Filed Pursuant to Rule 424(b)(3)
Registration No. 333-89348
PROSPECTUS
$250,000,000
D.R. HORTON, INC.
OFFER TO EXCHANGE
8.5% SENIOR EXCHANGE NOTES DUE 2012
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
FOR
ANY AND ALL OF OUR OUTSTANDING
8.5% SENIOR NOTES DUE 2012
(CUSIP NOS. 23331A AK 5, U26442 AA 8 AND 23331A AM 1)
We are offering to exchange our 8.5% Senior Exchange Notes Due 2012
(exchange notes), which have been registered under the Securities Act of 1933,
as amended, for any and all of our outstanding 8.5% Senior Notes Due 2012 (old
notes) in the aggregate principal amount of $250,000,000.
THE EXCHANGE NOTES
o The terms of the registered exchange notes to be issued are
substantially identical to the terms of the old notes, except for
transfer restrictions, registration rights and liquidated damages
provisions relating to the old notes which will not apply to the
exchange notes.
o Interest on the exchange notes will accrue at the rate of 8.5% per
year, payable in cash every six months on April 15 and October 15,
with the first payment on October 15, 2002.
o We may redeem some or all of the exchange notes at any time on or
after April 15, 2007 at a redemption price equal to 100% of the
principal amount plus a premium declining ratably to par, plus accrued
interest. In addition, at any time on or before April 15, 2005, we may
redeem up to 35% of the aggregate principal amount of the exchange
notes with the proceeds of public equity offerings at a redemption
price equal to 108.5% of the principal amount plus accrued interest.
If we undergo a change of control or sell certain of our assets, we
may be required to offer to purchase exchange notes from you.
o The exchange notes will be unsecured and will rank equally with all of
our existing and future unsecured and unsubordinated obligations,
including our unsecured credit facility. All of our existing and
future restricted subsidiaries will guarantee the exchange notes.
These guarantees will be unsecured and will rank equally with all
existing and future unsecured and unsubordinated obligations of the
guarantors, including their guarantees of our credit facility.
o This prospectus includes additional information on the terms of the
exchange notes, including redemption and repurchase prices and
covenants.
o We have applied to list the exchange notes on the New York Stock
Exchange. Our common stock is listed on the New York Stock Exchange
under the symbol "DHI."
MATERIAL TERMS OF THE EXCHANGE OFFER
o The exchange offer expires at 5:00 p.m., New York City time, on
July 9, 2002, unless extended.
o All old notes that are validly tendered and not validly withdrawn will
be exchanged for an equal principal amount of exchange notes which are
registered under the Securities Act of 1933.
o Tenders of old notes may be withdrawn at any time prior to the
expiration of the exchange offer.
o The exchange offer is not subject to any minimum tender condition, but
is subject to the terms of the registration rights agreement that we
entered into on April 11, 2002 with the initial purchasers of the old
notes.
o We will not receive any proceeds from the exchange offer. We will pay
the expenses of the exchange offer.
FOR A DISCUSSION OF RISKS THAT SHOULD BE CONSIDERED BY HOLDERS IN DECIDING
WHETHER TO TENDER OLD NOTES IN THE EXCHANGE OFFER SEE "RISK FACTORS" BEGINNING
ON PAGE 9.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL WE ACCEPT SURRENDER
FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN WHICH THE
EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE
SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
The date of this prospectus is June 6, 2002
You should rely only on the information contained in or incorporated by
reference in this prospectus. We have not authorized anyone to provide you with
different information. We are not making any offer of these securities in any
state where the offer is not permitted. You should not assume the information
provided by this prospectus is accurate as of any date other than the date on
the front of this prospectus.
This prospectus incorporates important business and financial information
about us that is not included in or delivered with the document. This
information is available without charge to security holders upon written or oral
request. You may make such a request by contacting us at: Assistant to Corporate
Counsel, D.R. Horton, Inc., 1901 Ascension Blvd., Suite 100, Arlington, TX
76006, (817) 856-8200, Ext. 1046. IN ORDER TO ENSURE TIMELY DELIVERY OF THE
DOCUMENTS INCORPORATED BY REFERENCE IN THIS PROSPECTUS, ANY REQUEST SHOULD BE
MADE NO LATER THAN FIVE BUSINESS DAYS PRIOR TO THE DATE ON WHICH YOU PLAN TO
MAKE A FINAL DECISION TO EXCHANGE YOUR OLD NOTES.
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
Disclosure Regarding Forward-Looking Statements......................... ii
Prospectus Summary...................................................... 1
Risk Factors............................................................ 9
The Exchange Offer...................................................... 13
Use of Proceeds......................................................... 21
Capitalization.......................................................... 22
Business................................................................ 23
Description of the Exchange Notes....................................... 29
Material United States Federal Income Tax Considerations................ 55
Plan of Distribution.................................................... 59
Legal Matters........................................................... 59
Experts................................................................. 59
Available Information and Incorporation by Reference.................... 60
</Table>
Each broker-dealer that receives exchange notes for its own account
pursuant to the exchange offer must acknowledge that it will deliver a
prospectus in connection with any resale of such exchange notes. The letter of
transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act of 1933, as amended. This prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of exchange notes received in exchange for old notes
where such old notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities. We and each of the
guarantors have agreed that, starting on the expiration date of the exchange
offer and ending on the earlier of:
o the close of business on the 180th day after the expiration date of
the exchange offer, as the expiration date may be extended by the
number of days during such period that any stop order shall be in
effect suspending the effectiveness of the registration statement for
the exchange offer, and
o the close of business on the date upon which all such broker-dealers
have sold all exchange notes held by them,
we will make this prospectus available, as it may be amended or supplemented, to
any broker-dealer for use in connection with any such resale. See "Plan of
Distribution."
i
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
All statements other than statements of historical or current fact
included in this prospectus, including statements regarding our future financial
position and profitability, business strategy, and management's plans and
objectives for future operations, are forward-looking statements.
Forward-looking statements generally can be identified by the use of
forward-looking terminology such as "may," "will," "expect," "intend,"
"estimate," "anticipate," "believe" or "continue" or the negative thereof or
variations thereon or similar terminology.
Although we believe that the expectations reflected in such
forward-looking statements are reasonable, we can give no assurance that such
expectations will prove to have been correct. Important factors that could cause
actual results to differ materially from our expectations ("cautionary
statements") are set forth below and elsewhere in this prospectus including
under the section entitled "Risk Factors." These factors include, among others:
o changes in general economic, real estate construction and other
business conditions;
o changes in interest rates and the availability of mortgage financing;
o governmental regulations and environmental matters;
o our substantial debt;
o competitive conditions within our industry;
o the availability of capital; and
o our ability to effect our growth strategies successfully.
We undertake no obligation to update publicly any forward-looking
statements, whether as a result of new information, future events or otherwise.
However, any further disclosures made on related subjects in additional
documents incorporated into this prospectus by reference should be consulted.
We urge you to review carefully the section entitled "Risk Factors" in
this prospectus for a more complete discussion of the risks of an investment in
the exchange notes. All subsequent written and oral forward-looking statements
attributable to us, or persons acting on our behalf, are expressly qualified in
their entirety by the cautionary statements.
ii
PROSPECTUS SUMMARY
This is only a summary of the prospectus and may not contain all of the
information that may be important to you. You should read the entire prospectus
and the detailed information incorporated into it by reference, including the
financial statements, pro forma combined financial information and their
accompanying notes, before making an investment decision. Unless the context
otherwise requires, the terms "D.R. Horton," the "Company," "we" and "our" refer
to D.R. Horton, Inc., a Delaware corporation, and its predecessors and
subsidiaries.
THE COMPANY
We are a national homebuilder. We construct and sell single-family homes in
metropolitan areas of the Mid-Atlantic, Midwest, Southeast, Southwest and West
regions of the United States. We offer high quality homes, designed principally
for first-time and move-up home buyers. Our homes generally range in size from
1,000 to 5,000 square feet and range in price from $80,000 to $900,000. For the
year ended September 30, 2001, we closed 21,371 homes with an average sales
price approximating $200,700. For the six months ended March 31, 2002, we closed
12,330 homes with an average sales price approximating $215,700.
We are one of the largest and most geographically diversified homebuilders
in the United States, with operating divisions in 21 states and 42 markets. The
markets we operate in include: Albuquerque, Atlanta, Austin, Birmingham,
Charleston, Charlotte, Chicago, Colorado Springs, Columbia, Dallas, Denver, Fort
Myers/Naples, Fort Worth, Greensboro, Greenville, Hawaii, Hilton Head, Houston,
Jacksonville, Killeen, Las Vegas, Los Angeles, Louisville, Maryland-D.C.,
Miami/West Palm Beach, Minneapolis/St. Paul, Myrtle Beach, New Jersey, Orlando,
Phoenix, Portland, Raleigh/Durham, Richmond, Sacramento, Salt Lake City, San
Antonio, San Diego, San Francisco Bay Area, Seattle, Tucson, Virginia-D.C. and
Williamsburg.
We build homes under the following names: D.R. Horton, Arappco, Cambridge,
Continental, Dietz-Crane, Dobson, Emerald, Mareli, Melody, Milburn, Regency,
Schuler, SGS, Stafford, Torrey, Trimark and Western Pacific.
Our financial reporting segments consist of homebuilding and financial
services. Our homebuilding operations comprise the most substantial part of our
business, with more than 98% of consolidated revenues in fiscal 1999, 2000 and
2001. The homebuilding operations segment generates the majority of its revenues
from the sale of complete 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 and closing services.
Financial information, including revenue, pre-tax income and identifiable assets
of both of our reporting segments are included in our consolidated financial
statements.
Donald R. Horton began our homebuilding business in 1978. In 1991 we were
incorporated in Delaware to acquire the assets and businesses of our predecessor
companies which were residential home construction and development companies
owned or controlled by Mr. Horton. Since July 1993, we have acquired 18 other
homebuilding companies, including Schuler Homes, Inc. which we acquired on
February 21, 2002. Schuler strengthened our market position in several markets,
including California, while expanding our geographic presence and product
offerings in other markets in the West region. For the 12 months ended September
30, 2001, Schuler, together with Western Pacific Housing with which it combined
in April 2001, closed 5,254 homes with an average sales price approximating
$293,000. From October 1, 2001 through the date we acquired Schuler, the Schuler
operations closed 2,019 homes with an average sales price approximating
$276,000. The consideration we paid for Schuler consisted of approximately 20.1
million shares of common stock and $168.7 million in cash, plus the assumption
of $802.2 million in Schuler debt. In addition, we issued Schuler employees
options to purchase approximately 527,000 shares of our common stock to replace
their Schuler options.
Our principal executive offices are at 1901 Ascension Blvd., Suite 100,
Arlington, Texas 76006, our telephone number is (817) 856-8200, and our Internet
website address is www.drhorton.com. Information on our Internet website is not
part of this prospectus.
1
SUMMARY OF THE EXCHANGE OFFER
The following is a summary of the principal terms of the exchange offer. A
more detailed description is contained in the section "The Exchange Offer." The
term "old notes" refers to our outstanding 8.5% Senior Notes due 2012, and the
term "exchange notes" refers to our 8.5% Senior Exchange Notes due 2012. The
term "indenture" refers to the indenture that governs both the old notes and
the exchange notes.
The Exchange Offer.................... We are offering to exchange $1,000
principal amount of our exchange notes,
which have been registered under the
Securities Act of 1933, as amended, for
each $1,000 principal amount of our
unregistered old notes. We issued the
old notes on April 11, 2002 in a
private offering. The terms of the
exchange notes are substantially
identical to the terms of the old
notes.
In order to exchange your old notes,
you must properly tender them before
the expiration of the exchange offer.
All old notes that are validly tendered
and not validly withdrawn will be
exchanged. We will issue the exchange
notes on or promptly after the
expiration of the exchange offer.
You may tender your old notes for
exchange notes in whole or in part in
integral multiples of $1,000 principal
amount.
Registration Rights Agreement......... We sold the old notes on April 11, 2002
to a group of initial purchasers.
Simultaneously with that sale, we
entered into a registration rights
agreement relating to the old notes
with the initial purchasers, which
requires us to conduct the exchange
offer.
You have the right under the
registration rights agreement to
exchange your old notes for exchange
notes with substantially identical
terms. This exchange offer is intended
to satisfy those rights. After this
exchange offer is complete, you will no
longer be entitled to any exchange or
registration rights with respect to
your old notes.
For a description of the procedures for
tendering your old notes, see "The
Exchange Offer" under the heading
"Procedures for Tendering Old Notes."
Expiration Date....................... 5:00 p.m., New York City time, July 9,
2002, unless the exchange offer is
extended, in which case the expiration
date will be the latest date and time
to which the exchange offer is
extended. See "The Exchange Offer"
under the heading "Terms of the
Exchange Offer."
Consequences of Failure to Exchange
Your Old Notes.................... If you do not exchange your old notes
for exchange notes in the exchange
offer, you will still have the
restrictions on transfer provided in
the old notes and in the indenture. In
general, the old notes may not be
offered or sold unless registered or
exempt from registration under the
Securities Act, or in a transaction not
subject to the Securities Act and
applicable state securities laws. We do
not plan to register the old notes
under the Securities Act.
Conditions to the Exchange Offer...... The exchange offer is subject to
customary conditions described under
"The Exchange Offer" under the heading
"Conditions to the Exchange Offer,"
some of which we may waive in our sole
discretion. The exchange offer is not
conditioned upon any minimum principal
amount of old notes being tendered. We
reserve the right in our sole and
absolute discretion, subject to
applicable law, at any time and from
time to time:
o to terminate the exchange offer
if one or more specific
conditions have not been
satisfied;
o to extend the expiration date of
the exchange offer and retain all
tendered old notes, subject,
however, to the right of the
tendering holders to withdraw
their tendered old notes; or
2
o to waive any condition or
otherwise amend the terms of the
exchange offer in any respect.
See "The Exchange Offer" under the
heading "Terms of the Exchange Offer."
Procedures for Tendering Old Notes.... If you wish to tender your old notes
for exchange notes, you must:
o complete and sign a letter of
transmittal in accordance with
the instructions contained in the
letter of transmittal; and
o forward the completed letter of
transmittal by mail, facsimile or
hand delivery, together with any
other required documents, to the
exchange agent, either with the
old notes to be tendered or in
compliance with the specified
procedures for guaranteed
delivery of such old notes.
Specified brokers, dealers, commercial
banks, trust companies and other
nominees may also effect tenders by
book-entry transfer.
You should not send letters of
transmittal or certificates
representing old notes to us. You
should send those documents only to the
exchange agent. The address, and
telephone and facsimile numbers, of the
exchange agent are set forth in "The
Exchange Offer" under the heading "The
Exchange Agent" and in the letter of
transmittal.
Special Procedures for Beneficial
Owners............................ If your old notes are registered in the
name of a broker, dealer, commercial
bank, trust company or other nominee,
we urge you to contact your nominee
holder promptly if you wish to tender
such old notes. See "The Exchange
Offer" under the heading "Procedures
for Tendering Old Notes."
Withdrawal of Tenders................. You may withdraw the tender of your old
notes at any time on or prior to the
expiration date by delivering a written
notice of withdrawal to the exchange
agent in conformity with the procedures
discussed under "The Exchange Offer"
under the heading "Withdrawal of
Tenders."
Acceptance of Old Notes and Delivery
of Exchange Notes.................. Upon consummation of the exchange
offer, we will accept any and all old
notes that are validly tendered in the
exchange offer and not validly
withdrawn prior to 5:00 p.m., New York
City time, on the expiration date. The
exchange notes issued in the exchange
offer will be delivered promptly after
acceptance of the tendered old notes.
See "The Exchange Offer" under the
heading "Terms of the Exchange Offer."
Consequences of Exchanging Old Notes.. We believe that you will be able to
offer for resale, resell or otherwise
transfer exchange notes issued in the
exchange offer without compliance with
the registration and prospectus
delivery provisions of the federal
securities laws, provided that:
o you are acquiring the exchange
notes in the ordinary course of
your business;
o you have no arrangement or
understanding with any person to
participate in a distribution of
the old notes or the exchange
notes; and
o you are not an "affiliate" of
D.R. Horton, Inc., as the term is
defined for the purposes of Rule
405 under the Securities Act.
Our belief is based on interpretations
by the staff of the Securities and
Exchange Commission, as set forth in
no-action letters issued to third
parties unrelated to us. The staff of
the SEC has not considered this
exchange offer in the context of a
no-action letter, and we cannot assure
you that the staff of the SEC would
make a similar determination with
respect to this exchange offer.
If our belief is not accurate and you
transfer an exchange note without
delivering a prospectus meeting the
requirements of the federal securities
laws or without an exemption from these
laws, you may incur liability under the
3
federal securities laws. We do not and
will not assume, or indemnify you
against, this liability.
Each broker-dealer that receives
exchange notes for its own account in
exchange for old notes that such
broker-dealer acquired as a result of
market-making or other trading
activities must agree to deliver a
prospectus meeting the requirements of
the federal securities laws in
connection with any resale of the
exchange notes. See "The Exchange
Offer" under the heading "Consequences
of Exchanging Old Notes."
Exchange Agent........................ The exchange agent for the exchange
offer is American Stock Transfer &
Trust Company. The address, telephone
number and facsimile number of the
exchange agent are provided in "The
Exchange Offer" under the heading "The
Exchange Agent" and in the letter of
transmittal.
