FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C.
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2000
------------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the Transition Period From ______________ To _______________
Commission file number 1-14122
---------
D.R. HORTON, INC.
------------------
(Exact name of registrant as specified in its charter)
DELAWARE 75-2386963
--------------------------------- ------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1901 Ascension Blvd., Suite 100, Arlington, Texas 76006
-----------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(817) 856-8200
---------------
(Registrant's telephone number, including area code)
-------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock, $.01 par value -- 61,823,505 shares as of May 10, 2000
-------------
This Report contains 20 pages.
----
<PAGE>
INDEX
D.R. HORTON, INC.
PART I. FINANCIAL INFORMATION. Page
- ------------------------------ ----
ITEM 1. Financial Statements.
Consolidated Balance Sheets--March 31, 2000 and
September 30, 1999. 3
Consolidated Statements of Income--Three Months
and Six Months Ended March 31, 2000 and 1999. 4
Consolidated Statement of Stockholders' Equity--
Six Months Ended March 31, 2000. 5
Consolidated Statements of Cash Flows--Six Months
Ended March 31, 2000 and 1999. 6
Notes to Consolidated Financial Statements. 7-9
ITEM 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition. 10-16
ITEM 3. Quantitative and Qualitative Disclosures about
Market Risk 17
PART II. OTHER INFORMATION.
- ---------------------------
ITEM 2. Changes in Securities. 18
ITEM 4. Submission of Matters to a Vote of Security Holders. 18
ITEM 6. Exhibits and Reports on Form 8-K. 19
SIGNATURES. 20
- ----------
<PAGE>
D.R. HORTON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, September 30,
2000 1999
----------------------------
(In thousands)
(Unaudited)
ASSETS
Homebuilding:
Cash $ 79,618 $ 122,208
Inventories:
Finished homes and construction in progress 1,114,921 952,015
Residential lots - developed and
under development 1,032,460 909,586
Land held for development 4,286 4,507
---------- ----------
2,151,667 1,866,108
Property and equipment (net) 40,335 36,972
Earnest money deposits and other assets 136,112 96,807
Excess of cost over net assets acquired (net) 113,120 112,456
---------- ----------
2,520,852 2,234,551
---------- ----------
Financial Services:
Cash 5,779 6,360
Mortgage loans held for sale 91,433 113,786
Other assets 7,039 7,111
---------- ----------
104,251 127,257
---------- ----------
$2,625,103 $2,361,808
========== ==========
LIABILITIES
Homebuilding:
Accounts payable and other liabilities $ 342,070 $ 365,506
Notes payable:
Unsecured:
Revolving credit facility due 2002 500,000 395,000
8% senior notes due 2009, net 383,014 382,941
8 3/8% senior notes due 2004, net 148,348 148,150
10% senior notes due 2006, net 147,338 147,278
10 1/2% senior notes due 2005, net 149,415 -
Other secured 8,617 12,904
---------- ----------
1,136,732 1,086,273
---------- ----------
1,678,802 1,451,779
---------- ----------
Financial Services:
Accounts payable and other liabilities 2,746 3,268
Notes payable to financial institutions 76,800 104,350
---------- ----------
79,546 107,618
---------- ----------
1,758,348 1,559,397
---------- ----------
Minority interests 4,678 4,802
---------- ----------
STOCKHOLDERS' EQUITY
Preferred stock, $.10 par value, 30,000,000
shares authorized, no shares issued - -
Common stock, $.01 par value, 200,000,000
shares authorized, 64,396,305 at March 31,
2000 and 64,267,073 at September 30, 1999,
issued and outstanding. 644 643
Additional capital 420,643 419,259
Retained earnings 477,737 400,111
Treasury stock, 2,589,200 shares at March 31,
1999 and 1,484,300 shares at September 30, 1999,
at cost (36,947) (22,404)
---------- ----------
862,077 797,609
---------- ----------
$2,625,103 $2,361,808
========== ==========
See accompanying notes to consolidated financial statements.
-3-
<PAGE>
D. R. HORTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three Months Six Months
Ended March 31, Ended March 31,
------------------ -------------------
2000 1999 2000 1999
------- ------ ------ ------
(In thousands, except net income per share)
(Unaudited)
Homebuilding:
Revenues
Home sales................ $780,156 $683,174 $1,562,528 $1,294,875
Land/lot sales............ 7,958 7,426 23,150 48,553
-------- -------- ---------- -----------
788,114 690,600 1,585,678 1,343,428
-------- -------- ---------- -----------
Cost of sales
Home sales................ 636,990 562,138 1,272,822 1,056,141
Land/lot sales............ 7,332 6,154 18,137 42,931
-------- -------- ---------- -----------
644,322 568,292 1,290,959 1,099,072
-------- -------- ---------- -----------
Gross profit
Home sales................ 143,166 121,036 289,706 238,734
Land/lot sales............ 626 1,272 5,013 5,622
-------- -------- ---------- -----------
143,792 122,308 294,719 244,356
Selling, general and
administrative expense........ 82,133 68,648 164,830 137,591
Interest expense.............. 1,561 3,088 4,856 5,881
Other (income)................ (644) (734) (725) (1,724)
-------- -------- ---------- -----------
60,742 51,306 125,758 102,608
-------- -------- ---------- -----------
Financial Services:
Revenues...................... 10,750 8,481 22,126 16,283
Selling, general and
administrative expense........ 8,022 5,229 15,997 10,203
Interest expense.............. 1,157 669 2,706 1,412
Other (income)................ (1,290) (760) (3,023) (1,639)
-------- -------- ---------- -----------
2,861 3,343 6,446 6,307
-------- -------- ---------- -----------
INCOME BEFORE INCOME TAXES.. 63,603 54,649 132,204 108,915
Provision for income taxes.... 24,169 21,229 50,238 42,800
-------- -------- ---------- -----------
NET INCOME.................. $39,434 $33,420 $81,966 $66,115
======== ======== ========== ===========
Net income per share:
Basic..................... $0.64 $0.53 $1.32 $1.08
Diluted................... $0.63 $0.52 $1.31 $1.05
======== ======== ========== ===========
Weighted average number of
shares of stock outstanding:
Basic..................... 61,839 63,334 62,247 61,367
Diluted................... 62,265 64,251 62,711 62,960
======== ======== ========== ===========
Cash dividends per share...... $0.04 $0.03 $0.07 $0.0525
======== ======== ========== ===========
See accompanying notes to consolidated financial statements.
-4-
<PAGE>
D. R. HORTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Total
Common Additional Retained Treasury Stockholders'
Stock Capital Earnings Stock Equity
--------------------------------------------------
(In thousands)
(Unaudited)
Balances at October 1, 1999 $643 $419,259 $400,111 ($22,404) $797,609
Net income - - 81,966 - 81,966
Issuances under D.R. Horton,
Inc. employee benefit plans
(31,025 shares) - 329 - - 329
Exercise of stock options
(98,207 shares) 1 1,055 - - 1,056
Purchase of treasury stock
(1,104,900 shares) (14,543) (14,543)
Dividends declared
($.07 per share) - - (4,340) - (4,340)
--------------------------------------------------
Balances at March 31, 2000 $644 $420,643 $477,737 ($36,947) $862,077
==================================================
See accompanying notes to consolidated financial statements.
-5-
<PAGE>
D. R. HORTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months
Ended March 31,
--------------------
2000 1999
--------- ---------
(In thousands)
(Unaudited)
OPERATING ACTIVITIES
Net income $ 81,966 $ 66,115
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 10,508 9,017
Changes in operating assets and liabilities:
Increase in inventories (280,602) (238,421)
Increase in earnest money deposits and other assets (25,259) (28,744)
Decrease in mortgage loans held for sale 22,353 (6,638)
Decrease in accounts payable, accrued expenses and
customer deposits (24,082) 24,624
-------- --------
NET CASH USED IN OPERATING ACTIVITIES (215,116) (174,047)
-------- --------
INVESTING ACTIVITIES
Net purchase of property and equipment (8,848) (13,336)
Net investment in venture capital entities (15,071) ---
Net cash paid for acquisitions (4,800) (1,300)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (28,719) (14,636)
-------- --------
FINANCING ACTIVITIES
Proceeds from notes payable 355,000 366,825
Repayment of notes payable (285,302) (576,060)
Issuance of Senior Notes payable 148,464 377,134
Repurchase of treasury stock (14,543) (536)
Proceeds from common stock offerings and
stock associated with certain employee
benefit plans 1,385 2,497
Payment of cash dividends (4,340) (3,238)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 200,664 166,622
-------- --------
INCREASE (DECREASE) IN CASH (43,171) (22,061)
Cash at beginning of period 128,568 76,754
-------- --------
Cash at end of period $ 85,397 $ 54,693
======== ========
Supplemental cash flow information:
Interest paid $ 7,399 $ 6,868
======== ========
Income taxes paid $ 68,009 $ 47,000
======== ========
Supplemental disclosures of noncash activities:
Notes payable assumed related to acquisitions $ 0 $103,384
======== ========
Conversion of subordinated notes to common stock $ 0 $ 59,327
======== ========
Issuance of common stock related to acquisition $ 0 $ 55,000
======== ========
See accompanying notes to consolidated financial statements.
-6-
<PAGE>
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 2000
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited, consolidated financial statements include the
accounts of D.R. Horton, Inc. (the "Company") and its subsidiaries. Intercompany
accounts and transactions have been eliminated in consolidation. The statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and the instructions to Form 10-Q and
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair presentation
have been included. Certain reclassifications have been made in prior years'
financial statements to conform to classifications used in the current year.
Operating results for the three and six month periods ended March 31, 2000, are
not necessarily indicative of the results that may be expected for the year
ending September 30, 2000.
Business - The Company is a national builder that is engaged primarily in the
construction and sale of single-family housing in the United States. The Company
designs, builds and sells single-family houses on lots developed by the Company
and on finished lots which it purchases, ready for home construction.
Periodically, the Company sells land or lots it has developed. The Company also
provides title agency and mortgage brokerage services to its homebuyers.
NOTE B - SEGMENT INFORMATION
The Company's financial reporting segments consist of homebuilding and financial
services. The Company's homebuilding operations comprise the most substantial
part of its business, with approximately 99% of consolidated revenues for the
three and six months ended March 31, 2000 and 1999. The homebuilding operations
segment generates the majority of its revenues from the sale of completed homes
with a lesser amount from the sale of land and lots. The financial services
segment generates its revenues from originating and selling mortgages and
collecting fees for title insurance agency and closing services.
NOTE C - NET INCOME PER SHARE
Basic net income per share for the three and six month periods ended March 31,
2000 and 1999, is based on the weighted average number of shares of common stock
outstanding. Diluted net income per share is based on the weighted average
number of shares of common stock and dilutive common stock equivalents
outstanding.
The following table sets forth the computation of basic and diluted earnings per
share (in thousands):
Three months ended Six months ended
March 31, March 31,
------------------- ------------------
2000 1999 2000 1999
------- ------- ------- -------
Denominator for basic
earnings per share---
weighted average shares 61,839 63,334 62,247 61,367
Effect of dilutive securities:
6 7/8% convertible
subordinated notes - - - 659
Employee stock options 426 917 464 934
------- ------- ------- -------
Denominator for diluted
earnings per share---adjusted
weighted average shares and
assumed conversions 62,265 64,251 62,711 62,960
======= ======= ======= =======
Options to purchase 1,991,000 and 1,612,000 shares of common stock at various
prices were outstanding during the six months ended March 31, 2000 and 1999,
respectively, but were not included in the computation of diluted earnings per
share because the exercise prices were greater than the average market price of
the common shares and, therefore, their effect would be antidilutive.
-7-
<PAGE>
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
March 31, 2000
NOTE D - INTEREST
The Company capitalizes interest during development and construction.
Capitalized interest is charged to cost of sales as the related inventory is
delivered to the homebuyer. Interest costs are (in thousands):
Three months ended Six months ended
March 31, March 31,
------------------------ ---------------------
2000 1999 2000 1999
------ ------ ------ ------
Capitalized interest,
beginning of period $ 46,463 $ 32,759 $ 41,525 $ 35,153
Interest incurred
-homebuilding 24,971 22,868 47,072 38,151
Interest expensed:
Directly-homebuilding (1,561) (3,088) (4,856) (5,881)
Amortized to
cost of sales (14,725) (12,956) (28,593) (27,840)
-------- -------- -------- --------
Capitalized interest,
end of period $ 55,148 $ 39,583 $ 55,148 $ 39,583
======== ======== ======== ========
NOTE E - SUMMARIZED FINANCIAL INFORMATION
The 8%, 8 3/8%, 10% and 10 1/2% Senior Notes are fully and unconditionally
guaranteed, on a joint and several basis, by all of the Company's direct and
indirect subsidiaries other than certain inconsequential subsidiaries. Each of
the Guarantors is a wholly-owned subsidiary. Separate financial statements and
other disclosures concerning the guarantor subsidiaries are not presented
because management has determined that they are not material to investors.
Summarized financial information of the Company and its subsidiaries, including
the non-guarantor subsidiaries, is presented below. Additional financial
information relating to the non-guarantor financial services subsidiaries is
included in the accompanying financial statements.
As of and for the six months ended March 31, 2000 and 1999, and for the year
ended September 30, 1999 (in thousands):
<TABLE>
<CAPTION>
March 31, 2000 Nonguarantor Subsidiaries
(Unaudited) D.R. ------------------------- Inter-
Horton, Guarantor Financial company
Inc. Subsidiaries Services Other Eliminations Total
---------- -------------- ----------- --------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Total assets............. $2,301,199 $1,893,233 $105,109 $50,624 ($1,725,062) $2,625,103
Total liabilities........ 1,439,122 1,468,247 81,933 38,755 (1,265,031) 1,763,026
Total equity............. 862,077 424,986 23,176 11,869 (460,031) 862,077
Revenues................. 237,006 1,334,698 22,125 13,975 - 1,607,804
Gross profit............. 38,582 252,195 - 3,596 346 294,719
Net income............... 81,966 78,874 4,214 (75) (83,013) 81,966
<CAPTION>
March 31, 1999 Nonguarantor Subsidiaries
(Unaudited) D.R. ------------------------- Inter-
Horton, Guarantor Financial company
Inc. Subsidiaries Services Other Eliminations Total
---------- -------------- ----------- --------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Total assets............. $1,809,736 $1,759,925 $87,213 $31,602 ($1,585,704) $2,102,772
Total liabilities........ 1,081,135 1,405,400 78,893 20,593 (1,211,850) 1,374,171
Total equity............. 728,601 354,525 8,320 11,009 (373,854) 728,601
Revenues................. 261,060 1,070,182 16,283 12,186 - 1,359,711
Gross profit............. 34,402 202,052 - 2,503 - 238,957
Net income............... 66,115 49,861 3,829 (258) (53,432) 66,115
<CAPTION>
September 30, 1999 Nonguarantor Subsidiaries
D.R. ------------------------- Inter-
Horton, Guarantor Financial company
Inc. Subsidiaries Services Other Eliminations Total
---------- -------------- ----------- --------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Total assets............. $1,996,311 $1,865,148 $125,895 $31,302 ($1,656,848) $2,361,808
Total liabilities........ 1,198,702 1,465,596 108,476 19,663 (1,228,238) 1,564,199
Total equity............. 797,609 399,552 17,419 11,639 (428,610) 797,609
Revenues................. 551,696 2,540,077 37,251 27,187 - 3,156,211
Gross profit............. 95,509 456,302 - 6,069 334 558,214
Net income............... 159,827 144,575 7,929 78 (152,582) 159,827
</TABLE>
-8-
<PAGE>
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
March 31, 2000
NOTE E - SUMMARIZED FINANCIAL INFORMATION - Continued
Summarized cash flow information for the non-guarantor financial services
subsidiaries is presented below:
Six months
ended
March 31,
2000 1999
---------- ----------
(In thousands)
OPERATING ACTIVITIES
Net income......................................... $ 3,999 $ 3,829
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................. 555 247
Changes in operating assets and liabilities:
Decrease in other assets..................... 22 245
Decrease/(increase) in mortgage loans held
for sale................................... 22,353 (6,637)
Increase in accounts payable and
other liabilities.......................... 1,930 772
------- -------
NET CASH PROVIDED BY/(USED IN) OPERATING ACTIVITIES 28,859 (1,544)
------- -------
INVESTING ACTIVITIES
Purchase of property and equipment................. (505) (599)
------- -------
NET CASH USED IN INVESTING ACTIVITIES (505) (599)
------- -------
FINANCING ACTIVITIES
Net (repayments of)/proceeds from notes payable.... (27,549) 35,717
Decrease in amounts payable to parent.............. (1,386) (42,986)
------- -------
NET CASH USED IN FINANCING ACTIVITIES (28,935) (7,269)
------- -------
DECREASE IN CASH (581) (9,412)
Cash at beginning of period.......................... 6,360 13,017
------- -------
Cash at end of period................................ $ 5,779 $ 3,605
======= =======
Cash flows for the other non-guarantor subsidiaries are not significant in any
period presented.
