture, lease, contract or other agreement, instrument or
undertaking.
(b) The Manager hereby represents and warrants to the Company as
follows:
(i) The Manager is duly organized, validly existing and in good
standing under the laws of the State of Delaware; the Manager has the power to
own its assets and to transact the business in which it is now
35
<PAGE>
engaged and is duly qualified to do business and is in good standing under the
laws of each jurisdiction where its ownership or lease of property or the
conduct of its business requires such qualification, except for failures to be
so qualified, authorized or licensed that could not in the aggregate have a
material adverse effect on the business operations, assets or financial
condition of the Manager and its subsidiaries, taken as a whole. The Manager
does not do business under any fictitious business name.
(ii) The Manager has the power and authority to execute, deliver
and perform this Agreement and all obligations required hereunder and has taken
all necessary corporate action to authorize the execution, delivery and
performance of this Agreement and all obligations required hereunder. No
consent of any other person including, without limitation, directors and
creditors of the Manager, and no license, permit, approval or authorization of,
exemption by, notice or report to, or registration, filing or declaration with,
any governmental authority is required by the Manager in connection with this
Agreement or the execution, delivery, performance, validity or enforceability of
this Agreement and all obligations required hereunder. This Agreement has been,
and each instrument or document required hereunder will be, executed and
delivered by a duly authorized agent of the Manager, and this Agreement
constitutes, and each instrument or document required hereunder when executed
and delivered hereunder will constitute, the legally valid and binding
obligation of the Manager enforceable against the Manager in accordance with its
terms.
(iii) The execution, delivery and performance of this
Agreement and the documents or instruments required hereunder, will not violate
any provision of any existing law or regulation binding on the Manager, or any
order, judgment, award or decree of any court, arbitrator or governmental
authority binding on the Manager, or the Governing Instruments of, or any
securities issued by, the Manager or of any mortgage, indenture, lease, contract
or other agreement, instrument or undertaking to which the Manager is a party or
by which the Manager or any of its assets may be bound, the violation of which
would have a material adverse effect on the business operations, assets or
financial condition of the Manager
36
<PAGE>
and its subsidiaries, taken as a whole, and will not result in, or require, the
creation or imposition of any lien on any of its property, assets or revenues
pursuant to the provisions of any such mortgage, indenture, lease, contract or
other agreement, instrument or undertaking.
SECTION 22. NOTICES. Unless expressly provided otherwise herein, all
notices, requests, demands and other communications required or permitted under
this Agreement shall be in writing and shall be deemed to have been duly given,
made and received when delivered against receipt or upon actual receipt of
registered or certified mail, postage prepaid, return receipt requested,
addressed as set forth below:
(a) If to the Company:
3600 South Yosemite Street
Suite 900
Denver, Colorado 80237
Attention: President
with a copy given in the manner prescribed above, to the Chief
Operating Officer/Chief Financial Officer, Chief Accounting Officer
and each member of the Board of Directors at their addresses as set
forth in the records of the Company.
If to the Manager:
3600 South Yosemite Street
Suite 900
Denver, Colorado 80237
Attention: President
with a copy given in the manner prescribed above, to the General
Counsel at the same address.
Either party may alter the address to which communications or copies
are to be sent by giving notice of such change of address in conformity with
the provisions of this Section 22 for the giving of notice.
37
<PAGE>
SECTION 23. BINDING NATURE OF AGREEMENT, SUCCESSORS AND ASSIGNS.
This Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective heirs, personal representatives, successors and
assigns as provided herein.
SECTION 24. ENTIRE AGREEMENT. This Agreement contains the entire
agreement and understanding between the parties hereto with respect to the
subject matter hereof. The express terms hereof control and supersede any
course of performance and/or usage of the trade inconsistent with any of the
terms hereof. This Agreement may not be modified or amended other than by an
agreement in writing.
SECTION 25. CONTROLLING LAW. This Agreement and all questions
relating to its validity, interpretation, performance and enforcement shall be
governed by and construed, interpreted and enforced in accordance with the laws
of the State of Colorado, notwithstanding any Colorado or other conflict-of-law
provisions to the contrary.
SECTION 26. COUNTERPARTS. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
shall constitute one and the same instrument.
SECTION 27. COMPUTATION OF INTEREST. Interest will be computed on
the basis of a 360-day year consisting of twelve months of thirty days each.
SECTION 28. INDULGENCES, NOT WAIVERS. Neither the failure nor any
delay on the part of a party to exercise any right, remedy, power or privilege
under this Agreement shall operate as a waiver thereof, nor shall any single or
partial exercise of any right, remedy, power or privilege preclude any other or
further exercise of the same or of any other right, remedy, power or privilege,
nor shall any waiver of any right, remedy, power or privilege with respect to
any occurrence be construed as a waiver of such right, remedy, power or
privilege with respect to any other occurrence. No waiver shall be effective
unless it is in writing and is signed by the party asserted to have granted such
waiver.
38
<PAGE>
SECTION 29. COSTS AND EXPENSES. Each party hereto shall bear its
own costs and expenses (including the fees and disbursements of counsel and
accountants) incurred in connection with the negotiations and preparation of and
the closing under this Agreement, and all matters incident thereto.
SECTION 30. SCHEDULES AND EXHIBITS. All Schedules and Exhibits
referred to herein or attached hereto are hereby incorporated by reference into,
and made a part of, this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.
COMMERCIAL ASSETS, INC.
Attest: By:
--------------------------- ------------------------------------
Name:
Title:
FINANCIAL ASSET MANAGEMENT
CORPORATION
By:
------------------------------------
Name:
Title:
39
<PAGE>
MANAGEMENT AGREEMENT
THIS AGREEMENT, dated as of October 12, 1993 by and between COMMERCIAL
ASSETS, INC., a Maryland corporation (hereinafter referred to as the "Company"),
and FINANCIAL ASSET MANAGEMENT CORPORATION, a Delaware corporation (hereinafter
referred to as the "Manager").
W I T N E S S E T H:
WHEREAS, the Company owns Mortgage Assets and qualifies for the tax
benefits accorded by Section 856 through 860 of the Internal Revenue Code of
1986; and
WHEREAS, the Company has engaged and desires to continue to retain
the Manager to manage the assets of the Company and to perform administrative
services for the Company in the manner and on the terms set forth herein;
NOW, THEREFORE, in consideration of the mutual agreements herein set
forth, the parties hereto agree as follows:
Section 1. DEFINITIONS. Capitalized terms used but not defined herein
shall have the respective meanings assigned them below.
(a) "Affiliate" means, when used with reference to a specified
person, (i) any person that directly or indirectly controls or is controlled by
or is under common control with the specified person, (ii) any person that is an
officer, director or employee of, partner in or trustee
<PAGE>
2
of, or serves in a similar capacity with respect to, the specified person, or of
which the specified person is an officer, director or employee of, partner in or
trustee of or with respect to which the specified person serves in a similar
capacity, (iii) any person that, directly or indirectly, is the beneficial owner
of 5% or more of any class of equity securities issued by the specified person,
or any person 5% or more of whose equity securities are, directly or indirectly
beneficially owned by such other person, or (iv) any person that has a material
business or professional relationship with the specified person, PROVIDED,
however, that a person shall not be deemed to be an Affiliate of the Manager or
of any person that is an Affiliate of the Manager solely by reason of serving as
a director of one or more investment companies of which the Manager or an
Affiliate of the Manager serves as investment advisor or in any other capacity;
(b) "Affiliated Issuer" means any Person that issues Mortgage-
Backed Obligations and which is organized by or on behalf of the Company;
(c) "Agreement" means this Management Agreement, as amended from
time to time;
(d) "AIC" means Asset Investors Corporation, a Maryland
Corporation;
(e) "Average Invested Assets" for any period means the average
of the aggregate book value of the consolidated assets of the Company, its
trusts and subsidiaries,
<PAGE>
3
computed in accordance with GAAP, invested, directly or indirectly, in equity
interests in and loans secured by real estate, including assets that are pledged
to secure Mortgage-Backed Obligations, after reserves for depreciation or bad
debts or other similar noncash reserves, less the book value of minority
interest (the portion of equity interest in a Mortgage-Backed Obligation not
owned by the Company) and the liabilities associated with issued and outstanding
Mortgage-Backed Obligations of the Company, its trusts and subsidiaries,
computed for any period by adding the Average Invested Assets at the end of each
month during such period and dividing by the number of months in the period
(provided that Average Invested Assets shall not include (A) investments in any
other REIT for which the Manager or an Affiliate of the Manager acts as a
manager and (B) cash, certificates of deposit, treasury instruments and other
non-real estate related assets);
(f) "Average Net Worth" means for any period, the sum of (1) the
gross proceeds of all offerings of equity securities of the Company and (2) the
$75,000,000 capital contribution received from AIC in 1993 times the number of
calendar days during such period that the proceeds of each such offering or
capital contribution were available for use by the Company divided by the total
number of calendar days in such period, together with (a) for the first quarter
of the current fiscal year, the Company's Tax Retained Earnings (Losses) at the
beginning of the first