Use of Proceeds....................... We will not receive any cash proceeds
from the issuance of the exchange
notes. See "Use of Proceeds."
Certain Federal Income Tax
Consequences...................... Your acceptance of an exchange offer
and the related exchange of your old
notes for exchange notes will not be a
taxable exchange for United States
federal income tax purposes. You should
not recognize any taxable gain or loss
or any interest income as a result of
the exchange.
SUMMARY OF THE TERMS OF THE EXCHANGE NOTES
The following is a summary of the principal terms of the exchange notes. A
more detailed description is contained in the section "Description of the
Exchange Notes."
Issuer................................ D.R. Horton, Inc.
Securities Offered.................... $250,000,000 aggregate principal amount
of 8.5% Senior Exchange Notes due 2012.
Maturity Date......................... April 15, 2012.
Interest Rate and Payment Dates....... Interest will accrue from April 11,
2002 and will be payable semi-annually
on each April 15 and October 15,
commencing October 15, 2002.
Guarantees............................ Each guarantor is our wholly owned
subsidiary that is a restricted
subsidiary under the indenture for the
exchange notes. However, not all of our
wholly owned subsidiaries are
guarantors of the exchange notes. If we
cannot make payments on the exchange
notes when they are due, the guarantor
subsidiaries must make them.
Optional Redemption................... We may redeem all or some of the
exchange notes, beginning on April 15,
2007, at the redemption prices listed
in the section entitled "Description of
the Exchange Notes" under the heading
"Optional Redemption."
At any time on or before April 15,
2005, we may redeem the exchange notes
with the net cash proceeds of one or
more public equity offerings by us, at
a redemption price equal to 108.5% of
the principal amount of the exchange
notes, plus accrued and unpaid
interest, if any, to the date of
redemption, so long as at least 65% of
the aggregate principal amount of the
exchange notes remains outstanding.
Change of Control..................... Upon a change of control as described
in the section entitled "Description of
the Exchange Notes," you will have the
right to require us to purchase some or
all of your exchange notes at 101% of
the principal amount, plus accrued and
unpaid interest to the date of
purchase. We can give no assurance that
upon such an event we will have
sufficient funds to purchase any of
your exchange notes.
Ranking............................... These exchange notes are our general
obligations and will not be secured by
any collateral. Your right to payment
under these exchange notes will be:
4
o junior to the rights of our
secured creditors to the extent
of the value of their security in
our assets;
o equal with the rights of
creditors under our other
unsecured unsubordinated debt,
including our revolving credit
facility; and
o senior to the rights of creditors
under our debt that is expressly
subordinated to these exchange
notes.
The guarantees of our existing and
future restricted subsidiaries will
also not be secured by any collateral.
Your right to payment under any
guarantee will be:
o junior to the rights of secured
creditors to the extent of the
value of their security in the
guarantors' assets;
o equal with the rights of
creditors under the guarantors'
other unsecured unsubordinated
debt, including the guarantors'
guarantee of our revolving credit
facility; and
o senior to the rights of creditors
under the guarantors' debt that
is expressly subordinated to the
guarantees.
At March 31, 2002, assuming we had
completed the change of control
repurchase of the Schuler senior and
senior subordinated notes and the
offering of the old notes on that date
and all of the net proceeds of such
offering were used to reduce borrowings
under our revolving credit facility,
D.R. Horton, Inc. and the guarantors
would have had approximately $2,713.3
million of debt (including the old
notes) outstanding. Of this debt, $76.2
million would have been secured debt,
$1,886.8 million would have been
unsubordinated unsecured debt that
ranks equally with the old notes and
the exchange notes, and $502.4 million
would have been subordinated to the old
notes and the exchange notes. In
addition, at such date, our
non-guarantor subsidiaries would have
had approximately $183.3 million of
debt outstanding.
Certain Covenants..................... We will issue the exchange notes under
an indenture. The indenture, among
other things, will restrict our ability
and the ability of our restricted
subsidiaries to:
o borrow money;
o pay dividends on our common
stock;
o repurchase our common stock;
o make investments in subsidiaries
that are not restricted;
o use assets as security in other
transactions;
o sell assets outside the ordinary
course of business;
o merge with or into other
companies; and
o enter into certain transactions
with our affiliates.
For more details, see the section
entitled "Description of the Exchange
Notes" under the heading "Certain
Covenants."
5
SUMMARY CONSOLIDATED AND PRO FORMA COMBINED FINANCIAL INFORMATION
AND OPERATING DATA
The following summary consolidated financial information for the five years
ended September 30, 2001, is derived from our audited consolidated financial
statements. On April 20, 1998, we consummated a merger with Continental Homes
Holding Corp., which was treated as a pooling of interests for accounting
purposes. Therefore, all financial amounts have been restated as if we had been
combined throughout the periods presented. The following summary consolidated
financial information for the six months ended March 31, 2002 and 2001, is
derived from our unaudited consolidated financial statements.
The following unaudited summary pro forma combined financial information
gives effect to our acquisition of Schuler. The unaudited pro forma combined
condensed statements of income for the six months ended March 31, 2002 and for
the year ended September 30, 2001, including the pro forma adjustments and
accompanying notes, are incorporated herein by reference to the Form 8-K we
filed with the SEC on May 29, 2002. The unaudited summary pro forma combined
income statement information for the six months ended March 31, 2002, assumes
that the acquisition occurred on October 1, 2001. The unaudited summary pro
forma combined income statement information for the year ended September 30,
2001, assumes the acquisition occurred on October 1, 2000. The financial
information about Schuler included in the pro forma combined information for the
six months ended March 31, 2002 has been derived from the Schuler unaudited
financial statements. The financial information about Schuler included in the
pro forma combined information for the year ended September 30, 2001 has been
derived from the Schuler (and its predecessor) and Western Pacific Housing
unaudited financial statements.
The unaudited summary pro forma combined financial statement information has
been included for comparative purposes only. The unaudited summary pro forma
combined financial statement information does not purport to show what the
financial position or operating results would have been if the acquisition had
been consummated as of the dates indicated and should not be construed as
representative of a future operating results.
6
<Table>
<Caption>
PRO FORMA
COMBINED
WITH SCHULER
FOR THE
D.R. HORTON FISCAL
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, YEAR ENDED
------------------------------------------------------------------ SEPTEMBER 30,
1997 1998 1999 2000 2001 2001
---------- ---------- ---------- ---------- ---------- -------------
(IN MILLIONS, EXCEPT FOR PER SHARE DATA, NUMBER OF HOMES AND RATIO OF EARNINGS TO FIXED CHARGES)
INCOME STATEMENT DATA:
Revenues:
Homebuilding .............. $ 1,567.5 $ 2,155.0 $ 3,119.0 $ 3,604.2 $ 4,383.6 $ 5,924.4
Financial services ........ 11.0 21.9 37.3 49.5 72.0 72.0
Gross profit ............... 274.9 394.9 570.5 663.1 856.4 1,169.0
Income before income
taxes:
Homebuilding .............. 105.6 152.0 250.7 294.5 380.8 512.2
Financial services ........ 3.0 7.1 13.1 14.7 27.0 27.0
Cumulative effect of
change in accounting
principle, net of
income taxes(1) ........... -- -- -- -- 2.1 2.1
Net income ................. 65.0 93.4 159.8 191.7 257.0 335.5
Income per share before
cumulative effect of
change in accounting
principle:(2)
Basic(3) .................. $ 0.71 $ 0.96 $ 1.40 $ 1.70 $ 2.25 $ 2.32
Diluted(4) ................ 0.64 0.86 1.38 1.69 2.21 2.29
Cash dividends declared
per common share ........ 0.06 0.09 0.11 0.15 0.19 0.19
Weighted average number
of shares
outstanding:(2)
Basic(3) .................. 91.8 96.8 113.9 112.6 113.5 143.6
Diluted(4) ................ 107.7 112.7 116.1 113.6 115.4 145.7
SELECTED OPERATING DATA:
Gross profit margin ........ 17.5% 18.3% 18.3% 18.4% 19.5% 19.7%
Number of homes closed ..... 10,038 13,944 18,395 19,144 21,371 26,625
New sales orders, net
(homes)(5) ................ 10,551 15,952 18,911 19,223 22,179 27,445
New sales orders, net ($
value)(5) ................. $ 1,595.7 $ 2,533.2 $ 3,266.2 $ 3,676.4 $ 4,502.6 $ 6,013.6
Sales backlog at end of
period (homes)(6) ......... 3,961 6,341 7,309 7,388 9,263 11,265
Sales backlog at end of
period ($ value)(6) ....... $ 609.2 $ 1,052.9 $ 1,356.5 $ 1,536.9 $ 1,933.8 $ 2,509.7
OTHER FINANCIAL DATA:
Interest expensed:
Expensed directly ......... $ 10.9 $ 16.2 $ 16.5 $ 15.8 $ 14.1 $ 21.3
Amortized to cost of
sales ................... 29.3 48.0 58.2 69.6 91.4 149.8
Provision for income
taxes ..................... 43.6 65.7 104.0 117.5 152.9 205.8
Depreciation and
amortization .............. 6.6 9.4 20.3 22.0 31.2 41.3
Interest incurred(7) ....... 51.2 70.4 81.0 110.0 136.3 204.3
Ratio of earnings to
fixed charges(8) .......... 2.88x 3.13x 4.10x 3.52x 3.69x 3.42x
<Caption>
PRO FORMA
COMBINED
WITH SCHULER
D.R. HORTON FOR THE SIX
SIX MONTHS MONTHS
ENDED MARCH 31, ENDED
------------------------ MARCH 31,
2001 2002 2002
---------- ---------- ------------
(IN MILLIONS, EXCEPT FOR PER SHARE DATA,
NUMBER OF HOMES AND RATIO OF EARNINGS
TO FIXED CHARGES)
INCOME STATEMENT DATA:
Revenues:
Homebuilding .............. $ 1,766.0 $ 2,711.2 $ 3,286.2
Financial services ........ 28.5 48.8 48.8
Gross profit ............... 349.2 509.3 624.2
Income before income
taxes:
Homebuilding .............. 149.7 237.5 282.1
Financial services ........ 9.2 22.3 22.3
Cumulative effect of
change in accounting
principle, net of
income taxes(1) ........... 2.1 -- --
Net income ................. 101.4 162.4 189.2
Income per share before
cumulative effect of
change in accounting
principle:(2)
Basic(3) .................. $ 0.88 $ 1.33 $ 1.30
Diluted(4) ................ 0.86 1.26 1.24
Cash dividends declared
per common share ........ 0.09 0.11 0.11
Weighted average number
of shares
outstanding:(2)
Basic(3) .................. 112.8 122.1 145.9
Diluted(4) ................ 114.6 129.4 153.5
SELECTED OPERATING DATA:
Gross profit margin ........ 19.8% 18.8% 19.0%
Number of homes closed ..... 8,620 12,330 14,349
New sales orders, net
(homes)(5) ................ 10,941 13,761 15,890
New sales orders, net ($
value)(5) ................. $ 2,256.1 $ 2,854.9 $ 3,531.0
Sales backlog at end of
period (homes)(6) ......... 9,709 12,398 12,398
Sales backlog at end of
period ($ value)(6) ....... $ 2,083.3 $ 2,663.7 $ 2,663.7
OTHER FINANCIAL DATA:
Interest expensed:
Expensed directly ......... $ 6.5 $ 6.1 $ 7.1
Amortized to cost of
sales ................... 36.7 51.7 71.0
Provision for income
taxes ..................... 59.6 97.4 115.1
Depreciation and
amortization .............. 12.0 10.7 17.9
Interest incurred(7) ....... 62.7 85.6 108.4
Ratio of earnings to
fixed charges(8) .......... 3.17x 3.65x 3.56x
</Table>
7
<Table>
<Caption>
D.R. HORTON D.R. HORTON
AS OF SEPTEMBER 30, AS OF MARCH 31,
-------------------------------------------------------------- -----------------------
1997 1998 1999 2000 2001 2001 2002
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE SHEET DATA:
Inventories ............ $ 1,024.3 $ 1,358.0 $ 1,866.1 $ 2,191.0 $ 2,804.4 $ 2,533.0 $ 4,201.1
Total assets ........... 1,248.3 1,667.8 2,361.8 2,694.6 3,652.2 3,127.0 5,596.7
Notes payable .......... 650.7 854.5 1,190.6 1,344.4 1,884.3 1,691.7 2,896.4
Stockholders' equity ... 427.9 549.4 797.6 969.6 1,250.2 1,072.2 2,038.7
</Table>
- ----------
(1) On October 1, 2000, we adopted Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities"
(SFAS #133) as amended by SFAS #137 and #138. Accordingly, the fair market
value of our interest rate swaps, which were not designated as hedges under
SFAS #133, was recorded, net of applicable income taxes, as a cumulative
effect of a change in accounting principle.
(2) Income per share amounts and weighted average number of shares outstanding
have been adjusted as appropriate to reflect the effects of the 9% and 11%
stock dividends of September 2000 and March 2001 and the effect of the
April 2002 three-for-two stock split effected as a stock dividend.
(3) Basic income per share before cumulative effect of change in accounting
principle is based upon the weighted average number of shares of common
stock outstanding during each year.
(4) Diluted income per share before cumulative effect of change in accounting
principle is based upon the weighted average number of shares of common
stock outstanding during each year, adjusted for the effects of dilutive
securities outstanding.
(5) Represents homes placed under contract during the period, net of
cancellations.
(6) Represents homes under contract but not yet closed at the end of the
period.
(7) Interest incurred consists of all interest costs, whether expensed or
capitalized, including amortization of debt issuance costs, if applicable.
(8) For purposes of computing the ratio of earnings to fixed charges, earnings
consist of the sum of income before income taxes and the cumulative effect
of change in accounting principle, interest amortized to cost of sales,
interest expense and the portion of rent expense deemed to represent
interest. Fixed charges consist of interest incurred, whether expensed or
capitalized, including amortization of debt issuance costs, if applicable,
and the portion of rent expense deemed to represent interest.
8
RISK FACTORS
Before you participate in the exchange offer, you should consider all of
the information set forth in this prospectus and the information incorporated by
reference and, in particular, you should evaluate the risk factors set forth
below.
RISKS RELATING TO OUR BUSINESS
BECAUSE OF THE CYCLICAL NATURE OF OUR INDUSTRY, FUTURE CHANGES IN GENERAL
ECONOMIC, REAL ESTATE CONSTRUCTION OR OTHER BUSINESS CONDITIONS COULD ADVERSELY
AFFECT OUR BUSINESS.
Cyclical Industry. The homebuilding industry is cyclical and is
significantly affected by changes in general and local economic conditions, such
as:
o employment levels;
o availability of financing for home buyers;
o interest rates;
o consumer confidence; and
o housing demand.
An oversupply of alternatives to new homes, such as rental properties and
used homes, could depress new home prices and reduce our margins on the sale of
new homes.
The terrorist attacks at the World Trade Center and the Pentagon or other
acts of violence in the future, and any corresponding response by the United
States, may adversely affect general economic conditions or cause a slowdown of
the national economy.
Inventory Risks. Inventory risks can be substantial for homebuilders. We
must continuously seek and make acquisitions of land for expansion into new
markets and for replacement and expansion of land inventory within our current
markets. The risks inherent in purchasing and developing land increase as
consumer demand for housing decreases. Thus, we may have bought and developed
land on which we cannot build and sell homes. The market value of undeveloped
land, building lots and housing inventories can fluctuate significantly as a
result of changing market conditions. We cannot assure you that the measures we
employ to manage inventory risks will be successful.
In addition, inventory carrying costs can be significant and can result in
losses in a poorly performing project or market. In the event of significant
changes in economic or market conditions, we may have to sell homes at a loss.
Supply Risks. The homebuilding industry has from time to time experienced
significant difficulties, including:
o shortages of qualified trades people;
o reliance on local subcontractors, who may be inadequately
capitalized;
o shortages of materials; and
o volatile increases in the cost of materials, particularly
increases in the price of lumber, drywall and cement, which are
significant components of home construction costs.
Risks from Nature. Weather conditions and natural disasters, such as
hurricanes, tornadoes, earthquakes, volcanic activity, floods and fires, can
harm the homebuilding business. The climates and geology of many of the states
in which we operate, including California, Florida, Georgia, Hawaii, North
Carolina, Oregon, South Carolina, Texas and Washington, present increased risks
of natural disaster.
As a result of all of the foregoing, in the future, potential customers may
be less willing or able to buy our homes, or we may take longer or pay more
costs to build them. We may not be able to recapture increased costs by raising
prices in many cases because we fixed our prices up to six months in advance of
delivery by signing home sales contracts. In addition, some home buyers may
cancel or not honor their home sales contracts altogether.
9
FUTURE INCREASES IN INTEREST RATES OR REDUCTIONS IN MORTGAGE AVAILABILITY COULD
PREVENT POTENTIAL CUSTOMERS FROM BUYING OUR HOMES AND ADVERSELY AFFECT OUR
BUSINESS.
Virtually all our customers finance their acquisitions through lenders
providing mortgage financing. Increases in interest rates or decreases in
availability of mortgage financing could depress the market for new homes
because of the increased monthly mortgage costs to potential home buyers. Even
if potential customers do not need financing, changes in interest rates and
mortgage availability could make it harder for them to sell their homes to
potential buyers who need financing. This could adversely affect our results of
operations.