-9-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - CONSOLIDATED
D. R. Horton, Inc. and subsidiaries (the "Company") provide homebuilding
activities in 23 states and 40 markets through its 47 homebuilding divisions.
Through its financial services segment, the Company also provides mortgage
banking and title agency services in many of these same markets.
Three Months Ended March 31, 2000 Compared to Three Months Ended March 31, 1999
Consolidated revenues for the three months ended March 31, 2000, increased
14.3%, to $798.9 million, from $699.1 million for the comparable period of 1999,
primarily due to increases in home sales revenues.
Income before income taxes for the three months ended March 31, 2000, increased
16.4%, to $63.6 million, from $54.6 million for the comparable period of 1999.
As a percentage of revenues, income before income taxes for the three months
ended March 31, 2000, increased 0.2%, to 8.0%, from 7.8% for the comparable
period of 1999, primarily due to the increase in gross margin percentage
achieved by the homebuilding segment and a decrease in homebuilding interest
expense.
The consolidated provision for income taxes increased 13.8%, to $24.2 million
for the three months ended March 31, 2000, from $21.2 million for the same
period of 1999, due to the corresponding increase in income before income taxes.
The effective income tax rate decreased 0.8%, to 38.0%, from 38.8% for the
comparable period of 1999, primarily due to changes in the estimated overall
effective state income tax rate.
Six Months Ended March 31, 2000 Compared to Six Months Ended March 31, 1999
Consolidated revenues for the six months ended March 31, 2000, increased 18.2%,
to $1,607.8 million, from $1,359.7 million for the comparable period of 1999,
primarily due to increases in home sales revenues.
Income before income taxes for the six months ended March 31, 2000, increased
21.4%, to $132.2 million, from $108.9 million for the comparable period of 1999.
As a percentage of revenues, income before income taxes for the six months ended
March 31, 2000, increased 0.2%, to 8.2%, from 8.0% for the comparable period of
1999, primarily due to the increase in gross margin percentage achieved by the
homebuilding segment.
The consolidated provision for income taxes increased 17.4%, to $50.2 million
for the six months ended March 31, 2000, from $42.8 million for the same period
of 1999, primarily due to the corresponding increase in income before income
taxes. The effective income tax rate decreased 1.3%, to 38.0%, from 39.3% for
the comparable period of 1999, primarily due to changes in the estimated overall
effective state income tax rate.
-10-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - HOMEBUILDING
The following tables set forth certain operating and financial data for the
Company's homebuilding activities:
<TABLE>
<CAPTION>
Percentages of Homebuilding Revenues
Three Months Ended Six Months Ended
March 31, March 31,
2000 1999 2000 1999
Costs and expenses: ------ ------ ------ ------
<S> <C> <C> <C> <C>
Cost of sales........................ 81.8% 82.3% 81.4% 81.8%
Selling, general and administrative
expense.............................. 10.4% 9.9% 10.4% 10.2%
Interest expense..................... 0.2% 0.5% 0.3% 0.5%
------ ------ ------ ------
Total costs and expenses..................... 92.4% 92.7% 92.1% 92.5%
Other (income)............................... (0.1%) (0.1%) 0.0% (0.1%)
------ ------ ------ ------
Income before income taxes................... 7.7% 7.4% 7.9% 7.6%
====== ====== ====== ======
<CAPTION>
Homes Closed
Three Months Ended March 31, Six Months Ended March 31,
2000 1999 2000 1999
---- ---- ---- ----
Homes Homes Homes Homes
Closed Revenues Closed Revenues Closed Revenues Closed Revemues
-------- -------- -------- -------- -------- -------- -------- --------
($'s in millions) ($'s in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mid-Atlantic......... 680 $133.7 707 $130.0 1,327 $ 257.6 1,339 $ 243.4
Midwest.............. 443 95.9 375 71.3 954 200.9 621 117.5
Southeast............ 656 109.4 589 94.5 1,248 207.5 1,184 188.3
Southwest............ 1,825 270.1 1,795 244.7 3,715 545.2 3,440 463.5
West................. 760 171.1 697 142.7 1,612 351.3 1,425 282.2
-------- -------- -------- -------- -------- --------- -------- ---------
4,364 $780.2 4,163 $683.2 8,856 $1,562.5 8,009 $1,294.9
======== ======== ======== ======== ======== ========= ======== =========
<CAPTION>
New Sales Contracts (net of cancellations)
Three Months Ended March 31, Six Months Ended March 31,
2000 1999 2000 1999
---- ---- ---- ----
Homes Homes Homes Homes
Sold $ Sold $ Sold $ Sold $
-------- -------- -------- -------- -------- -------- -------- --------
($'s in millions) ($'s in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mid-Atlantic......... 761 $153.2 930 $170.8 1,330 $ 275.3 1,501 $ 282.4
Midwest.............. 476 110.0 566 111.6 841 208.0 794 157.1
Southeast............ 824 142.5 813 131.3 1,442 243.3 1,358 216.3
Southwest............ 2,360 363.2 2,289 324.4 3,994 616.4 3,934 553.9
West................. 1,013 226.1 1,033 200.0 1,678 374.4 1,581 309.1
-------- -------- -------- -------- -------- --------- -------- ---------
5,434 $995.0 5,631 $938.1 9,285 $1,717.4 9,168 $1,518.8
======== ======== ======== ======== ======== ========= ======== =========
<CAPTION>
Sales Backlog
March 31,
2000 1999
---- ----
Homes $ Homes $
-------- --------- -------- ---------
($'s in millions)
<S> <C> <C> <C> <C>
Mid-Atlantic................................. 1,094 $ 260.5 1,094 $ 219.9
Midwest...................................... 1,021 254.3 1,044 212.5
Southeast.................................... 1,030 176.4 907 144.3
Southwest.................................... 3,360 544.1 3,537 514.3
West......................................... 1,233 276.1 1,370 278.3
-------- --------- -------- --------
7,738 $1,511.4 7,952 $1,369.3
======== ========= ======== ========
<FN>
The Company's market regions consist of the following markets:
Mid-Atlantic Charleston, Charlotte, Columbia, Greensboro, Greenville,
Hilton Head, Myrtle Beach, New Jersey, Newport News,
Raleigh/Durham, Richmond, Suburban Washington D.C. and
Wilmington
Midwest Chicago, Cincinnati, Louisville, Minneapolis/St. Paul and
St. Louis
Southeast Atlanta, Birmingham, Jacksonville, Nashville, Orlando,
Pensacola and South Florida
Southwest Albuquerque, Austin, Dallas/Fort Worth, Houston, Killeen,
Phoenix, San Antonio and Tucson
West Denver, Las Vegas, Los Angeles, Portland, Sacramento,
Salt Lake City and San Diego
</FN>
</TABLE>
-11-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three Months Ended March 31, 2000 Compared to Three Months Ended March 31, 1999
Revenues from homebuilding activities increased 14.1%, to $788.1 million (4,364
homes closed) for the three months ended March 31, 2000, from $690.6 million
(4,163 homes closed) for the comparable period of 1999. Revenues from
homebuilding activities increased in all of the Company's market regions, with
percentage increases ranging from 2.8% in the Mid-Atlantic region to 34.4% in
the Midwest region. The increases in both revenues and homes closed were due to
strong housing demand throughout the majority of the Company's markets.
The average selling price of homes closed during the three months ended March
31, 2000 was $178,800, up 9.0% from $164,100 for the same period in 1999. The
increase in average selling price was due to changes in the mix of homes closed
and, with the strong housing demand, the Company's ability to sell more custom
features with its homes and to raise prices to cover increased costs.
The value of new net sales contracts increased 6.1%, to $995.0 million (5,434
homes) for the three months ended March 31, 2000, from $938.1 million (5,631
homes) for the same period of 1999. The value of new net sales contracts
increased in three of the Company's five market regions, with percentage
increases ranging from 8.5% in the Southeast to 13.0% in the West. The value of
new net sales contracts declined 1.4% and 10.3% in the Midwest and Mid-Atlantic
regions, respectively. The average price of a new net sales contract in the
three months ended March 31, 2000 was $183,100, up 9.9% over the $166,600
average in the three months ended March 31, 1999. The increase in average
selling price was due to changes in the mix of homes closed and, with the strong
housing demand, the Company's ability to sell more custom features with its
homes and to raise prices to cover increased costs.
At March 31, 2000, the Company's backlog of sales contracts was $1,511.4 million
(7,738 homes), up 10.4% from the comparable amount at March 31, 1999. The
average sales price of homes in sales backlog was $195,300 at March 31, 2000, up
13.4% from the $172,200 average at March 31, 1999. The average sales price of
homes in backlog typically is higher than the sales price of closed homes
because it takes longer to construct more expensive homes.
Cost of sales increased by 13.4%, to $644.3 million for the three months ended
March 31, 2000, from $568.3 million for the comparable quarter in 1999. The
increase in cost of sales was primarily attributable to the increase in
revenues. Cost of home sales as a percentage of home sales revenues was down
0.7%, to 81.6% for the three months ended March 31, 2000, from 82.3% for the
comparable period of 1999, primarily due to the application of purchase
accounting in 1999 causing a $7.4 million inventory write-up associated with
homes acquired with Cambridge and closed subsequent to the acquisition. Cost of
land/lot sales increased to 92.1% of land/lot sales revenues for the three
months ended March 31, 2000, from 82.9% for the comparable period of 1999. Total
homebuilding cost of sales was 81.8% of total homebuilding revenues, down 0.5%
from 82.3% for the comparable period of 1999.
Selling, general and administrative (SG&A) expenses from homebuilding activities
increased by 19.6%, to $82.1 million in the three months ended March 31, 2000,
from $68.6 million in the comparable period of 1999. As a percentage of
revenues, SG&A expenses increased to 10.4% for the three months ended March 31,
2000, from 9.9% for the comparable period of 1999. The increase in SG&A expenses
as a percentage of revenue is primarily due to higher costs incurred in order to
ensure that the Company is properly positioned for its peak home-closing
season, which normally occurs during the second half of the fiscal year.
Interest expense associated with homebuilding activities decreased to $1.6
million in the three months ended March 31, 2000, from $3.1 million in the
comparable period of 1999. As a percentage of homebuilding revenues,
homebuilding interest expense decreased to 0.2% for the three months ended March
31, 2000, from 0.5% in the comparable period of 1999. In anticipation of the
spring selling season, the Company rapidly increased its inventory during the
three months ended March 31, 2000. As a result, inventory under construction or
development grew at a more rapid pace than interest-bearing debt. Therefore,
compared to 1999, a larger proportion of total incurred interest was capitalized
to inventory in the second quarter of fiscal 2000. The
-12-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Company follows a policy of capitalizing interest only on inventory under
construction or development. During both periods, the Company expensed the
portion of incurred interest and other financing costs which could not be
charged to inventory. Capitalized interest and other financing costs are
included in cost of sales at the time of home closings.
Six Months Ended March 31, 2000 Compared to Six Months Ended March 31, 1999
Revenues from homebuilding activities increased 18.0%, to $1,585.7 million
(8,856 homes closed) for the six months ended March 31, 2000, from $1,343.4
million (8,009 homes closed) for the comparable period of 1999. Revenues from
homebuilding activities increased in all of the Company's market regions, with
percentage increases ranging from 5.8% in the Mid-Atlantic region to 71.0% in
the Midwest region. The increases in both revenues and homes closed were due to
strong housing demand and the increases attributable to the acquisition of
Cambridge Homes in January, 1999. In markets where the Company operated
throughout both six-month periods, home sales revenues increased by 15.6%, to
$1,493.0 million (8,538 homes closed).
The average selling price of homes closed during the six months ended March 31,
2000 was $176,400, up 9.1% from $161,700 for the same period in 1999. The
increase in average selling price was due to changes in the mix of homes closed
and, with the strong housing demand, the Company's ability to sell more custom
features with its homes and to raise prices to cover increased costs.
The value of new net sales contracts increased 13.1%, to $1,717.4 million (9,285
homes) for the six months ended March 31, 2000, from $1,518.8 million (9,168
homes) for the same period of 1999. The value of new net sales contracts
increased in four of the Company's five market regions, with percentage
increases ranging from 11.3% in the Southwest to 32.4% in the Midwest. The value
of new net sales contracts declined 2.5% in the Mid-Atlantic region. The overall
increase in the value of new net sales contracts was due in part to sales
achieved by Cambridge Homes, acquired in January, 1999. In markets where the
Company operated throughout both six-month periods, the value of new net sales
contracts increased 8.9%, to $1,648.7 million, and the number of new net sales
contracts decreased 1.2%, to 9,038 homes. The average price of a new net sales
contract in the six months ended March 31, 2000 was $185,000, up 11.6% over the
$165,700 average in the six months ended March 31, 1999. The increase in average
selling price was due to changes in the mix of homes closed and, with the strong
housing demand, the Company's ability to sell more custom features with its
homes and to raise prices to cover increased costs.
Cost of sales increased by 17.5%, to $1,291.0 million for the six months ended
March 31, 2000, from $1,099.1 million for the comparable period of 1999. The
increase in cost of sales was primarily attributable to the increase in
revenues. Cost of home sales as a percentage of home sales revenues was down
0.1%, to 81.5% for the six months ended March 31, 2000, from 81.6% for the
comparable period of 1999. Cost of land/lot sales decreased to 78.3% of land/lot
sales revenues for the six months ended March 31, 2000, from 88.4% for the
comparable period of 1999. Total homebuilding cost of sales was 81.4% of total
homebuilding revenues, down 0.4% from 81.8% for the comparable period of 1999.
Selling, general and administrative (SG&A) expenses from homebuilding activities
increased by 19.8%, to $164.8 million in the six months ended March 31, 2000,
from $137.6 million in the comparable period of 1999. As a percentage of
revenues, SG&A expenses increased to 10.4% for the six months ended March 31,
2000, from 10.2% for the comparable period of 1999. The increase in SG&A
expenses as a percentage of revenue is primarily due to higher costs incurred in
order to ensure that the Company is properly positioned for its peak home-
closing season, which normally occurs during the second half of the fiscal year.
Interest expense associated with homebuilding activities decreased to $4.9
million in the six months ended March 31, 2000, from $5.9 million in the
comparable period of 1999. As a percentage of homebuilding revenues,
homebuilding interest expense decreased to 0.3% for the six months ended March
31, 2000, from 0.5% for the comparable period of 1999. In anticipation of the
spring selling season, the Company rapidly increased its inventory during the
second quarter. As a result, inventory under construction or development grew at
a more rapid pace than interest-bearing debt. Therefore, in both the three and
six months
-13-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ended March 31, 2000, a larger proportion of total incurred interest was
capitalized to inventory than in the comparable periods of fiscal 1999. The
Company follows a policy of capitalizing interest only on inventory under
construction or development. During both periods, the Company expensed the
portion of incurred interest and other financing costs which could not be
charged to inventory. Capitalized interest and other financing costs are
included in cost of sales at the time of home closings.