<PAGE>
4
quarter or (b) for each subsequent year-to-date cumulative quarterly period of
the year for which a calculation is required pursuant to Section 9(b) hereof,
the average of the Company's Tax Retained Earnings (Losses) computed by adding
the Company's Tax Retained Earnings (Losses) as of the beginning of each fiscal
quarter during such year-to-date period divided by the number of quarters in
such period. A sample calculation of Average Net Worth is shown in Exhibit A;
(g) "Board of Directors" means the Board of Directors of the
Company;
(h) "CMO Administration Services" means the services provided by
the Manager pursuant to Section 2(q) hereof;
"CMO Issuance Services" means the services provided by the
Manager pursuant to Section 2(p) hereof;
"Commercial Mortgage-Backed Obligations" means Mortgage-
Backed Obligations secured by commercial real estate, including multi-family
residential properties (more than four units);
(k) "Commitment" means, with respect to any Mortgage Asset, the
agreement containing the terms pursuant to which the Company agrees to acquire
on a forward basis such Mortgage Asset from any Person;
(l) "Company" means Commercial Assets, Inc., a Maryland
corporation, for all purposes; provided, however,
<PAGE>
5
that with respect to references to Series of Mortgage-Backed Obligations issued
by the Company, the term "Company" shall include subsidiaries of the Company
which issue such Mortgage-Backed obligations;
(m) "Conforming Mortgage Loan" means a mortgage loan that
complies with the requirements for inclusion in a guaranty or purchase program
sponsored by any of FNMA, FHLMC or GNMA;
(n) "Conventional Mortgage Loan" means a mortgage loan that is
not insured by the FHA or guaranteed by the VA;
(o) "Direct Issuance Costs" means all fees and expenses incurred
in connection with the issuance of Mortgage-Backed Obligations issued or caused
to be issued by the Company, including trustee, accounting, consulting, legal,
rating agency, registration, printing and engraving, tax advisory and tax
preparation (but not including preparation of annual tax returns) fees and
expenses, underwriting discounts, up-front master servicing fees, and up-front
costs of credit enhancements;
(p) "FDIC" means the Federal Deposit Insurance Corporation or
any successor or assign or any resulting, surviving or transferee entity;
(q) "FHA" means the Federal Housing Administration of the
Department of Housing and Urban Development of the United States of America or
any successor or assign or any resulting, surviving or transferee entity;
<PAGE>
6
(r) "FHA Loan" means a mortgage loan insured by the FHA;
(s) "FHLMC" means the Federal Home Loan Mortgage Corporation, a
corporation organized and existing under the laws of the United States of
America, or any successor or assign or any resulting, surviving or transferee
entity;
(t) "FHLMC Certificate" means a FHLMC mortgage participation
certificate;
(u) "FNMA" means the Federal National Mortgage Association, a
corporation organized and existing under the laws of the United States of
America, or any successor or assign or any resulting, surviving or transferee
entity;
(v) "FNMA Certificate" means a FNMA mortgage pass-through
certificate;
(w) "GAAP" means generally accepted accounting principles;
(x) "GNMA" means the Government National Mortgage Association, a
corporation organized and existing under the laws of the United States of
America, or any successor or assign or any resulting, surviving or transferee
entity;
(y) "GNMA Certificate" means a fully-modified pass-through
mortgage-backed certificate guaranteed by GNMA;
(z) "Governing Instruments" means, the Company's Articles of
Incorporation, as amended, By-Laws, as
<PAGE>
7
amended, and any resolutions duly adopted by the Board of Directors;
(aa) "Internal Revenue Code" or "Code" means the Internal Revenue
Code of 1986, as amended;
(bb) "Mortgage Assets" means, collectively, Mortgage Instruments,
Residual Interests and Mortgage-Backed Obligations;
(cc) "Mortgage-Backed Obligations" means, collectively,
collateralized mortgage obligations, mortgage-backed bonds and mortgage
collateralized debt, mortgage pass-through obligations or other instruments
collateralized by, or representing interests in, mortgage debt or Mortgage
Instruments;
(dd) "Mortgage Certificates" means, collectively (i) GNMA
Certificates, (ii) FHLMC Certificates, (iii) FNMA Certificates and (iv) any
other mortgage certificates; including private label pass-through certificates,
and other mortgage instruments as reasonably determined by the Company;
(ee) "Mortgage Finance Companies" means entities which own and
finance Mortgage Instruments;
(ff) "Mortgage Instruments" means, collectively, Mortgage
Certificates and Mortgage Loans;
(gg) "Mortgage Interests" means an equity interest in Mortgage
Finance Companies;
<PAGE>
8
(hh) "Mortgage Loans" means, collectively, Conforming Mortgage
Loans and Non-conforming Mortgage Loans;
(ii) "Net Income" means the Company's REIT Income including
capital gains and capital losses arising from the Company's operations in the
year they are generated before (i) the Manager's incentive compensation, (ii)
net operating loss deductions arising from losses in prior periods, (iii)
special deductions permitted by the Internal Revenue Code in calculating taxable
income for a REIT, and (iv) the deduction arising from the exercise of stock
options permitted under Code Section 83 and the deduction for dividend
equivalent rights. In addition, REIT income will also be reduced by 25% of the
expense otherwise deductible for tax purposes relating to the exercise of stock
options and the issuance of Common Stock relating to dividend equivalent rights;
(jj) "Non-conforming Mortgage Loan" means a mortgage loan that
meets the requirements of the guaranty programs of either FNMA, FHLMC or GNMA;
except for the requirements with respect to the maximum original outstanding
principal amounts of such mortgage loans and such other particular requirements
of such programs presented to and approved by the Board of Directors;
(kk) "Other Mortgage Assets" means (i) interest-only
certificates, (ii) principal-only certificates, (iii) subordinated interests in
mortgage pass-through transactions and (iv) other mortgage-derivative assets;
<PAGE>
9
(ll) "Person" means a natural person, corporation, partnership,
association, trust (including any beneficiary thereof), company, joint venture,
joint stock company, unincorporated organization or other entity;
(mm) "REIT" means a real estate investment trust under the
Internal Revenue Code;
(nn) "REIT Income" means taxable income computed as prescribed
for REITs under the Code prior to the "dividends paid deduction" (including the
dividends paid deduction for dividends related to capital gains).
(oo) "Residual Interests" means interests in Mortgage-Backed
Obligations that entitle the holder to receive excess cash flow from the
collateral pledged to secure such obligations;
(pp) "Repurchase Agreement" means a financing transaction
pursuant to which the Company would sell Mortgage Assets for cash and
simultaneously agree to repurchase them at a specified date for the same amount
of cash plus an interest component;
(qq) "Residential Mortgage-Backed Obligations" means Mortgage-
Backed Obligations secured by single-family residential (one to four units)
properties;
(rr) "Series of Mortgage-Backed Oobligations" means a separate
series of Mortgage-Backed Obligations issued or caused to be issued by the
Company or an Affiliated Issuer or other person pursuant to an indenture or
other agreement;
<PAGE>
10
(ss) "Servicing Agreement" means a servicing agreement between
the Company and any servicer of the Company's Mortgage Loans;
(tt) "Stockholders" means the registered owners of the shares of
common stock of the Company;
(uu) "Tax Retained Earnings (Losses)" for purposes of computing
the incentive compensation pursuant to Section 9(b) of this Agreement, shall be
computed as follows: (a) at the beginning of the first quarter of the current
fiscal year, the sum of the tax retained earnings at the beginning of the fourth
quarter of the prior fiscal year plus REIT Income for the fourth quarter of the
prior fiscal year computed in accordance with the management agreement in effect
during such prior fiscal year minus dividends declared during the fourth quarter
of the prior fiscal year; or (b) at the beginning of each subsequent quarter of
the current fiscal year, the sum of the Tax Retained Earnings (Losses) at the
beginning of the prior fiscal quarter plus REIT Income for the prior fiscal
quarter minus dividends declared during the prior fiscal quarter, see Exhibit A;
(vv) "Ten Year U.S. Treasury Rate" for any period means the
arithmetic average of the weekly average yield to maturity for actively traded
current coupon U.S. Treasury fixed interest rate securities (adjusted to
constant maturities of ten years) published by the Federal Reserve Board during
such period, or, if such rate is not published by the Federal Reserve Board,
then any Federal
<PAGE>
11
Reserve Bank or agency or department of the federal government selected by the
Company; or, if the Company determines in good faith that for any reason the
Company cannot determine the Ten Year U.S. Treasury Rate for any period as
provided above, then the Ten Year U.S. Treasury Rate for such period shall be
the arithmetic average of the per annum average yields to maturity, based upon
the closing asked price on each business day during such period, as chosen and
quoted in New York City for each business day (or less frequently if daily
quotations shall not be generally available) by at least three recognized
dealers in U.S. government securities selected by the Company, for each actively
traded marketable U.S. Treasury fixed interest rate security (other than
securities which can, at the option of the holder, be surrendered at face value
in payment of any federal estate tax) with a final maturity date not less than
eight nor more than twelve years from the date of such closing asked price;
(ww) "Total Operating Expenses" means the expenses indicated in
Section 9(c)(iii);
(xx) "Unaffiliated Directors" shall have the meaning ascribed to
that term in the By-Laws of the Company, as the same may be amended or
supplemented from time to time;
(yy) "VA" means the Veterans Administration of the United States
of America, or any successor or assign or any resulting, surviving or transferee
entity; and
<PAGE>
12
(zz) "VA Loan" means a mortgage loan partially guaranteed by the
VA.
Section 2. GENERAL DUTIES OF THE MANAGER.
The Manager undertakes to use its best efforts to (i) present to the
Company asset acquisition opportunities consistent with the policies and
objectives of the Company and (ii) furnish the Board of Directors with
information concerning the making, acquisition, holding and disposing of assets.