In addition, we believe that the availability of FHA and VA mortgage
financing is an important factor in marketing many of our homes. Any limitations
or restrictions on the availability of such financing could adversely affect our
sales.
GOVERNMENTAL REGULATIONS COULD INCREASE THE COST AND LIMIT THE AVAILABILITY OF
OUR DEVELOPMENT AND HOMEBUILDING PROJECTS AND ADVERSELY AFFECT OUR BUSINESS.
We are subject to extensive and complex regulations that affect the
development and homebuilding process, including zoning, density and building
standards. These regulations often provide broad discretion to the administering
governmental authorities. This can delay or increase the costs of development or
homebuilding.
We also are subject to a variety of local, state and federal laws and
regulations concerning protection of the environment. These environmental laws
may result in delays, may cause us to incur substantial compliance and other
costs, and can prohibit or severely restrict development and homebuilding
activity in environmentally sensitive regions or areas.
OUR SUBSTANTIAL DEBT COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION.
We have a significant amount of debt. As of March 31, 2002, assuming we had
completed the offering of the old notes on that date and all of the net proceeds
of such offering were used to reduce borrowings under our revolving credit
facility, our consolidated debt would have been approximately $2.9 billion.
Possible Consequences. The amount of our debt could have important
consequences to you. For example, it could:
o limit our ability to obtain future financing for working capital,
capital expenditures, acquisitions, debt service requirements or
other requirements;
o require us to dedicate a substantial portion of our cash flow
from operations to payment of or on our debt and reduce our
ability to use our cash flow for other purposes;
o limit our flexibility in planning for, or reacting to, the
changes in our business;
o place us at a competitive disadvantage because we have more debt
than some of our competitors; and
o make us more vulnerable in the event of a downturn in our
business or in general economic conditions.
Dependence on Future Performance. Our ability to meet our debt service and
other obligations will depend upon our future performance. We are engaged in
businesses that are substantially affected by changes in economic cycles. Our
revenues and earnings vary with the level of general economic activity in the
markets we serve. Our businesses are also affected by financial, political,
business and other factors, many of which are beyond our control. The factors
that affect our ability to generate cash can also affect our ability to raise
additional funds for these purposes through the sale of equity securities, the
refinancing of debt, or the sale of assets. Changes in prevailing interest rates
may affect our ability to meet our debt service obligations, because borrowings
under our revolving credit facility bear interest at floating rates. We have
entered into "interest rate swap" agreements for only a portion of our
outstanding borrowings.
Our debt payment obligations for the 12 months beginning April 1, 2002
total $213.4 million. Based on the current level of operations, we believe our
cash flow from operations, available cash and available borrowings under our
revolving credit facility will be adequate to meet our future liquidity needs.
We cannot assure you, however, that in the future our business will generate
sufficient cash flow from operations or that borrowings will be available to us
in an amount sufficient to enable us to pay or refinance our indebtedness or to
fund other liquidity needs.
Indenture and Credit Facility Restrictions. The indentures governing our
outstanding public debt and our revolving credit facility impose restrictions on
our operations and activities. The most significant restrictions relate to debt
incurrence, lien incurrence, sales of assets and cash distributions by us and
require us to comply with certain financial covenants. If we
10
fail to comply with any of these restrictions or covenants, the trustees or the
banks, as appropriate, could cause our debt to become due and payable prior to
maturity. In addition, available credit under our revolving credit facility is
subject to limitations based on specified percentages of the costs of unsold
homes, developed lots and lots under development included in inventory and the
amount of other senior, unsecured indebtedness. Under the most restrictive of
the limitations imposed by our indentures and revolving credit agreement, as of
March 31, 2002, assuming we had completed the offering of the old notes on that
date and all of the net proceeds of such offering were used to reduce borrowings
under our revolving credit facility, we would have been permitted to increase
our homebuilding debt by approximately $1,376.8 million, which includes
approximately $306.1 million available under our revolving credit facility.
HOMEBUILDING IS VERY COMPETITIVE, AND COMPETITIVE CONDITIONS COULD ADVERSELY
AFFECT OUR BUSINESS.
The homebuilding industry is highly competitive. Homebuilders compete not
only for home buyers, but also for desirable properties, financing, raw
materials and skilled labor. We compete with other local, regional and national
homebuilders, including those with a sales presence on the Internet, often
within larger subdivisions designed, planned and developed by such homebuilders.
The competitive conditions in the homebuilding industry could result in:
o difficulty in acquiring suitable land at acceptable prices;
o increased selling incentives;
o lower sales or profit margins; or
o delays in construction of our homes.
OUR FUTURE GROWTH REQUIRES ADDITIONAL CAPITAL, WHICH MAY NOT BE AVAILABLE.
Our operations require significant amounts of cash. We will be required to
seek additional capital, whether from sales of equity or debt or additional bank
borrowings, for the future growth and development of our business. We can give
no assurance as to the terms or availability of such additional capital.
Moreover, the indentures for our outstanding debt and our revolving credit
facility contain provisions that restrict the debt we may incur in the future.
If we are not successful in obtaining sufficient capital, it could reduce our
sales and may adversely affect our future growth and results of operations.
WE CANNOT ASSURE YOU THAT OUR GROWTH STRATEGIES WILL BE SUCCESSFUL.
Since 1993, we have acquired many homebuilding companies. In addition to
our internal growth, we are currently focusing on strategic acquisitions of
homebuilding companies. Successful strategic acquisitions require the
integration of operations and management and other efforts to realize the
benefits that may be available. Although we believe that we have been successful
in doing so in the past, we can give no assurance that we will continue to be
able to identify, acquire and integrate successful strategic acquisitions in the
future. Moreover, we may not be able to implement successfully our operating and
growth strategies within our existing markets.
RISKS RELATING TO THE EXCHANGE NOTES
THERE ARE CONSEQUENCES ASSOCIATED WITH FAILING TO EXCHANGE THE OLD NOTES FOR THE
EXCHANGE NOTES.
If you do not exchange your old notes for exchange notes in the exchange
offer, you will still have the restrictions on transfer provided in the old
notes and the indenture. In general, the old notes may not be offered or sold
unless registered or exempt from registration under the Securities Act, or in a
transaction not subject to the Securities Act, and applicable state securities
laws. We do not plan to register the old notes under the Securities Act.
YOU MUST COMPLY WITH THE PROCEDURES FOR THE EXCHANGE OFFER IN ORDER TO RECEIVE
THE EXCHANGE NOTES.
You are responsible for complying with all exchange offer procedures. You
will only receive exchange notes in exchange for your old notes if, prior to the
expiration date, you deliver the following to the exchange agent:
o certificate for the old notes or a book-entry confirmation of a
book-entry transfer of the old notes into the exchange agent's account
with The Depository Trust Company;
o the letter of transmittal or facsimile thereof, properly completed and
duly executed by you, together with any required signature guarantees;
and
11
o other documents required by the letter of transmittal.
You should allow sufficient time to ensure that the exchange agent receives
all required documents before the expiration date. Neither we nor the exchange
agent has any duty to inform you of defects or irregularities with respect to
the tender of your old notes for exchange notes. See "The Exchange Offer."
WE MAY NOT HAVE THE ABILITY TO RAISE FUNDS NECESSARY TO FINANCE ANY CHANGE OF
CONTROL OFFER REQUIRED BY THE INDENTURE.
If a change of control occurs as described in the section "Description
of Exchange Notes" under the heading "Certain Covenants," we would be required
to offer to purchase your notes at 101% of their principal amount, together with
all accrued and unpaid interest, if any. If a purchase offer obligation arises
under the indenture governing the exchange notes, a change of control will have
also occurred under one or more of the other indentures governing our debt.
Moreover, a change of control may also result in the acceleration under our
revolving credit facility. If a purchase offer were required under the
indentures for our other debt or our revolving credit debt were accelerated, we
can give no assurance that we would have sufficient funds to pay the purchase
price for all debt that we are required to repurchase or repay. After giving
effect to the issuance of the old notes, we would not have sufficient funds
available to purchase all of such outstanding debt upon a change of control.
FEDERAL AND STATE LAWS ALLOW COURTS, UNDER SPECIFIC CIRCUMSTANCES, TO VOID
GUARANTEES AND TO REQUIRE YOU TO RETURN PAYMENTS RECEIVED FROM GUARANTORS.
Although you will be direct creditors of the guarantors by virtue of
the guarantees, a court could avoid or subordinate any guarantor's guarantee
under the fraudulent conveyance laws if existing or future creditors of such
guarantor were successful in establishing that:
o such guarantee was incurred with fraudulent intent; or
o such guarantor did not receive fair consideration or reasonably
equivalent value for issuing its guarantee; and
- was insolvent at the time of the guarantee;
- was rendered insolvent by reason of the guarantee;
- was engaged in a business or transaction for which its
assets constituted unreasonably small capital to carry on
its business; or
- intended to incur, or believed that it would incur, debt
beyond its ability to pay such debt as it matured.
The measures of insolvency for purposes of determining whether a
fraudulent conveyance occurred would vary depending upon the laws of the
relevant jurisdiction and upon the valuation assumption and methodology applied
by the court. Generally, however, a company would be considered insolvent for
purposes of the foregoing if:
o the sum of the company's debts, including contingent,
unliquidated and unmatured liabilities, is greater than all of
such company's property at a fair valuation; or
o the present fair saleable value of the company's assets is less
than the amount that will be required to pay the probable
liability on its existing debts as they become absolute and
matured.
WE CANNOT ASSURE YOU THAT AN ACTIVE TRADING MARKET WILL DEVELOP FOR THE EXCHANGE
NOTES.
Although we have applied to list the exchange notes and related guarantees
on the New York Stock Exchange, there is no established trading market for the
exchange notes and we cannot assure you that the exchange notes will be listed.
If such a market were to develop, the exchange notes could trade at prices that
are higher or lower than the initial offering price of the old notes depending
on many factors, including the number of holders of the exchange notes, the
overall market for similar securities, our financial performance and prospects
and prospects for companies in our industry generally. The initial purchasers of
the old notes have informed us that they intend to make a market in the exchange
notes. However, the initial purchasers are not obligated to do so, and may cease
any market-making activities at any time without notice. If the exchange notes
are not listed on a securities exchange, you cannot be sure that an active
trading market will develop for the exchange notes, that you will be able to
sell your exchange notes, or that, even if you can sell them, you will be able
to do so at an acceptable price.
12
THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
When we sold the old notes on April 11, 2002, we entered into a
registration rights agreement with the initial purchasers of those notes. Under
the registration rights agreement, we and the guarantors agreed to:
o use our respective reasonable best efforts to file with the SEC a
registration statement, with respect to the exchange of the
exchange notes which are registered under the Securities Act for
old notes, not later than 90 days of April 11, 2002 or, if that
day is not a business day, then the next day that is a business
day;
o use our respective reasonable best efforts to cause the exchange
offer registration statement to be declared effective by the SEC
within 150 days of April 11, 2002 or, if that day is not a
business day, then the next day that is a business day; and
o upon the effectiveness of the exchange offer registration
statement, promptly commence the exchange offer.
We and the guarantors also agreed to use our respective reasonable best
efforts to keep the exchange offer open for not less than 20 business days and
not more than 30 business days after the date notice of the exchange offer is
mailed to the holders of the old notes (or, in each case, longer, if required by
applicable law).
If any changes in applicable law or the applicable interpretations of the
staff of the SEC do not permit us to effect the exchange offer, or if for any
reason the exchange offer is not completed within 180 days of April 11, 2002, or
if any holder of the old notes, other than the initial purchasers, is not
eligible to participate in the applicable exchange offer because of applicable
law or the applicable interpretations of the staff of the SEC, or upon the
request of an initial purchaser under the specified circumstances, we and the
guarantors will, at our cost:
o as promptly as practicable and in any event on or before 45 days after
such filing obligation arises, file a shelf registration statement
covering resales of the old notes or exchange notes, as applicable;
o use our respective reasonable best efforts to cause the shelf
registration statement to be declared effective under the Securities
Act within 135 days after such filing obligation arises; and
o use our reasonable best efforts to keep effective the shelf
registration for up to two years after its effective date.
If we file a shelf registration statement, we will provide to each holder
of the applicable notes copies of the prospectus which is a part of the shelf
registration statement, notify each holder when the shelf registration statement
for such notes has become effective and take other actions as are required to
permit unrestricted resales of such notes. A holder of notes that sells the
notes pursuant to the shelf registration statement generally will be:
o required to be named as a selling security holder in the related
prospectus and deliver a prospectus to purchasers;
o subject to certain of the civil liability provisions under the
Securities Act in connection with the sales; and
o bound by the provisions of the registration rights agreement which are
applicable to such a holder, including indemnification obligations.
In addition, each holder of the notes will be required to deliver
information to be used in connection with the shelf registration statement in
order to have its notes included in the shelf registration statement.
We are required to pay liquidated damages to the holders of old notes whose
old notes are subject to transfer restrictions if:
o neither an exchange offer registration statement nor a shelf
registration statement has been filed with the SEC on or before the
90th calendar day after April 11, 2002 or, if that day is not a
business day, then the next day that is a business day;
o neither an exchange offer registration statement nor a shelf
registration statement has been declared effective on or before the
150th day after April 11, 2002 or, if that day is not a business day,
then the next day that is a business day;
o the exchange offer has not been completed on or before the 180th
calendar day after April 11, 2002 or, if that day is not a business
day, then the next day that is a business day; or
13
o after either an exchange offer registration statement or a shelf
registration statement has been declared effective by the SEC but shall
thereafter cease to be effective, except as specifically permitted
therein.
Each of these four events is referred to as a registration default. The
liquidated damages consist of an amount in cash equal to 0.25% per annum of the
aggregate principal amount of the old notes for the period from the occurrence
of the registration default until such time as no registration default is in
effect, which rate shall increase by 0.25% per annum for each subsequent 90-day
period during which such registration default continues up to a maximum of 1.0%
per annum.
A copy of the registration rights agreement is filed as an exhibit to the
registration statement of which this prospectus forms a part.
TERMS OF THE EXCHANGE OFFER
This prospectus and the accompanying letter of transmittal together
constitute the exchange offer. Upon the terms and subject to the conditions set
forth in this prospectus and in the letter of transmittal, we will accept for
exchange old notes that are validly tendered on or before the expiration date
and are not withdrawn as permitted below. The expiration date for the exchange
offer is 5:00 p.m., New York City time, on July 9, 2002, or such later date and
time to which we, in our sole discretion, extend the exchange offer.
The form and terms of the exchange notes being issued in the exchange offer
are the same as the form and terms of the old notes, except that the exchange
notes being issued in the exchange offer:
o will have been registered under the Securities Act;
o will not bear the restrictive legends restricting their transfer under
the Securities Act; and
o will not contain the registration rights and liquidated damages
provisions contained in the old notes.
Old notes tendered in the exchange offer must be in denominations of the
principal amount of $1,000 and any integral multiple of $1,000.
We expressly reserve the right, in our sole discretion:
o to extend the expiration date;
o to delay accepting any old notes;
o if any of the conditions set forth below under the heading "Conditions
to the Exchange Offer" have not been satisfied, to terminate the
exchange offer and not accept any old notes for exchange; and
o to amend the exchange offer in any manner.
We will give oral or written notice of any extension, delay,
non-acceptance, termination or amendment as promptly as practicable by a public
announcement, and in the case of an extension, no later than 9:00 a.m., New York
City time, on the next business day after the previously scheduled expiration
date.
During an extension, all old notes previously tendered will remain subject
to the exchange offer and may be accepted for exchange by us. Any old notes not
accepted for exchange for any reason will be returned without cost to the holder
that tendered them as promptly as practicable after the expiration or
termination of the exchange offer.
WE MAKE NO RECOMMENDATION TO THE HOLDERS OF THE OLD NOTES AS TO WHETHER TO
TENDER OR REFRAIN FROM TENDERING ALL OR ANY PORTION OF THEIR OLD NOTES IN THE
EXCHANGE OFFER. IN ADDITION, NO ONE HAS BEEN AUTHORIZED TO MAKE ANY SUCH
RECOMMENDATION. HOLDERS OF THE OLD NOTES MUST MAKE THEIR OWN DECISION AS TO
WHETHER TO TENDER PURSUANT TO THE EXCHANGE OFFER, AND, IF SO, THE AGGREGATE
AMOUNT OF OLD NOTES TO TENDER, AFTER READING THIS PROSPECTUS AND THE LETTER OF
TRANSMITTAL AND CONSULTING WITH THEIR ADVISERS, IF ANY, BASED ON THEIR FINANCIAL
POSITIONS AND REQUIREMENTS.
PROCEDURES FOR TENDERING OLD NOTES
When the holder of old notes tenders and we accept old notes for exchange,
a binding agreement between us and the tendering holder is created, subject to
the terms and conditions set forth in this prospectus and the accompanying
letter of transmittal. Except as set forth below, a holder of old notes who
wishes to tender old notes for exchange must, on or prior to the expiration
date:
14
o transmit a properly completed and duly executed letter of
transmittal, including all other documents required by such
letter of transmittal, to the American Stock Transfer & Trust
Company, the exchange agent, at the address set forth below under
the heading "The Exchange Agent"; or
o if old notes are tendered pursuant to the book-entry procedures
set forth below, the tendering holder must transmit an agent's
message to the exchange agent at the address set forth below
under the heading "The Exchange Agent."