RESULTS OF OPERATIONS - FINANCIAL SERVICES
The following table summarizes financial and other information for the Company's
financial services operations:
Three months ended Six months ended
March 31, March 31,
---------------------------------------------
2000 1999 2000 1999
---- ---- ---- ----
($'s in thousands)
Number of loans originated....... 1,831 1,911 3,773 3,668
------ ------ ------ -------
Loan origination fees............ $2,146 $2,030 $4,345 $3,772
Sale of servicing rights and
gains from sale of mortgages... 4,514 4,025 9,267 7,964
Other revenues................... 994 918 2,202 1,723
------ ------ ------ -------
Total mortgage banking revenues.. 7,654 6,973 15,814 13,459
Title policy premiums, net....... 3,096 1,508 6,312 2,824
------ ------ ------ -------
Total revenues.................. 10,750 8,481 22,126 16,283
General and administrative
expenses........................ 8,022 5,229 15,997 10,203
Interest expense................. 1,157 669 2,706 1,412
Interest/other (income).......... (1,290) (760) (3,023) (1,639)
------ ------ ------ -------
Income before income taxes....... $2,861 $3,343 $6,446 $6,307
====== ====== ====== =======
Three Months Ended March 31, 2000 Compared to Three Months Ended March 31, 1999
Revenues from the financial services segment increased 26.8%, to $10.8 million
in the three months ended March 31, 2000, from $8.5 million in the comparable
period of 1999. The increase in financial services revenues was due to the rapid
expansion of the Company's mortgage loan and title services provided to
customers of the Company's homebuilding segment. These activities are being
expanded to additional markets served by the homebuilding segment. SG&A expenses
associated with financial services increased 53.4%, to $8.0 million in the three
months ended March 31, 2000, from $5.2 million in the comparable period of 1999.
As a percentage of financial services revenues, SG&A expenses increased by
12.9%, to 74.6% in the three months ended December 31, 1999, from 61.7% in the
comparable period in 1999, due primarily to 2000 startup expenses in new markets
with limited revenues.
Six months Ended March 31, 2000 Compared to Six months Ended March 31, 1999
Revenues from the financial services segment increased 35.9%, to $22.1 million
in the six months ended March 31, 2000, from $16.3 million in the comparable
period of 1999. The increase in financial services revenues was due to the rapid
expansion of the Company's mortgage loan and title services provided to
customers of the Company's homebuilding segment. These activities are being
expanded to additional markets served by the homebuilding segment. SG&A expenses
associated with financial services increased 56.8%, to $16.0 million in the six
months ended March 31, 2000, from $10.2 million in the comparable period of
1999. As a percentage of financial services revenues, SG&A expenses increased by
9.6%, to 72.3% in the six months ended December 31, 1999, from 62.7% in the
comparable period in 1999, due primarily to 2000 startup expenses in new markets
with limited revenues.
-14-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, the Company had available cash and cash equivalents of $85.4
million. Inventories (including finished homes, construction in progress, and
developed residential lots and other land) at March 31, 2000, had increased by
$285.6 million since September 30, 1999, due to a general increase in business
activity and the expansion of operations in the Company's market areas. The
inventory increase was financed largely by issuing $150 million in senior notes,
borrowing an additional $105.0 million under the revolving credit facility and
by retaining earnings. As a result, the Company's ratio of homebuilding notes
payable to total capital at March 31, 2000, increased 3.1% to 60.8%, from 57.7%
at September 30, 1999. The stockholders' equity to total assets ratio decreased
1.0%, to 32.8% at March 31, 2000, from 33.8% at September 30, 1999.
The Company has an $825 million, unsecured revolving credit facility, consisting
of a $775 million four-year revolving loan and a $50 million four-year letter of
credit facility that matures in 2002. Additionally, the Company has another $25
million standby letter of credit agreement and a $16.8 million non-renewable
letter of credit facility acquired with the Cambridge acquisition. At March 31,
2000, the Company had outstanding homebuilding debt of $1,336.7 million, of
which $500 million represented advances under the revolving credit facility.
Under the debt covenants associated with the revolving credit facility, at March
31, 2000, the Company had additional homebuilding borrowing capacity of $275
million. The Company has entered into multi-year interest rate swap agreements,
aggregating $200 million, that fix the interest rate on a portion of the
variable rate revolving credit facility. An additional interest rate swap
agreement, with a notional amount of $148.5 million, was entered into in
December, 1999. The new agreement has the effect of converting part of the
Company's fixed rate debt to a variable rate which is currently less than the
related fixed rate. The new agreement helps re-establish the Company's balance
of fixed and variable rate debt at historical levels.
On March 21, 2000, under an existing shelf registration statement, the Company
issued $150 million aggregate principal amount of 10 1/2% Senior Notes, due
2005. The proceeds of the notes were used to repay outstanding debt under our
revolving credit facility and for general corporate purposes. The Company has
$450 million remaining on its currently effective universal shelf registration
statement, which facilitates access to the capital markets.
At March 31, 2000, the financial services segment has mortgage loans held for
sale of $91.4 million and loan commitments for $107.6 million at fixed rates.
The Company hedges the interest rate market risk on these mortgage loans held
for sale and loan commitments through the use of best-efforts whole loan
delivery commitments, mandatory forward commitments to sell mortgage-backed
securities and the purchase of options on financial instruments.
The financial services segment has a $175 million, one-year bank warehouse
facility that is secured by mortgage loans held for sale. The warehouse facility
is not guaranteed by the parent company. As of March 31, 2000, $76.8 million had
been drawn under this facility. In the future, it is anticipated that all
mortgage company activities will be financed under the warehouse facility.
The Company's rapid growth and acquisition strategy require significant amounts
of cash. It is anticipated that future home construction, lot and land purchases
and acquisitions will be funded through internally generated funds and existing
credit facilities. Additionally, an effective shelf registration contains about
7.4 million shares of common stock issuable to effect, in whole or in part,
possible future acquisitions. In the future, the Company intends to maintain
effective shelf registration statements that would facilitate access to the
capital markets.
During the six months ended March 31, 2000, the Company's Board of Directors
declared one quarterly cash dividend of $0.03 per common share and one quarterly
cash dividend of $0.04 per common share, the last of which was paid on February
7, 2000.
In November, 1998, the Company's Board of Directors approved stock and debt
repurchase programs for up to $100 million each. These programs are intended to
allow the Company to repurchase securities at attractive prices should favorable
market conditions occur. During the six months ended March 31, 2000, the Company
repurchased in the open market $14.5 million of its common stock, or 1,104,900
shares at an average cost of $13.16.
-15-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In July 1999, the Company formed GP-Encore, Inc. and Encore II, Inc., which have
since entered into three separate limited partnership agreements with the
purpose of investing in start-up and emerging growth companies whose technology
and business plans will permit the Company to leverage its size, expertise and
customer base in the homebuilding industry. The Company has agreed to invest up
to $125 million through these limited partnerships over the next four years.
These investments will be concentrated primarily in e-commerce businesses that
serve the homebuilding, real estate and financial services industries, as well
as in strategic opportunities that allow for diversification of the Company's
operations. As of March 31, 2000, the Company had made such investments
totaling $15.3 million, which are reported in homebuilding other assets.
Except for ordinary expenditures for the construction of homes, the acquisition
of land and lots for development and sale of homes, at March 31, 2000, the
Company had no material commitments for capital expenditures.
SAFE HARBOR STATEMENT
Certain statements contained herein, as well as statements made by the Company
in periodic press releases and oral statements made by the Company's officials
to analysts and stockholders in the course of presentations about the Company
may be construed as "Forward-Looking Statements" as defined in the Private
Securities Litigation Reform Act of 1995. Such statements may involve unstated
risks, uncertainties and other factors that may cause actual results to differ
materially from those initially anticipated. Such risks, uncertainties and other
factors include, but are not limited to:
o The Company's substantial leverage
o Changes in general economic and business conditions
o Changes in interest rates and the availability of mortgage financing
o Governmental regulations and environmental matters
o Changes in costs and availability of material, supplies and labor
o Competitive conditions within the homebuilding industry
o The availability of capital
o The Company's ability to effect its growth strategies successfully
o The success of the Company's diversification efforts
-16-
<PAGE>
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
The Company is subject to interest rate risk on its long term debt. The Company
manages its exposure to changes in interest rates by optimizing the use of
variable and fixed rate debt. In addition, the Company has hedged its exposure
to changes in interest rates on its variable rate bank debt by entering into
interest rate swap agreements to obtain a fixed interest rate for a portion of
those borrowings. Finally, in order to maintain a more appropriate balance of
variable and fixed rate debt, the Company entered into an interest rate swap
agreement exchanging a variable rate interest payment for a fixed rate payment
on a notional amount equal to the $148.5 million principal amount of the 10%
Senior Notes due 2006. The variable payment for which the Company is obligated
is fixed through the 10% Senior Notes' first call date, April 15, 2001, and will
ensure that the Company will have received a net amount of $2.3 million as of
that date. Thereafter, the variable payment will be made through the 10% Senior
Notes' maturity, April 15, 2006, and will be based upon the 90-day LIBOR rate,
plus 2.745%.
The following table shows, as of March 31, 2000, the Company's long term debt
obligations, principal cash flows by scheduled maturity, weighted average
interest rates and estimated fair market value. In addition, the table shows the
notional amounts and weighted average interest rates of the Company's interest
rate swaps.
<TABLE>
<CAPTION>
Six Months
Ended
Sept. 30, Year ended September 30,
---------- --------------------------------------------------------------------------------
($ in millions)
FMV @
2000 2001 2002 2003 2004 Thereafter Total 3/31/00
----- ----- ----- ----- ----- ---------- -------- ---------
Debt:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed rate.............. $4.7 $0 $2.0 $0 $149.4 $680.6 $836.7 $754.2
Average interest rate... 8.63% --- 6.00% --- 8.46% 9.32% 8.92% ---
Variable rate........... $76.8 $0 $500.0 $0 $0 $0 $576.8 $576.8
Average interest rate... 7.13% --- 7.03% --- --- --- 7.04% ---
Interest Rate Swaps:
Variable to fixed....... $200.0 $200.0 $200.0 $200.0 $200.0 $200.0 --- $3.4
Average pay rate........ 5.10% 5.10% 5.10% 5.10% 5.10% 5.08% --- ---
Average receive rate.... 90-day LIBOR
Fixed to variable....... $148.5 $148.5 $148.5 $148.5 $148.5 $148.5 --- ($1.8)
Average pay rate........ 8.745% * 90-day LIBOR + 2.745% --- ---
Average receive rate.... 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% --- ---
* - 8.745% until April 15, 2001; 90-day LIBOR + 2.745% thereafter.
</TABLE>
-17-
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. Changes in Securities.
On March 21, 2000 the Company issued $150 million principal amount of
its 10-1/2 % Senior Notes, due 2005 (the "Notes"). As part of that issuance, the
Company executed an Eighth Supplemental Indenture, dated as of March 21, 2000,
among the Company, the Guarantors named therein and American Stock Transfer &
Trust Company, as Trustee, authorizing the Notes. The Supplemental Indenture,
and the Indenture to which it relates (dated June 9, 1997, as supplemented),
impose limitations on the ability of the Company and its subsidiaries
guaranteeing the Notes to, among other things, incur indebtedness, make
"Restricted Payments" (as defined, which includes payments of dividends or other
distributions on the Common Stock of the Company), effect certain "Asset
Dispositions" (as defined), enter into certain transactions with affiliates,
merge or consolidate with any person, or transfer all or substantially all of
their properties and assets. These limitations are substantially similar to the
limitations already existing with respect to the Company's 8% Senior Notes, due
2009, and related Indentures and Supplemental Indentures. Other information
concerning the offering and issuance of the Notes has previously been reported
in, and is described in, the Company's Registration Statement on Form S-3
(Registration Number 333-76175) dated April 13, 1999, the Company's Prospectus
Supplement, dated March 16, 2000 and filed with the Securities Exchange
Commission (the "Commission") on March 17, 2000 pursuant to Rule 424(b), and the
Company's current report on Form 8-K, dated March 17, 2000 and filed with the
Commission on March 17, 2000, each of which is incorporated herein by reference.
ITEM 4. Submission of Matters to a Vote of Security Holders.
(a) On January 20, 2000, the Company held its Annual Meeting
of Stockholders (the "Meeting"). At the Meeting, the stockholders
re-elected nine members of the Board of Directors of the Company to
serve until the Company's next annual meeting of stockholders and until
their respective successors are elected and qualified. The names of the
nine directors, the votes cast for and the number of votes withheld
were as follows:
Name Votes For Votes Withheld
---- --------- --------------
Bradley S. Anderson 54,678,867 972,456
Richard Beckwitt 54,335,593 1,315,730
Richard I. Galland 54,671,515 979,808
Donald R. Horton 54,546,766 1,104,557
Richard L. Horton 54,533,394 1,117,929
Terrill J. Horton 54,533,944 1,117,379
Francine I. Neff 54,661,522 989,801
Scott J. Stone 54,336,504 1,314,819
Donald J. Tomnitz 54,532,323 1,119,000
(b) At the Meeting, a vote was taken for the approval and adoption of a
proposal to adopt the D.R. Horton, Inc. 2000 Incentive Bonus Plan. The
following votes were cast upon this proposal:
For: 54,273,615
Against: 1,306,503
Abstain: 71,204
-18-
<PAGE>
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
4.1 Indenture, dated as of June 9, 1997, among the
Company, the guarantors named therein and American
Stock Transfer & Trust Company, as Trustee, relating
to Senior Debt Securities, is incorporated herein by
reference from Exhibit 4.1(a) to the Company's
Registration Statement on Form S-3 (Registration No.
333-27521), filed with the Commission on May 21,
1997.
4.2 Sixth Supplemental Indenture, dated as of February 4,
1999, among the Company, the guarantors named therein
and American Stock Transfer & Trust Company, as
Trustee, relating to the 8% Senior Notes due 2009,
including the form of the Company's 8% Senior Notes
due 2009, is incorporated herein by reference from
Exhibit 4.1 to the Company's Form 8-K, filed with the
Commission on February 2, 1999.
4.3 Seventh Supplemental Indenture, dated as of August
31, 1999, among the Company, the guarantors named
therein and American Stock Transfer & Trust Company,
as Trustee, is incorporated herein by reference from
Exhibit 4.9 to the Company's Annual Report on Form
10-K for the fiscal year ended September 30, 1999,
filed with the Commission on December 10, 1999.
4.4 Eighth Supplemental Indenture, dated as of March 21,
2000, among the Company, the guarantors named therein
and American Stock Transfer & Trust Company, as
Trustee, relating to the 10- 1/2% Senior Notes due
2005, is incorporated herein by reference from
Exhibit 4.1 to the Company's Form 8-K, filed with the
Commission on March 17, 2000.
4.5 Ninth Supplemental Indenture, dated as of March 31,
2000, among the Company, the guarantors named therein
and American Stock Transfer & Trust Company, as
Trustee, is filed herewith.
10.1 The D.R. Horton, Inc. 2000 Incentive Bonus Plan is
incorporated by reference from Exhibit A to the
Company's Proxy Statement, filed with the Commission
on December 10, 1999.
10.2 First Amendment to Non-Qualified Stock Option
Agreements, dated as of March 15, 2000, between the
Company and Richard Beckwitt is filed herewith.
10.3 Letter Agreement concerning partial bonus under
Incentive Bonus Plan, dated March 15, 2000, between
the Company and Richard Beckwitt is filed herewith.
10.4 Limited Partnership Agreement of Encore Venture
Partners II (Texas), L.P., dated as of March 21,
2000, among GP-Encore, Inc. (formerly, Encore I,
Inc.), Encore II, Inc., EVP Capital, L.P. (formerly,
Encore Capital (Texas), L.P.) and Richard Beckwitt
is filed herewith.
27 Financial Data Schedule for the six months ended
March 31, 2000 is filed herewith.
(b) Reports on Form 8-K.