Subject to the supervision and control of the Board of Directors, the Manager
shall provide services to the Company and, to the extent directed by the Board
of Directors, shall provide similar services to any Affiliated Issuer, if any,
or subsidiary of the Company as follows:
(a) serve as the Company's consultant with respect to the
formulation of asset acquisition criteria and policy guidelines for
recommendation to the Board of Directors;
(b) counsel the Company in connection with policy decisions to
be made by the Board of Directors;
(c) issue Commitments on behalf of the Company to acquire
Mortgage Assets;
(d) represent the Company in connection with the acquisition and
accumulation of Mortgage Assets;
(e) furnish reports and statistical and economic research to the
Company regarding the Company's portfolio activities and the services performed
for the
<PAGE>
13
Company by the Manager as reasonably requested by the Board of Directors;
(f) monitor and provide to the Board of Directors, on an on-
going basis, rate information and other data regarding Repurchase Agreements and
alternative lending sources;
(g) negotiate and enter into agreements on behalf of the Company
with banking institutions and other leaders to provide for the borrowing of
funds by the Company;
(h) monitor and provide to the Board of Directors, on an on-
going basis, price information and other data obtained from certain nationally
recognized dealers that maintain markets in Mortgage Assets and Other Mortgage
Assets identified by the Board of Directors from time to time, and provide data
and advice to the Board of Directors in connection with the identification of
such dealers;
(i) provide a full time chief operating officer/chief financial
officer of the Company, a full time chief accounting officer of the Company,
provide the personnel to perform or supervise the duties of the computer
programmer and analyst (including necessary computer support staff), senior
investment officer, controller, shareholder relations, press officer, cash
manager, tax manager (including necessary support staff) (any of which functions
may be performed by the same person or persons) and other personnel necessary to
manage the Company on a day-to-day basis and
<PAGE>
14
provide to the Company, commencing as of the date hereof and thereafter on a
semi-annual basis, a list of all the full time and part time employees of the
Manager and a description of the functions of such employees (for purposes of
this subsection, full-time shall mean full time obligation to AIC and the
Company);
(j) administer the day-to-day operations of the Company and
perform or supervise the performance of such other administrative functions
necessary in the management of the Company as may be agreed upon by the Manager
and the Board of Directors, including the collection of revenues and the payment
of the Company's expenses, debts and obligations and maintenance of appropriate
computer services to perform such administrative functions;
(k) communicate on behalf of the Company with the holders of the
equity and debt securities of the Company as required to satisfy the continuous
reporting and other requirements of any governmental bodies or agencies,
securities exchanges and bond indentures and to maintain effective relations
with such holders;
(l) prepare, draft and file all the Company's filings with the
Securities and Exchange Commission, PROVIDED THAT filing fees, legal fees,
accounting fees and any other third-party fees shall be the responsibility of
the Company;
(m) to the extent not otherwise subject to an agreement executed
by the Company, designate a servicer
<PAGE>
15
for those Mortgage Loans sold to the Company by originators that have elected
not to service such loans and arrange for the monitoring and administering of
such servicers;
(n) monitor and administer the servicing of the Company's
Mortgage Loans, other than Mortgage Loans pooled to back Mortgage Certificates
or pledged to secure Mortgage-Backed Obligations, including serving as the
Company's consultant with respect to the servicing of loans; collecting
information and submitting reports pertaining to the Mortgage Loans and to
moneys remitted to the Manager or the Company by servicers; periodically
reviewing and evaluating the performance of each servicer to determine its
compliance with the terms and conditions of the servicing agreement and, if
deemed appropriate, recommending to the Company the termination of such
servicing agreement; acting as a liaison between servicers and the Company and
working with servicers to the extent necessary to improve their servicing
performance; reviewing recommendations as to fire losses, easement problems and
condemnation, delinquency and foreclosure procedures with regard to the Mortgage
Loans; reviewing servicers' delinquency, foreclosing and other reports on
Mortgage Loans; supervising claims filed under any mortgage insurance policies;
and enforcing the obligation of any servicer to repurchase Mortgage Loans from
the Company;
(o) in accordance with criteria set up by the Board of
Directors, invest or reinvest the Company's
<PAGE>
16
cash consistent with the Company's status as a REIT provided that the Company
shall not invest in Residential Mortgage-Backed Obligations;
(p) provide to the Company itself or through another appropriate
party (but the Manager shall not charge for the services of such an appropriate
party unless authorized by the Board of Directors) all services in connection
with the issuance of each Series of Mortgage-Backed Obligations issued by the
Company or any Affiliated Issuer, including:
(i) representing the Company with respect to the
structuring of each such Series of Mortgage-Backed Obligations;
(ii) negotiating the rating requirements with rating
agencies with respect to the rating of each such Series of Mortgage-Backed
Obligations;
(iii) representing the Company in connection with the
acquisition and accumulation of any Mortgage Instruments and the pooling
and exchange of Mortgage Loans into Mortgage Certificates in connection
with each Series of Mortgage-Backed Obligations issued by the Company or
any Affiliated Issuer;
(iv) issuing Commitments on behalf of the Company to acquire
Mortgage Instruments to be used to secure or constitute the mortgage pool
for each such Series of Mortgage-Backed Obligations;
<PAGE>
17
(v) with respect to the issuance of each such series of
Mortgage-Backed Obligations for which the underlying collateral consists of
Mortgage Instruments owned by the Company or an Affiliated Issuer,
accumulating and reviewing all Mortgage Instruments which may secure or
constitute the mortgage pool for each such Series of Mortgage-Backed
Obligations;
(vi) with respect to the issuance of each such Series of
Mortgage-Backed Obligations for which the underlying collateral does not
consist of Mortgage Instruments owned by the Company or an Affiliated
Issuer, reviewing interest rates, maturity dates and other attributes of
the Mortgage Instruments;
(vii) negotiating all agreements and credit enhancements
with respect to each such Series of Mortgage-Backed Obligations;
(viii) organizing and administering all activities in
connection with the closing of each such Series of Mortgage-Backed
Obligations including all negotiations and agreements with underwriters,
trustees, servicers, master servicers and other parties; and
(ix) performing such other services as may be required
from time to time for completing the issuance of each such Series of
Mortgage-Backed Obligations.
(q) provide to the Company itself or through another appropriate
party (but the Manager shall not charge
<PAGE>
18
for the services of such an appropriate party unless authorized by the Board of
Directors) all services in connection with the administration of each Series of
Mortgage-Backed Obligations issued by the Company or any Affiliated Issuer,
including:
(i) communicating on behalf of the Company with the holders
of each such Series of Mortgage-Backed Obligations as required to satisfy
the reporting and tax informational requirements of any governmental bodies
or agencies with respect to holders of each such Series of Mortgage-Backed
Obligations and as required to satisfy any governmental bodies and the
provisions of any indenture, pooling and servicing agreement or other
agreement with respect to each such Series of Mortgage-Backed Obligations;
(ii) determining the amount of, and making, all payments
with respect to each such Series of Mortgage-Backed Obligations and
directing the reinvestment of principal and interest from the Mortgage
Instruments in accordance with the terms of any indenture, pooling and
servicing agreement or other agreement relating to each such Series of
Mortgage-Backed Obligations;
(iii) furnishing all reports and statistical information
required with respect to the administration of each such Series of
Mortgage-Backed Obligations;
<PAGE>
19
(iv) working with the Company and with accountants, counsel,
trustees, servicers, master servicers and other parties with respect to the
administration of each such Series of Mortgage-Backed Obligations;
(v) assisting trustees and paying agents in distributing
all excess or residual payments with respect to each such Series of
Mortgage-Backed Obligations as directed by the Company or any indenture,
pooling and servicing agreement or other agreement with respect to each
such Series of Mortgage-Backed Obligations;
(vi) monitoring and providing, on an on-going basis,
information with respect to each such Series of Mortgage-Backed Obligations
as is required by the Company;
(vii) advising the Company with respect to the
administration of each such Series of Mortgage-Backed Obligations; and
(viii) performing such other services as may be required
from time to time in connection with the administration of each such Series
of Mortgage-Backed Obligations as the Company shall deem appropriate under
the particular circumstances.
(r) provide to the Company itself or through another appropriate
party (but the Manager shall not charge for the services of such an appropriate
party unless autho-
<PAGE>
20
rized by the Board of Directors) services in connection with reviewing and
monitoring the administration of each series of Mortgage-Backed Obligations
managed by a party other than the Manager or any of its Affiliates, including:
(i) reviewing monthly financial statements and/or other
financial data prepared by the third-party bond administrator and
distributed to the Company;
(ii) reviewing bond payment information and verifying the
excess cash flow payment received by the Company;
(iii) monitoring on-going expenses related to each series
of Mortgage-Backed Obligations, where expense information has been provided
to the Company;
(iv) reviewing federal income tax reports prepared by the
third-party bond administrator and distributed to the Company, including
but not limited to, reports for real estate mortgage investment conduits;
and
(v) providing and preparing for Residual Interests in
Mortgage-Backed Obligations which are accounted for under a level-yield
method: (A) necessary services for computing monthly income in accordance
with GAAP; and (B) the necessary calculations to compute the carrying
amount adjustment in accordance with the Company's accounting principles.
<PAGE>
21
(s) monitor the Company's portfolio with regard to interest rate
risk and recommend to the Board of Directors, and negotiate and enter into on
behalf of the Company, transactions to reduce interest rate risk including, but
not limited to, interest rate swap agreements, forward rate agreements, interest
rate cap agreements, interest rate floor agreements and financial futures and
option contracts in accordance with the criteria established by the Board of
Directors;
(t) perform such other services as may be required from time to
time for management and other activities relating to the assets of the Company
as the Board of Directors shall deem appropriate under the particular
circumstances;
(u) provide tax planning and advisory services and prepare and
file on behalf of the Company all filings required by federal, state and local
governments, including but not limited to, federal and state REIT income tax
returns (including the preparation of the related REIT qualification
calculations), personal property tax returns, sales tax returns, payroll tax
returns, franchise tax returns, annual reports and federal and state information
returns; and
(v) provide the executive, administrative and other personnel,
office space and services required in rendering services to the Company listed
in this Section 2.
<PAGE>
22
The Manager agrees to use its best efforts at all times in performing
services for the Company hereunder.
Section 3. ADDITIONAL ACTIVITIES OF MANAGER. Nothing herein shall
prevent or restrict the Manager or any of its officers, employees or Affiliates
from engaging in any business or rendering services of any kind to any other
Person, including investment in, or advisory service to others investing in, any
type of real estate assets, including assets which meet the principal portfolio
objectives of the Company, except that, without the consent of the Board of
Directors, which consent shall not be unreasonably withheld, the Manager shall
not provide general management services to any REIT or similar entity other than
the Company and its subsidiaries and affiliates other than acting as a manager
to AIC. Directors, officers, employees and agents of the Manager or Affiliates
of the Manager may serve as directors, officers, employees, agents, nominees or
signatories for the Company or any subsidiary of the Company, to the extent
permitted by their Governing Instruments, as from time to time amended, or by
any resolutions duly adopted by the Board of Directors pursuant to its Governing
Instruments. When executing documents or otherwise acting in such capacities
for the Company, such persons shall use their respective titles in the Company.
Section 4. COMMITMENTS. In order to meet the portfolio requirements
of the Company, as determined by the Board of Directors from time to time, the
Manager agrees to
<PAGE>
23
issue on behalf of the Company Commitments on such terms as are established by
the Board of Directors, including a majority of the Unaffiliated Directors, for
the acquisition of Mortgage Assets originated by, or acquired from, any Person.
Section 5. BANK ACCOUNTS. At the direction of the Board of Directors,
the Manager may establish and maintain one or more bank accounts in the name of
the Company or any subsidiary of the Company, and may collect and deposit into
any such account or accounts, and disburse funds from any such account or
accounts, under such terms and conditions as the Board of Directors may approve;
and the Manager shall from time to time render appropriate accountings of such
collections and payments to the Board of Directors and, upon request, to the
auditors of the Company or any subsidiary of the Company. Such accounts shall
be insured by the FDIC.
Section 6. RECORDS; CONFIDENTIALITY. The Manager shall maintain
appropriate books of account and records relating to services performed
hereunder, and such books of account and records shall be accessible for
inspection by representatives of the Company or any subsidiary of the Company at
any time during normal business hours. The Manager shall keep confidential any
and all information obtained in connection with the services rendered hereunder
and shall not disclose any such information to nonaffiliated
<PAGE>
24
third parties except with the prior written consent of the Board of Directors.
Section 7. OBLIGATIONS OF MANAGER.
(a) The Manager shall require each seller or transferor of
Mortgage Assets to the Company to make such representations and warranties
regarding such Mortgage Assets as may, in the judgment of the Manager, be
necessary and appropriate. In addition, the Manager shall take such other
action as it deems necessary or appropriate with regard to the protection of the
Company's assets. Notwithstanding any other provision herein, the Manager shall
act in accordance with any portfolio management guidelines that may be
established by the Board of Directors and, in the absence of specific
guidelines, in accordance with industry standards.