In addition, either:
o the exchange agent must receive the certificates for the old
notes and the letter of transmittal;
o the exchange agent must receive, prior to the expiration date, a
timely confirmation of the book-entry transfer of the old notes
being tendered into the exchange agent's account at The
Depository Trust Company, or DTC, along with the letter of
transmittal or an agent's message; or
o the holder must comply with the guaranteed delivery procedures
described below.
The term "agent's message" means a message, transmitted to DTC and received
by the exchange agent and forming a part of a book-entry transfer, referred to
as a "book-entry confirmation," which states that DTC has received an express
acknowledgment that the tendering holder agrees to be bound by the letter of
transmittal and that we may enforce the letter of transmittal against such
holder.
The method of delivery of the old notes, the letter of transmittal and all
other required documents is at the election and risk of the holder. If such
delivery is by mail, we recommend registered mail, properly insured, with return
receipt requested. In all cases, you should allow sufficient time to assure
timely delivery. No letters of transmittal or old notes should be sent directly
to us.
Signatures on a letter of transmittal or a notice of withdrawal, as the
case may be, must be guaranteed unless the old notes surrendered for exchange
are tendered:
o by a holder of old notes who has not completed the box entitled
"Special Issuance Instructions" or "Special Delivery
Instructions" on the letter of transmittal; or
o for the account of an eligible institution.
An "eligible institution" is a firm or other entity identified in Rule
17Ad-15 under the Exchange Act as an "eligible guarantor institution," including
(as such terms are defined therein): (a) a bank, (b) a broker, dealer, municipal
securities broker or dealer or government securities broker or dealer, (c) a
credit union, (d) a national securities exchange, registered securities
association or clearing agency, or (e) a savings association that is a
participant in the Securities Transfer Association.
If signatures on a letter of transmittal or notice of withdrawal are
required to be guaranteed, the guarantor must be an eligible institution. If old
notes are registered in the name of a person other than the signer of the letter
of transmittal, the old notes surrendered for exchange must be endorsed by, or
accompanied by a written instrument or instruments of transfer or exchange, in
satisfactory form as determined by us in our sole discretion, duly executed by
the registered holder with the holder's signature guaranteed by an eligible
institution.
We will determine all questions as to the validity, form, eligibility
(including time of receipt) and acceptance of old notes tendered for exchange in
our sole discretion. We reserve the absolute right to:
o reject any and all tenders of any old note improperly tendered;
o refuse to accept any old note if, in our judgment or the judgment
of our counsel, acceptance of the old note may be deemed
unlawful; and
o waive any defects or irregularities or conditions of the exchange
offer as to any particular old note either before or after the
expiration date, including the right to waive the ineligibility
of any holder who seeks to tender old notes in the exchange
offer.
Our interpretation of the terms and conditions of the exchange offer as to
any particular old note either before or after the expiration date, including
the letter of transmittal and the instructions to it, will be final and binding
on all parties.
15
Holders must cure any defects and irregularities in connection with tenders of
old notes for exchange within such reasonable period of time as we will
determine, unless we waive such defects or irregularities. Neither we, the
exchange agent nor any other person will be under any duty to give notification
of any defect or irregularity with respect to any tender of old notes for
exchange, nor will any such persons incur any liability for failure to give such
notification.
If a person or persons other than the registered holder or holders of the
old notes tendered for exchange signs the letter of transmittal, the tendered
old notes must be endorsed or accompanied by appropriate powers of attorney, in
either case signed exactly as the name or names of the registered holder or
holders that appear on the old notes.
If trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity sign the letter of transmittal or any old notes or any power of
attorney, such persons should so indicate when signing, and you must submit
proper evidence satisfactory to us of such person's authority to so act unless
we waive this requirement.
By tendering, each holder will represent to us that, among other things,
any exchange notes received by such holder in the exchange offer will be
acquired in the ordinary course of its business, that such holder has no
arrangement or understanding with any person to participate in the distribution
of the old notes or the exchange notes and that such holder is not an
"affiliate" of our company as defined in Rule 405 under the Securities Act. If
any holder is an "affiliate" of our company, or is engaged in or intends to
engage in or has an arrangement or understanding with any person to participate
in a distribution of the exchange notes, such holder or any such other person:
o may not rely on the applicable interpretations of the staff of
the SEC; and
o must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale
transaction.
Each broker-dealer that receives exchange notes for its own account in
exchange for old notes, where such old notes were acquired by such broker-dealer
as a result of market-making activities or other trading activities, must
acknowledge that it will deliver a prospectus in connection with any resale of
such exchange notes. The letter of transmittal states that by so acknowledging
and by delivering a prospectus, a broker-dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the Securities Act. See "Plan of
Distribution" for a discussion of the exchange and resale obligations of
broker-dealers in connection with the exchange offer.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES ISSUED IN THE
EXCHANGE OFFER
Upon satisfaction or waiver of all of the conditions to the exchange offer,
we will accept, promptly after the expiration date, all old notes validly
tendered and will issue exchange notes registered under the Securities Act. For
purposes of the exchange offer, we will be deemed to have accepted validly
tendered old notes for exchange when, as and if we have given oral or written
notice to the exchange agent, with written confirmation of any oral notice to be
given promptly thereafter. See "Conditions to the Exchange Offer" for a
discussion of the conditions that must be satisfied before we accept any old
notes for exchange.
For each old note accepted for exchange, the holder will receive a exchange
note registered under the Securities Act having a principal amount equal to, and
in the denomination of, that of the surrendered old note. Accordingly,
registered holders of exchange notes on the relevant record date for the first
interest payment date following the consummation of the exchange offer will
receive interest accruing from the issue date of the old notes or, if interest
has been paid, the most recent date to which interest has been paid. Old notes
that we accept for exchange will cease to accrue interest from and after the
date of consummation of the exchange offer. We may be required to make
additional payments in the form of liquidated damages to the holders of the old
notes under circumstances relating to the timing of the exchange offer, as
discussed above.
In all cases, we will issue exchange notes in the exchange offer for old
notes that are accepted for exchange only after the exchange agent timely
receives:
o certificates for such old notes or a timely book-entry
confirmation of such old notes into the exchange agent's account
at DTC;
o a properly completed and duly executed letter of transmittal or
an agent's message; and
o all other required documents.
16
If for any reason set forth in the terms and conditions of the exchange
offer we do not accept any tendered old notes, or if a holder submits old notes
for a greater principal amount than the holder desires to exchange, we will
return such unaccepted or non-exchanged old notes without cost to the tendering
holder. In the case of old notes tendered by book-entry transfer into the
exchange agent's account at DTC, such non-exchanged old notes will be credited
to an account maintained with DTC. We will return the old notes or have them
credited to DTC as promptly as practicable after the expiration or termination
of the exchange offer.
BOOK-ENTRY TRANSFERS
The exchange agent will make a request to establish an account at DTC for
purposes of the exchange offer within two business days after the date of this
prospectus. Any financial institution that is a participant in DTC's system must
make book-entry delivery of old notes denominated in dollars by causing DTC to
transfer the old notes into the exchange agent's account at DTC in accordance
with DTC's procedures for transfer. Such participant should transmit its
acceptance to DTC on or prior to the expiration date or comply with the
guaranteed delivery procedures described below. DTC will verify such acceptance,
execute a book-entry transfer of the tendered old notes into the exchange
agent's account at DTC and then send to the exchange agent confirmation of such
book-entry transfer. The confirmation of such book-entry transfer will include
an agent's message confirming that DTC has received an express acknowledgment
from such participant that such participant has received and agrees to be bound
by the letter of transmittal and that we may enforce the letter of transmittal
against such participant. Delivery of old notes tendered in the exchange offer
may be effected through book-entry transfer at DTC as applicable. However,
unless a holder complies with the guaranteed delivery procedures described
below, the letter of transmittal or facsimile thereof or an agent's message,
with any required signature guarantees and any other required documents, must be
transmitted to and received by the exchange agent at the address set forth below
under the heading "The Exchange Agent" on or prior to the expiration date.
GUARANTEED DELIVERY PROCEDURES
If a holder of old notes desires to tender such notes and the holder's old
notes are not immediately available, or time will not permit such holder's old
notes or other required documents to reach the exchange agent before the
expiration date, or the procedure for book-entry transfer cannot be completed on
a timely basis, a tender may be effected if:
o the holder tenders the old notes through an eligible institution;
o prior to the expiration date, the exchange agent receives from
such eligible institution a properly completed and duly executed
notice of guaranteed delivery, substantially in the form we have
provided, by facsimile transmission, mail or hand delivery,
setting forth the name and address of the holder of the old notes
being tendered and the amount of the old notes being tendered.
The notice of guaranteed delivery will state that the tender is
being made and guarantee that within three New York Stock
Exchange trading days after the date of execution of the notice
of guaranteed delivery, the certificates for all physically
tendered old notes, in proper form for transfer, or a book-entry
confirmation, as the case may be, together with a properly
completed and duly executed letter of transmittal or agent's
message with any required signature guarantees and any other
documents required by the letter of transmittal will be deposited
by the eligible institution with the exchange agent; and
o the exchange agent receives the certificates for all physically
tendered old notes, in proper form for transfer, or a book-entry
confirmation, as the case may be, together with a properly
completed and duly executed letter of transmittal or agent's
message with any required signature guarantees and any other
documents required by the letter of transmittal, within three New
York Stock Exchange trading days after the date of execution of
the notice of guaranteed delivery.
WITHDRAWALS OF TENDERS
You may withdraw tenders of your old notes at any time prior to 5:00 p.m.,
New York City time, on the expiration date. For a withdrawal to be effective,
you must send a written notice of withdrawal to the exchange agent at one of the
addresses set forth below under "The Exchange Agent." Any such notice of
withdrawal must:
o specify the name of the person having tendered the old notes to
be withdrawn;
o identify the old notes to be withdrawn, including the principal
amount of such old notes; and
o where certificates for old notes are transmitted, specify the
name in which old notes are registered, if different from that of
the withdrawing holder.
17
If certificates for old notes have been delivered or otherwise identified
to the exchange agent, then, prior to the release of such certificates the
withdrawing holder must also submit the serial numbers of the particular
certificates to be withdrawn and signed notice of withdrawal with signatures
guaranteed by an eligible institution unless such holder is an eligible
institution. If old notes have been tendered pursuant to the procedure for
book-entry transfer described above, any notice of withdrawal must specify the
name and number of the account at DTC to be credited with the withdrawn old
notes and otherwise comply with the DTC's procedures. We will determine all
questions as to the validity, form and eligibility (including time of receipt)
of such notices and our determination will be final and binding on all parties.
Any tendered old notes so withdrawn will be deemed not to have been validly
tendered for exchange for purposes of the exchange offer. Any old notes which
have been tendered for exchange but which are not exchanged for any reason will
be returned to the holder of those old notes without cost to the holder. In the
case of old notes tendered by book-entry transfer into the exchange agent's
account at DTC, the old notes withdrawn will be credited to an account
maintained with DTC for the old notes. The old notes will be returned or
credited to this account as soon as practicable after withdrawal, rejection of
tender or termination of the exchange offer. Properly withdrawn old notes may be
re-tendered by following one of the procedures described under the heading
"Procedures For Tendering Old Notes" above at any time on or prior to 5:00 p.m.,
New York City time, on the expiration date.
CONDITIONS TO THE EXCHANGE OFFER
We are not required to accept for exchange, or to issue exchange notes in
the exchange offer for, any old notes and we may terminate or amend the exchange
offer at any time before the acceptance of old notes for exchange, if:
o any federal law, statute, rule or regulation is adopted or
enacted which, in our judgment, would reasonably be expected to
impair our ability to proceed with the exchange offer;
o any stop order is threatened or in effect with respect to the
registration statement of which this prospectus constitutes a
part or the qualification of the indenture under the Trust
Indenture Act of 1939, as amended;
o there is a change in the current interpretation by staff of the
SEC which permits the exchange notes issued in the exchange offer
in exchange for the old notes to be offered for resale, resold
and otherwise transferred by such holders, other than
broker-dealers and any such holder which is an "affiliate" of our
company within the meaning of Rule 405 under the Securities Act,
without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that the exchange
notes acquired in the exchange offer are acquired in the ordinary
course of such holder's business and such holder has no
arrangement or understanding with any person to participate in
the distribution of the exchange notes;
o there is a general suspension of or general limitation on prices
for, or trading in, securities on any national securities
exchange or in the over-the-counter market;
o any governmental agency creates limits that adversely affect our
ability to complete the exchange offer;
o there is any declaration of war, armed hostilities or other
similar international calamity directly or indirectly involving
the United States, or the worsening of any such condition that
existed at the time that we commence the exchange offer;
o there is a change or a development involving a prospective change
in our and our subsidiaries' businesses, properties, assets,
liabilities, financial condition, operations or results of
operations, taken as a whole, that is or may be adverse to us; or
o we become aware of facts that, in our reasonable judgment, have
or may have adverse significance with respect to the value of the
old notes or the exchange notes to be issued in the exchange
offer.
The preceding conditions are for our sole benefit and we may assert them
regardless of the circumstances giving rise to any such condition. We may waive
the preceding conditions in whole or in part at any time and from time to time
in our sole discretion. If we do so, the exchange offer will remain open for at
least three business days following any waiver of the preceding conditions. Our
failure at any time to exercise the foregoing rights will not be deemed a waiver
of any such right and each such right will be deemed an ongoing right which we
may assert at any time and from time to time.
18
THE EXCHANGE AGENT
We have appointed the American Stock Transfer & Trust Company as our
exchange agent for the exchange offer. You should direct all executed letters of
transmittal to our exchange agent at the address set forth below. You should
direct all questions and requests for assistance, requests for additional copies
of this prospectus or of the letter of transmittal and requests for notices of
guaranteed delivery to the exchange agent as follows:
BY MAIL, OVERNIGHT COURIER OR HAND DELIVERY:
American Stock Transfer & Trust Company
59 Maiden Lane
New York, New York 10038
Telephone number: (800) 937-5449
Facsimile transmission (for eligible institutions only): (718) 234-5001
Delivery of the letter of transmittal to an address other than as set forth
above or transmission of such letter of transmittal via facsimile other than as
set forth above does not constitute a valid delivery of such letter of
transmittal.
FEES AND EXPENSES
We will not make any payment to brokers, dealers or others soliciting
acceptance of the exchange offer except for reimbursement of mailing expenses.
We will pay the cash expenses to be incurred in connection with the exchange
offer, including:
o the SEC registration fee;
o fees and expenses of the exchange agent and the trustee;
o accounting and legal fees;
o printing fees; and
o other related fees and expenses.
TRANSFER TAXES
Holders who tender their old notes for exchange will not be obligated to
pay any transfer taxes in connection with the exchange. If, however, the
exchange notes issued in the exchange offer are to be delivered to, or are to be
issued in the name of, any person other than the holder of the old notes
tendered, or if a transfer tax is imposed for any reason other than the exchange
of old notes in connection with the exchange offer, then the holder must pay any
of these transfer taxes, whether imposed on the registered holder or on any
other person. If satisfactory evidence of payment of, or exemption from, these
taxes is not submitted with the letter of transmittal, the amount of these
transfer taxes will be billed directly to the tendering holder.
CONSEQUENCES OF FAILURE TO EXCHANGE OLD NOTES
Holders who desire to tender their old notes in exchange for exchange notes
registered under the Securities Act should allow sufficient time to ensure
timely delivery. Neither we, the exchange agent nor any other person are under
any duty to give notification of defects or irregularities with respect to the
tenders of old notes for exchange.
Old notes that are not tendered or are tendered but not accepted will,
following the consummation of the exchange offer, continue to be subject to the
provisions in the indenture regarding the transfer and exchange of the old notes
and the existing restrictions on transfer set forth in the legend on the old
notes. Except in limited circumstances with respect to specific types of holders
of old notes, we will have no further obligation to provide for the registration
under the Securities Act of such old notes. In general, old notes, unless
registered under the Securities Act, may not be offered or sold except pursuant
to an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. We do not currently anticipate that we will
take any action to register the old notes under the Securities Act or under any
state securities laws.
19
Upon completion of the exchange offer, holders of the old notes will not be
entitled to any further registration rights under the registration rights
agreement, except under limited circumstances.
Holders of the exchange notes and any old notes that remain outstanding
after consummation of the exchange offer will vote together as a single class
for purposes of determining whether holders of the requisite percentage of the
class have taken certain actions or exercised certain rights under the
indenture.
CONSEQUENCES OF EXCHANGING OLD NOTES
Based on interpretations of the staff of the SEC, as set forth in no-action
letters to third parties, we believe that the exchange notes may be offered for
resale, resold or otherwise transferred by holders of those exchange notes,
other than by any holder that is an "affiliate" of our company within the
meaning of Rule 405 under the Securities Act. The exchange notes may be offered
for resale, resold or otherwise transferred without compliance with the
registration and prospectus delivery provisions of the Securities Act, if:
o the exchange notes issued in the exchange offer are acquired in
the ordinary course of the holder's business; and
o the holder, other than a broker-dealer, has no arrangement or
understanding with any person to participate in the distribution
of the exchange notes issued in the exchange offer.
However, the SEC has not considered this exchange offer in the context of a
no-action letter and we cannot guarantee that the staff of the SEC would make a
similar determination with respect to this exchange offer as in such other
circumstances.
Each holder must furnish a written representation, at our request, that:
o it is acquiring the exchange notes in the ordinary course of its
business;
o it has no arrangement or understanding with any person to
participate in a distribution of the old notes or the exchange
notes; and
o it is not an affiliate of our company.