On March 17, 2000, the Company filed a Current Report
on Form 8-K (Items 5 and 7), which filed an underwriting
agreement, a supplemental indenture and a statement of
computation of ratio of earnings to fixed changes, all
relating to the offering and issuance of $150 million
principal amount of the Company's 10 1/2% Senior Notes, due
2005.
-19-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
D.R. HORTON, INC.
Date: May 12, 2000 By: /s/ Samuel R. Fuller
-----------------------
Samuel R. Fuller, on behalf of D.R. Horton, Inc.
and as Executive Vice President, Treasurer and
Chief Financial Officer (Principal Financial and
Accounting Officer)
-20-
EXHIBIT 4.5
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
D.R. HORTON, INC. AND THE GUARANTORS PARTY HERETO
AND
AMERICAN STOCK TRANSFER & TRUST COMPANY,
as
Trustee
------------------
NINTH SUPPLEMENTAL INDENTURE
Dated as of March 31, 2000
------------------
10 1/2 % SENIOR NOTES
DUE 2005
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
NINTH SUPPLEMENTAL INDENTURE, dated and effective as of March 31, 2000,
to the Indenture, dated as of June 9, 1997 (as amended, modified or supplemented
from time to time in accordance therewith, the "Indenture"), by and among D.R.
HORTON, INC., a Delaware corporation (the "Company"), the ADDITIONAL GUARANTORS
(as defined herein), the EXISTING GUARANTORS (as defined herein) and AMERICAN
STOCK TRANSFER & TRUST COMPANY, as trustee (the "Trustee").
RECITALS
WHEREAS, the Company and the Trustee entered into the Indenture to
provide for the issuance from time to time of senior debt securities (the
"Securities") to be issued in one or more series as the Indenture provides;
WHEREAS, pursuant to the Eighth Supplemental Indenture dated as of
March 21, 2000 (the "Eighth Supplemental Indenture"), among the Company, the
guarantors party thereto ( the "Existing Guarantors") and the Trustee, the
Company issued a series of Securities designated as its 10 1/2 % Senior Notes
due 2005 in the aggregate principal amount of up to $150,000,000 (the "10 1/2 %
Notes");
WHEREAS, pursuant to Section 4.05 of the Indenture, if the Company
organizes, acquires or otherwise invests in another Subsidiary which becomes a
Restricted Subsidiary, then such Subsidiary shall execute and deliver a
supplemental indenture pursuant to which such Restricted Subsidiary shall
unconditionally guarantee all of the Company's obligations under the Securities
on the terms set forth in the Indenture;
WHEREAS, the execution of this Ninth Supplemental Indenture has been
duly authorized by the Boards of Directors of the Company and the Additional
Guarantors and all things necessary to make this Ninth Supplemental Indenture a
valid, binding and legal instrument according to its terms have been done and
performed;
NOW THEREFORE, for and in consideration of the premises, the Company,
the Additional Guarantors and the Existing Guarantors covenant and agree with
the Trustee for the equal and ratable benefit of the respective holders of the
Securities as follows:
ARTICLE I.
ADDITIONAL GUARANTORS
1.1. As of March 31, 2000, and in accordance with Section 4.05 of
the Indenture, the following Restricted Subsidiaries (the "Additional
Guarantors") hereby unconditionally guarantee
NINTH SUPPLEMENTAL INDENTURE Page 1
<PAGE>
all of the Company's obligations under the 10 1/2 % Notes on the terms set forth
in the Indenture, including without limitation Article Nine thereof, Article One
of the Eighth Supplemental Indenture thereto and the Guarantees affixed thereto:
Jurisdiction of
Name Organization
- ---- ------------
Astante Luxury Communities, Inc. Delaware
DRH Cambridge Homes, LLC Delaware
DRH Southwest Construction, Inc. California
DRH Title Company of Colorado, Inc. Colorado
Meadows VIII, Ltd. Delaware
1.2 The Trustee is hereby authorized to add the above-named Additional
Guarantors to the list of Guarantors on the Guarantees affixed to the 10 1/2 %
Notes.
ARTICLE II.
MISCELLANEOUS PROVISIONS
2.1 This Ninth Supplemental Indenture constitutes a supplement to the
Indenture. The Indenture, and all Supplemental Indentures thereto, including
without limitation this Ninth Supplemental Indenture, by and among the Company,
the guarantors thereto and the Trustee, shall be read together and shall have
the effect so far as practicable as though all of the provisions thereof and
hereof are contained in one instrument.
2.2 The parties may sign any number of copies of this Ninth
Supplemental Indenture. Each signed copy shall be an original, but all of them
together represent the same agreement.
2.3 In case any one or more of the provisions contained in this Ninth
Supplemental Indenture or the Securities, including without limitation the 10
1/2 % Notes, shall for any reason be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provisions of this Ninth Supplemental Indenture or
the Securities, including without limitation the 10 1/2 % Notes.
2.4 The article and section headings herein are for convenience
only and shall not affect the construction hereof.
2.5 Any capitalized term used in this Ninth Supplemental Indenture that
is defined in the Indenture and not defined herein shall have the meaning
specified in the Indenture, unless the context shall otherwise require.
NINTH SUPPLEMENTAL INDENTURE Page 2
<PAGE>
2.6 All covenants and agreements in this Ninth Supplemental Indenture
by the Company, the Existing Guarantors and the Additional Guarantors shall bind
each of their successors and assigns, whether so expressed or not. All
agreements of the Trustee in this Ninth Supplemental Indenture shall bind its
successors and assigns.
2.7 The laws of the State of New York shall govern this Ninth
Supplemental Indenture, the Securities of each Series and the Guarantees.
2.8 Except as amended by this Ninth Supplemental Indenture, the terms
and provisions of the Indenture shall remain in full force and effect.
2.9 This Ninth Supplemental Indenture may not be used to interpret
another indenture, loan or debt agreement of the Company or a Subsidiary. Any
such indenture, loan or debt agreement may not be used to interpret this Ninth
Supplemental Indenture.
2.10 All liability described in paragraph 12 of the 10 1/2 % Notes, of
any director, officer, employee or stockholder, as such, of the Company is
waived and released.
2.11 The Trustee accepts the modifications of the trust effected by
this Ninth Supplemental Indenture, but only upon the terms and conditions set
forth in the Indenture. Without limiting the generality of the foregoing, the
Trustee assumes no responsibility for the correctness of the recitals herein
contained which shall be taken as the statements of the Company and the
Additional Guarantors, and the Trustee shall not be responsible or accountable
in any way whatsoever for or with respect to the validity or execution or
sufficiency of this Ninth Supplemental Indenture, and the Trustee makes no
representation with respect thereto.
IN WITNESS WHEREOF, the parties hereto have caused this Supplemental
Indenture to be duly executed, all as of the day and year first above written.
D.R. HORTON, INC.
By: /s/ Samuel R. Fuller
--------------------------
Samuel R. Fuller
Executive Vice President, Treasurer
and Chief Financial Officer
NINTH SUPPLEMENTAL INDENTURE Page 3
<PAGE>
ADDITIONAL GUARANTORS:
---------------------
Astante Luxury Communities, Inc.
DRH Southwest Construction, Inc.
DRH Title Company of Colorado, Inc.
Meadows VIII, Ltd.
By: /s/ Samuel R. Fuller
---------------------------
Samuel R. Fuller, Treasurer
DRH Cambridge Homes, LLC
By D.R. Horton, Inc. - Chicago, a member
By: /s/ Samuel R. Fuller
----------------------------
Samuel R. Fuller, Treasurer
EXISTING GUARANTORS
- -------------------
C. Richard Dobson Builders, Inc.
CHI Construction Company
CHTEX of Texas, Inc.
Continental Homes, Inc.
Continental Homes of Florida, Inc.
Continental Residential, Inc. (formerly L&W
Investments, Inc.)
D.R. Horton, Inc. - Birmingham
D.R. Horton, Inc. - Chicago
D.R. Horton, Inc. - Denver
D.R. Horton, Inc. - Greensboro
D.R. Horton, Inc. - Louisville
D.R. Horton, Inc. - Minnesota
D.R. Horton, Inc. - New Jersey
D.R. Horton, Inc. - Portland
D.R. Horton, Inc. - Sacramento
D.R. Horton, Inc. - San Diego
D.R. Horton, Inc. - Torrey
D.R. Horton Los Angeles Holding Company, Inc.
D.R. Horton San Diego Holding Company, Inc.
NINTH SUPPLEMENTAL INDENTURE Page 4
<PAGE>
DRH Cambridge Homes, Inc.
DRH Construction, Inc.
DRH Tucson Construction, Inc.
DRHI, Inc.
KDB Homes, Inc.
Meadows I, Ltd.
Meadows IX, Inc.
Meadows X, Inc.
By: /s/ Samuel R. Fuller
-------------------------
Samuel R. Fuller, Treasurer
CH Investments of Texas, Inc.
Meadows II, Ltd.
By: /s/ William K. Peck
--------------------------
William K. Peck, President
Continental Homes of Texas, L.P.
By CHTEX of Texas, Inc., its general
partner
By: /s/ Samuel R. Fuller
--------------------------
Samuel R. Fuller, Treasurer
D.R. Horton Management Company, Ltd.
D.R. Horton - Texas, Ltd.
By Meadows I, Ltd., its general partner
By: /s/ Samuel R. Fuller
---------------------------
Samuel R. Fuller, Treasurer
NINTH SUPPLEMENTAL INDENTURE Page 5
<PAGE>
SGS Communities at Grande Quay, LLC
By Meadows IX, Inc., a member
By: /s/ Samuel R. Fuller
-----------------------------
Samuel R. Fuller, Treasurer
and
By Meadows X, Inc., a member
By: /s/ Samuel R. Fuller
-----------------------------
Samuel R. Fuller, Treasurer
NINTH SUPPLEMENTAL INDENTURE Page 6
<PAGE>
AMERICAN STOCK TRANSFER & TRUST
COMPANY, as Trustee
By: /s/ Herbert J. Lemmer
------------------------------
Name: Herbert J. Lemmer
------------------------------
Title: Vice President
------------------------------
NINTH SUPPLEMENTAL INDENTURE Page 7
EXHIBIT 10.2
FIRST AMENDMENT TO
NON-QUALIFIED STOCK OPTION AGREEMENTS
THIS FIRST AMENDMENT is made as of the 15th day of March, 2000, by and
among D.R. HORTON, INC., a Delaware corporation (the "Company"), and RICHARD
BECKWITT (the "Participant").
WHEREAS, the Company and Participant entered into
Non-Qualified Stock Option Agreements on March 12, 1993, July 20, 1995,
July 18, 1996, July 28, 1997 and July 23, 1998 (the "Agreements");
WHEREAS, Participant is a director of the Company; and
WHEREAS, the parties hereto desire hereby to amend the
Agreements;
NOW, THEREFORE, in consideration of the premises and promises
herein contemplated, the parties agree as follows:
ARTICLE I
1.1 The second sentence of paragraph 1.(A) of the Agreements is
hereby amended to read as follows:
Except as otherwise provided in paragraph 3, this option shall
be exercisable only if the Participant shall have been a
director of the Company, or in the continuous employ of the
Company or any Subsidiary, from the date hereof until this
option is exercised.
1.2 Paragraph 1.(C) of the Agreements is hereby amended to read as
follows:
(C) Notwithstanding the provisions of subparagraph (A) of this
paragraph 1, this option shall be exercisable to the extent of
100% of the shares hereinabove specified at the time the
Participant ceases to be a director of the Company or an
employee of the Company or any Subsidiary upon the occurrence
of the events described in subparagraph (B) or (D) of
paragraph 3.
1.3 Paragraph 3 of the Agreements is hereby amended to read as
follows:
3. This option shall terminate on the earliest of the
following dates:
1
<PAGE>
(A) Provided that Participant does not remain a
director of the Company, three months after delivery to the
Participant by the Company or a Subsidiary of notice of
termination of the Participant's employment with the Company
or a Subsidiary other than for any matter that constitutes a
violation of the standard of employee conduct set forth in the
Company's Employee Manual as in effect on the date of such
termination or delivery to the Company by the Participant of
notice of the voluntary termination by the Participant of the
Participant's employment with the Company or a Subsidiary;
(B) One year after the Participant ceases to be an
employee of the Company or a Subsidiary by reason of
retirement under a retirement plan of the Company or a
Subsidiary, which retirement is at or after normal retirement
age provided for in such retirement plan;
(C) Immediately upon the delivery to the Participant
by the Company or a Subsidiary of notice of termination of the
Participant's employment with the Company or a Subsidiary for
any matter that constitutes a violation of the standard of
employee conduct set forth in the Company's Employee Manual as
in effect on the date of such termination;
(D) Two years after the death or permanent disability
of the Participant if the Participant dies or becomes
permanently disabled while a director of the Company or an
employee of the Company or a Subsidiary;
(E) Three months after Participant is no longer a
director of the Company for any reason except as provided in
Subparagraph (D) above; and
(F) Ten years from the date on which this option was
granted.
Nothing contained in this option shall limit whatever right
the Company or a Subsidiary might otherwise have to terminate
the employment of the Participant. Except as otherwise
provided in subparagraph (C) of paragraph 1, after the
termination of the Participant's employment and term as a
director this option shall be exercisable for the same number
of shares for which it was exercisable prior to such
termination. In the event that the Participant's employment
and term as a director terminates on the
2
<PAGE>
same date that a Change in Control of the Company occurs, the
Change in Control will be deemed to have occurred prior to the
termination of the Participant's employment and term as a
director.
ARTICLE II
2.1 Except as hereby modified, amended or supplemented, the
Agreements shall remain in full force and effect, and any
reference hereafter made by any party hereto to the Agreements
shall be deemed to refer to the same as hereby amended,
regardless of whether specific reference is made hereto.
2.2 All capitalized terms used herein and not otherwise defined
herein shall have the meaning ascribed thereto in the
Agreements.
2.3 All terms of construction and interpretation set forth in the
Agreements shall have equal effect in construing this
Amendment.
IN WITNESS WHEREOF, each party has executed and delivered this
Amendment or caused this Amendment to be executed and delivered on its behalf by
a duly authorized officer, all as of the date first above written.
D.R. HORTON, INC.
By: /s/ Donald R. Horton
-------------------------
Title: Chairman of the Board
------------------------
Name: Donald R. Horton
--------------------
/s/ Richard Beckwitt
----------------------
Richard Beckwitt
3
EXHIBIT 10.3
March 15, 2000
Richard Beckwitt
1901 Ascension Blvd., Suite 100
Arlington, Texas 76006
Dear Rick,
In connection with your resignation as an officer and employee of D.R.
Horton, Inc. (the "Company"), you and the Company hereby agree that your bonus
for the fiscal year 2000 under the D.R. Horton, Inc. 2000 Incentive Bonus Plan
(the "Plan") shall be 45.83% of whatever Donald J. Tomntiz ("Tomnitz") would be
entitled to receive under the Plan, assuming that he remained an employee in
good standing with the Company throughout the fiscal year (subject to any
adjustments to Tomnitz's award permitted or required under the Plan).
In the event Tomnitz's bonus is for less than a full fiscal year, for
the purpose of calculating your bonus in accordance with the preceding
paragraph, the amount of Tomnitz's bonus shall be annualized. That is, it shall
be multiplied by a fraction, the numerator of which is the number of days in the
fiscal year, and the denominator of which is the number of days in the fiscal
year for which Tomnitz received a bonus. That amount shall then be multiplied by
45.83% to determine your bonus.
This letter agreement is entered into subject to approval of the
Compensation Committee. Please confirm your agreement to this letter by signing
in the space provided below.
Very truly yours,
D.R. HORTON, INC.
By: /s/ Donald R. Horton
-----------------------
Donald R. Horton,
Chairman of the Board
AGREED TO: /s/ Richard Beckwitt
-------------------------
Richard Beckwitt
EXHIBIT 10.4
ENCORE VENTURE PARTNERS II (TEXAS), L.P.