(b) The Manager shall refrain from any action which would
adversely affect the status of the Company as a REIT or, if applicable, any
subsidiary of the Company as a REIT or as a qualified REIT subsidiary or which
would violate any law, rule or regulation of any governmental body or agency
having jurisdiction over the Company or any such subsidiary or which would
otherwise not be permitted by the Company's or such subsidiary's Governing
Instruments. If the Manager is ordered to take any such action by the Board of
Directors, the Manager shall promptly notify the Board of Directors of the
Manager's judgment that such action would adversely affect such status or
violate any
<PAGE>
25
such law, rule or regulation or the Governing Instruments and refrain from
taking such action pending further clarification from the Board of Directors.
If the Manager receives further clarification or instructions expressly ordering
that the action be taken, the Manager shall act as instructed by the Board of
Directors and shall have no liability for such action. Notwithstanding the
foregoing, the Manager, its directors, officers, stockholders and employees
shall not be liable to the Company, any Affiliated Issuer, any subsidiary of the
Company, the Unaffiliated Directors or the Company's or its subsidiary's
stockholders for any act or omission by the Manager, its directors, officers,
stockholders or employees except as provided in Section 13 of this Agreement.
Section 8. INVESTMENT COMPANY STATUS.
Notwithstanding any other provision of this Agreement to the contrary,
the Company and the Manager each shall use its best efforts to refrain from
taking any action which, in its judgment made in good faith and with the
exercise of reasonable care, would cause the Company or any subsidiary of the
Company to be required to register as an investment company under the Investment
Company Act of 1940, as amended (the "Investment Company Act"). It shall be the
duty of the Manager to perform such calculations necessary to insure that the
Company or any subsidiary of the Company shall not be required to register under
the Investment Company Act. If an action is ordered by the Board of Direc-
<PAGE>
26
tors, which in the Manager's judgment might cause such registration to be
required, the Manager shall promptly notify the Board of Directors and shall
refrain from taking such action pending further clarification or instructions
from the Board of Directors. If the Manager receives further clarification or
instructions expressly ordering that the action be taken, the Manager shall act
as instructed by the Board of Directors and shall have no liability for such
action.
Section 9. COMPENSATION.
(a) BASE FEE. Subject to Sections 9(c) and 9(f) hereof, the
Company shall pay to the Manager, for services rendered under this Agreement, a
base management fee in an amount equal to 1% per annum of the Average Invested
Assets of the Company during each fiscal year. An amount equal to 1/4 of 1% of
the Average Invested Assets for each fiscal quarter (pro rata based on the
number of days elapsed during any partial fiscal quarter), shall be paid to the
Manager, as provided by, and subject to adjustment under, Section 9(f) of this
Agreement.
(b) INCENTIVE COMPENSATION. The Company shall pay the Manager
as incentive compensation a yearly fee, in an amount equal to 20% of the dollar
amount, if any, by which the annual Net Income of the Company for each fiscal
year exceeds an amount equal to the Average Net Worth multiplied by the Ten Year
U.S. Treasury Rate plus one percentage point. If the annual Net Income of the
Company
<PAGE>
27
is less than the amount equal to the Average Net Worth multiplied by the Ten
Year U.S. Treasury Rate plus one percentage point, the Manager shall refund to
the Company the net year-to-date incentive compensation previously paid to the
Manager during the current fiscal year, if any.
The quarterly payment of such amount by the Company to the Manager, or
refund to the Company from the Manager in the event the incentive compensation
for any year-to-date period is less than the incentive compensation computed and
paid to the Manager as of the previous year-to-date period, shall be computed
each fiscal quarter on a cumulative year-to-date basis in an amount equal to (A)
20% of the dollar amount, if any, by which the year-to-date Net Income through
such fiscal quarter, exceeds an amount equal to the Average Net Worth for such
year-to-date period multiplied by the year-to-date Ten Year U.S. Treasury Rate
plus one percentage point multiplied by the number of quarters during such year-
to-date period divided by four; and (B) minus the year-to-date incentive
compensation computed for the prior fiscal quarter. If the year-to-date
incentive compensation computed through such fiscal quarter of the Company is
less than the net year-to-date incentive compensation computed for the previous
year-to-date fiscal quarter, the Manager shall refund to the Company the lesser
of (i) the difference between the net year-to-date incentive compensation
computed for the previous year-to-date fiscal quarter and the net year-to-date
incentive compensation
<PAGE>
28
computed for the current fiscal quarter or (ii) the net year-to-date incentive
compensation computed for the previous year-to-date fiscal quarter, if any.
Such quarterly payment shall be paid to the Manager, or refunded to the Company,
as provided by, and subject to adjustment under, Section 9(f) of this Agreement.
A sample calculation of the incentive compensation is shown in Exhibit A.
(c) LIMITATION ON BASE FEE AND INCENTIVE COMPENSATION.
(i) REDUCTION OF BASE FEE AND INCENTIVE COMPENSATION.
During any fiscal quarter, the base management fee described in Section
9(a) above and incentive compensation described in Section 9(b) above shall
be reduced by the amount, up to the total amount of such base management
fee and incentive compensation, by which the year-to-date Total Operating
Expenses (as defined below) of the Company and its subsidiaries exceed the
greater of 2% of its Average Invested Assets multiplied by the number of
quarters during such year-to-date period divided by four or 25% of its
year-to-date Net Income through such fiscal quarter, provided, however,
that a majority of the Unaffiliated Directors may waive part or all of any
such reduction to the extent that they determine, based upon unusual or
nonrecurring factors which they deem sufficient, that a higher level of
expenses is justified for such year.
(ii) RECOVERY OF BASE FEE AND INCENTIVE COMPENSATION. If
at the close of any fiscal year the
<PAGE>
29
limitation on the base management fee and incentive compensation pursuant
to Section 9(c)(i) above is imposed, the Manager shall be entitled to
recover without interest any reduction of fees during such fiscal year
pursuant to Section 9(c)(i) when, if, and to the extent that, the Total
Operating Expenses of the Company and its subsidiaries in any future
calendar year, including the recovery of the base management fee and
incentive compensation or any portion thereof, are less than the greater of
2% of the Company's Average Invested Assets or 25% of its Net Income for
such year.
(iii) TOTAL OPERATING EXPENSES. For the purposes of
Section 9(c) only, "Total Operating Expenses" for any period means the
aggregate year-to-date expenses for such period of every character payable
by the Company which constitute ordinary operating expenses of the Company,
exclusive of:
(1) expenses relating to raising capital and all
interest and discounts;
(2) taxes and license fees;
(3) expenses connected directly with the issuance,
sale and distribution, and of listing on any stock exchange, of
securities of the Company including, but not limited to, underwriting
and brokerage discounts and commissions, private placement fees and
expenses, legal and accounting costs, printing,
<PAGE>
30
engraving and mailing costs, and listing and registration fees;
(4) expenses connected directly with the acquisition,
disposition, operation, maintenance, management (including the
Administrative fee and the Acquisition fee) or ownership of the
Company's assets, including but not limited to costs of foreclosure,
maintenance, repair and improvement of property, maintenance and
protection of the lien of mortgages, property management fees, loan
origination fees, servicing and master servicing fees, legal fees,
premiums for insurance on property owned by or mortgaged to the
Company, taxes, brokerage and acquisition fees and commissions,
appraisal fees, title insurance and abstract expenses, provisions for
depreciation, depletion and amortization, disposition fees and
subordinated real estate commissions, and losses on the disposition of
assets and provisions for such losses;
(5) fees and expenses payable to public accountants,
consultants, or persons employed for the Company directly by the Board
of Directors;
(6) legal, accounting and other expenses incurred in
connection with (a) formal or informal administrative actions or legal
proceedings which involve a challenge of the status of the Company as
a REIT, (b) advice regarding obtaining or maintain-
<PAGE>
31
ing such status, (c) determination by the Company of its taxable
income as computed in accordance with the REIT provisions of the
Internal Revenue Code or (d) a claim that the activities of the
Company or of any member of the Board of Directors, officer or
stockholder of the Company were improper;
(7) expenses of organizing, reorganizing or
terminating the Company;
(8) non cash expenditures (including depreciation,
amortization and bad debt reserves);
(9) fees and expenses of transfer agents, registrars,
warrant agents, right agents, dividend payment and dividend
reinvestment agents, escrow holders and indenture trustees;
(10) all expenses connected with communications to
holders of securities of the Company and other bookkeeping and
clerical work necessary in maintaining relations with holders of
securities, including the costs of printing and mailing certificates
for securities, proxy solicitation materials and reports to such
holders and the cost of holding meetings of holders of securities of
the Company; and
(11) legal, accounting, printing and other costs,
including clerical costs, of reports required to be filed with state
or federal governmental agencies.
<PAGE>
32
(d) ADMINISTRATIVE FEE. Unless otherwise agreed by the parties
hereto, in addition to any other fee payable to the Manager under this
Agreement, the Manager shall be paid for each Series of Mortgage-Backed
Obligations issued or owned by the Company or any subsidiary of the Company, in
the case of Mortgage-Backed Obligations sold or intended to be sold primarily to
institutional investors, the lesser of (A) $10,000 annually and (B) an annual
amount equal to $10,000 multiplied by the percentage ownership of the Company or
such subsidiary of the Company in such Mortgage-Backed obligation for the first
class of such Series of Mortgage-Backed obligations issued or owned by the
Company plus for each addition class of such Series of Mortgage-Backed
Obligations issued or owned by the Company or any subsidiary of the Company the
lesser of (1) $2,500 anually and (2) an annual amount equal to $2,500 multiplied
by the percentage of ownership of the Company or such subsidiary of the Company
in such Mortgage-Backed Obligation.
With respect to any series of Mortgage-Backed Obligations issued
or acquired during a fiscal quarter, the applicable portion of such fees shall
be calculated pro rata based on the number of days such Mortgage-Backed
obligations were outstanding during such quarter; provided, however, that series
of Mortgage-Backed Obligations issued or acquired after the 20th day of a month
shall not be considered outstanding during such month.
<PAGE>
33
The Administrative Fee shall be compensation for related
accounting functions and overseeing the third-party management and
administration. Notwithstanding any other provision of this Agreement, the
Manager shall be entitled to reimbursement for its actual costs in providing
servicing functions for any pool of Mortgage Loans.
(e) ACQUISITION FEE. Unless otherwise agreed by the parties
hereto, in addition to any other fee payable to the Manager under this
Agreement, the Company shall pay the Manager, at the end of each fiscal quarter
of the Company, an Acquisition Fee equal to 0.5% of the cost of acquisition of
the assets acquired during such fiscal quarter of the Company.