Each holder must acknowledge that, if a broker-dealer receives exchange
notes for its own account in exchange for old notes, other than as a result of
market-making or other trading activities, or if an affiliate of our company
receives exchange notes,
o such broker-dealer or affiliate may not rely on the applicable
interpretation of the SEC staff's position contained in Exxon
Capital Holdings Corp., SEC No-Action Letter (May 13, 1989),
Morgan, Stanley & Co., Inc., SEC No-Action Letter (June 5, 1991)
and Shearman & Sterling, SEC No-Action Letter (July 2, 1993); and
o such broker-dealer or affiliate must comply with the registration
and prospectus delivery requirements of the Securities Act in
connection with any resale transaction, which must be covered by
an effective registration statement that contains information
with respect to any selling holder required by the Securities
Act, in connection with any resale of exchange notes issued in
the exchange offer.
Each broker-dealer that receives exchange notes for its own account in
exchange for old notes, where such old notes were acquired by such broker-dealer
as a result of market-making activities or other trading activities, must
acknowledge that it will deliver a prospectus in connection with any resale of
such exchange notes.
See "Plan of Distribution" for a discussion of the exchange and resale
obligations of broker-dealers in connection with the exchange offer.
In addition, to comply with state securities laws of certain jurisdictions,
the exchange notes issued in the exchange offer may not be offered or sold in
any state unless they have been registered or qualified for sale in such state
or an exemption from registration or qualification is available and complied
with by the holders selling the exchange notes. We have agreed in the
registration rights agreement that, prior to any public offering of exchange
notes, we will use our reasonable best efforts to arrange, if necessary, for the
qualification of the exchange notes for sale under the securities laws of those
states as any holder of the notes reasonably requests in writing and will
maintain such qualification in effect so long as reasonably
20
required. Unless a holder requests, we currently do not intend to register or
qualify the sale of the exchange notes in any state where an exemption from
registration or qualification is required and not available. However, we intend
to apply to list the exchange notes and related guarantees on the New York Stock
Exchange. If the exchange notes and related guarantees are authorized for
listing on the New York Stock Exchange, Section 18 of the Securities Act
provides that no state may require the registration or qualification of the sale
of the exchange notes in such state.
USE OF PROCEEDS
The exchange offer is intended to satisfy certain of our obligations under
the registration rights agreements. We will not receive any proceeds from the
issuance of the exchange notes or the closing of the exchange offer.
In consideration for issuing the exchange notes as contemplated in this
prospectus, we will receive, in exchange, an equal number of old notes in like
principal amount. The form and terms of the exchange notes are identical in all
material respects to the form and terms of the old notes, except as otherwise
described in "The Exchange Offer" under the heading "Terms of the Exchange
Offer." The old notes surrendered in exchange for the exchange notes will be
retired and canceled and cannot be reissued.
The net proceeds from the offering of the old notes, after deducting fees
and costs, of $247.2 million were used for repayment of outstanding debt under
our revolving credit facility and general corporate purposes. Amounts repaid
under our revolving credit facility remain available for future borrowing.
Borrowings under our revolving credit facility are available, subject to
satisfaction of customary borrowing conditions, for our homebuilding operations,
acquisitions, working capital, repayment of debt and other general corporate
purposes. See footnote 2 to the section entitled "Capitalization." Borrowings
under our revolving credit facility currently bear interest at an annual rate
equal to 90-day LIBOR plus 1.825%, and a portion of these borrowings is subject
to an interest rate swap that effectively fixes the annual rate at 5.10%.
21
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 2002 and
as adjusted to reflect the repurchase of Schuler notes in our change of control
offers in connection with the Schuler acquisition, the effect of the
three-for-two stock split, the sale of the old notes and the application of the
net proceeds of the sale of the old notes.
<Table>
<Caption>
AS OF MARCH 31, 2002
----------------------------
ACTUAL ADJUSTED(1)
------------ ------------
(DOLLARS IN THOUSANDS)
Homebuilding debt:
Notes payable under revolving credit facility(2) ....... $ 480,000 $ 253,662
Notes payable -- other, secured ........................ 111,334 111,334
8.375% senior notes due 2004, net ...................... 149,141 149,141
10.5% senior notes due 2005, net ....................... 199,498 199,498
10% senior notes due 2006, net ......................... 147,701 147,701
9% senior notes due 2008, net .......................... 102,704 102,704
8% senior notes due 2009, net .......................... 383,346 383,346
9.375% senior notes due 2009, net ...................... 262,305 246,567
9.75% senior subordinated notes due 2010, net .......... 148,954 148,954
9.375% senior subordinated notes due 2011, net ......... 199,698 199,698
7.875% senior notes due 2011, net ...................... 198,377 198,377
10.5% senior subordinated notes due 2011, net .......... 159,334 153,784
8.5% senior notes due 2012, net ........................ -- 247,928
Zero coupon convertible senior notes due 2021,net(3) ... 205,805 205,805
------------ ------------
Total homebuilding debt ................................ 2,748,197 2,748,499
Notes payable under mortgage warehouse facility .......... 148,157 148,157
------------ ------------
Total debt ............................................. 2,896,354 2,896,656
------------ ------------
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, 97,502,837 shares issued and
outstanding before the three-for-two stock split
and 146,254,255 shares issued and outstanding
after the three-for-two stock split ................. 975 1,463
Additional capital ..................................... 1,346,697 1,346,209
Unearned compensation(4) ............................... (7,460) (7,460)
Retained earnings ...................................... 698,519 698,519
------------ ------------
Total stockholders' equity ............................. 2,038,731 2,038,731
------------ ------------
Total capitalization ................................... $ 4,935,085 $ 4,935,387
============ ============
</Table>
- ----------
(1) Adjusted to reflect (i) the repurchase of $20.2 million in principal amount
of the Schuler senior and senior subordinated notes in our change of
control offers in connection with the Schuler acquisition, (ii) the effect
of the April 2002 three-for-two stock split effected as a stock dividend,
and (iii) the application of the proceeds from the offering of the old
notes to repay debt under our revolving credit facility. See the sections
entitled "Summary" and "Use of Proceeds."
(2) We have an $805 million unsecured revolving credit facility with 21
financial institutions. The revolving credit facility matures in January
2006 and includes $125 million that may be used for letters of credit.
Available credit under the facility is subject to limitations based on
specified percentages of the costs of unsold homes, developed lots and lots
under development included in inventory and the amount of other unsecured
senior indebtedness. The revolving credit facility and our senior and
senior subordinated note indentures contain covenants which, taken
together, limit investments in inventory, cash dividends and other
restricted payments, incurrence of indebtedness, creation of liens and
asset dispositions, and require minimum levels of tangible net worth.
(3) Holders of our zero coupon convertible senior notes may require us to
purchase their notes at their accreted value in 2003, 2008 and 2013. We may
redeem these notes at their accreted value beginning in 2003. Each $1,000
in principal amount of the approximately $381 million in aggregate
principal amount at maturity of these notes outstanding is convertible into
our common stock on any date as of which the average closing price of our
common stock for the 20 preceding trading days exceeds the specified
threshold of 110% of the accreted value of the note, divided by the
conversion rate. The conversion rate was adjusted to 26.2391 shares per
$1,000 principal amount as of March 26, 2002, in connection with our
three-for-two stock split. The notes first became eligible for conversion
on February 5, 2002, and have remained eligible for conversion on each day
since then through the date of this prospectus. The shares issuable upon
conversion of the notes have been included in the calculation of diluted
earnings per share for the three months and six months ended March 31,
2002.
(4) Unearned compensation represents the intrinsic value of unvested options to
purchase D.R. Horton common stock which were issued to Schuler employees in
connection with the acquisition of Schuler. The unearned compensation is
being amortized over the remaining vesting period of the stock options.
22
BUSINESS
We are a national homebuilder. We construct and sell high quality
single-family homes, principally for first-time and move-up home buyers.
Although we have historically positioned ourselves as a custom builder, in the
last five years we have acquired five volume homebuilding companies (Schuler,
Continental, Torrey, Cambridge and Emerald) which enable us to compete across a
broader product offering.
OPERATING STRATEGY
We believe that the following operating strategies have enabled us to
achieve consistent growth and profitability:
Geographic Diversity
From 1978 to late 1987, excluding Continental Homes locations, our
homebuilding activities were conducted in the Dallas/Fort Worth area. We then
instituted a policy of diversifying geographically, entering the following of
our current markets, both through startup operations and acquisitions, in the
years shown:
<Table>
<Caption>
YEARS ENTERED MARKETS
------------- -------
1987.......... Phoenix
1988.......... Atlanta, Orlando
1989.......... Charlotte
1990.......... Houston
1991.......... Maryland-D.C., Virginia-D.C.
1992.......... Chicago, Raleigh/Durham
1993.......... Austin, Los Angeles, Salt Lake City, San Diego
1994.......... Minneapolis/St. Paul, Las Vegas, San Antonio
1995.......... Birmingham, Denver, Greensboro, Miami/West Palm
Beach
1996.......... Albuquerque
1997.......... Greenville, New Jersey, Tucson
1998.......... Charleston, Hilton Head, Jacksonville, Killeen,
Louisville, Myrtle Beach, Portland, Richmond,
Sacramento, Williamsburg
1999.......... Columbia
2001.......... Fort Myers/Naples
2002.......... Colorado Springs, Hawaii, San Francisco Bay Area,
Seattle
</Table>
We continually monitor the sales and margins achieved in each of the
subdivisions in which we operate as part of our evaluation of the use of our
capital. While we believe there are significant growth opportunities in our
existing markets, we also intend to continue our policy of diversification by
seeking to enter new markets. We believe our diversification strategy mitigates
the effects of local and regional economic cycles and enhances our growth
potential. Typically, we will not invest material amounts in real estate,
including raw land, developed lots, models and speculative homes, or overhead in
start-up operations in new markets, until such markets demonstrate significant
growth potential and acceptance of our products.
Acquisitions
As an integral component of our operational strategy of continued expansion,
we continually evaluate opportunities for strategic acquisitions. We believe
that expanding our operations through the acquisition of existing homebuilding
companies affords us several benefits not found in start-up operations. Such
benefits include:
o Established land positions and inventories;
o Existing relationships with land owners, developers, subcontractors
and suppliers;
o Brand name recognition; and
o Proven product acceptance by home buyers in the market.
In evaluating potential acquisition candidates, we seek homebuilding
companies that have an excellent reputation, a track record of profitability and
a strong management team with an entrepreneurial orientation. We limit the risks
associated with acquiring a going concern by conducting extensive operational,
financial and legal due diligence on each acquisition and by only acquiring
homebuilding companies that we believe will have an immediate positive impact on
our earnings. Since 1993, we have made 18 acquisitions. We will continue to
evaluate potential future acquisition opportunities that satisfy our acquisition
criteria in both existing and new markets.
23
Decentralized Operations
We decentralize our homebuilding activities to give more operating
flexibility to our local division presidents. We have 52 separate operating
divisions, some of which are in the same market area. Generally, each operating
division consists of a division president, an office manager and staff, a sales
manager and sales personnel, and a construction manager and construction
superintendents. We believe that division presidents, who are intimately
familiar with local conditions, make better decisions regarding local
operations. Our division presidents receive performance bonuses based upon
achieving targeted operating levels in their operating divisions.
Operating Division Responsibilities
Each operating division is responsible for:
o Site selection, which involves
-- A feasibility study;
-- Soil and environmental reviews;
-- Review of existing zoning and other governmental requirements; and
-- Review of the need for and extent of offsite work required to meet
local building codes.
o Negotiating lot option or similar contracts;
o Overseeing land development;
o Planning its homebuilding schedule;
o Selecting building plans and architectural schemes;
o Obtaining all necessary building approvals; and
o Developing a marketing plan.
Corporate Office Controls
The corporate office controls key risk elements through centralized:
o Financing;
o Cash management;
o Risk management;
o Accounting and management reporting;
o Payment of subcontractors' invoices;
o Administration of payroll and employee benefits;
o Final approval of land and lot acquisitions;
o Capital allocation; and
o Oversight of inventory levels.
Cost Management
We control our overhead costs by centralized administrative and accounting
functions and by limiting the number of field administrative personnel and
middle level management positions. We also minimize advertising costs by
participating in promotional activities, publications and newsletters sponsored
by local real estate brokers, mortgage companies, utility companies and trade
associations.
We control construction costs through the efficient design of our homes and
by obtaining favorable pricing from certain subcontractors and national vendors
based on the high volume of services and products they provide us. We also
control construction costs by monitoring expenses on each house through our
purchase order system. We control capital and overhead costs by monitoring our
inventory levels through our management information systems.
24
MARKETS
Homebuilding activities are conducted in five geographic regions, consisting
of:
<Table>
<Caption>
GEOGRAPHIC REGION MARKETS
----------------- -------
Mid-Atlantic....... Charleston, Charlotte, Columbia, Greensboro,
Greenville, Hilton Head, Maryland-D.C., Myrtle
Beach, New Jersey, Raleigh/Durham, Richmond,
Virginia-D.C., Williamsburg
Midwest............ Chicago, Louisville, Minneapolis/St. Paul
Southeast.......... Atlanta, Birmingham, Fort Myers/Naples, Jacksonville,
Miami/West Palm Beach, Orlando
Southwest.......... Albuquerque, Austin, Dallas, Fort Worth, Houston,
Killeen, Phoenix, San Antonio, Tucson
West............... Colorado Springs, Denver, Hawaii, Las Vegas, Los
Angeles, Portland, Sacramento, Salt Lake City,
San Diego, San Francisco Bay Area, Seattle
</Table>
When entering new markets or conducting operations in existing markets,
among the things we consider are:
o Regional economic conditions;
o Job growth;
o Land availability;
o Local land development process;
o Consumer tastes;
o Competition; and
o Secondary home sales activity.
Our homebuilding revenues, which include land and lot sales, by geographic
region are:
<Table>
<Caption>
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
------------------------------------ -----------------------
1999 2000 2001 2001 2002
---------- ---------- ---------- ---------- ----------
Mid-Atlantic ...... $ 540.6 $ 614.5 $ 615.6 $ 280.3 $ 266.9
Midwest ........... 347.1 451.0 457.6 218.4 217.2
Southeast ......... 429.6 491.5 518.2 205.6 310.5
Southwest ......... 1,068.0 1,176.7 1,489.5 607.1 839.5
West .............. 733.7 870.5 1,302.7 454.6 1,077.1
---------- ---------- ---------- ---------- ----------
Total ........... $ 3,119.0 $ 3,604.2 $ 4,383.6 $ 1,766.0 $ 2,711.2
========== ========== ========== ========== ==========
</Table>
On a pro forma combined basis with Schuler, our homebuilding revenues, by
geographic region are:
<Table>
<Caption>
SIX MONTHS ENDED
YEAR ENDED MARCH 31,
SEPTEMBER 30, ---------------------------
2001 2001 2002
------------- ------------ ------------
(IN MILLIONS)
Mid-Atlantic ...... $ 615.6 $ 280.3 $ 266.9
Midwest ........... 457.6 218.4 217.2
Southeast ......... 518.2 205.6 310.5
Southwest ......... 1,504.5 607.2 851.7
West .............. 2,828.5 1,296.4 1,639.9
------------ ------------ ------------
Total ........... $ 5,924.4 $ 2,607.9 $ 3,286.2
============ ============ ============
</Table>
LAND POLICIES
Typically, we acquire land and enter into lot option contracts to acquire
developed building lots only after necessary "entitlements" have been obtained,
i.e., when we have the right to begin development or construction. Before we
acquire lots or tracts of land, we will, among other things, complete a
feasibility study, which includes soil tests, independent environmental studies
and other engineering work, and determine that all necessary zoning and other
governmental
25
entitlements required to develop and use the property for home construction have
been acquired. Although we purchase and develop land primarily to support our
own homebuilding activities, occasionally we sell lots and land to other
developers and homebuilders.
We also use lot option contracts, in which we purchase the right, but not
the obligation, to buy building lots at predetermined prices on a takedown
schedule commensurate with anticipated home closings. Lot option contracts
generally are on a nonrecourse basis, thereby limiting our financial exposure to
earnest money deposits given to property sellers. This enables us to control
significant lot positions with a minimal capital investment and substantially
reduces the risks associated with land ownership and development. At March 31,
2002, about 46% of our total lot position of 136,775 lots was controlled under
option or similar contracts.
A summary of our land/lot position at March 31, 2002 is:
<Table>
Finished lots we own......................... 19,564
Lots under development we own................ 54,067
---------
Total lots owned............................. 73,631
Lots available under lot option and similar
contracts.................................... 63,144
---------
Total land/lot positions..................... 136,775
=========
</Table>
We limit our exposure to real estate inventory risks by:
o Generally commencing construction of homes under contract only after
receipt of a satisfactory down payment and, where applicable, the
buyer's receipt of mortgage approval;
o Limiting the number of speculative homes (homes started without an
executed sales contract) built in each subdivision;
o Closely monitoring local market and demographic trends, housing
preferences and related economic developments, such as new job
opportunities, local growth initiatives and personal income trends;
o Utilizing lot option contracts, where possible; and
o Limiting the size of acquired land parcels to smaller tracts of land.
CONSTRUCTION
Our home designs are prepared by architects in each of our markets to appeal
to local tastes and preferences of the community. We also offer optional
interior and exterior features to enhance the basic home design and to promote
our sales efforts.
Substantially all of our construction work is performed by subcontractors.