LIMITED PARTNERSHIP AGREEMENT
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I. GENERAL PROVISIONS..........................................1
Section 1.1. Certain Definitions...................................1
Section 1.2. Partnership Name......................................5
Section 1.3. Fiscal Periods........................................5
Section 1.4. Principal Office......................................5
Section 1.5. Purposes of the Partnership...........................5
Section 1.6. Restrictions on Assignability.........................5
Section 1.7. Registered Office and Agent in Delaware...............6
ARTICLE II. MANAGEMENT OF PARTNERSHIP..................................6
Section 2.1. Management Generally..................................6
Section 2.2. Authority of Each General Partner.....................6
Section 2.3. Matters Requiring the Consent of the Majority
General Partners......................................7
Section 2.4. Matters Requiring the Consent of All the General
Partners..............................................8
Section 2.5. Reliance by Third Parties.............................8
Section 2.6. Activities of Class A General Partner.................8
Section 2.7. Exculpation...........................................9
Section 2.8. Indemnification of Partners...........................9
Section 2.9. Payment of Costs and Expenses........................10
Section 2.10. Management Fee......................................10
ARTICLE III. CAPITAL ACCOUNTS OF PARTNERS AND OPERATION THEREOF.......11
Section 3.1. Capital Contributions and Calls......................11
Section 3.2. Capital Accounts.....................................12
Section 3.3. Interest.............................................13
Section 3.4. Tax Allocations......................................13
Section 3.5. Determination by General Partners....................16
Section 3.6. Adjustments to Take Account of Interim Events........16
ARTICLE IV. WITHDRAWALS, DISTRIBUTIONS AND LOANS OF CAPITAL...........16
Section 4.1. Withdrawals and Distributions in General.............16
Section 4.2. Portfolio Distributions..............................17
Section 4.3. Restrictions on Distributions........................18
Section 4.4. Deemed Sale of Assets................................18
Section 4.5. Loans to Partners....................................19
Section 4.6. Withholding..........................................20
i
<PAGE>
ARTICLE V. WITHDRAWAL, DEATH, INCOMPETENCY............................20
Section 5.1. Withdrawal of Partners...............................20
Section 5.2. Effect of Withdrawal, Death, Etc.....................20
ARTICLE VI. DURATION AND TERMINATION OF PARTNERSHIP...................20
Section 6.1. Duration.............................................20
Section 6.2. Termination..........................................20
ARTICLE VII. TAX RETURNS; REPORTS TO PARTNERS.........................21
Section 7.1. Filing of Tax Returns................................21
Section 7.2. Tax Matters Partner..................................21
Section 7.3. Reports to Partners..................................21
Section 7.4. Tax Information......................................22
Section 7.5. Tax Elections........................................22
ARTICLE VIII. MISCELLANEOUS...........................................23
Section 8.1. General..............................................23
Section 8.2. Power of Attorney....................................23
Section 8.3. Amendments to Partnership Agreement..................24
Section 8.4. Choice of Law........................................24
Section 8.5. Notices..............................................24
Section 8.6. Headings.............................................24
Section 8.7. Construction and Interpretation......................24
ii
<PAGE>
LIMITED PARTNERSHIP AGREEMENT
Dated as of March 21, 2000
The undersigned (the "Partners", which term shall include any persons
hereafter admitted to the Partnership pursuant to this Agreement and shall
exclude any persons who cease to be Partners pursuant to Article V of this
Agreement) hereby agree to form and hereby form, as of March 21, 2000, a limited
partnership (the "Partnership") pursuant to the provisions of the Delaware
Revised Uniform Limited Partnership Act (the "Delaware Act") which shall be
governed by, and operated pursuant to, the terms and provisions of this Limited
Partnership Agreement (this "Agreement").
ARTICLE I.
GENERAL PROVISIONS
Section 1.1. Certain Definitions. Unless the context otherwise
--------------------
specifies or requires, for purposes of this Agreement:
"Adjusted Capital Account Deficit" shall mean, with respect to
any Partner, the deficit balance, if any, in such Partner's
Capital Account as of the end of the relevant Fiscal Year,
after giving effect to the following adjustments:
(a) credit to such Capital Account any amounts
which such Partner is obligated to restore
or is deemed to be obligated to restore
pursuant to Treasury Regulations sections
1.704-2(g) and 1.704-2(i)(5); and
(b) debit to such Capital Account the items
described in Treasury Regulations sections
1.704-1(b)(2)(ii)(d)(4), (5) and(6).
The foregoing definition of Adjusted Capital Account Deficit
is intended to comply with the provisions of Treasury
Regulations section 1 .704-1(b)(2)(ii)(d) and shall be
interpreted consistently therewith.
"Business Day" shall mean any day except Saturday, Sunday or
other days on which commercial banks in New York City are
authorized by law to close.
"Capital Account" shall have the meaning specified in Section
3.2.
"Capital Call" shall have the meaning specified in Section
3.1(c).
"Capital Commitment" shall mean, with respect to each Partner,
(a) the sum of (i) the amount of capital each such Partner
commits to contribute to the Partnership as set forth under
the heading "Capital Commitment" on the Schedule and (ii) such
Partner's Rollover Commitment and (b) such Partner's
obligation, if any, to contribute Fee and Expense Capital.
<PAGE>
"Capital Contribution" shall mean, with respect to each
Partner, (i) the amount of capital each such Partner
contributes to the Partnership, plus (ii) such Partner's
Rollover Commitment Account.
"Class A General Partner" shall mean Encore Capital (Texas),
L.P., a Delaware limited partnership.
"Class B General Partner" shall mean Encore I, Inc., an
Arizona corporation.
"Closing" shall mean the initial date upon which Interests are
purchased.
"Code" shall mean the Internal Revenue Code of 1986, as
amended.
"Delaware Act" has the meaning provided in the preamble.
"Fee and Expense Capital" shall mean Capital Contributions of
the Limited Partners other than Richard Beckwitt for the
payment of Management Fees and Overhead Expenses.
"General Partner" shall mean the Class A General Partner or
the Class B General Partner.
"Immediate Family" shall mean father, mother, grandfather,
grandmother, child, grandchild, father-in-law, mother-in-law,
brother, sister, brother-in-law, sister-in-law, nephew, niece
and cousin.
"Indemnified Persons" shall mean each Partner, any officer,
manager, director, stockholder, member or partner of a
Partner, or any controlling Person of any of them.
"Initial Capital Contribution" shall mean, with respect to
each Partner, the amount of capital initially contributed by
such Partner to the Partnership as set forth under the heading
"Initial Capital Contribution" on the Schedule.
"Interests" shall mean interests in the Partnership, which
interests shall only be held by a Partner and which represent
such Partner's share of the profits and losses of the
Partnership and its right to receive distributions of the
Partnership's assets in accordance with this Agreement.
"Investment Period" shall have the meaning set forth in
Section 3.1 (a)(ii).
"Limited Partner" shall mean Encore II, Inc., an Arizona
corporation, Richard Beckwitt, or any Person admitted as a
limited partner of the Partnership pursuant to Section 1.6.
"Losses" shall mean any and all losses, expenses, judgments,
fees (including reasonable attorneys' fees and expenses),
costs or damages.
2
<PAGE>
"Majority General Partners" shall mean one or more General
Partners holding at least a majority of the votes held by the
General Partners. For such purpose, the Class A General
Partner shall have one vote, and the Class B General Partner
shall have two votes. The relative votes of the General
Partners shall not be affected by the relative amounts in
their Capital Accounts from time to time.
"Management Fee" shall mean the fee paid to the Class A
General Partner pursuant to Section 2.10.
"Net Loss" shall mean the net loss, if any, of the Partnership
with respect to a Fiscal Period, as determined for federal
income tax purposes, provided that such loss shall be
decreased by the amount of all income during such period which
is exempt from federal income tax, and shall be determined by
excluding all items of expense and income that are specially
allocated to the Partners pursuant to Section 3.4(c) for such
Fiscal Period, and increased by the amount of all expenditures
made by the Partnership during such period which are not
deductible for federal income tax purposes and which do not
constitute capital expenditures.
"Net Profit" shall mean the net income, if any, of the
Partnership with respect to a Fiscal Period, as determined for
federal income tax purposes, provided that such income shall
be increased by the amount of all income during such period
that is exempt from federal income tax, and shall be
determined by excluding all items of income and expense that
are specially allocated to the Partners pursuant to Section
3.4(c) for such Fiscal Period, and decreased by the amount of
all expenditures made by the Partnership during such period
which are not deductible for federal income tax purposes and
which do not constitute capital expenditures.
"Nonrecourse Deductions" shall have the meaning set forth in
Treasury Regulations section 1.704-2(b)(1).
"Nonrecourse Liability" shall have the meaning set forth in
Treasury Regulations section 1.752-1(a)(2).
"Organizational Expenses" shall mean all legal and accounting
fees, costs and other expenses incurred by the Partnership in
connection with the initial structuring, organization and
closing of the Partnership.
"Overhead Expenses" shall mean all expenses to be paid by the
Partnership pursuant to Section 2.9(b)(ii).
"Partners" shall mean the General Partners and the Limited
Partners.
"Partner Loan" shall refer to a loan from the Partnership to a
Partner pursuant to Section 4.5.
"Partner Nonrecourse Debt Minimum Gain" shall have the meaning
set forth in Treasury Regulations section 1.704-(i)(2).
3
<PAGE>
"Partnership Minimum Gain" shall have the meaning set forth in
Treasury Regulations section 1.704-2(b)(2) and (d).
"Person" means any individual, partnership, joint venture,
corporation, limited liability company, unincorporated
organization or association, trust (including the trustees
thereof in their capacity as such), government (or agency or
political subdivision thereof) or other entity.
"Portfolio Distribution" shall have the meaning set forth in
Section 4.2.
"Portfolio Expenses" shall mean those expenses directly
related to Portfolio Investments, including (without
limitation), all taxes, all out-of-pocket expenses directly
attributable to the purchase, holding and disposition of
Portfolio Investments, such as due diligence and negotiation
costs (including travel and entertainment costs), legal
expenses, insurance expenses, and external accounting fees and
expenses, and all extraordinary expenses, such as litigation
and indemnification expenses; provided that such expenses
shall not include the expenses described in Section
2.9(b)(ii).
"Portfolio Investment" shall mean any private equity or other
investment made by the Partnership.
"Rollover Commitment" shall mean, with respect to each
Partner, 50% of the aggregate amount, if any, by which (i) all
Net Profits for any Fiscal Year of the Partnership, reduced
for taxes thereon at an assumed combined federal and state
income tax rate of 40%, that are allocated to such Partner
exceeds (ii) all Net Losses for any Fiscal Year that are
allocated to such Partner.
"Rollover Commitment Account" shall mean an account maintained
for each Partner having an opening balance equal to such
Partner's Rollover Commitment, as adjusted from time to time,
less (i) the principal amount of any Partner Loan received by
such Partner, plus (ii) the amount of principal and interest
repaid by such Partner to the Partnership with respect to any
Partner Loan received by such Partner, and less (iii) all
distributions received by such Partner under Section
4.2(a)(ii).
"Schedule" shall mean the schedule attached hereto, setting
forth each Partner's respective Initial Capital Contribution
and Capital Commitment other than for Fee and Expense Capital.
"Tax Matters Partner" shall have the meaning set forth in
Section 7.2.
"Termination Date" shall have the meaning set forth in Section
6.1.
"Treasury Regulations" shall mean the income tax regulations,
including temporary regulations promulgated, under the Code,
as the same may be amended hereafter from time to time
(including corresponding provisions of succeeding income tax
regulations).
4
<PAGE>
"Unfunded Capital Commitment" shall mean, with respect to a
particular Partner at a particular time, the portion of such
Partner's Capital Commitment other than for Fee and Expense
Capital which has not yet been funded at such time.
Section 1.2. Partnership Name. The Partnership shall do business under
the name of Encore Venture Partners II (Texas), L.P. Should any Person cease
being a Partner of the Partnership, such Person shall have no right to use the
name "Encore Venture Partners" or "Encore" in any competing business, except
that upon liquidation of the Partnership the Partnership's rights to use the
name "Encore Venture Partners" or "Encore" shall be among the assets distributed
to Encore II, Inc., as a Limited Partner.
Section 1.3. Fiscal Periods. The "Fiscal Year" of the Partnership shall
end on September 30 of each year. The "Fiscal Quarters" of the Partnership shall
end on December 31, March 31, June 30 and September 30 of each Fiscal Year. A
"Fiscal Period" of the Partnership shall commence (i) at the beginning of the
Fiscal Year, (ii) on each date of the admission of any Partner, (iii) on each
date of the acceptance by the Partnership of any additional Capital
Contributions and (iv) on each date next following any withdrawal of capital
from the Partnership by any Partner (whether or not the date of such withdrawal
is September 30 of any year) and shall end on the date immediately preceding the
next Fiscal Period or Fiscal Year.
Section 1.4. Principal Office. The principal office of the Partnership
shall be at 1901 Ascension Blvd., Arlington, Texas 76006, or such other place as
may from time to time be designated by the Majority General Partners. The Class
A General Partner shall give prompt notice of any change to each Partner.
Section 1.5. Purposes of the Partnership. The Partnership is organized
for the purposes of (a) seeking long-term capital appreciation through a variety
of Portfolio Investments and (b) engaging in all activities and transactions as
the General Partners may deem reasonably necessary or advisable or incidental in
connection therewith; provided, however, the Partnership shall not invest or
trade in, purchase or sell, sell short or cover any commodity or commodities
contract that is regulated under the Commodity Exchange Act, as amended.
Section 1.6. Restrictions on Assignability.
-----------------------------
(a) Except with the express written consent of the other General
Partner, neither the Class A General Partner nor the Class B General Partner may
assign, sell, transfer, pledge, hypothecate or otherwise dispose of any of the
attributes of its interest in the Partnership in whole or in part to any Person,
whether directly or indirectly, by operation of law or otherwise. For purposes
of the preceding sentence, a change in control of a General Partner or any
Person controlling a General Partner, shall be deemed a transfer; provided that
if, in the case of the Class B General Partner, the change in control results
from the change in control of D.R. Horton, Inc., a Delaware corporation, or its
successors, such change in control shall be deemed not to be a transfer. Any
assignment, sale, transfer, pledge, hypothecation or other disposition made in
violation of this Section 1.6(a) shall be void and of no effect. No transferee
of an interest of a General Partner in the Partnership shall become a Partner
except upon the consent of all the Partners.
5
<PAGE>
(b) A Limited Partner may assign, sell, transfer, pledge, hypothecate
or otherwise dispose of any of the attributes of its interest in the
Partnership, in whole or in part, to any Person upon notice to the General
Partners and compliance with any applicable laws to the satisfaction of the
General Partners. No transferee of an interest of the Limited Partner in the
Partnership shall become a Partner except upon the consent of the Majority
General Partners.
Section 1.7. Registered Office and Agent in Delaware. The address of
the Partnership's registered office in the State of Delaware is 1209 Orange
Street, City of Wilmington in the County of New Castle. The name of its
registered agent at that address is The Corporation Trust Company. The
Partnership may from time to time have such other place or places of business
within or without the State of Delaware as may be designated by the Majority
General Partners.
ARTICLE II.
MANAGEMENT OF PARTNERSHIP
Section 2.1. Management Generally. The management of the Partnership
shall be vested exclusively in the General Partners. The Limited Partners shall
have no part in the management of the Partnership and shall have no authority or
right to act on behalf of the Partnership in connection with any matter.
Employees of the Partnership, if any, shall have authority to act on behalf and
in the name of the Partnership to the extent authorized by the General Partners.