(f) ADJUSTMENT AND PAYMENT. The Manager shall compute the
estimated compensation payable or refundable under Sections 9(a), 9(b), 9(c),
9(d) and 9(e) hereof as soon as practicable after the end of each fiscal
quarter, but no later than 50 days after the end of each such quarter. A copy
of such computations shall be thereafter promptly submitted to the Company and
each member of the Board of Directors. Such compensation shall be paid to the
Manager, or refunded to the Company, on the first business day of the third
month after such fiscal quarter as payment on account, subject to adjustment
under this Section 9(f) of this Agreement. The aggregate amount of the
Manager's compensation under Sections 9(a), 9(b), 9(c), 9(d) and 9(e) for each
fiscal year shall be adjusted within: (x) 120 days after the end of such fiscal
year; or (y) 120 days after the filing of the Company's
<PAGE>
34
federal income tax return for such fiscal year, whichever is later. Such
adjustment shall be made to reflect additional information provided by the
Company's tax return for such fiscal year. Any excess owed to, or refund owed
by, the Manager shall be paid to the Manager or remitted by the Manager to the
Company within ten days of presentment of the adjustment.
Section 10. COMPENSATION FOR ADDITIONAL SERVICES. If the Company
requests the Manager (or any Affiliate or any officer or employee thereof) to
render services for the Company other than those required to be rendered by the
Manager hereunder, such additional services, if performed, shall be compensated
separately on terms to be agreed upon between such party and the Board of
Directors from time to time. To the extent that the Manager or any Affiliate of
the Manager performs any brokerage, leasing, loan servicing, loan
administration, property management or other similar services for the Company
other than as required hereunder, the rate of compensation for such services
shall be either (a) the rate at which the Manager or such Affiliate of the
Manager is then performing similar services for unaffiliated parties in the same
geographic area or (b) the rate at which qualified unaffiliated persons are then
performing such services for similar investors in the same geographic area.
Section 11. EXPENSES OF THE MANAGER. Without regard to the
compensation received hereunder by the
<PAGE>
35
Manager, the Manager shall bear the following expenses (unless agreed otherwise
by the Board of Directors):
(a) Employment expenses of the personnel employed by the
Manager, including, but not limited to, salaries, wages, payroll taxes, and the
cost of employee benefit plans for such employees;
(b) Rent, telephone, utilities, office furniture, equipment,
machinery (including computers), subscriptions and such other overhead expenses
incurred in connection with the conduct of the Manager's business;
(c) Travel and other expenses of directors, officers and
employees of the Manager, except expenses of such persons incurred in connection
with attending meetings, conferences or conventions that relate solely to the
business affairs of the Company or any subsidiary of the Company;
(d) Legal, accounting and auditing fees, and tax advisory and
tax preparation fees, relating to the corporate affairs of the Manager;
(e) If the Manager or an Affiliate acts as bond administrator
for a Series of Mortgage-Backed Obligations, all expenses relating to the
performance of the services set forth in Sections 2(p) and 2(q) of this
Agreement for such Series of Mortgage-Backed Obligations;
(f) Expenses incurred (including personnel) in preparation of
the Company's monthly financial statements; and
<PAGE>
36
(g) Miscellaneous administrative expenses incurred in
supervising and monitoring the Company's assets or any subsidiary's assets or
relating to performance by the Manager of its functions hereunder.
If any of the expenses set out above total $5,000 or more
individually, or $15,000 or more in the aggregate and are incurred by the
Manager in part for the purposes of the Company and in part for purposes
unrelated to the Company (including expenses incurred on behalf of AIC), the
Manager shall submit an accounting to the Company's Audit Committee of the Board
of Directors on a quarterly basis to show the allocation of such expenses. The
Manager shall also submit a quarterly schedule of its allocation of expenses
between the Company and AIC.
Section 12. EXPENSES OF THE COMPANY. The Company or any subsidiary
of the Company shall pay all of its expenses, except those that are the
responsibility of the Manager pursuant to Section 11 of this Agreement or other
provisions of this Agreement, and without limiting the generality of the
foregoing, the following expenses of the Company or any subsidiary of the
Company shall be paid by the Company or such subsidiary and shall not be paid by
the Manager:
(a) Expenses related to raising capital, including the cost of
borrowed money, interest payments, discounts, loan and commitment fees, points
and any other related charges;
<PAGE>
37
(b) All license fees and all taxes applicable to the Company or
any subsidiary of the Company, including interest and penalties thereon;
(c) Legal, audit, accounting, underwriting, brokerage, listing,
rating agency, registration and other fees' printing, engraving and other
expenses and taxes incurred in connection with the issuance, sale, distribution,
transfer, registration and stock exchange listing of the securities of the
Company or of any subsidiary of the Company;
(d) Employment expenses, fees and out-of-pocket costs of the
Company and fees and expenses paid to employees, agents, advisers and
independent contractors, consultants, managers, and other agents (other than the
Manager) employed directly by the Company or any subsidiary of the Company or by
the Manager at the request of the Company or such subsidiary for the account of
the Company or the subsidiary;
(e) Expenses connected with the acquisition, disposition,
operation (except for those duties performed by the Manager) and ownership of
the assets of the Company or any subsidiary of the Company, including, without
limitation, commitment, appraisal, guaranty and hedging fees, brokerage and
acquisition fees and commissions, ad valorem taxes, costs of foreclosure,
maintenance, repair and improvement of property, maintenance and protection of
the lien of mortgages, property management fees, loan origina-
<PAGE>
38
tion fees, servicing and master servicing fees, legal fees, premiums for
insurance on property owned by the Company or any subsidiary of the Company and
insurance and abstract expenses; PROVIDED, that with regard to brokerage fees,
unless approved by a majority of the Unaffiliated Directors, neither the Manager
nor any of its Affiliates shall charge a brokerage commission or similar fee to
the Company or any subsidiary of the Company in connection with the acquisition,
disposition or ownership of the assets of the Company or the subsidiary;
(f) Expenses of organizing, reorganizing, dissolving or winding-
up the Company or any subsidiary of the Company;
(g) All insurance costs not included in paragraph (e) hereof and
incurred by the Company or any subsidiary of the Company, including without
limitation, the cost of officer and director liability insurance;
(h) Expenses connected with payments of dividends or interest or
distributions in cash or any other form made or caused to be made by the Board
of Directors to holders of the securities of the Company or any subsidiary of
the Company;
(i) Direct Issuance Costs;
(j) All expenses connected with communications to holders of
equity securities or debt securities of the Company or any subsidiary of the
Company and with governmental agencies and the other bookkeeping and clerical
<PAGE>
39
work necessary in maintaining relations with holders of such securities and in
complying with the continuous reporting and other requirements of governmental
bodies or agencies, including, without limitation, the cost of printing and
mailing certificates for such securities and proxy solicitation materials and
reports to holders of the Company's or any subsidiary's securities and reports
to third-parties required under any indenture to which the Company or any
subsidiary of the Company is a party, except such expenses that are the
responsibility of the Manager as set forth in Section 11 hereof, including but
not limited to the expenses listed in Sections 11(a) and 11(b) incurred by the
Manager in connection with this Section 12(j);
(k) Fees and charges of any transfer agent or registrar;
(l) Fees and expenses paid to directors of the Company or any
subsidiary of the Company, except, in each case, directors who are Affiliates of
the Manager;
(m) Legal, accounting and auditing fees, and tax advisory and
tax preparation fees, relating to the operations of the Company or any
subsidiary;
(n) Legal, accounting and auditing fees, tax advisory and tax
preparation fees, consulting fees and expenses relating to the administration of
Mortgage-Backed Obligations issued or caused to be issued by the Company;
(o) Any judgment rendered against the Company or any subsidiary
of the Company, or against any
<PAGE>
40
officer or director of the Company or any subsidiary of the Company in his
capacity as such by any court or governmental agency;
(p) If the Manager or an Affiliate does not act as bond
administrator for a Series of Mortgage-Backed Obligations issued by an
Affiliated Issuer by or on behalf of the Company, all fees charged by the bond
administrator who performs the services set forth in Sections 2(p) and 2(q) of
this Agreement for such Series of Mortgage-Backed Obligations;
(q) Fees paid to the Manager with the approval of a majority of
the Unaffiliated Directors for participation by the Company in programs operated
by the Manager for the pricing and acquisition of Mortgage Loans;
(r) Amounts payable by the Company to the Manager under Section
13 of this Agreement;
(s) Third-party fees and expenses incurred by the Manager under
Section 14 of this Agreement; and
(t) other miscellaneous expenses in connection with the
operation of the Company or any subsidiary of the Company which are not expenses
of the Manager under Section 11 of this Agreement, provided that any such single
expense in excess of $10,000 shall be submitted to the Company's Audit Committee
of the Board of Directors on a quarterly basis.
<PAGE>
41
Section 13. LIMITS OF RESPONSIBILITY OF THE MANAGER.
(a) The Company shall indemnify the Manager and its Affiliates
with respect to all expenses, losses, damages, liabilities, demands, charges or
claims of any nature in respect of acts or omissions of the Manager made in good
faith and in accordance with the standards set forth in this Agreement.
(b) Notwithstanding subsection (a) of this Section 13, the
Company shall not be responsible for any and all losses, damages, costs,
charges, counsel fees, payments, expenses and liabilities arising out of or
attributable to the Manager's failure to comply with the terms of this Agreement
or any action or failure or omission to act by the Manager as a result of the
gross negligence, willful misconduct or lack of good faith of the Manager or any
of its agents or as a result of its or any of their reckless disregard of its
duties and any obligations hereunder, or which arise out of the willful breach
of any representation or warranty of the Manager hereunder.
(c) The Manager shall indemnify and hold harmless the Company
with respect to all expenses, losses, damages, liabilities, demands, charges or
claims of any nature in respect of acts or omissions of the Manager not in
accordance with the standards set forth in this Agreement.
(d) The Manager shall promptly notify the Board of Directors of
any litigation or governmental inves-
<PAGE>
42
tigation involving the Company and shall keep the Board of Directors fully
informed of the status of any such litigation or governmental investigation.
Section 14. POOLING OF MORTGAGE LOANS; ISSUANCE OF MORTGAGE
CERTIFICATES. If the Manager determines it to be in the best interests of the
Company and consistent with the portfolio criteria approved by the Board of
Directors, the Manager shall, directly or indirectly and on behalf of the
Company, pool Mortgage Loans acquired by the Company and use its best efforts to
have Mortgage Certificates issued backed by such Mortgage Loans which meet all
underwriting and other requirements for such issuance. In connection therewith,
the Manager shall, directly or indirectly and on behalf of the Company, apply to
the respective issuer for a commitment to issue the related Mortgage
Certificates and, once such commitment has been approved, contract to pool such
Mortgage Loans and cause to be issued Mortgage Certificates backed by such
Mortgage Loans, which Mortgage Certificates shall be owned by and registered in
the name, or deposited into a depository institution for the account, of the
Company. After the issuance of such Mortgage Certificates, unless otherwise
specified by the Company, the servicer of the related Mortgage Loans shall have
all responsibilities and duties to the issuer of such Mortgage Certificates with
respect to such Mortgage Loans and Mortgage Certificates, and shall service such
Mortgage Loans after the issuance of the Mortgage Certificates which they back
in accordance with
<PAGE>
43
the requirements of the issuer of such Mortgage Certificates.