Our construction supervisors monitor the construction of each home, participate
in material design and building decisions, coordinate the activities of
subcontractors and suppliers, subject the work of subcontractors to quality and
cost controls and monitor compliance with zoning and building codes.
Subcontractors typically are retained for a specific subdivision pursuant to a
contract that obligates the subcontractor to complete construction at a fixed
price. Agreements with our subcontractors and suppliers generally are negotiated
for each subdivision. We compete with other homebuilders for qualified
subcontractors, raw materials and lots in the markets where we operate.
Construction time for our homes depends on the weather, availability of
labor, materials and supplies, size of the home, and other factors. We typically
complete the construction of a home within four months.
We do not maintain significant inventories of construction materials, except
for work in process materials for homes under construction. Typically, the
construction materials used in our operations are readily available from
numerous sources. We have contracts exceeding one year with certain suppliers of
our building materials that are cancelable at our option with a 30 day notice.
In recent years, we have not experienced any significant delays in construction
due to shortages of materials or labor.
26
MARKETING AND SALES
We market and sell our homes through commissioned employees and independent
real estate brokers. We typically conduct home sales from sales offices located
in furnished model homes in each subdivision. At March 31, 2002, we owned 1,110
model homes, which we generally do not offer for sale until the completion of a
subdivision. Our sales personnel assist prospective home buyers by providing
them with floor plans, price information, tours of model homes and the selection
of options and other custom features. We train and inform our sales personnel as
to the availability of financing, construction schedules, and marketing and
advertising plans.
In addition to using model homes, we typically build a limited number of
speculative homes in each subdivision to enhance our marketing and sales
activities. Construction of these speculative homes also is necessary to satisfy
the requirements of relocated personnel and independent brokers, who often
represent home buyers requiring a completed home within 60 days. We sell a
majority of these speculative homes while they are under construction or
immediately following completion. The number of speculative homes is influenced
by local market factors, such as new employment opportunities, significant job
relocations, growing housing demand and the length of time we have built in the
market. Depending upon the seasonality of each market, we attempt to limit our
speculative homes in each subdivision. At March 31, 2002, we averaged
approximately 5.9 speculative homes, in various stages of construction, in each
subdivision.
We advertise on a limited basis in newspapers and in real estate broker,
mortgage company and utility publications, brochures, newsletters and on
billboards. In addition, we use our Internet web site to market the location,
price range, and availability of our homes. To minimize advertising costs, we
attempt to operate in subdivisions in conspicuous locations that permit us to
take advantage of local traffic patterns. We also believe that model homes play
a significant role in our marketing efforts. Consequently, we expend significant
effort in creating an attractive atmosphere in our model homes.
Our sales contracts require a down payment of at least $500. The contracts
include a financing contingency which permits customers to cancel if they cannot
obtain mortgage financing at prevailing interest rates within a specified
period, typically four to six weeks, and may include other contingencies, such
as the sale of an existing home. We include a home sale in our sales backlog
when the sales contract is signed and we have received the initial down payment.
We do not recognize revenue upon the sale of a home until it is closed and title
passes to the home buyer. The average period between the signing of a sales
contract for a home and closing is approximately three to five months.
CUSTOMER SERVICE AND QUALITY CONTROL
Our operating divisions are responsible for pre-closing, quality control
inspections and responding to customers' post-closing needs. We believe that
prompt and courteous response to home buyers' needs during and after
construction reduces post-closing repair costs, enhances our reputation for
quality and service, and ultimately leads to significant repeat and referral
business from the real estate community and home buyers. We provide our home
buyers with a limited one-year warranty on workmanship and building materials.
The subcontractors who perform most of the actual construction also provide us
with warranties on workmanship and are generally prepared to respond to us and
the homeowner promptly upon request. In most cases, we supplement our one-year
warranty by purchasing a ten-year limited warranty from a third party. To cover
our potential warranty obligations, we accrue an estimated amount for future
warranty costs.
CUSTOMER FINANCING
We provide mortgage financing services principally to purchasers of homes we
build and sell. CH Mortgage, a wholly-owned subsidiary, provides mortgage
banking services in Arizona, Colorado, Florida, Georgia, Illinois, Maryland,
Minnesota, Nevada, New Mexico, North and South Carolina, Texas, and Virginia.
DRH Mortgage, LLC, a joint venture formed in 1998 with a third party, provides
services in California. We acquired Melody Mortgage Co. (Colorado), Schuler
Mortgage, Inc. (Washington and Oregon), and Western Pacific Funding (northern
California) in the Schuler acquisition. On a combined basis, related mortgage
banking entities provided mortgage financing services for about 61% of the homes
closed during the year ended September 30, 2001, in the markets we serve. We
anticipate expanding these mortgage activities to other markets in which we
conduct homebuilding operations.
In other markets where we currently do not provide mortgage financing, we
work with a variety of mortgage lenders that make available to home buyers a
range of conventional mortgage financing programs. By making information about
these programs available to prospective home buyers and maintaining a
relationship with such mortgage lenders, we are able to coordinate and expedite
the entire sales transaction by ensuring that mortgage commitments are received
and that closings take place on a timely and efficient basis.
27
TITLE SERVICES
Through our subsidiaries, Century Title, Custom Title, DRH Title Company of
Texas, Ltd., DRH Title Company of Florida, Inc., DRH Title Company of Minnesota,
Inc., Metro Title Company, Principal Title and Travis County Title Company, we
serve as a title insurance agent by providing title insurance policies and
closing services to purchasers of homes we build in the Austin, Dallas, Fort
Worth, Houston, Maryland-D.C., Miami/West Palm Beach, Minneapolis, Orlando,
Phoenix, San Antonio and Virginia-D.C. markets. We assume no underwriting risk
associated with these title policies.
EMPLOYEES
At March 31, 2002, we employed 5,418 persons, of whom 1,272 were sales and
marketing personnel, 1,890 were executive, administrative and clerical
personnel, 1,650 were involved in construction, and 606 worked in mortgage and
title operations. Fewer than 20 of our employees are covered by collective
bargaining agreements. Some of the subcontractors which we use are represented
by labor unions or are subject to collective bargaining agreements. We believe
that our relations with our employees and subcontractors are good.
COMPETITION
The single family residential housing industry is highly competitive and we
compete in each of our markets with numerous other national, regional and local
homebuilders, often with larger subdivisions designed, planned and developed by
such homebuilders. Our homes compete on the basis of quality, price, design,
mortgage financing terms and location.
GOVERNMENTAL REGULATION AND ENVIRONMENTAL MATTERS
The housing, mortgage and title insurance industries are subject to
extensive and complex regulations. We and our subcontractors must comply with
various federal, state and local laws and regulations, including zoning, density
and development requirements, building, environmental, advertising and consumer
credit rules and regulations, as well as other rules and regulations in
connection with our development, homebuilding, sales and financial services
activities. These include requirements affecting the development process, as
well as building materials to be used, building designs and minimum elevation of
properties. Our homes are inspected by local authorities where required, and
homes eligible for insurance or guarantees provided by the FHA and VA are
subject to inspection by them. These regulations often provide broad discretion
to the administering governmental authorities. This can delay or increase the
cost of development or homebuilding.
We also are subject to a variety of local, state and federal statutes,
ordinances, rules and regulations concerning protection of health and the
environment. The particular environmental laws for each site vary greatly
according to location, environmental condition and the present and former uses
of the site and adjoining properties. These environmental laws may result in
delays, may cause us to incur substantial compliance and other costs, and can
prohibit or severely restrict development and homebuilding activity in certain
environmentally sensitive regions or areas.
Our internal mortgage activities and title insurance agencies must also
comply with various federal and state laws, consumer credit rules and
regulations and other rules and regulations unique to such activities.
Additionally, mortgage loans and title activities originated under the FHA, VA,
FNMA and GNMA are subject to rules and regulations imposed by those agencies.
28
DESCRIPTION OF THE EXCHANGE NOTES
The exchange notes will be issued under the indenture that governs the old
notes, dated as of April 11, 2002, among the Company, the Guarantors and
American Stock Transfer & Trust Company, as trustee (the "TRUSTEE"), as
supplemented (the "INDENTURE"). The following is a summary of the material terms
and provisions of the exchange notes. The terms of the exchange notes include
those set forth in the Indenture and those made part of the Indenture by
reference to the Trust Indenture Act of 1939, as amended (the "TRUST INDENTURE
ACT"). The exchange notes are subject to all such terms, and we refer you to the
Indenture and the Trust Indenture Act for a statement of such terms. As used in
this "Description of the Exchange Notes," the term "Company" refers to D.R.
Horton, Inc. and not any of its Subsidiaries. We refer to the exchange notes and
the old notes, to the extent not exchanged for exchange notes, in this section
as the "NOTES."
Definitions of certain terms are set forth under "Certain Definitions" and
throughout this description. Capitalized terms that are used but not otherwise
defined herein have the meanings assigned to them in the Indenture, and those
definitions are incorporated herein by reference.
GENERAL
The Notes bear interest from April 11, 2002 at 8.5% per annum, payable
semi-annually on April 15 and October 15 of each year, commencing October 15,
2002, to Holders of record at the close of business on April 1 or October 1, as
the case may be, immediately preceding each such interest payment date. The
Notes will mature on April 15, 2012, and the exchange notes will be issued in
denominations of $1,000 and integral multiples thereof.
The Notes will be issued in an aggregate principal amount of $250 million.
Additional Notes (the "ADDITIONAL NOTES") may be issued in one or more series
from time to time subject to the limitations set forth under "Certain Covenants
- -- Limitation on Indebtedness."
The Notes will be guaranteed by each of the Guarantors pursuant to the
guarantees (the "GUARANTEES") described below. Generally, the Guarantors
currently do not include our subsidiaries that are engaged in the financial
services segment. These subsidiaries currently do not guarantee our other senior
notes or our revolving credit facility. In addition, the Notes will not
initially be guaranteed by several of our insignificant subsidiaries.
RANKING
The Notes are general unsecured obligations of the Company and rank senior
in right of payment to all existing and future Indebtedness of the Company that
is, by its terms, expressly subordinated in right of payment to the Notes and
pari passu in right of payment with all existing and future unsecured
Indebtedness of the Company that is not so subordinated. The Guarantees are
general unsecured obligations of the Guarantors and rank senior in right of
payment to all existing and future Indebtedness of the Guarantors that is, by
its terms, expressly subordinated in right of payment to the Guarantees and rank
pari passu in right of payment with all existing and future unsecured
Indebtedness of the Guarantors that is not so subordinated.
Secured creditors of the Company and the Guarantors will have a claim on the
assets which secure the obligations of the Company and the Guarantors to such
creditors prior to claims of Holders of the Notes against those assets. At March
31, 2002, assuming we had completed the change of control repurchase of the
Schuler senior and senior subordinated notes and the offering of the old notes
on that date and all of the net proceeds of such offering were used to reduce
borrowings under our revolving credit facility, the Company and the Guarantors
would have had approximately $2,713.3 million of Indebtedness (including the
Notes) outstanding. Of this Indebtedness, $76.2 million would have been secured
debt, $1,886.8 million would have been equal to the Notes, and $502.4 million
would have been subordinated to the Notes. In addition, at such date, our
non-guarantor subsidiaries had approximately $183.3 million of debt outstanding.
OPTIONAL REDEMPTION
Except as set forth below, the Notes are not redeemable prior to April 15,
2007. Thereafter, the Notes will be redeemable in whole or in part, from time to
time at the option of the Issuers, at the following redemption prices (expressed
as percentages of principal amount) if redeemed during the twelve month period
beginning with April 15 of the year indicated below, in each case together with
accrued and unpaid interest and Liquidated Damages, if any, thereon to the date
of redemption:
29
<Table>
<Caption>
YEAR PERCENTAGE
---- ----------
2007................. 104.250%
2008................. 102.833%
2009................. 101.417%
2010 and thereafter.. 100.000%
</Table>
In addition, the Company may redeem Notes, at any time and from time to
time, on or prior to April 15, 2005, with the net cash proceeds of one or more
Public Equity Offerings by the Company, at a redemption price equal to 108.5% of
the principal amount of such Notes, plus accrued and unpaid interest, including
any Liquidated Damages, if any, to the date of redemption; provided, that at
least 65% of the aggregate principal amount of Notes, excluding any Notes held
by the Company or any of its Affiliates, remains outstanding immediately after
the occurrence of such redemption. Notice of any such redemption must be given
within 60 days after the date of the closing of the relevant Public Equity
Offering.
Selection of the Notes or portions thereof for redemption pursuant to the
foregoing shall be made by the Trustee only on a pro rata basis or on as nearly
a pro rata basis as is practicable (subject to the procedures of The Depository
Trust Company), unless such method is otherwise prohibited. Notice of redemption
will be mailed at least 30 days but not more than 60 days before the redemption
date to each Holder whose Notes are to be redeemed at the registered address of
such Holder. On and after the redemption date, interest ceases to accrue on the
Notes or portions thereof called for redemption.
There is no sinking fund for the Notes.
THE GUARANTEES
The Notes are guaranteed by each of the Guarantors pursuant to the
Guarantees. Generally, the Guarantors currently do not include our subsidiaries
that are engaged in the financial services segment. These subsidiaries currently
do not guarantee our other senior notes or our revolving credit facility. In
addition, the Notes are not guaranteed by several of our insignificant
subsidiaries.
Each of the Guarantors (so long as it remains a Restricted Subsidiary)
unconditionally guarantees on a joint and several basis all of the Company's
obligations under the Notes, including its obligations to pay principal,
premium, if any, and interest, if any, with respect to the Notes. The Guarantees
are general unsecured obligations of the Guarantors and rank pari passu with all
existing and future unsecured Indebtedness of the Guarantors that is not, by its
terms, expressly subordinated in right of payment to the Guarantees. The
obligations of each Guarantor are limited to the maximum amount which, after
giving effect to all other contingent and fixed liabilities of such Guarantor
and after giving effect to any collections from or payments made by or on behalf
of any other Guarantor in respect of the obligations of such other Guarantor
under its Guarantee or pursuant to its contribution obligations under the
Indenture, will result in the obligations of such Guarantor under its Guarantee
not constituting a fraudulent conveyance or fraudulent transfer under federal or
state law. Each Guarantor that makes a payment or distribution under a Guarantee
shall be entitled to a contribution from each other Guarantor in an amount pro
rata, based on the net assets of each Guarantor, determined in accordance with
GAAP. Except as provided in the covenants described under "Certain Covenants"
below, the Company is not restricted from selling or otherwise disposing of any
of the Guarantors.
The Indenture requires that each existing and future Restricted Subsidiary
be a Guarantor. The Company is permitted to cause any Unrestricted Subsidiary to
be a Guarantor.
The Indenture provides that if all or substantially all of the assets of any
Guarantor or all of the Capital Stock of any Guarantor is sold (including by
consolidation, merger, issuance or otherwise) or disposed of (including by
liquidation, dissolution or otherwise) by the Company or any of its
Subsidiaries, or, unless the Company elects otherwise, if any Guarantor is
designated an Unrestricted Subsidiary in accordance with the terms of the
Indenture, then such Guarantor (in the event of a sale or other disposition of
all of the Capital Stock of such Guarantor or a designation as an Unrestricted
Subsidiary) or the Person acquiring such assets (in the event of a sale or other
disposition of all or substantially all of the assets of such Guarantor) shall
be deemed automatically and unconditionally released and discharged from any of
its obligations under the Indenture without any further action on the part of
the Trustee or any Holder of the Notes.
An Unrestricted Subsidiary that is a Guarantor shall be deemed automatically
and unconditionally released and discharged from all obligations under its
Guarantee upon notice from the Company to the Trustee to such effect, without
any further action required on the part of the Trustee or any Holder.
30
A sale of assets or Capital Stock of a Guarantor may constitute an Asset
Disposition subject to the "Limitations on Disposition of Assets" covenant.
CERTAIN COVENANTS
The following is a summary of certain covenants contained in the Indenture.
Such covenants are applicable (unless waived or amended as permitted by the
Indenture) so long as any of the Notes are outstanding or until the Notes are
defeased pursuant to provisions described under "Defeasance of Indenture."
REPURCHASE OF NOTES UPON CHANGE OF CONTROL. In the event that there shall
occur a Change of Control, each Holder of Notes shall have the right, at such
Holder's option, to require the Company to purchase all or any part of such
Holder's Notes on a date (the "REPURCHASE DATE") that is no later than 90 days
after notice of the Change of Control, at 101% of the principal amount thereof
plus accrued and unpaid interest to the Repurchase Date.
On or before the thirtieth day after any Change of Control, the Company is
obligated to mail, or cause to be mailed, to all Holders of record of Notes a
notice regarding the Change of Control and the repurchase right. The notice
shall state the Repurchase Date, the date by which the repurchase right must be
exercised, the price for the Notes and the procedure which the Holder must
follow to exercise such right. To exercise such right, the Holder of such Note
must deliver at least ten days prior to the Repurchase Date written notice to
the Company (or an agent designated by the Company for such purpose) of the
Holder's exercise of such right, together with the Note with respect to which
the right is being exercised, duly endorsed for transfer; provided, however,
that if mandated by applicable law, a Holder may be permitted to deliver such
written notice nearer to the Repurchase Date than may be specified by the
Company.
The Company will comply with applicable law, including Section 14(e) of the
Exchange Act and Rule 14e-1 thereunder, if applicable, if the Company is
required to give a notice of right of repurchase as a result of a Change of
Control.