Section 2.2. Authority of Each General Partner. Except as provided in
Sections 2.3 or 2.4, or in other Sections of this Agreement, each General
Partner shall have the authority on behalf and in the name of the Partnership to
carry out any and all of the purposes of the Partnership, and to perform all
acts and enter into and perform all contracts and other undertakings which it
may deem necessary or advisable or incidental thereto, including, without
limitation, the authority to:
(a) act as an investment adviser to the Partnership and
consult with the other General Partner in the performance of any of the
following activities: identify potential Portfolio Investments; conduct
due diligence, analysis, and evaluation thereof; negotiate the terms of
potential Portfolio Investments; and monitor the progress of
negotiations of Portfolio Investments;
(b) open, maintain and close accounts with brokers, dealers,
banks, currency dealers and others, and issue all instructions and
authorizations to entities regarding the purchase and sale or entering
into, as the case may be, of securities, options, certificates of
deposit, bankers acceptances, repurchase and reverse repurchase
agreements, agreements for the borrowing and lending of' portfolio
securities and other assets, instruments and investments for the
purpose of seeking to achieve the Partnership's purposes as well as to
facilitate capital contributions, distributions, withdrawals, the
payment of Partnership expenses;
(c) open, maintain and close bank accounts and draw checks
or other orders for the payment of monies;
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(d) deposit, withdraw, pay, retain and distribute the
Partnership's funds in a manner consistent with this Agreement; and
(e) take any action that may be required by governmental
authorities having jurisdiction over the Partnership.
Section 2.3. Matters Requiring the Consent of the Majority General
Partners. Subject to Section 2.4, a General Partner shall have the authority
regarding the following matters only with the consent of the Majority General
Partners:
(a) delegate responsibility as investment adviser of the
Partnership;
(b) lease, sell or dispose of any assets or investments in the
name or for the account of the Partnership or enter into any contract
or endorsement in the name or for the account of the Partnership with
respect to any such assets or investments or in any other manner bind
the Partnership to lease, sell or dispose of any such assets or
investments on such terms as the Majority General Partners may
determine;
(c) loan or borrow money, post margin on securities or enter
into transactions having a similar leveraging effect or for temporary
purposes on behalf of the Partnership, from any source or with any
party, upon such terms and conditions as the Majority General Partners
may deem advisable and proper, to execute promissory notes, drafts,
bills of exchange and other instruments and evidences of indebtedness
and to secure the payment thereof by mortgage, pledge or assignment of
or security interest in all or any part of property then owned or
thereafter acquired by the Partnership, and refinance, recast, modify
or extend any of the obligations of the Partnership and the instruments
securing those obligations;
(d) lend, transfer, mortgage, pledge or otherwise deal in, and
secure the payment of obligations of the Partnership by mortgage upon,
or hypothecation or pledge of, all or part of the property of the
Partnership, whether at the time owned or thereafter acquired, or
participate in arrangements with creditors, institute and settle or
compromise suits and administrative proceedings and other similar
matters;
(e) employ, retain or otherwise secure or enter into
contracts, agreements and other undertakings with Persons by or on
behalf of the Partnership, including, without limitation, any attorneys
and accountants, providing for the payment by the Partnership for goods
or services in one transaction or series of related transactions of
$100,000 or more;
(f) bring or defend, pay, collect, compromise, arbitrate,
resort to legal action, or otherwise adjust claims or demands of or
against the Partnership;
(g) do any and all acts on behalf of the Partnership, and
exercise all rights of the Partnership, with respect to its interest in
any property or any Person, including, without limitation, the voting
of securities, participation in arrangements with creditors, the
institution and settlement or compromise of suits and administrative
proceedings and other like or similar matters;
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(h) authorize any officer, director, employee or other agent
of a General Partner or a Limited Partner, or any employee or agent of
the Partnership, to act for and on behalf of the Partnership in any or
all of the matters incidental thereto; and
(i) do any acts that the Majority General Partners deem
advisable to further the purpose of the Partnership or this Agreement
that are not prohibited by applicable law.
Section 2.4. Matters Requiring the Consent of All the General Partners.
A General Partner shall have authority regarding the following matters only with
the consent of all the General Partners:
(a) Make any Portfolio Investment;
(b) Make any Capital Call other than for Fee and Expense
Capital;
(c) Enter into any contract, agreement or other undertakings
or transaction on behalf of and in the name of the Partnership with any
General Partner, any Limited Partner or any Person controlling, under
common control with or controlled by any General Partner or any Limited
Partner;
(d) Issue any additional interests in the Partnership;
(e) Merge with or transfer substantially all of the
Partnership's assets to any other Person other than by mortgage,
hypothecation, pledge or the grant of a security interest; and
(f) Effect an initial public offering with respect to the
Partnership's business.
Section 2.5. Reliance by Third Parties. Persons dealing with the
Partnership are entitled to rely conclusively upon the certificate of a General
Partner to the effect that it is then acting as a General Partner and upon the
power and authority of a General Partner and an employee or agent of the General
Partner as set forth in this Agreement.
Section 2.6. Activities of Class A General Partner. The Class A General
Partner, its general partners and their respective general partners, members,
managers, officers and employees, including Richard Beckwitt, shall devote
substantially all of their business time to the business and affairs of the
Partnership. The general partners, members, managers, officers, and employees of
the Class A General Partner and its general partners shall not be permitted to
provide investment advice to, or perform duties similar to the duties
contemplated by this Agreement for, any other Person for compensation or other
consideration other than members of the Immediate Family of Richard Beckwitt and
his wife, or trusts for members of such family and any other Person approved in
writing by the Majority General Partners; provided that nothing herein shall
restrict the making of bona fide personal investments that do not interfere with
or create a conflict of interest with respect to the business and affairs of the
Partnership as reasonably determined by the Majority General Partners. Richard
Beckwitt may not serve on the board of directors, managers or trustees (or the
equivalent) of any business entity other than an affiliate of the Class B
General Partner or business entities in which the Partnership has made a
Portfolio Investment without the prior written approval of the Majority General
Partners.
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Section 2.7. Exculpation. No Indemnified Person shall be liable to any
Partner or the Partnership for any act or failure to act on behalf of the
Partnership, unless such act or failure to act resulted from the willful
misfeasance, bad faith or gross negligence of the Indemnified Person. Each
Indemnified Person may consult with counsel and accountants in respect of the
Partnership business and affairs and shall be fully protected and justified in
any action or inaction which is taken in accordance with the advice or opinion
of such counsel or accountants. Notwithstanding any of the foregoing to the
contrary, the provisions of this Section 2.7 shall not be construed so as to
relieve (or attempt to relieve) any Indemnified Person of any liability, to the
extent (but only to the extent) that such liability may not be waived, modified
or limited under applicable law, but shall be construed so as to effectuate the
provisions of this Section 2.7 to the fullest extent permitted by law.
Section 2.8. Indemnification of Partners.
---------------------------
(a) The Partnership, out of its own assets and not out of the assets of
any Partner, shall indemnify and hold harmless each Indemnified Person from and
against any and all Losses directly or indirectly relating to, arising out of or
in connection with, or based upon (i) such Indemnified Person being or having
been a Partner, a manager, member, officer, director, shareholder, partner,
employee or agent (or a legal representative or controlling person of any of
them) of a Partner, or a member of any committee or advisory board of a Partner
or the Partnership, or (ii) any action or failure to act on the part of such
Indemnified Person unless such act or failure to act was the result of the
willful misconduct, bad faith or gross negligence of such Indemnified Person.
The Partnership shall, in the sole discretion of the Majority General Partners,
advance to any Indemnified Person reasonable attorneys' fees and other costs and
expenses incurred in connection with the defense of any action or proceeding
which arises out of conduct which is the subject of the indemnification provided
hereunder. Each Partner hereby agrees, and each other Indemnified Person shall
agree, as a condition to any such advance, that in the event such Indemnified
Person receives such advance, such Indemnified Person shall reimburse the
Partnership for such advance to the extent that it shall be finally judicially
determined that such Indemnified Person was not entitled to indemnification
under this Section 2.8.
(b) The provisions of this Section 2.8 shall not be construed so as to
provide for the indemnification of any Indemnified Person for any liability to
the extent (but only to the extent) that such indemnification would be in
violation of applicable law or such liability may not be waived, modified or
limited under applicable law, but shall be construed so as to effectuate the
provisions of this Section 2.8 to the fullest extent permitted by law.
(c) Notwithstanding anything expressed or implied to the contrary in
this Agreement, the Majority General Partners are authorized to take any action
that they determine to be necessary or appropriate to cause the Partnership to
comply with any foreign or United States federal, state or local withholding
requirement with respect to any allocation, payment or distribution by the
Partnership to any Partner or other Person. All amounts so withheld shall be
treated as distributions to the applicable Partners under the applicable
provision of this Agreement. If any such withholding requirement with respect to
any Partner exceeds the amount distributable to such Partner under this
Agreement or if any such withholding requirement was not satisfied with respect
to any amount previously allocated, paid or distributed to such Partner, such
Partner or any successor or assignee with respect to such Partner's interest
hereby indemnifies and agrees to hold harmless the other Partners and the
Partnership for such excess amount or such withholding requirement, as the case
may be, including interest on such amount and any penalties assessed on such
amounts.
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Section 2.9. Payment of Costs and Expenses.
-----------------------------
(a) The Partnership will pay all Organizational Expenses and all
Portfolio Expenses.
(b) The Class A General Partner shall provide (i) all investment advice
required for the purposes of the Partnership and (ii), at the expense of the
Partnership through the Termination Date, staffing, equipment and facilities
that are adequate, suitable and reasonably required for the business and affairs
of the Partnership. In furtherance of the foregoing, but not in limitation
thereof, the Partnership shall pay the rent of the offices which the Class A
General Partner will occupy, the compensation and benefits of the staff of the
Class A General Partner, the costs or expenses of maintenance of Partnership
books and records, and the telephone charges, costs of computer equipment (and
related software), communications equipment and other office equipment, and
other overhead costs required for the business and affairs of the Partnership;
provided that, in all cases, such amounts shall be reasonable in the judgment of
the Majority General Partners.
(c) The Majority General Partners shall have authority to determine all
accounting practices of the Partnership and may establish reserves or similar
adjustments as they deem appropriate or necessary to account for or accrue for
expenses and liabilities (whether actual or contingent).
Section 2.10. Management Fee.
--------------
(a) The Partnership shall pay the Management Fee to the Class A General
Partner, quarterly in advance. The first payment shall be $52,083 and shall be
made at Closing, and all subsequent payments shall be made on or before the
first day of each calendar quarter.
(b) Until the fourth anniversary of the Closing, the annual Management
Fee shall be 2.5% of the aggregate amount of the Capital Commitments other than
for Fee and Expense Capital or Rollover Commitments of the Class B General
Partner and the Limited Partners, but in no event more than $1,250,000.
(c) After the fourth anniversary of the Closing, the annual Management
Fee shall be equal to 2% of (i) the aggregate amount of Capital Contributions of
the Class B General Partner and the Limited Partners other than for Fee and
Expense Capital, less (ii) the aggregate amount of all distributions to the
Class B General Partner and the Limited Partners in excess of the aggregate Net
Profit allocated to such Partners, but in no event more than $1,250,000.
(d) Notwithstanding the foregoing, the Management Fee shall not accrue
from and after the Termination Date.
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ARTICLE III.
CAPITAL ACCOUNTS OF PARTNERS AND OPERATION THEREOF
Section 3.1. Capital Contributions and Calls.
-------------------------------
(a) Capital Commitments.
(i) Each Partner hereby agrees to make the amount of Capital
Contributions equal to the Capital Commitment set forth
opposite its name in the Schedule if requested pursuant to
Capital Calls within the Investment Period and has made
the Initial Capital Contribution in the amount set forth
opposite such Partner's name in the Schedule. In
addition, the Limited Partners other than Richard Beckwitt
agree to make Capital Contributions in such amounts as may
be required to pay when due all Management Fees and
Overhead Expenses. All Capital Contributions shall be
made in cash in U.S. dollars.
(ii) The General Partners shall have no obligation to make
Capital Calls other than for Fee and Expense Capital
required to pay Management Fees and Overhead Expenses when
due. No General Partner shall be obligated to consent to
a Portfolio Investment not acceptable to it in its sole
discretion even though it or any Person affiliated with it
has a Capital Commitment. All Capital Commitments other
than for Fee and Expense Capital not called will terminate
four years after the Closing, or (if earlier) (A) when all
Capital Commitments other than for Fee and Expense Capital
are drawn down or (B) when the Partnership is terminated
(the "Investment Period"); provided that (1) the Majority
--------
General Partners may extend the Investment Period in the
case of Portfolio Investments with longer commitment
periods than the Investment Period until the earlier of
(x) the expiration of such Portfolio Investment's
commitment period and (y) six years after the Closing.
(iii) During the Investment Period, amounts drawn down will
proportionately reduce a Partner's Capital Commitment
other than for Fee and Expense Capital and not be subject
to recall, except where: (A) an amount was drawn down in
anticipation of a potential Portfolio Investment, such
investment was not consummated and such amount was
returned to the Partner, or (B) a Portfolio Investment was
(1) sold within the Investment Period or after being held
by the Partnership for less than a 6-month period and (2)
the proceeds were distributed to the Partners, in which
case a Partner's Capital Commitment will be increased by
the lesser of (x) amounts drawn down for investment under
clause (A) above or invested in a Portfolio Investment
pursuant to clause (B) above, and (y) amounts actually
distributed to such Partner with respect to any Portfolio
Investment described in clauses (A) or (B) above.
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(iv) Except as otherwise set forth in Section 3.1, at the end
of the Investment Period, Capital Commitments not drawn
down will be released from any further obligations
and no Partner will be required to make any further
Capital Contributions to the Partnership, except Capital
Contributions necessary to (A) fund Rollover Commitments,
(B) pay Management Fees and Overhead Expenses through
the Termination Date or (C) complete Portfolio Investments
which were in process as of the termination of the
Investment Period.
(b) Capital Contributions. On or about the Closing, each Partner will
---------------------
have made its Initial Capital Contribution, unless all the Majority General
Partners, in their sole discretion, require a different amount.
(c) Capital Calls. The Majority General Partners, upon at least two
Business Days' notice, may issue calls for Capital Contributions at any time, in
the case of Capital Contributions other than for Fee and Expense Capital, and
shall issue calls for Capital Contributions for Fee and Expense Capital when
required to pay when due Management Fees and Overhead Expenses (each such call,
a "Capital Call"). A Capital Call other than for Fee and Expense Capital may be
in any amount up to a Partner's Unfunded Capital Commitment. All Capital Calls
shall be made pro rata for all Partners or, in the case of Capital Calls for Fee
and Expense Capital, the Limited Partners other than Richard Beckwitt according
to their Capital Commitments other than for Fee and Expense Capital. The Capital
Call shall specify the date, place and amount of the Capital Call, give a brief
description of the transaction or purpose for which such call is being made, and
set forth the depository institution and account into which such Capital
Contribution shall be made. Each Partner agrees to comply with the terms of each
Capital Call.
Section 3.2. Capital Accounts. Capital accounts ("Capital Accounts")
shall be established and maintained on the Partnership's books with respect to
each Partner, in accordance with the provisions of Treasury Regulations section
1.704-1(b), including the following:
(a) Each Partner's Capital Account shall be increased by:
(i) the amount of capital such Partner
contributes to the Partnership;
(ii) the amount of Net Profit allocated to such
Partner and all items of income or gain
specially allocated to such Partner under
this Agreement;
(iii) the fair market value of any property (other
than cash) contributed in the Partnership by
such Partner (net of liabilities to which
such property is subject); and
(iv) any other increases required by the Code or
Treasury Regulations.
(b) Each Partner's Capital Account shall be decreased by:
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(i) the amount of Net Loss allocated by such
Partner and all items of deduction or loss
specially allocated to such Partner under
this Agreement;
(ii) all amounts paid or distributed to such
Partner pursuant to this Agreement, other
than any amount required to be treated as a
payment for property or services under the
Code;
(iii) the fair market value of any property
distributed in kind to such Partner (net of
any liabilities secured by such distributed
property that such Partner is considered to
assume or take subject to for purposes of
section 752 of the Code); and
(iv) any other decreases required by the Code or
Treasury Regulations.