In connection therewith, the Manager shall apply conditions of the
Servicing Agreement, and, if deemed appropriate, recommend to the Company the
termination of such Servicing Agreement; acting as a liaison between servicers
and the company and working with servicers to the extent necessary to improve
their servicing performance; review of and recommendations as to fire losses,
easement problems and condemnation, delinquency and foreclosure procedures with
regard to the Mortgage Loans; review of servicers' delinquency, foreclosing and
other reports on Mortgage Loans; supervising claims filed under any mortgage
insurance policies; and enforcing the obligation of any servicer to repurchase
Mortgage Loans from the Company.
Section 15. NO JOINT VENTURE. The Company and the Manager are not
partners or joint venturers with each other and nothing herein shall be
construed to make them such partners or joint venturers or impose any liability
as such on either of them.
Section 16. TERM. This Agreement shall continue in force until
December 31, 1994 unless otherwise renewed or extended.
<PAGE>
44
Section 17. TERMINATION OF AGREEMENT.
(a) Notwithstanding any other provision of this Agreement to the
contrary, this Agreement may be terminated by either party with or without cause
upon 60 days' written notice. In addition, this Agreement may be terminated at
any time by a majority vote of (i) the Unaffiliated Directors or (ii) the
holders of the Common Stock of the Company, not including the shares held by
AIC.
(b) This Agreement may be immediately terminated by the Company
by written notice of termination from the Company to the Manager upon the
occurrence of any of the following events:
(i) if the Manager shall violate any material provision of
this Agreement which, after written notice of such violation, is not cured
within 30 days;
(ii) if the Manager or any of its Affiliates shall be
adjudged bankrupt or insolvent by a court of competent jurisdiction, or any
order shall be made by a court of competent jurisdiction for the appointment of
a receiver, liquidator or trustee of the Manager or any of its Affiliates or of
all or substantially all of its property by reason of the foregoing or approving
any petition filed against the Manager or any of its Affiliates for its
reorganization and such adjudication, order or petition has not been stayed or
discharged pending appeal within 60 days of its entry;
<PAGE>
45
(iii) if the Manager or any of its Affiliates shall institute
proceedings for voluntary bankruptcy or shall file a petition seeking
reorganization under the federal bankruptcy laws, or for relief under any law of
the relief of debtors, or shall consent to the appointment of a receiver, or
shall make a general assignment for the benefit of its creditors, or shall admit
in writing its inability to pay its debts generally as they become due;
(iv) if any governmental authority, court or self-regulatory
authority shall withdraw, suspend or revoke or declare invalid any license,
charter, authorization or, registration required or necessary for the conduct by
the Manager or any of its Affiliates of any material portion of its business or
businesses and such adjudication, order or petition has not been stayed or
discharged pending appeal within 60 days of its entry; or
(v) if any event or circumstances shall occur which
materially impairs the financial condition of the Manager or any of its
Affiliates or the ability of the Manager to perform its obligations hereunder.
The Manager agrees that if any of the events specified in
subsection (b) of this Section 17 shall occur, it will give written notice
thereof to the Board of Directors within five days after the occurrence of such
event.
<PAGE>
46
Section 18. ASSIGNMENTS.
(a) Except as set forth in Section 18(b) of this Agreement, this
Agreement shall terminate automatically in the event of its assignment, in whole
or in part, by the Manager, unless such assignment is consented to in writing by
the Company with the consent of a majority of the Unaffiliated Directors. Any
such assignment shall bind the assignee hereunder in the same manner as the
Manager is bound. In addition, the assignee shall execute and deliver to the
Company a counterpart of this Agreement naming such assignee as Manager. This
Agreement shall not be assigned by the Company without the prior written consent
of the Manager, except in the case of assignment by the Company to a REIT or
other organization which is a successor (by merger, consolidation or purchase of
assets) to the Company, in which case such successor organization shall be bound
hereunder and by the terms of such assignment in the same manner as the Company
is bound hereunder.
(b) Notwithstanding any provision of this Agreement, the Manager
may subcontract and assign any or all of its responsibilities at no additional
cost to the Company under Sections 2(p), 2(q) and 2(r) of this Agreement to any
of its Affiliates, and the Company hereby consents to any such assignment and
subcontracting.
Section 19. ACTION UPON TERMINATION.
(a) Except as provided in Section 19(b) of this Agreement, from
and after the effective date of termi-
<PAGE>
47
nation of this Agreement, pursuant to Sections 16, 17 or 18 of this Agreement,
the Manager shall not be entitled to compensation for further services
hereunder, but shall be paid all compensation accruing to the date of
termination. Upon such termination, the Manager shall forthwith:
(i) Pay over to the Company or any subsidiary of the
Company all money collected and held for the account of the Company or any
subsidiary of the Company pursuant to this Agreement;
(ii) Deliver to the Board of Directors a full accounting,
including a statement showing all payments collected by it and a statement of
all money held by it, covering the period following the date of the last ended
fiscal quarter;
(iii) Deliver to the Board of Directors all property and
documents of the Company or any subsidiary of the Company then in the custody of
the Manager;
(iv) Present an accounting of any accrued compensation
pursuant to Section 9 above and an accounting of any expenses for which it seeks
reimbursement to the Board of Directors; and
(v) If the Company so requests, sell the items listed on
Exhibit B back to the Company at a price equal to the net book value of such
items, computed in accordance with GAAP, as of the date of termination.
(b) Notwithstanding any provisions of this Agreement, if the
Manager is terminated pursuant to Sec-
<PAGE>
48
tion 17(a) of this Agreement within twelve months after the occurrence of any of
the events set forth in Section 19(c) hereunder, the Manager shall be entitled
to compensation as follows:
(i) The Manager shall be paid all compensation to the date
of termination; and
(ii) On the final day of each fiscal quarter after the date
of termination and ending one year thereafter, the Manager shall receive an
amount equal to one-quarter of the average of the annual aggregate of all
compensation incurred under this Agreement and its predecessors during the three
fiscal years prior to the fiscal year in which termination occurred.
(c) The events referred to in Section 19(b) are as follows:
(i) Any corporation, person or other entity (other than the
Company, the Manager or their respective affiliates) makes a tender or exchange
offer for shares of the Company's Common Stock pursuant to which such
corporation, person or other entity acquires 15% or more of the issued and
outstanding shares of the Company's Common Stock;
(ii) The stockholders of the Company approve a definitive
agreement to merge or consolidate the Company with or into another corporation
or to sell or otherwise dispose of all or substantially all of its assets,
<PAGE>
49
except in the case of a merger or consolidation with, or sale to, the Manager or
an affiliate of the Manager; or
(iii) Any person, within the meaning of Section
3(a)(9) or Section 13(d)(3) of the Securities Exchange Act of 1934, acquires
more than 15% (30% in the case of a passive investor) of the Company's issued
and outstanding voting securities.
Section 20. RELEASE OF MONEY OR OTHER PROPERTY UPON WRITTEN REQUEST.
The Manager agrees that any money or other property of the Company or any
subsidiary of the Company held by the Manager under this Agreement shall be held
by the Manager as custodian for the Company or such subsidiary, and the
Manager's records shall be appropriately marked clearly to reflect the ownership
of such money or other property by the Company or such subsidiary. Upon the
receipt by the Manager of a written request signed by a duly authorized officer
of the Company requesting the Manager to release to the Company or any
subsidiary of the Company any money or other property then held by the Manager
for the account of the Company or any subsidiary of the Company under this
Agreement, the Manager shall forthwith release such money or other property to
the Company or such subsidiary. The Manager shall not be liable to the Company,
any subsidiary of the Company, the Unaffiliated Directors, or the Company's or
its subsidiary's stockholders for any acts performed or omissions to act by the
Company or any subsidiary of the Company in connection with the money or other
<PAGE>
50
property released to the Company or any subsidiary of the Company in accordance
with this Section. The Company and any subsidiary of the Company shall
indemnify the Manager, its directors, officers and employees against any and all
expenses, losses, damages, liabilities, demands, charges and claims of any
nature whatsoever, which arise in connection with the Manager's release of such
money or other property to the Company or any subsidiary of the Company in
accordance with the terms of this Section 20 of this Agreement, except insofar
as such expenses, losses, damages, liabilities, demands, charges and claims
arise out of acts of the Manager, its directors, officers and employees
constituting bad faith, willful misconduct, gross negligence or reckless
disregard of their duties. Indemnification pursuant to this provision shall be
in addition to any right of the Manager to indemnification under Section 13 of
this Agreement.
Section 21. REPRESENTATIONS AND WARRANTIES.
(a) The Company hereby represents and warrants to the Manager as
follows:
(i) The Company has been duly organized and is validly
existing and in good standing under the laws of the State of Maryland; the
Company has the corporate power to own its assets and to transact the business
in which it is now engaged and is duly qualified as a foreign corporation and in
good standing under the laws of each jurisdiction where its ownership or lease
of property or the conduct of its business requires such qualification, except
<PAGE>
51
for failures to be so qualified, authorized or licensed that could not in the
aggregate have a material adverse effect on the business operations, assets or
financial condition of the company and its subsidiaries, taken as a whole. The
Company does not do business under any fictitious business name.
(ii) The Company has the corporate power and authority to
execute, deliver and perform this Agreement and all obligations required
hereunder and has taken all necessary corporate action to authorize the
execution, delivery and performance of this Agreement and all obligations
required hereunder. No consent of any other person including, without
limitation, directors, stockholders and creditors of the Company, and no
license, permit, approval or authorization of, exemption by, notice or report
to, or registration, filing or declaration with, any governmental authority is
required by the Company in connection with this Agreement or the execution,
delivery, performance, validity or enforceability of this Agreement and all
obligations required hereunder. This Agreement has been, and each instrument or
document required hereunder will be, executed and delivered by a duly authorized
officer of the Company, and this Agreement constitutes, and each instrument or
document required hereunder when executed and delivered hereunder will
constitute, the legally valid and binding obligation of the Company enforceable
against the Company in accordance with its terms.