With respect to any disposition of assets, the phrase "all or substantially
all" as used in the Indenture (including as set forth under "Limitations on
Mergers, Consolidations and Sales of Assets" below) varies according to the
facts and circumstances of the subject transaction, has no clearly established
meaning under New York law (which governs the Indenture) and is subject to
judicial interpretation. Accordingly, in certain circumstances there may be a
degree of uncertainty in ascertaining whether a particular transaction would
involve a disposition of "all or substantially all" of the assets of the
Company, and therefore it may be unclear as to whether a Change of Control has
occurred and whether the Holders have the right to require the Company to
repurchase Notes.
None of the provisions relating to a repurchase upon a Change of Control is
waivable by the Board of Directors of the Company. The Company could, in the
future, enter into certain transactions, including certain recapitalizations of
the Company, that would not result in a Change of Control, but would increase
the amount of Indebtedness outstanding at such time.
The Indenture requires the payment of money for Notes or portions thereof
validly tendered to and accepted for payment by the Company pursuant to a Change
of Control offer. In the event that a Change of Control has occurred under the
Indenture, a change of control may also have occurred under the agreements
governing other Indebtedness of the Company or its subsidiaries. In addition, a
Change of Control may also result in the acceleration of Indebtedness under the
Credit Facilities. If a Change of Control were to occur, there can be no
assurance that the Company would have sufficient funds to pay the purchase price
for all Notes and amounts due under other Indebtedness that the Company may be
required to repurchase or repay. After giving effect to the offering of the old
notes and the application of the net proceeds therefrom as set forth under the
section entitled "Use of Proceeds," the Company would not have sufficient funds
available to purchase all of the outstanding Notes pursuant to a Change of
Control offer. In the event that the Company were required to purchase
outstanding Notes pursuant to a Change of Control offer, the Company expects
that it would need to seek third-party financing to the extent it does not have
available funds to meet its purchase obligations. However, there can be no
assurance that the Company would be able to obtain such financing.
Failure by the Company to purchase the Notes when required upon a Change of
Control will result in an Event of Default with respect to the Notes.
These provisions could have the effect of deterring hostile or friendly
acquisitions of the Company where the Person attempting the acquisition views
itself as unable to finance the purchase of the principal amount of Notes which
may be tendered to the Company upon the occurrence of a Change of Control.
31
LIMITATIONS ON INDEBTEDNESS. The Indenture provides that, until the Notes
are rated Investment Grade by both Rating Agencies (after which time the
following covenant will no longer be in effect), the Company will not, and will
not cause or permit any Restricted Subsidiary, directly or indirectly, to,
create, incur, assume, become liable for or guarantee the payment of
(collectively, an "INCURRENCE") any Indebtedness (including Acquired
Indebtedness) unless, after giving effect thereto and the application of the
proceeds therefrom, the Consolidated Fixed Charge Coverage Ratio on the date
thereof would be at least 2.0 to 1.0.
Notwithstanding the foregoing, the provisions of the Indenture do not
prevent the incurrence of:
(1) Permitted Indebtedness,
(2) Refinancing Indebtedness,
(3) Non-Recourse Indebtedness,
(4) any Guarantee of Indebtedness of the Company represented by the Notes,
and
(5) any guarantee of Indebtedness incurred under Credit Facilities in
compliance with the Indenture.
For purposes of determining compliance with this covenant, in the event that
an item of Indebtedness may be incurred through the first paragraph of this
covenant or by meeting the criteria of one or more of the types of Indebtedness
described in the second paragraph of this covenant (or the definitions of the
terms used therein), the Company, in its sole discretion,
(1) may classify such item of Indebtedness under and comply with either of
such paragraphs (or any of such definitions), as applicable,
(2) may classify and divide such item of Indebtedness into more than one of
such paragraphs (or definitions), as applicable, and
(3) may elect to comply with such paragraphs (or definitions), as
applicable, in any order.
The Company will not, and will not cause or permit any Guarantor to,
directly or indirectly, in any event incur any Indebtedness that purports to be
by its terms (or by the terms of any agreement governing such Indebtedness)
subordinated to any other Indebtedness of the Company or of such Guarantor, as
the case may be, unless such Indebtedness is also by its terms (or by the terms
of any agreement governing such Indebtedness) made expressly subordinated to the
Notes or the Guarantee of such Guarantor, as the case may be, to the same extent
and in the same manner as such Indebtedness is subordinated to such other
Indebtedness of the Company or such Guarantor, as the case may be.
LIMITATIONS ON RESTRICTED PAYMENTS. The Indenture provides that, until the
Notes are rated Investment Grade by both Rating Agencies (after which time the
following covenant will no longer be in effect), the Company will not, and will
not cause or permit any Restricted Subsidiary to, directly or indirectly, make
any Restricted Payment unless:
(1) no Default or Event of Default shall have occurred and be continuing at
the time of or immediately after giving effect to such Restricted
Payment;
(2) immediately after giving effect to such Restricted Payment, the Company
could incur at least $1.00 of Indebtedness pursuant to the first
paragraph of the "Limitations on Indebtedness" covenant; and
(3) immediately after giving effect to such Restricted Payment, the
aggregate amount of all Restricted Payments (including the Fair Market
Value of any non-cash Restricted Payment) declared or made after the
Issue Date does not exceed the sum of:
(a) 50% of the Consolidated Net Income of the Company on a cumulative
basis during the period (taken as one accounting period) from and
including April 1, 1998 and ending on the last day of the Company's
fiscal quarter immediately preceding the date of such Restricted
Payment (or in the event such Consolidated Net Income shall be a
deficit, minus 100% of such deficit), plus
(b) 100% of the aggregate net cash proceeds of and the fair market value
of Property received by the Company from (1) any capital
contribution to the Company after June 9, 1997 or any issue or sale
after June 9, 1997 of Qualified Stock (other than to any Subsidiary
of the Company) and (2) the issue or sale after June 9, 1997 of any
Indebtedness or other securities of the Company convertible into or
exercisable for Qualified Stock of the Company that have been so
converted or exercised, as the case may be, plus
32
(c) $86.0 million, which is equal to the aggregate principal amount of
the Company's 6 7/8% Convertible Subordinated Notes due 2002 that
were converted into the Company's Common Equity prior to the Issue
Date, plus
(d) in the case of the disposition or repayment of any Investment
constituting a Restricted Payment made after June 9, 1997, an amount
(to the extent not included in the calculation of the Consolidated
Net Income referred to in (a)) equal to the lesser of (x) the return
of capital with respect to such Investment (including by dividend,
distribution or sale of Capital Stock) and (y) the amount of such
Investment that was treated as a Restricted Payment, in either case,
less the cost of the disposition or repayment of such Investment (to
the extent not included in the calculation of the Consolidated Net
Income referred to in (a)), plus
(e) with respect to any Unrestricted Subsidiary that is redesignated as
a Restricted Subsidiary after June 9, 1997 in accordance with the
definition of Unrestricted Subsidiary (so long as the designation of
such Subsidiary as an Unrestricted Subsidiary was treated as a
Restricted Payment made after June 9, 1997 and only to the extent
not included in the calculation of the Consolidated Net Income
referred to in (a)), an amount equal to the lesser of (x) the
proportionate interest of the Company or a Restricted Subsidiary in
an amount equal to the excess of (I) the total assets of such
Subsidiary, valued on an aggregate basis at the lesser of book value
and Fair Market Value thereof, over (II) the total liabilities of
such Subsidiary, determined in accordance with GAAP, and (y) the
Designation Amount at the time of such Subsidiary's designation as
an Unrestricted Subsidiary, plus
(f) $50 million, minus
(g) the aggregate amount of all Restricted Payments (other than
Restricted Payments referred to in clause (C) of the immediately
succeeding paragraph) made after June 9, 1997 through the Issue
Date.
The foregoing clauses (2) and (3) will not prohibit:
(A) the payment of any dividend within 60 days of its declaration if such
dividend could have been made on the date of its declaration without
violation of the provisions of the Indenture;
(B) the repurchase, redemption or retirement of any shares of Capital Stock
of the Company in exchange for, or out of the net proceeds of the
substantially concurrent sale (other than to a Subsidiary of the
Company) of, other shares of Qualified Stock; and
(C) the purchase, redemption or other acquisition, cancellation or
retirement for value of Capital Stock, or options, warrants, equity
appreciation rights or other rights to purchase or acquire Capital
Stock, of the Company or any Subsidiary held by officers or employees or
former officers or employees of the Company or any Subsidiary (or their
estates or beneficiaries under their estates) not to exceed $20 million
in the aggregate since the Issue Date;
provided, however, that each Restricted Payment described in clauses (A) and (B)
of this sentence shall be taken into account for purposes of computing the
aggregate amount of all Restricted Payments pursuant to clause (3) of the
immediately preceding paragraph.
For purposes of determining the aggregate and permitted amounts of
Restricted Payments made, the amount of any guarantee of any Investment in any
Person that was initially treated as a Restricted Payment and which was
subsequently terminated or expired, net of any amounts paid by the Company or
any Restricted Subsidiary in respect of such guarantee, shall be deducted.
In determining the "fair market value of Property" for purposes of clause
(3) of the first paragraph of this covenant, Property other than cash, Cash
Equivalents and Marketable Securities shall be deemed to be equal in value to
the "equity value" of the Capital Stock or other securities issued in exchange
therefor. The "equity value" of such Capital Stock or other securities shall be
equal to (i) the number of shares of Common Equity issued in the transaction (or
issuable upon conversion or exercise of the Capital Stock or other securities
issued in the transaction) multiplied by the closing sale price of the Common
Equity on its principal market on the date of the transaction (less, in the case
of Capital Stock or other securities which require the payment of consideration
at the time of conversion or exercise, the aggregate consideration payable
thereupon) or (ii) if the Common Equity is not then traded on the New York Stock
Exchange, American Stock Exchange or Nasdaq National Market, or if the Capital
Stock or other securities issued in the transaction do not consist of Common
Equity (or Capital Stock or other securities convertible into or exercisable for
Common Equity), the value of such Capital Stock or other securities as
determined by a nationally recognized investment banking firm retained by the
Board of Directors of the Company.
33
LIMITATIONS ON TRANSACTIONS WITH AFFILIATES. The Indenture provides that,
until the Notes are rated Investment Grade by both Rating Agencies (after which
time the following covenant will no longer be in effect), the Company will not,
and will not cause or permit any Restricted Subsidiary to, make any loan,
advance, guarantee or capital contribution to, or for the benefit of, or sell,
lease, transfer or otherwise dispose of any property or assets to, or for the
benefit of, or purchase or lease any property or assets from, or enter into or
amend any contract, agreement or understanding with, or for the benefit of, any
Affiliate of the Company or any Affiliate of any of the Company's Subsidiaries
or any holder of 10% or more of the Common Equity of the Company (including any
Affiliates of such holders), in a single transaction or series of related
transactions (each, an "AFFILIATE TRANSACTION"), except for any Affiliate
Transaction the terms of which are at least as favorable as the terms which
could be obtained by the Company or such Restricted Subsidiary, as the case may
be, in a comparable transaction made on an arm's length basis with Persons who
are not such a holder, an Affiliate of such a holder or an Affiliate of the
Company or any of the Company's Subsidiaries.
In addition, the Company will not, and will not cause or permit any
Restricted Subsidiary to, enter into an Affiliate Transaction unless:
(1) with respect to any such Affiliate Transaction involving or having a
value of more than $10 million, the Company shall have (x) obtained the
approval of a majority of the Board of Directors of the Company and (y)
either obtained the approval of a majority of the Company's
disinterested directors or obtained an opinion of a qualified
independent financial advisor to the effect that such Affiliate
Transaction is fair to the Company or such Restricted Subsidiary, as the
case may be, from a financial point of view and
(2) with respect to any such Affiliate Transaction involving or having a
value of more than $50 million, the Company shall have (x) obtained the
approval of a majority of the Board of Directors of the Company and (y)
delivered to the Trustee an opinion of a qualified independent financial
advisor to the effect that such Affiliate Transaction is fair to the
Company or such Restricted Subsidiary, as the case may be, from a
financial point of view.
The Indenture will provide that notwithstanding the foregoing, an Affiliate
Transaction will not include:
(1) any contract, agreement or understanding with, or for the benefit of, or
plan for the benefit of, employees of the Company or its Subsidiaries
generally (in their capacities as such) that has been approved by the
Board of Directors of the Company,
(2) Capital Stock issuances to directors, officers and employees of the
Company or its Subsidiaries pursuant to plans approved by the
stockholders of the Company,
(3) any Restricted Payment otherwise permitted under the "Limitations on
Restricted Payments" covenant,
(4) any transaction between or among the Company and one or more Restricted
Subsidiaries or between or among Restricted Subsidiaries (provided,
however, no such transaction shall involve any other Affiliate of the
Company (other than an Unrestricted Subsidiary to the extent the
applicable amount constitutes a Restricted Payment permitted by the
Indenture)) and
(5) any transaction between one or more Restricted Subsidiaries and one or
more Unrestricted Subsidiaries where all of the payments to, or other
benefits conferred upon, such Unrestricted Subsidiaries are
substantially contemporaneously dividended, or otherwise distributed or
transferred without charge, to the Company or a Restricted Subsidiary.
LIMITATIONS ON DISPOSITIONS OF ASSETS. The Indenture provides that, until
the Notes are rated Investment Grade by both Rating Agencies (after which time
the following covenant will no longer be in effect), the Company will not, and
will not cause or permit any Restricted Subsidiary to, make any Asset
Disposition unless:
(x) the Company (or such Restricted Subsidiary, as the case may be) receives
consideration at the time of such Asset Disposition at least equal to
the Fair Market Value thereof, and
(y) not less than 70% of the consideration received by the Company (or such
Restricted Subsidiary, as the case may be) is in the form of cash, Cash
Equivalents and Marketable Securities.
The amount of any Indebtedness (other than any Indebtedness subordinated to
the Notes) of the Company or any Restricted Subsidiary that is actually assumed
by the transferee in such Asset Disposition shall be deemed to be consideration
required by clause (y) above for purposes of determining the percentage of such
consideration received by the Company or the Restricted Subsidiaries.
34
The Net Cash Proceeds of an Asset Disposition shall, within one year, at the
Company's election, (a) be used by the Company or a Restricted Subsidiary in the
business of the construction and sale of homes conducted by the Company and the
Restricted Subsidiaries or any other business of the Company or a Restricted
Subsidiary existing at the time of such Asset Disposition or (b) to the extent
not so used, be applied to make a Net Cash Proceeds Offer for the Notes and, if
the Company or a Restricted Subsidiary elects or is required to do so, repay,
purchase or redeem any other unsubordinated Indebtedness (on a pro rata basis if
the amount available for such repayment, purchase or redemption is less than the
aggregate amount of (i) the principal amount of the Notes tendered in such Net
Cash Proceeds Offer and (ii) the lesser of the principal amount, or accreted
value, of such other unsubordinated Indebtedness, plus, in each case, accrued
interest to the date of repayment, purchase or redemption) at 100% of the
principal amount or accreted value thereof, as the case may be, plus accrued
interest to the date of purchase or repayment.
Notwithstanding the foregoing, (A) the Company will not be required to apply
such Net Cash Proceeds to the purchase of Notes in accordance with clause (b) of
the preceding sentence except to the extent that such Net Cash Proceeds,
together with the aggregate Net Cash Proceeds of prior Asset Dispositions (other
than those so used) which have not been applied in accordance with this
provision and as to which no prior Net Cash Proceeds Offer shall have been made,
exceed 5% of Consolidated Tangible Assets and (B) in connection with any Asset
Disposition, the Company and the Restricted Subsidiaries will not be required to
comply with the requirements of clause (y) of the first sentence of the first
paragraph of this covenant to the extent that the aggregate non-cash
consideration received in connection with such Asset Disposition, together with
the sum of all non-cash consideration received in connection with all prior
Asset Dispositions that has not yet been converted into cash, does not exceed 5%
of Consolidated Tangible Assets; provided, however, that when any non-cash
consideration is converted into cash, such cash shall constitute Net Cash
Proceeds and be subject to the preceding sentence.
LIMITATIONS ON LIENS. The Indenture provides that the Company will not, and
will not cause or permit any Restricted Subsidiary to, create, incur, assume or
suffer to exist any Liens, other than Permitted Liens, on any of its Property,
or on any shares of Capital Stock or Indebtedness of any Restricted Subsidiary,
unless contemporaneously therewith or prior thereto all payments due under the
Indenture and the Notes are secured on an equal and ratable basis with the
obligation or liability so secured until such time as such obligation or
liability is no longer secured by a Lien.