(c) Capital Accounts shall be adjusted pursuant to Treasury
Regulation Section 1.704-1(b)(2)(iv)(f) and (g) upon the occurrence of
any of the events set forth in Treasury Regulation Section
1.704-1(b)(2)(iv)(f)(5). Any gain or loss resulting from the adjustment
of Capital Accounts shall be determined and allocated pursuant to
Section 4.4.
(d) All provisions of this Agreement relating to the
maintenance of Capital Accounts are intended to comply with the Code
and Treasury Regulations thereunder and shall be interpreted and
applied in a manner consistent with such law. The Majority General
Partners are hereby authorized to and shall make any necessary
modifications to this Article III in the event unanticipated events
occur that might otherwise cause this Agreement not to comply with such
law or any changes thereto.
Section 3.3. Interest. No interest shall be paid or credited to the
Partners with respect to their Capital Commitments, Capital Contributions or
Capital Accounts or upon any undistributed profits left on deposit with the
Partnership.
Section 3.4. Tax Allocations.
---------------
(a) General Rule. Except as provided in this Section 3.4, Net Profit
(and items thereof) and Net Loss (and items thereof) for any Fiscal Period shall
be allocated among the Partners in a manner such that the Capital Account of
each Partner, immediately after giving effect to such allocation, is, as nearly
as possible equal (proportionately) to the amount of the distributions that
would be made to such Partner during such Fiscal Period pursuant to Section 4.2,
without regard to Section 4.2(c), if
(i) the Partnership were dissolved and terminated;
(ii) its affairs were wound up and each Partnership asset
was sold for cash equal to its cost to the
Partnership (except that any Partnership asset that
is sold in such Fiscal Period shall be treated as if
sold for an amount of cash equal to the sum of (x)
the amount of any net cash proceeds actually received
by the Partnership in connection with such
disposition and (y) the fair market value of any
property actually received by the Partnership in
connection with such disposition); and
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(iii) all Partnership liabilities were satisfied (limited
with respect to each nonrecourse liability to the
book value of the assets securing such liability).
The Majority General Partners may, in their sole discretion, make such other
assumptions (whether or not consistent with the above assumptions) as they deem
necessary or appropriate in order to effectuate the intended economic
arrangement of the Partners as reflected in Article IV.
(b) Allocations Relating to Last Fiscal Year. Except as provided in
this Agreement, if upon the dissolution and termination of the Partnership
pursuant to Article VI, after all other allocations provided for in this Section
3.4 have been tentatively made as if this Section 3.4(b) were not in this
Agreement, a distribution to the Partners under Section 6.2(c) would be
different from a distribution to the Partners under Article IV, then Net Profit
(and items thereof) and Net Loss (and items thereof) for the Fiscal Period of
the dissolution and termination of the Partnership pursuant to Article VI shall
be allocated among the Partners in a manner such that the Capital Account of
each Partner, immediately after giving effect to such allocation, is, as nearly
as possible, equal (proportionately) to the amount of the distributions that
would be made to such Partner during such last Fiscal Period pursuant to Section
4.2(a). The Majority General Partners may, in their sole discretion, apply the
principles of this Section 3.4(b) to any Fiscal Year preceding the Fiscal Period
in which the Partnership dissolves and terminates (including through application
of section 761(e) of the Code) if delaying application of the principles of this
Section 3.4 would likely result in distributions under Section 6.2(c)that are
materially different from distributions under Section 4.2(a) in the Fiscal
Period in which the Partnership dissolves and terminates.
(c) Regulatory and Related Allocations. Notwithstanding any other
------------------------------------
provision in this Agreement to the contrary, the following special allocations
shall be made in the following order:
(i) Minimum Gain Chargeback. Notwithstanding any other
-------------------------
provision of this Article III, if there is a net
decrease in Partnership Minimum Gain during any
Fiscal Year, each Partner shall be specially
allocated items of Partnership income and gain for
such Fiscal Year (and, if necessary, subsequent
Fiscal Years) in an amount equal to the portion of
such Partner's share of the net decrease in such
Partnership Minimum Gain, determined in accordance
with Treasury Regulations sections 1.704-2(d)(1)(f)
and (g), that is allocable to the disposition of
Partnership property, subject to Nonrecourse
Liabilities. Such allocations shall be made in
proportion to the respective amounts required to be
allocated to the Partners pursuant thereto. The
items to be so allocated shall be determined in
accordance with Treasury Regulations section 1.104-2.
This clause (i) is intended to comply with the
minimum gain chargeback requirement in such section
of the Treasury Regulations and shall be interpreted
consistently therewith.
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(ii) Partnership Minimum Gain Chargeback. Notwithstanding
-----------------------------------
any other provision of this Article III, if there is
a net decrease in a Partner Nonrecourse Debt Minimum
Gain attributable to a Partner nonrecourse debt (as
defined in Treasury Regulations section 1.704-2(i))
during any Fiscal Year, each Partner shall be
specially allocated items of Partnership income and
gain for such Fiscal Year (and, if necessary,
subsequent Fiscal Years) in an amount equal to the
portion of such Partner's share of the net decrease
in Partner Nonrecourse Debt Minimum Gain attributable
to such Partner's nonrecourse debt, determined in
accordance with Treasury Regulations section
1.704-2(i). This clause (ii) is intended to comply
with the minimum gain chargeback requirements in such
section of the Treasury Regulations and shall be
interpreted consistently therewith.
(iii) Qualified Income Offset. In the event any Partner
-----------------------
unexpectedly receives any adjustments, allocations,
or distributions described in Treasury Regulations
sections 1 .704-1(b)(2)(ii)(d)(4), (5) or (6) with
respect to such Partner's Capital Account, items of
Partnership income and gain shall be specially
allocated to each such Partner in an amount and
manner sufficient to eliminate, to the extent
required by the Treasury Regulations, the Adjusted
Capital Account Deficit of such Partner as quickly as
possible, provided that an allocation pursuant to
--------
this Section 3.4(c)(iii) shall be made only if and to
the extent that such Partner would have an Adjusted
Capital Account Deficit after all other allocations
provided for in this Section 3.4 have been
tentatively made as if this Section 3.4(c)(iii) were
not in this Agreement.
(iv) Nonrecourse Deductions. Any Nonrecourse Deductions
----------------------
attributable to Portfolio Investments for any Fiscal
Period or other period shall be allocated to the
Partners in accordance with their respective Capital
Accounts.
(v) Gross Income Allocation. In the event any Partner
-----------------------
has an Adjusted Capital Account Deficit, items of
Partnership income and gain shall be specially
allocated to such Partner in an amount and manner
sufficient to eliminate such Partner's Adjusted
Capital Account Deficit as quickly as possible;
provided that an allocation pursuant to this Section
3.4(c)(v) shall be made only if and to the extent
that such Partner would have an Adjusted Capital
Account Deficit after all other allocations provided
for in this Section 3.4 (other than Section 3.4(c)
(iii)) have been tentatively made as if this Section
3.4(c)(v) were not in this Agreement.
(vi) Loss Allocation Limitation. No allocation of Net Loss
(or items thereof) shall be made to any Partner to
the extent that such allocation would create or
increase an Adjusted Capital Account Deficit with
respect to such Partner.
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(vii) Section 754 Adjustments. Pursuant to Treasury
-------------------------
Regulations section 1.704-1 (b)(2)(iv)(m), to the
extent an adjustment to the adjusted tax basis of any
Partnership asset under Code section 732, 734(b) or
743(b) is required to be taken into account in
determining Capital Accounts, the amount of such
adjustment to the Capital Accounts shall be treated
as an item of gain (if the adjustment increases the
basis of the asset) or loss (if the adjustment
decreases such basis) and such gain or loss shall be
specially allocated to the Partners in a manner
consistent with the manner in which their Capital
Accounts are required to be adjusted pursuant to such
section of the Treasury Regulations.
(viii) Certain Expense Allocations. All Management Fee
-----------------------------
expense and Overhead Expense shall be specially
allocated to the Limited Partner who contributes the
Fee and Expense Capital to pay them.
(d) Transfer of or Change in Interests. The Majority General Partners
are authorized to adopt any convention or combination of conventions likely to
be upheld for federal income tax purposes regarding the allocation and/or
special allocation of items of Partnership income, gain, loss, deduction and
expense with respect to a newly issued Interest, a transferred Interest and a
redeemed Interest. A transferee of an Interest shall succeed to the Capital
Account of the transferor Partner to the extent it relates to the transferred
Interest.
Section 3.5. Determination by General Partners. All matters concerning
the computation of Capital Accounts, the allocation of Net Profit (and items
thereof) and Net Loss (and items thereof), the allocation of items of
Partnership income, gain, loss, deduction and expense for all purposes of this
Agreement and the adoption of any accounting procedures, including reserves for
expenses and contingencies not expressly provided for by the terms of this
Agreement shall be determined in good faith by the Majority General Partners.
Section 3.6. Adjustments to Take Account of Interim Events. If a
Partner shall make additional Capital Contributions to the Partnership as of a
date other than the first day of a Fiscal Quarter, withdraw from the Partnership
or make a withdrawal from such Partner's Capital Account as of a date other than
the last day of a Fiscal Year, the Majority General Partners shall make such
adjustments in the determination and allocation among the Partners of Net Profit
and Net Loss and items of income, deduction, gain, loss or credit for tax
purposes and accounting procedures as shall equitably take into account such
interim event and applicable provisions of law.
ARTICLE IV.
WITHDRAWALS, DISTRIBUTIONS AND LOANS OF CAPITAL
Section 4.1. Withdrawals and Distributions in General. Except with the
consent of all the General Partners in their sole discretion, no Partner shall
be entitled to (i) receive distributions from the Partnership or (ii) withdraw
any amount from such Partner's Capital Account, other than as provided in this
Article IV and Article VI.
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Section 4.2. Portfolio Distributions.
-----------------------
(a) Subject to Section 4.3, after provision for Portfolio Expenses,
sufficient working capital consistent with good fiscal operating policy and
management, taxes payable, and such other needs as the Majority General
Partners, in their sole discretion, shall deem appropriate, the Partnership will
cause all funds received by the Partnership in connection with the liquidation
or other disposition of the Portfolio Investments and from interest, dividend or
other income from the Portfolio Investments to be distributed in such amounts
and at such times as the Majority General Partners, in their sole discretion,
shall determine (each such distribution of funds, a "Portfolio Distribution"),
in the following order of priority:
(i) 100% to the Partners, pro rata in proportion to their
respective contributions of capital (other than Fee
and Expense Capital) to the Partnership, until the
Partners have received cumulative distributions in an
amount equal to the Partners' contributions of
capital (other than Fee and Expense Capital) to the
Partnership;
(ii) 100% to the Partners, pro rata in proportion to their
respective Rollover Commitment Account balances,
until the Partners have received cumulative
distributions in an amount equal to the balance of
their Rollover Commitment Accounts;
(iii) 100% to the Class B General Partner and the Limited
Partners, pro rata in proportion to their respective
Capital Contributions other than for Fee and Expense
Capital, until each such Partner has received an
amount that, when combined with its distributions
under subsection (i) above, results in such Partner
having achieved a 10% internal rate of return on the
aggregate amount of such Partner's Capital
Contributions other than its Fee and Expense Capital
and its Rollover Commitment Account;
(iv) 100% to the Class A General Partner, until such
Partner has received an amount that equals 5% of the
aggregate amount distributed under subsection (iii)
above and this subsection (iv); and
(v) thereafter, all remaining proceeds will be
distributed 95% to the Class B General Partner and
the Limited Partners, pro rata in proportion to their
respective Capital Contributions other than for Fee
and Expense Capital, and 5% to the Class A General
Partner.
(b) The Majority General Partners may make distributions in cash or in
kind in their sole discretion; provided that distributions shall be made so as
--------
to distribute to the Partners the same proportionate amounts of cash or other
assets to the greatest extent practicable.
(c) Tax Distributions. Notwithstanding Section 4.2(a), the Partnership
------------------
shall, prior to any Portfolio Distribution pursuant to Section 4.2(a) with
respect to Portfolio Investments, make distributions to the Partners from their
respective Capital Accounts in amounts intended to enable the Partners (or any
Person whose tax liability is determined by reference to the income of a
Partner) to discharge their United States federal, state and local income tax
liabilities arising from the allocations made pursuant to Section 3.4. The
amount distributable pursuant to this Section 4.2(c) shall be determined by the
Majority General Partners in their sole discretion, based on an assumed combined
federal and state income tax rate of 40% and the amounts allocated to the
Partners, and otherwise based on such reasonable assumptions as the Majority
General Partners determine in good faith to be appropriate. The amount
distributable to any Partner pursuant to Section 4.2(a) shall be reduced by the
amount distributed to such Partner pursuant to this Section 4.2(c).
17
<PAGE>
Section 4.3. Restrictions on Distributions. The provisions of this
-----------------------------
Article IV to the contrary notwithstanding, no distribution shall be made:
(a) if such distribution would violate any contract or
agreement to which the Partnership is then a party or any law, rule,
regulation, order or directive of any governmental authority then
applicable to the Partnership;
(b) to the extent that the Majority General Partners determine
in good faith that any amount otherwise distributable should be
retained by the Partnership to pay, or to establish a reserve for the
payment of, any actual or estimated liability or obligation of the
Partnership, whether liquidated, fixed, contingent or otherwise; or
(c) to the extent that the Majority General Partners determine
in good faith that (i) the cash available to the Partnership is
insufficient to permit such distribution or (ii) the amount to be
distributed pursuant to this Article IV is immaterial.
Section 4.4. Deemed Sale of Assets.
---------------------
(a) Any property (other than cash) that is distributed or to be
distributed in kind to one or more Partners with respect to a Fiscal Period
(including, without limitation, any non-cash property which is distributed or to
be distributed upon the dissolution and winding up of the Partnership) or, under
the principles of Section 3.2(c), revalued in the Partners' Capital Accounts
shall be deemed to have been sold for cash equal to its value as determined
under the principles of Section 4.4(b) (net of any relevant liabilities secured
by such property), and the unrealized gain or loss inherent in such property
shall be treated as recognized gain or loss for purposes of determining the Net
Profit and Net Loss of the Partnership to be allocated pursuant to Section 3.4
for such Fiscal Period.
(b) For purposes of determining the value of Partnership assets in the
event of (and thus the resulting Net Profits and Net Loss arising from) a
distribution or revaluation under Section 4.4(a):
(i) Any security that is traded principally on a market for
which daily transaction prices are published generally shall be valued
at the last sale price on the date of valuation. If there has been no
sale of such security on such day, such security shall be valued at the
mean of the closing bid and asked prices on such day. If no bid or
asked prices are quoted on such day, such security shall be valued by
such method as the Majority General Partners shall determine in good
faith to reflect its fair market value.
18
<PAGE>
(ii) Any security traded principally in a market for which
daily transaction prices are not published but for which bid and ask
quotations are available generally shall be valued at the latest bid
price available on the date of valuation for long positions and the
asked price for short positions.
(iii) All other securities or investments and assets of the
Partnership including securities whose market value cannot be readily
determined (whether or not a bid, ask or sale price exists) (the "Other
Assets") shall be valued at fair market value as determined by the
Majority General Partners in good faith, except as follows:
(A) Other Assets consisting of equity securities of
any Person distributed to the Partners upon termination of the
Partnership to effect an initial public offering shall be
valued at the offering price of such securities in such
initial public offering;
(B) all Other Assets to be valued as a result of a
termination of the Partnership by the Class A General Partner
pursuant to Section 6.1 shall be valued at the lower of cost
or fair market value (as determined in good faith by the
Majority General Partners) unless at the time notice of such
termination is given the Limited Partners other than Richard
Beckwitt are in material default of any obligation to
contribute Fee and Expense Capital and such default shall have
continued uncured for 30 days after the Class A General
Partner shall have provided written notice to such Limited
Partners describing such default and requesting that it be
cured; and
(C) all Other Assets to be valued as a result of a
termination of the Partnership by the Class B General Partner
pursuant to Section 6.1 shall be valued at the lower of cost
or fair market value (as determined in good faith by the
Majority General Partners) if at the time notice of such
termination is given the Class A General Partner (or, in the
case of Section 2.6, Richard Beckwitt) is in material breach
of its (or his) obligations under this Agreement or as a
general partner of the Partnership and such breach shall have
continued uncured for 30 days after the Class B General
Partner shall have provided written notice to the Class A
General Partner describing such breach and requesting that it
be cured.