<PAGE>
52
(iii) The execution, delivery and performance of this
Agreement and the documents or instruments required hereunder will not violate
any provision of any existing law or regulation binding on the Company, or any
order, judgment, award or decree of any court, arbitrator or governmental
authority binding on the Company, or the Governing Instruments of, or any
securities issued by, the Company or of any mortgage, indenture, lease, contract
or other agreement, instrument or undertaking to which the Company is a party or
by which the Company or any of its assets may be bound, the violation of which
would have a material adverse effect on the business operations, assets or
financial condition of the Company and its subsidiaries, taken as a whole, and
will not result in, or require, the creation or imposition of any lien on any of
its property, assets or revenues pursuant to the provisions of any such
mortgage, indenture, lease, contract or other agreement, instrument or
undertaking.
(b) The Manager hereby represents and warrants to the Company as
follows:
(i) The Manager is duly organized, validly existing and in
good standing under the laws of the State of Delaware; the Manager has the power
to own its assets and to transact the business in which it is now engaged and is
duly qualified to do business and is in good standing under the laws of each
jurisdiction where its ownership or lease of property or the conduct of its
<PAGE>
53
business requires such qualification, except for failures to be so qualified,
authorized or licensed that could not in the aggregate have a material adverse
effect on the business operations, assets or financial condition of the Manager
and its subsidiaries, taken as a whole. The Manager does not do business under
any fictitious business name.
(ii) The Manager has the power and authority to execute,
deliver and perform this Agreement and all obligations required hereunder and
has taken all necessary corporate action to authorize the execution, delivery
and performance of this Agreement and all obligations required hereunder. No
consent of any other person including, without limitation, directors and
creditors of the Manager, and no license, permit, approval or authorization of,
exemption by, notice or report to, or registration, filing or declaration with,
any governmental authority is required by the Manager in connection with this
Agreement or the execution, delivery, performance, validity or enforceability of
this Agreement and all obligations required hereunder. This Agreement has been,
and each instrument or document required hereunder will be, executed and
delivered by a duly authorized agent of the Manager, and this Agreement
constitutes, and each instrument or document required hereunder when executed
and delivered hereunder will constitute, the legally valid and binding
obligation of the Manager enforceable against the Manager in accordance with its
terms.
<PAGE>
54
(iii) The execution, delivery and performance of this
Agreement and the documents or instruments required hereunder, will not violate
any provision of any existing law or regulation binding on the Manager, or any
order, judgment, award or decree of any court, arbitrator or governmental
authority binding on the Manager, or the Governing Instruments of, or any
securities issued by, the Manager or of any mortgage, indenture, lease, contract
or other agreement, instrument or undertaking to which the Manager is a party or
by which the Manager or any of its assets may be bound, the violation of which
would have a material adverse effect on the business operations, assets or
financial condition of the Manager and its subsidiaries, taken as a whole, and
will not result in, or require, the creation or imposition of any lien on any of
its property, assets or revenues pursuant to the provisions of any such
mortgage, indenture, lease, contract or other agreement, instrument or
undertaking.
Section 22. NOTICES. Unless expressly provided otherwise herein, all
notices, requests, demands and other communications required or permitted under
this Agreement shall be in writing and shall be deemed to have been duly given,
made and received when delivered against receipt or upon actual receipt of
registered or certified mail, postage prepaid, return receipt requested,
addressed as set forth below:
(a) If to the Company:
<PAGE>
55
3600 South Yosemite Street
Suite 900
Denver, Colorado 80237
Attention: President
with a copy given in the manner prescribed above, to the
Chief Operating Officer/Chief Financial Officer, Chief
Accounting Officer and each member of the Board of Directors
at their addresses as set forth in the records of the
Company.
If to the Manager:
3600 South Yosemite Street
Suite 900
Denver, Colorado 80237
Attention: President
with a copy given in the manner prescribed above, to the
General Counsel at the same address.
Either party may alter the address to which communications or copies
are to be sent by giving notice of such change of address in conformity with the
provisions of this Section 22 for the giving of notice.
Section 23. BINDING NATURE OF AGREEMENT; SUCCESSORS AND ASSIGNS.
This Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective heirs, personal representatives, successors and
assigns as provided herein.
Section 24. ENTIRE AGREEMENT. This Agreement contains the entire
agreement and understanding between the parties hereto with respect to the
subject matter hereof. The express terms hereof control and supersede any
course of performance and/or usage of the trade inconsistent with any
<PAGE>
56
of the terms hereof. This Agreement may not be modified or amended other than
by an agreement in writing.
Section 25. CONTROLLING LAW. This Agreement and all questions
relating to its validity, interpretation, performance and enforcement shall be
governed by and construed, interpreted and enforced in accordance with the laws
of the State of Colorado, notwithstanding any Colorado or other conflict-of-law
provisions to the contrary.
Section 26. COUNTERPARTS. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
shall constitute one and the same instrument.
Section 27. COMPUTATION OF INTEREST. Interest will be computed on
the basis of a 360-day year consisting of twelve months of thirty days each.
Section 28. INDULGENCES, NOT WAIVERS. Neither the failure nor any
delay on the part of a party to exercise any right, remedy, power or privilege
under this Agreement shall operate as a waiver thereof, nor shall any single or
partial exercise of any right, remedy, power or privilege preclude any other or
further exercise of the same or of any other right, remedy, power or privilege,
nor shall any waiver of any right, remedy, power or privilege with respect to
any occurrence be construed as a waiver of such right, remedy, power or
privilege with respect to any other occurrence. No waiver shall be effective
unless it is in writing
<PAGE>
57
and is signed by the party asserted to have granted such waiver.
Section 29. COSTS AND EXPENSES. Each party hereto shall bear its own
costs and expenses (including the fees and disbursements of counsel and
accountants) incurred in connection with the negotiations and preparation of and
the closing under this Agreement, and all matters incident thereto.
Section 30. SCHEDULES AND EXHIBITS. All Schedules and Exhibits
referred to herein or attached hereto are hereby incorporated by reference into,
and made a part of, this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
COMMERCIAL ASSETS, INC.
By: /s/ Spencer I. Browne
-----------------------------------------
Spencer I. Browne
President And Chief
Executive Officer
FINANCIAL ASSET MANAGEMENT
CORPORATION
By: /s/ John C. Singer
-----------------------------------------
John C. Singer
Vice President
<PAGE>
GILBERT GOLDSTEIN, P.C.
Attorney and Counselor at Law
3600 South Yosemite Street, Suite 870
Denver, Colorado 80237
Gilbert Goldstein FAX (303) 220-8272 (303) 220-8200
September 22, 1994
Spencer Browne, President
MDC HOLDINGS, INC.
3600 South Yosemite, #900
Denver, Colorado 80237
Dear Spencer:
The purpose of this letter is to confirm an understanding reached between us
concerning the retention of Gilbert Goldstein, P.C. (GG, P.C.) by MDC Holdings,
Inc. (MDC) as a professional consultant on legal matters as follows:
A) GG, P.C. agrees to make Gilbert Goldstein available to perform
legal consultation services for MDC on a day-to-day as-needed and
directed basis for not less than 30 hours per week commencing
October 1, 1994.
B) MDC agrees to compensate GG, P.C. as follows:
1) $168,000 per year payable in equal monthly installments of
$14,000 on the first day of each month commencing October 1,
1994.
2) $150.00 per hour for services performed in any month in
excess of 120 hours.
3) Provide mutually agreed-upon office space at the office
building owned by MDC known as 3600 South Yosemite Street,
Denver, Colorado.
4) Reimburse actual expenses incurred that are directly related
to the consulting.
5) provide full-time secretarial services of a mutually agreed-
upon secretary.
C) This Agreement shall be in full force and effect for a period of
three years commencing October 1, 1994, and shall be extended for
two additional
<PAGE>
Mr. Spencer Browne
September 22, 1994
Page 2
years at the option of GG, P.C. , in which case GG, P.C. will be
compensated in the amount of $7,500 per month for providing
professional services for up to 15 hours per month.
D) GG, P.C. is an independent contractor and will not be an employee of
MDC for any purpose. In that regard, the method or performance
of services, the services rendered, and the exact time and hours GG,
P.C. is to perform services on any given day will be entirely in the
control and discretion of GG, P.C. MDC will rely on GG, P.C. to
perform the services as reasonably necessary to fulfill the spirit and
purpose of this Agreement. MDC is supplying office space and
secretarial services to GG, P.C. because it is economically more
efficient for it to do so since it has these available and because it
desires GG, P.C. to be located at 3600 South Yosemite for ease in the
consultation process. On the other hand, GG, P.C. has substantially
lowered the going rate for its services ($300.00 per hour) in order to
facilitate the Agreement.
E) GG, P.C. will continue to perform legal services for other persons and
entities so long as such services are not in conflict with the
consultations with MDC.
We have discussed the fact that Gilbert Goldstein is an "outside member of the
Board of Directors" of MDC. Each party desires that Gilbert Goldstein
continue in that capacity. The consulting Agreement will be performed in such
fashion as to not interfere or change that relationship. In the capacity of a
consultant to MDC, GG, P.C. may provide legal counsel and advice to the Audit
and Compensation Committees of the MDC Board of Directors. Those services will
be provided by Gilbert Goldstein in his capacity as a consultant to MDC, and not
in his capacity as a member of the MDC Board of Directors, and shall be included
in the calculation of hours spent providing consulting services pursuant to this
Agreement.
This entire Agreement has been approved by resolution of the Board of Directors
of MDC.
<PAGE>
Mr. Spencer Browne
September 22, 1994
Page 3
If you have any question, please call me.
Yours truly,
GILBERT GOLDSTEIN, P.C.
By: /s/ Gilbert Goldstein
----------------------------
Gilbert Goldstein
Approved and agreed to this
____ day of ____________________, 1994.
MDC HOLDINGS, INC.
By: /s/ Spencer Browne
------------------------------
Spencer Browne, President
<PAGE>
EMPLOYMENT AGREEMENT
AGREEMENT, dated December 19th, 1994, by and between M.D.C. Holdings,
Inc. (the "Company"), and Michael Touff (the "Employee").
WHEREAS, the Company desires to employ Employee and Employee is
willing to serve the Company upon the terms and conditions hereinafter provided;
NOW, THEREFORE, in consideration of the mutual promises contained
herein, the Company and the Employee agree as follows:
1. EMPLOYMENT AND DUTIES. The Company shall employ the Employee,
and the Employee shall be employed by the Company, as Vice President and General
Counsel, at the Company's headquarters in Denver, Colorado. In this capacity,
the Employee shall devote substantially all of his business time and energies to
the business of the Company and shall perform such services, consistent with his
office, as from time to time shall be assigned to him by the senior executive
officers and Board of Directors of the Company. Employee may engage in outside
activities provided that such activities have been disclosed to and approved by
the Company. The Company shall provide Employee with an office and secretarial
and support services as he may reasonably require for performance of his duties.