(iv) All values stated in a foreign currency shall be converted
into U.S. dollars at the average interbank currency exchange rate at
the close of business on the valuation day.
(c) Any values determined for the purposes of this Section 4.4 shall
not be used for purposes of computing Net Profit and Net Loss under Section
3.4(a)(ii) except as expressly provided in Section 4.4(a).
Section 4.5. Loans to Partners. If the Partnership has cash available
in excess of its needs for working capital and for which it has no current
reinvestment plans, it shall, upon the request of a Partner, make a loan to such
Partner in an amount not to exceed such Partner's Rollover Commitment Account;
provided that prior to making a Partner Loan, the Partnership shall have
received security for such loan in the form of an irrevocable letter of credit
drawn on a nationally recognized financial institution issued on behalf of the
Partner requesting such Partner Loan. Any Partner Loan shall be in the form of a
demand note, callable by the Majority General Partners, and shall bear interest
at the 90-day London Inter-Bank Offering Rate (LIBOR) as announced from time to
time by BankAmerica, N.A.
19
<PAGE>
Section 4.6. Withholding. Notwithstanding anything expressed or implied
to the contrary in this Agreement, the Majority General Partners are authorized
to take any action that they determine to be necessary or appropriate to cause
the Partnership to comply with any foreign or United States federal, state or
local withholding requirement with respect to any allocation, payment or
distribution by the Partnership to any Partner or other Person. All amounts so
withheld, and, in the manner determined by the Majority General Partners in
their sole discretion, amounts withheld with respect to any allocation, payment
or distribution by any person to the Partnership, shall be treated as
distributions to the applicable Partners under the applicable provision of this
Agreement. If any such withholding requirement with respect to any Partner
exceeds the amount distributable to such Partner under this Agreement, or if any
such withholding requirement was not satisfied with respect to any amount
previously allocated, paid or distributed to such Partner, such Partner or any
successor or assignee with respect to such Partner's Interest hereby indemnifies
and agrees to hold harmless the other Partners and the Partnership for such
excess amount or such withholding requirement, as the case may be.
ARTICLE V.
WITHDRAWAL, DEATH, INCOMPETENCY
Section 5.1. Withdrawal of Partners. No Partner may withdraw from the
Partnership without the consent of all the General Partners in their sole
discretion. No partial withdrawal will be permitted. If a General Partner
resigns or withdraws as a general partner of the Partnership in violation of
this Section 5.1, its interest in the Partnership shall thereupon become a
Limited Partner's interest in the Partnership, except that the amounts
distributable pursuant to Article IV shall continue to be those provided for
such General Partner prior to such event. The Partners shall have no right to
remove or replace a General Partner.
Section 5.2. Effect of Withdrawal, Death, Etc. The withdrawal, death,
disability, incapacity, incompetency, bankruptcy, insolvency or dissolution of a
Partner shall not dissolve the Partnership, unless there shall cease to be any
general partners of the Partnership.
ARTICLE VI.
DURATION AND TERMINATION OF PARTNERSHIP
Section 6.1. Duration. The Partnership will dissolve and terminate on
March 31, 2006 (the "Termination Date"); provided that the Majority General
Partners may twice extend the Termination Date for a period of one year upon
written notice to all of the Partners at least 90 days prior to the Termination
Date, as extended; provided further that either of the General Partners may
terminate the Partnership at any time upon 180 days' written notice.
Section 6.2. Termination. On termination of the Partnership, the
General Partners or, if there is only one General Partner, the remaining General
Partner (or in the absence of the General Partners, a liquidator selected by a
majority in Partnership interest of the Limited Partners) shall, within no more
than 30 days after completion of a final audit of the Partnership's books and
records (which shall be performed within 90 days of such termination), make
distributions, out of assets of the Partnership, in the following manner and
order:
20
<PAGE>
(a) to payment and discharge (or the provision therefor)
of the claims of all creditors of the Partnership who are not Partners;
(b) to payment and discharge (or the provision therefor)
of the claims of all creditors of the Partnership who are Partners;
(c) to the Partners pro rata in accordance with their
respective positive Capital Accounts after giving effect to any
allocations pursuant to Article III with respect to the Fiscal Year
ending on the date of termination.
In the event that the Partnership is terminated on a date other than
the last day of a Fiscal Year, the date of such termination shall be deemed to
be the last day of a Fiscal Year for purposes of adjusting the Capital Accounts
of the Partners pursuant to Article III.
ARTICLE VII.
TAX RETURNS; REPORTS TO PARTNERS
Section 7.1. Filing of Tax Returns. The Tax Matters Partner shall
prepare and file, or cause the accountants of the Partnership to prepare and
file, a federal information tax return in compliance with section 6031 of the
Code and any required state and local income tax and information returns for
each tax year of the Partnership. The Class A General Partner shall provide the
Tax Matters Partner with such assistance in the preparation of such returns as
the Tax Matters Partner shall require.
Section 7.2. Tax Matters Partner. The Class B General Partner, or (in
its absence) the Class A General Partner, shall be designated on the
Partnership's annual federal information tax return as the Tax Matters Partner
of the Partnership (the "Tax Matters Partner") as provided in section 6231(a)(7)
of the Code. In the event the Partnership shall be the subject of an income tax
audit by any federal, state or local authority, to the extent the Partnership is
treated as an entity for purposes of such audit including administrative
settlement and judicial review, the Tax Matters Partner shall act in accordance
with the decisions and restrictions of the Majority General Partners. All
expenses incurred in connection with any such audit, investigation, settlement
or review shall be borne by the Partnership. The Tax Matters Partner shall use
reasonable efforts to inform the other Partners of any audit or administrative
or judicial proceeding involving the Partnership.
Section 7.3. Reports to Partners. Subject to its receiving all
necessary information from third parties, within 120 days after the end of each
Fiscal Year, the Class B General Partner shall prepare and mail to each Partner,
or shall cause others to do so, a financial report setting forth the following:
(a) a balance sheet of the Partnership as of the close of
such Fiscal Year;
21
<PAGE>
(b) a statement showing the Net Profit or Net Loss of the
Partnership for such Fiscal Year in reasonable detail;
(c) a statement indicating the balance of such Partner's
Capital Account as of the beginning of such Fiscal Year;
(d) a statement indicating the amount of Net Profit or
Net Loss allocated to such Partner's Capital Account for such Fiscal
Year;
(e) a statement indicating any distribution to such
Partner from, and any withdrawals from or additional Capital
Contributions to, the Capital Account of such Partner during such
Fiscal Year; and
(f) a statement indicating the balance of such Partner's
Capital Account as of the end of such Fiscal Year.
The Partnership shall provide to each Partner such other information concerning
the business and affairs of the Partnership, and access to its books and
records, as such Partner may reasonably request.
Section 7.4. Tax Information. Subject to its receiving all necessary
information from third parties, within 90 days (or longer, if the date for
filing the Partnership's income tax return is extended) after the end of each
Fiscal Year, the Tax Matters Partner shall send each Person who was a Partner at
any time during the fiscal year then ended a Schedule K-1 and such Partnership
tax information as the Majority General Partners reasonably believe shall be
necessary for the preparation by such Person of his United States federal, state
and local tax returns in accordance with any applicable laws, rules and
regulations then prevailing. Such information shall include a statement showing
such Person's share of distributions, income, gain, loss, deductions and
expenses and other relevant fiscal items of the Partnership for such fiscal
year. Promptly upon the request of any Partner, the Class B General Partner will
furnish to such Partner:
(a) all United States federal, state and local income tax
returns or information returns, if any, which the Partnership is
required to file; and
(b) such other information as such Partner may reasonably
request for the purpose of applying for refunds of any withholding
taxes.
Section 7.5. Tax Elections.
-------------
(a) The Tax Matters Partner (and to the extent necessary to effectuate
any election, the other Partners) shall make the following elections (including
the filing of any forms necessary therefor) on behalf of the Partnership:
(i) to be treated as a partnership for federal income tax
purposes and, where possible, for state and local tax
purposes;
(ii) to elect the year ending September 30 as the Fiscal
Year if permitted by applicable law;
22
<PAGE>
(iii) to elect to treat all organization and start-up costs
of the Partnership as deferred expenses amortizable
over 60 months under sections 195 and 709 of the Code
for federal, state and local tax purposes; and
(iv) to elect with respect to such other tax matters
involving any United States or other tax authority as
the Majority General Partners may determine from time
to time in their sole discretion.
(b) Section 754 Election. In the event of a transfer of an Interest as
permitted hereunder, or in the event of a transfer of an Interest as permitted
hereunder and if requested to do so by any transferring Partner or by the
transferee by notice given to the General Partners, the Majority General
Partners shall have the right (exercisable in their sole discretion), but not
the obligation, to cause the Partnership to make a timely election under section
754 of the Code (and a corresponding election under applicable state and local
law). The Majority General Partners also may cause the Partnership to make a
timely election under section 754 of the Code in the event of a distribution of
property to a Partner.
ARTICLE VIII.
MISCELLANEOUS
Section 8.1. General. This Agreement (a) shall be binding on the
executors, administrators, estates, heirs, successors and permitted assigns of
the Partners; and (b) may be executed through the use of separate signature
pages or in any number of counterparts with the same effect as if the parties
executing such counterparts had all executed one counterpart; provided that the
counterparts, in the aggregate, shall have been signed by all of the Partners.
Section 8.2. Power of Attorney. Each of the Partners hereby appoints
the Class A General Partner or (in its absence) the Class B General Partner, or
any manager or officer of either, acting individually, as the true and lawful
representative of such Partner and attorney-in-fact, in such Partner's name,
place and stead:
(a) to receive and pay over to the Partnership on behalf
of such Partner, to the extent set forth in this Agreement, all funds
received hereunder, and
(b) to make, execute, sign, acknowledge, swear to and file:
(i) a Certificate of Limited Partnership of the
Partnership and all amendments thereto as
may be required under the Delaware Act
including, without limitation, any such
filing for the purpose of admitting the
undersigned and others as Partners and
describing their initial or any increased
Capital Contributions in accordance with
this Agreement;
(ii) any and all instruments, certificates, and
other documents which may be deemed
necessary or desirable to effect the
winding-up and termination of the
Partnership (including, but not limited to,
a Certificate of Cancellation of the
Certificate of Limited Partnership);
23
<PAGE>
(iii) any business certificate, fictitious name
certificate, amendment thereto, or other
instrument, agreement or document of any
kind that the Majority General Partners
consider necessary or desirable to
accomplish the business, purpose and
objectives of the Partnership, or required
by any applicable federal, state or local
law; and
(iv) all other filings with agencies of the
federal government, of any state or local
government, or of any other jurisdiction,
which the Majority General Partners consider
necessary or desirable to carry out the
purposes of this Agreement and the business
of the Partnership.
The power of attorney hereby granted by each of the Partners is coupled with an
interest, is irrevocable, shall survive the transfer of the Partner's interest
in the Partnership and shall survive, and shall not be affected by, the
subsequent death, disability, incapacity, incompetency, termination, bankruptcy,
insolvency or dissolution of such Partner. Such attorney-in-fact shall not have
any right, power or authority to amend or modify this Agreement when acting in
such capacity.
Section 8.3. Amendments to Partnership Agreement. The terms and
--------------------------------------
provisions of this Agreement may be modified or amended only with the written
consent of all the Partners.
Section 8.4. Choice of Law. Notwithstanding the place where this
Agreement may be executed by any of the parties thereto, the parties expressly
agree that all the terms and provisions hereof shall be construed under the laws
of the State of Delaware and, without limitation thereof, that the Delaware Act
as now adopted or as may be hereafter amended shall govern this Agreement.
Section 8.5. Notices. Except as provided in this Agreement, each notice
relating to this Agreement shall be in writing and delivered in person, by
facsimile or by registered or certified mail. All notices to the Partnership
shall be addressed to its principal office and place of business. All notices
addressed to a Partner shall be addressed to such Partner at the address set
forth in the Schedule. Any Partner may designate a new address by notice to that
effect given to the Partnership. Unless otherwise specifically provided in this
Agreement, a notice shall be deemed to have been effectively given when faxed or
mailed by registered or certified mail to the proper address or when delivered
in person.
Section 8.6. Headings. The titles of the Articles and the headings of
--------
the Sections of this Agreement are for convenience of reference only, and are
not to be considered in construing the terms and provisions of this Agreement.
24
<PAGE>
Section 8.7. Construction and Interpretation. Whenever possible, the
provisions of this Agreement shall be interpreted in such manner as to be
effective and valid under applicable law, but if' any provision of this
Agreement shall be unenforceable or invalid under any applicable law, such
provision shall be ineffective only to the extent of such unenforceability or
invalidity, and the remaining provisions of this Agreement shall continue to be
binding and in full force and effect.
[SIGNATURES ON NEXT PAGE]
25
<PAGE>
IN WITNESS WHEREOF, the undersigned have hereunto set their hands as of
the date first set forth above.
CLASS A GENERAL PARTNER: LIMITED PARTNERS:
ENCORE CAPITAL (TEXAS), L.P. ENCORE II, INC.
By: ENCORE MANAGEMENT, LLC,
its general partner By: /s/ Don C. Merrell
------------------
Name: Don C. Merrell
Title: Vice President
By: /s/ Richard Beckwitt
---------------------
Name: Richard Beckwitt
Title: Member
CLASS B GENERAL PARTNER: /s/ Richard Beckwitt
---------------------------
RICHARD BECKWITT
ENCORE I, INC.
By: /s/ Donald R. Horton
-----------------------
Name: Donald R. Horton
Title: Chairman
26
<PAGE>
ENCORE VENTURE PARTNERS II (TEXAS), L.P.
SCHEDULE OF CAPITAL CONTRIBUTIONS
PART I
General Partners
Initial Capital Capital
- ----------------------------------- Contribution Commitment(1)(2)
Name and Address ----------------- -----------------
- -----------------------------------
ENCORE CAPITAL (TEXAS), L.P.
1901 Ascension Blvd. $0 $0
Arlington, Texas 76006
Attn: General Partner
ENCORE I, INC. $10 $500,000
1901 Ascension Blvd.
Suite 100
Arlington, Texas 76006
Attn: D.R. Horton
PART II
Limited Partners
Initial Capital Capital
- ----------------------------------- Contribution Commitment(1)(2)
Name and Address ---------------- -----------------
- -----------------------------------
ENCORE II, INC. $990 $49,500,000
7001 N. Scottsdale Rd.
Suite 2050
Scottsdale, AZ 85253
Attn: Don C. Merrell
RICHARD BECKWITT $0 $100,000
1901 Ascension Blvd.
Arlington, Texas 76006
(1) Includes Initial Capital Contribution.
(2) Subject to termination as provided in Section 3.1(a)(ii).
27
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheets and Consolidated Statements of Income found on
pages 3 and 4 of the Company's Form 10-Q for the year-to-date, and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 85397
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 2151667
<CURRENT-ASSETS> 2328497
<PP&E> 40335
<DEPRECIATION> 0
<TOTAL-ASSETS> 2625103
<CURRENT-LIABILITIES> 344816
<BONDS> 0
0
0
<COMMON> 644
<OTHER-SE> 861433
<TOTAL-LIABILITY-AND-EQUITY> 2625103
<SALES> 1585678
<TOTAL-REVENUES> 1607804
<CGS> 1290959
<TOTAL-COSTS> 1290959
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7562
<INCOME-PRETAX> 132204
<INCOME-TAX> 50238
<INCOME-CONTINUING> 81966
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 81966
<EPS-BASIC> 1.32
<EPS-DILUTED> 1.31
</TABLE>