2. COMPENSATION AND BENEFITS.
(a) BASE SALARY. Commencing on December 31, 1994 (the
"Commencement Date") and during each calendar year for which Employee is
employed by the Company, the Company shall pay the Employee a base salary at a
rate of $210,000 per year (the "Base Salary"), payable in substantially equal
semi-monthly installments. Employee will be eligible for periodic increases in
Base Salary under the Company's normal policies and procedures for salary
increases. Employee's salary will not be reduced below its current level
without the consent of the Employee.
(b) ANNUAL INCENTIVE COMPENSATION. Employee will be entitled to
performance-based incentive and/or bonus compensation payable in accordance with
the Company's normal policies and procedures.
(c) LONG TERM INCENTIVE COMPENSATION.
(i) As of the Commencement Date, Employee is hereby granted
options to purchase 50,000 shares of the Company's common stock at the closing
price of the Company's common stock on that date. This option shall be
exercisable as to 12,500
<PAGE>
shares on the Commencement Date and cumulatively as to 12,500 additional shares
on each of the next three annual anniversaries of the Commencement Date. Except
as otherwise provided herein, the options shall be exercisable and governed by
and the shares registered in accordance with the M.D.C. Holdings, Inc. Employee
Equity Incentive Plan adopted in April, 1993.
(ii) Employee shall be eligible to participate in all
supplementary compensation and incentive plans or programs established by the
Company.
(d) EXPENSE REIMBURSEMENT. The Company promptly shall pay, or
reimburse the Employee for, all ordinary and necessary business expenses
incurred by him in the performance of his duties hereunder, provided that the
Employee properly accounts for them in accordance with Company policy. For
purposes hereof such necessary expenses shall include reasonable expenses
associated with relocation of Employee to the Company, professional memberships
and publications, continuing legal education expenses, and home office equipment
expense.
(e) OTHER BENEFIT PLANS, FRINGE BENEFITS, AND VACATIONS. The
Employee shall be eligible to participate as an Executive in its Executive
Medical Plan and in each of the Company's employee benefit plans, policies or
arrangements including without limitation the following:
(i) Reasonable vacation, scheduled to conform to Employee's
job responsibilities which during the first year shall not exceed two weeks.
(ii) Automobile allowance of $500 per month/and covered
parking privileges at the Employee's place of business.
(iii) The Company shall indemnify Employee for and hold him
harmless from any claims, liabilities or damages and associated expenses
(including attorneys' fees) arising out of his acts or omissions while serving
as an officer, director and/or employee of the Company (including its
subsidiaries and affiliates and/or any other entity for which Employee serves or
has served in such capacity for the benefit of the Company) to the fullest
extent permitted by applicable law. The Company shall maintain insurance
policies which provide coverage for Employee to the same extent and providing
limits of liability, deductibles and exclusions as are provided for the
Company's principal executive officers and outside directors. This covenant
shall survive termination of this Agreement for any reason.
-2-
<PAGE>
3. TERMINATION.
(a) DEATH AND DISABILITY OR VOLUNTARY RESIGNATION. The
Employee's employment hereunder shall terminate upon his voluntary resignation,
upon his death or upon his becoming totally disabled, in which case Employee, or
his estate, as the case may be, shall be entitled to payment of his Base Salary
and a pro-rated portion of any incentive compensation through the date of such
termination.
(b) FOR CAUSE. The Employee's employment hereunder may be
terminated for "Cause" which shall mean: (i) Employee's willful refusal to
perform material duties hereunder, (ii) Employee's commission of material acts
of fraud, dishonesty or misrepresentation in the performance of his duties
hereunder, or (iii) an act or acts on the Employee's part constituting a felony
under the laws of the United States or any state thereof. In the event of a
termination for Cause, Employee shall be entitled to payment of his Base Salary
through the date of termination.
(c) WITHOUT CAUSE. If, at any time during the first two years
of Employee's employment hereunder, the Employee's employment is terminated by
the Company without Cause, as soon as practicable (but not later than 30 days)
after such termination, he shall receive a lump sum cash payment equal to
$100,000.
(d) CHANGE IN CONTROL.
(i) If, at any time during the first two years of
Employee's employment hereunder, a "Change of Control" (as defined in the
Company's December 15, 1993 Senior Note Indenture) occurs, followed by a "Change
in Control Event," the Employee shall, if he so elects by written notice to the
Company within 360 days after such "Change in Control Event," be entitled to
terminate his employment, if not already terminated by the Company, and, in
either event receive the amount set forth in paragraph (c) above, as if the
Company had terminated his employment without Cause.
(ii) For purposes hereof a "Change in Control Event" shall
mean a Change of Control followed by:
a. The Company making any material reduction in the
Employee's duties or responsibilities from the position that the Employee
occupied on the date of the Change of Control;
-3-
<PAGE>
b. The Company assigning the Employee to another place
of employment which is more than 30 miles from the Company's current executive
offices;
c. The Company reducing the Employee's Base Salary,
annual or long term incentive compensation or benefits; or
d. The Company breaching the terms of this Agreement.
(e) If after the Commencement Date the Company develops a policy
or agreement for its senior executive officers which governs termination without
Cause and/or Change in Control, it is intended that this Agreement should be
modified so as to be consistent with such policy or agreement.
4. MISCELLANEOUS.
(a) GOVERNING LAW. This Agreement shall be governed by Delaware
law.
(b) NOTICES. Notices shall be in writing and deemed given when
personally delivered, or three days after deposit in the United States mail,
postage prepaid return receipt requested, to the parties at the following
addresses or at such other address as a party may specify by notice to the
other.
TO THE EMPLOYEE:
Michael Touff
85 South Birch Street
Denver, Colorado 80222
TO THE COMPANY:
M.D.C. Holdings, Inc.
3600 South Yosemite Street, Suite 900
Denver, Colorado 85237
Attention: Spencer I. Browne, President
(c) ENTIRE AGREEMENT; AMENDMENT. This Agreement supersedes any
agreements between the Employee and the Company relating to the terms of his
employment. It may not be amended except by a written agreement signed by both
parties.
(d) WAIVER. The failure of a party to insist upon strict
adherence to any term of this Agreement on any
-4-
<PAGE>
occasion shall not be considered a waiver thereof or deprive that party of the
right thereafter to insist upon strict adherence to that term or any other term
of this Agreement.
(e) ASSIGNMENT. This Agreement shall inure to the benefit of
and be binding upon the parties hereto and their respective heirs,
representatives, successors and assigns. This Agreement shall not be assignable
by Company or the Employee without the prior written consent of the other.
(f) ARBITRATION. Any dispute arising under this Agreement which
is not settled by agreement of the parties shall be resolved by binding
arbitration in Denver, Colorado pursuant to the rules and procedures of the
American Arbitration Association then in effect and judgment upon the award
rendered may be entered in any court having jurisdiction thereof.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement.
M.D.C. HOLDINGS, INC.
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
MICHAEL TOUFF
/s/ Michael Touff
-----------------------------------
-5-
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF M.D.C. HOLDINGS, INC.
ASFC-38, Inc.
ASFC-W, Inc.
ASW Finance Company
Asset Investors Equity, Inc.
Designer Door & Millwork of California, Inc.
ECM Holdings, Inc.
Enerwest, Inc.
FICUS Corporation
Financial Asset Management Corporation
Greenway Farms Development Corporation
HomeAmerican Mortgage Corporation
M.D.C./Wood, Inc.
M.D.C. Development and Pipeline Company
M.D.C. Acceptance Corporation
M.D.C. Construction Co.
M.D.C. Equities, Inc.
M.D.C. Financial Corporation
M.D.C. Home Finance Corporation
M.D.C. Home Mortgage Finance Corporation
M.D.C. Institutional Residuals, Inc.
M.D.C. Land Corporation
MDC Mortgage Finance, Inc.
M.D.C. Mortgage Funding Corporation II
M.D.C. Residual Holdings, Inc.
NNR/Stone Investment Co.
Petro Resources, Inc.
Richmond American Construction, Inc.
Richmond American Homes, Inc. -- a Florida corporation
Richmond American Homes, Inc. -- a Delaware corporation
Richmond American Homes of Arizona, Inc.
Richmond American Homes of California, Inc.
Richmond American Homes of Maryland, Inc.
Richmond American Homes of Nevada, Inc.
Richmond American of Potomac Knolls No. 1, Inc.
Richmond American of Potomac Knolls No. 2, Inc.
Richmond American of Potomac Knolls No. 3, Inc.
Richmond American of Potomac Knolls No. 4, Inc.
Richmond American of Potomac Knolls No. 5, Inc.
Richmond American of Potomac Knolls No. 6, Inc.
Richmond American Homes of Texas, Inc.
Richmond American Homes of Virginia, Inc.
Richmond Homes, Inc. I
Richmond Homes, Inc. II
Richmond Homes Limited
Richmond Realty, Inc.
Richmond Shelf, Inc.
T.C.V., Inc.
Van Schaack & Company
Van Schaack Referral Services, Inc.
Yosemite American Mortgage Corporation
Yosemite Financial, Inc.
995 Corporation
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in each Prospectus
constituting part of the Registration Statements on Form S-8 (no. 2-96464),
Form S-8 (no. 33-54429), Form S-3 (no. 33-52241), Form S-3 (no. 33-54007) and
Form S-4 (no. 33-52245) of M.D.C. Holdings, Inc. of our report dated
February 15, 1995 appearing on page F-2 of this Form 10-K.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Los Angeles, California
March 23, 1995
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from MDC
Holdings, Inc. consolidated financial statements included in its Form 10-K
for the year ended December 31, 1994 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<CASH> 43,564
<SECURITIES> 6,089
<RECEIVABLES> 12,508
<ALLOWANCES> 0
<INVENTORY> 464,157
<CURRENT-ASSETS> 0
<PP&E> 9,962
<DEPRECIATION> 0
<TOTAL-ASSETS> 725,445
<CURRENT-LIABILITIES> 0
<BONDS> 348,280
<COMMON> 212
0
0
<OTHER-SE> 192,083
<TOTAL-LIABILITY-AND-EQUITY> 725,445
<SALES> 793,793
<TOTAL-REVENUES> 824,869
<CGS> 749,329
<TOTAL-COSTS> 769,301
<OTHER-EXPENSES> 15,132
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,454
<INCOME-PRETAX> 30,982
<INCOME-TAX> 11,727
<INCOME-CONTINUING> 19,255
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,255
<EPS-PRIMARY> .94
<EPS-DILUTED> .87
</TABLE>