LIMITATIONS ON RESTRICTIONS AFFECTING RESTRICTED SUBSIDIARIES. The Indenture
provides that the Company will not, and will not cause or permit any Restricted
Subsidiary to, create, assume or otherwise cause or suffer to exist or become
effective any consensual encumbrance or restriction (other than encumbrances or
restrictions imposed by law or by judicial or regulatory action or by provisions
of leases and other agreements that restrict the assignability thereof) on the
ability of any Restricted Subsidiary to
(1) pay dividends or make any other distributions on its Capital Stock or
any other interest or participation in, or measured by, its profits,
owned by the Company or any other Restricted Subsidiary, or pay interest
on or principal of any Indebtedness owed to the Company or any other
Restricted Subsidiary,
(2) make loans or advances to the Company or any other Restricted
Subsidiary, or
(3) transfer any of its properties or assets to the Company or any other
Restricted Subsidiary, except for:
(a) encumbrances or restrictions existing under or by reason of
applicable law,
(b) covenants or restrictions contained in Indebtedness in effect on the
date of the Indenture as such covenants or restrictions are in
effect on such date,
(c) any restrictions or encumbrances arising under Acquired
Indebtedness; provided, that such encumbrance or restriction applies
only to either the assets that were subject to the restriction or
encumbrance at the time of the acquisition or the obligor on such
Indebtedness and its Subsidiaries,
(d) any restrictions or encumbrances arising in connection with
Refinancing Indebtedness; provided, however, that any restrictions
and encumbrances of the type described in this clause (d) that arise
under such Refinancing Indebtedness shall not be materially more
restrictive than those under the agreement creating or evidencing
the Indebtedness being refunded, refinanced, replaced or extended,
(e) any Permitted Lien, or any other agreement restricting the sale or
other disposition of property, securing Indebtedness permitted by
the Indenture if such Permitted Lien or agreement does not expressly
restrict the ability of a Subsidiary of the Company to pay dividends
or make or repay loans or advances prior to default thereunder,
(f) reasonable and customary borrowing base covenants set forth in
agreements evidencing Indebtedness otherwise permitted by the
Indenture,
35
(g) customary provisions restricting subletting or assignment of any
lease governing a leasehold interest of the Company or any
Restricted Subsidiary, and
(h) any restriction with respect to a Restricted Subsidiary imposed
pursuant to an agreement entered into for the sale or disposition of
all or substantially all of the Capital Stock or assets of such
Restricted Subsidiary pending the closing of such sale or
disposition.
LIMITATIONS ON MERGERS, CONSOLIDATIONS AND SALES OF ASSETS. The Indenture
provides that neither the Company nor any Guarantor will consolidate or merge
with or into, or sell, lease, convey or otherwise dispose of all or
substantially all of its assets (including, without limitation, by way of
liquidation or dissolution), or assign any of its obligations under the Notes,
the Guarantees or the Indenture (as an entirety or substantially in one
transaction or in a series of related transactions), to any Person (in each case
other than in a transaction in which the Company or a Restricted Subsidiary is
the survivor of a consolidation or merger, or the transferee in a sale, lease,
conveyance or other disposition) unless:
(1) the Person formed by or surviving such consolidation or merger (if other
than the Company or the Guarantor, as the case may be), or to which such
sale, lease, conveyance or other disposition or assignment will be made
(collectively, the "SUCCESSOR"), is a corporation or other legal entity
organized and existing under the laws of the United States or any state
thereof or the District of Columbia, and the Successor assumes by
supplemental indenture in a form reasonably satisfactory to the Trustee
all of the obligations of the Company or the Guarantor, as the case may
be, under the Notes or a Guarantee, as the case may be, and the
Indenture,
(2) immediately after giving effect to such transaction, no Default or Event
of Default has occurred and is continuing,
(3) immediately after giving effect to such transaction and the use of any
net proceeds therefrom, on a pro forma basis, the Consolidated Net Worth
of the Company or the Successor (in the case of a transaction involving
the Company), as the case may be, would be at least equal to the
Consolidated Net Worth of the Company immediately prior to such
transaction (exclusive of any adjustments to Consolidated Net Worth
attributable to transaction costs) less any amount treated as a
Restricted Payment in connection with such transaction in accordance
with the Indenture and
(4) unless prior to such transaction the Notes are rated Investment Grade by
both Rating Agencies (after which this clause (4) shall not apply),
immediately after giving effect to such transaction, the Company could
incur at least $1.00 of Indebtedness pursuant to the first paragraph of
the "Limitation on Indebtedness" covenant.
The foregoing provisions shall not apply to:
(a) a transaction involving the sale or disposition of Capital Stock of a
Guarantor, or the consolidation or merger of a Guarantor, or the sale,
lease, conveyance or other disposition of all or substantially all of
the assets of a Guarantor, that in any such case results in such
Guarantor being released from its Guarantee as provided under "The
Guarantees" above, or
(b) a transaction the purpose of which is to change the state of
incorporation of the Company or any Guarantor.
REPORTS TO HOLDERS OF NOTES. The Company shall file with the SEC the annual
reports and the information, documents and other reports required to be filed
pursuant to Section 13 or 15(d) of the Exchange Act. The Company shall file with
the Trustee and mail to each Holder of record of Notes such reports, information
and documents within 15 days after it files them with the SEC. In the event that
the Company is no longer subject to these periodic requirements of the Exchange
Act, it will nonetheless continue to file reports with the SEC and the Trustee
and mail such reports to each Holder of Notes as if it were subject to such
reporting requirements. Regardless of whether the Company is required to furnish
such reports to its stockholders pursuant to the Exchange Act, the Company will
cause its consolidated financial statements and a "Management's Discussion and
Analysis of Results of Operations and Financial Condition" written report,
similar to those that would have been required to appear in annual or quarterly
reports, to be delivered to Holders of Notes.
EVENTS OF DEFAULT
The following are Events of Default under the Indenture:
(1) the failure by the Company to pay interest on any Note when the same
becomes due and payable and the continuance of any such failure for a
period of 30 days;
(2) the failure by the Company to pay the principal or premium of any Note
when the same becomes due and payable at maturity, upon acceleration or
otherwise;
36
(3) the failure by the Company or any Restricted Subsidiary to comply with
any of its agreements or covenants in, or provisions of, the Notes, the
Guarantees or the Indenture and such failure continues for the period
and after the notice specified below (except in the case of a default
under covenants described under "Certain Covenants -- Repurchase of
Notes upon Change of Control" and "Limitations on Mergers,
Consolidations and Sales of Assets," which will constitute Events of
Default with notice but without passage of time);
(4) the acceleration of any Indebtedness (other than Non-Recourse
Indebtedness) of the Company or any Restricted Subsidiary that has an
outstanding principal amount of $25 million or more, individually or in
the aggregate, and such acceleration does not cease to exist, or such
Indebtedness is not satisfied, in either case within 30 days after such
acceleration;
(5) the failure by the Company or any Restricted Subsidiary to make any
principal or interest payment in an amount of $25 million or more,
individually or in the aggregate, in respect of Indebtedness (other than
Non-Recourse Indebtedness) of the Company or any Restricted Subsidiary
within 30 days of such principal or interest becoming due and payable
(after giving effect to any applicable grace period set forth in the
documents governing such Indebtedness);
(6) a final judgment or judgments that exceed $25 million or more,
individually or in the aggregate, for the payment of money having been
entered by a court or courts of competent jurisdiction against the
Company or any of its Restricted Subsidiaries and such judgment or
judgments is not satisfied, stayed, annulled or rescinded within 60 days
of being entered;
(7) the Company or any Restricted Subsidiary that is a Significant
Subsidiary pursuant to or within the meaning of any Bankruptcy Law:
(A) commences a voluntary case,
(B) consents to the entry of an order for relief against it in an
involuntary case,
(C) consents to the appointment of a Custodian of it or for all or
substantially all of its property, or
(D) makes a general assignment for the benefit of its creditors;
(8) a court of competent jurisdiction enters an order or decree under any
Bankruptcy Law that:
(A) is for relief against the Company or any Restricted Subsidiary that
is a Significant Subsidiary as debtor in an involuntary case,
(B) appoints a Custodian of the Company or any Restricted Subsidiary
that is a Significant Subsidiary or a Custodian for all or
substantially all of the property of the Company or any Restricted
Subsidiary that is a Significant Subsidiary, or
(C) orders the liquidation of the Company or any Restricted Subsidiary
that is a Significant Subsidiary,
and the order or decree remains unstayed and in effect for 60 days; or
(9) any Guarantee of a Guarantor which is a Significant Subsidiary ceases to
be in full force and effect (other than in accordance with the terms of
such Guarantee and the Indenture) or is declared null and void and
unenforceable or found to be invalid or any Guarantor denies its
liability under its Guarantee (other than by reason of release of a
Guarantor from its Guarantee in accordance with the terms of the
Indenture and the Guarantee).
A Default as described in subclause (3) above will not be deemed an Event of
Default until the Trustee notifies the Company, or the Holders of at least 25
percent in principal amount of the then outstanding Notes notify the Company and
the Trustee, of the Default and (except in the case of a default with respect to
covenants described under "Certain Covenants -- Repurchase of Notes upon Change
of Control" and "Limitations on Mergers, Consolidations and Sales of Assets")
the Company does not cure the Default within 60 days after receipt of the
notice. The notice must specify the Default, demand that it be remedied and
state that the notice is a "Notice of Default." If such a Default is cured
within such time period, it ceases.
If an Event of Default (other than an Event of Default with respect to the
Company resulting from subclauses (7) or (8) above), shall have occurred and be
continuing under the Indenture, the Trustee by notice to the Company, or the
Holders of at least 25 percent in principal amount of the Notes then outstanding
by notice to the Company and the Trustee, may declare all Notes to be due and
payable immediately. Upon such declaration of acceleration, the amounts due and
payable on the Notes will be due and payable immediately. If an Event of Default
with respect to the Company specified in subclauses (7) or (8) above occurs,
such an amount will ipso facto become and be immediately due and payable without
any declaration, notice or other act on the part of the Trustee and the Company
or any Holder.
37
The Holders of a majority in principal amount of the Notes then outstanding
by written notice to the Trustee and the Company may waive any Default or Event
of Default (other than any Default or Event of Default in payment of principal
or interest) on the Notes under the Indenture. Holders of a majority in
principal amount of the then outstanding Notes may rescind an acceleration and
its consequence (except an acceleration due to nonpayment of principal or
interest on the Notes) if the rescission would not conflict with any judgment or
decree and if all existing Events of Default (other than the non-payment of
accelerated principal) have been cured or waived.
The Holders may not enforce the provisions of the Indenture, the Notes or
the Guarantees except as provided in the Indenture. Subject to certain
limitations, Holders of a majority in principal amount of the Notes then
outstanding may direct the Trustee in its exercise of any trust or power,
provided, however, that such direction does not conflict with the terms of the
Indenture. The Trustee may withhold from the Holders notice of any continuing
Default or Event of Default (except any Default or Event of Default in payment
of principal or interest on the Notes or that resulted from the failure to
comply with the covenant entitled "Repurchase of Notes upon Change of Control")
if the Trustee determines that withholding such notice is in the Holders'
interest.
The Company is required to deliver to the Trustee an annual statement
regarding compliance with the Indenture, and include in such statement, if any
Officer of the Company is aware of any Default or Event of Default, a statement
specifying such Default or Event of Default and what action the Company is
taking or proposes to take with respect thereto. In addition, the Company is
required to deliver to the Trustee prompt written notice of the occurrence of
any Default or Event of Default.
DEFEASANCE OF INDENTURE
The Indenture permits the Company and the Guarantors to terminate all of
their respective obligations under the Indenture, other than the obligation to
pay interest on and the principal of the Notes and certain other obligations, at
any time by
(1) depositing in trust with the Trustee, under an irrevocable trust
agreement, money or U.S. government obligations in an amount sufficient
to pay principal of and interest on the Notes to their maturity, and
(2) complying with certain other conditions, including delivery to the
Trustee of an opinion of counsel or a ruling received from the Internal
Revenue Service to the effect that Holders will not recognize income,
gain or loss for federal income tax purposes as a result of the
Company's exercise of such right and will be subject to federal income
tax on the same amount and in the same manner and at the same times as
would have been the case otherwise.
In addition, the Indenture permits the Company and the Guarantors to
terminate all of their respective obligations under the Indenture (including the
obligations to pay interest on and the principal of the Notes and certain other
obligations), at any time by
(1) depositing in trust with the Trustee, under an irrevocable trust
agreement, money or U.S. government obligations in an amount sufficient
to pay principal of and interest on the Notes to their maturity, and
(2) complying with certain other conditions, including delivery to the
Trustee of an opinion of counsel or a ruling received from the Internal
Revenue Service to the effect that Holders will not recognize income,
gain or loss for federal income tax purposes as a result of the
Company's exercise of such right and will be subject to federal income
tax on the same amount and in the same manner and at the same times as
would have been the case otherwise, which opinion of counsel is based
upon a change in the applicable federal tax law since the date of the
Indenture.
AMENDMENT, SUPPLEMENT AND WAIVER
Subject to certain exceptions, the Indenture, the Notes or the Guarantees
may be amended or supplemented with the consent (which may include consents
obtained in connection with a tender offer or exchange offer for Notes) of the
Holders of at least a majority in principal amount of the Notes then
outstanding, and any existing Default under, or compliance with any provision of
the Indenture may be waived (other than any continuing Default or Event of
Default in the payment of interest on or the principal of the Notes) with the
consent (which may include consents obtained in connection with a tender offer
or exchange offer for Notes) of the Holders of a majority in principal amount of
the Notes then outstanding. Without the consent of any Holder, the Company and
the Trustee may amend or supplement the Indenture, the Notes or the
38
Guarantees to cure any ambiguity, defect or inconsistency; to comply with the
"Limitations on Mergers, Consolidations and Sales of Assets" covenant set forth
in the Indenture; to provide for uncertificated Notes in addition to or in place
of certificated Notes; to make any change that does not adversely affect the
legal rights of any Holder; or to delete a Guarantor which, in accordance with
the terms of the Indenture, ceases to be liable on its Guarantee.
Without the consent of each Holder affected, the Company and the Trustee may
not:
(1) reduce the amount of Notes whose Holders must consent to an amendment,
supplement or waiver,
(2) reduce the rate of or change the time for payment of interest, including
default interest, on any Note,
(3) reduce the principal of or change the fixed maturity of any Note or
alter the provisions (including related definitions) with respect to
redemptions described under "Optional Redemption" or with respect to
mandatory offers to purchase Notes described under "Limitations on
Dispositions of Assets" or "Repurchase of Notes upon Change of Control,"
(4) make any Note payable in money or securities other than that stated in
the Note,
(5) make any change in the "Waiver of Past Defaults and Compliance with
Indenture Provisions," "Rights of Holders to Receive Payment" or the
"With Consent of Holders" sections set forth in the Indenture,
(6) modify the ranking or priority of the Notes or any Guarantee,
(7) release any Guarantor from any of its obligations under its Guarantee or
the Indenture otherwise than in accordance with the Indenture, or
(8) waive a continuing Default or Event of Default in the payment of
principal of or interest on the Notes.
The right of any Holder to participate in any consent required or sought
pursuant to any provision of the Indenture (and the obligation of the Company to
obtain any such consent otherwise required from such Holder) may be subject to
the requirement that such Holder shall have been the Holder of record of any
Notes with respect to which such consent is required or sought as of a date
identified by the Trustee in a notice furnished to Holders in accordance with
the terms of the Indenture.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest (as defined in
the Indenture), it must eliminate such conflict or resign. In the ordinary
course of its business, the Trustee provides, and may continue to provide,
service to the Company as transfer agent for the common stock and as trustee for
other debt securities of the Company.
The Holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
occurs and is not cured, the Trustee will be required, in the exercise of its
power, to use the degree of care of a prudent person in similar circumstances in
the conduct of his own affairs. Subject to such provisions, the Trustee will be
under no obligation to exercise any of its rights or powers under the Indenture
at the request of any Holder, unless such Holder shall have offered to the
Trustee security and indemnity satisfactory to the Trustee.
GOVERNING LAW
The Indenture, the Notes and the Guarantees are governed by the laws of the
State of New York without giving effect to principles of conflict of laws.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
terms used in the Indenture.
"ACQUIRED INDEBTEDNESS" means (1) with respect to any Person that becomes a
Restricted Subsidiary (or is merged into the Company or any Restricted
Subsidiary) after the Issue Date, Indebtedness of such Person or any of its
Subsidiaries
39
existing at the time such Person becomes a Restricted Subsidiary (or is merged
into the Company or any Restricted Subsidiary) that was not incurred in
connection with, or in contemplation of, such Person becoming a Restricted
Subsidiary (or being merged into the Company or any Restricted Subsidiary) and
(2) with respect to the Company or any Restricted Subsidiary, any Indebtedness
expressly assumed by the Company or any Restricted Subsidiary in connection with
the acquisition of any assets from another Person (other than the Company or any
Restricted Subsidiary), which Indebtedness was not incurred by such other Person
in connection with or in contemplation of such acquisition. Indebtedness
incurred in connection with or in contemplation of any transaction described in
clause (1) or (2) of the preceding sentence shall be deemed to have been
incurred by the Company or a Restricted Subsidiary, as the case may be, at the
time such Person becomes a Restricted Subsidiary (or is merged into the Company
or any Restricted Subsidiary) in the case of clause (1) or at the time of the
acquisition of such assets in the case of clause (2), but shall not be deemed
Acquired Indebtedness.
"ADDITIONAL NOTES" has the meaning set forth in "-- General."
"AFFILIATE" means, when used with reference to a specified Person, any
Person directly or indirectly controlling or controlled by or under direct or
indirect common control with the Person specified.
"AFFILIATE TRANSACTION" has the meaning set forth in "-- Certain Covenants
- -- Limitations on Transactions with Affiliates."
"ASSET ACQUISITION" means (1) an Investment by the Company or any Restricted
Subsidiary in any other Person if, as a result of such Investment, such Person
shall become a Restricted Subsidiary or shall be consolidated or merged with or
into the Company or any Restricted Subsidiary or (2) the acquisition by the
Company or any Restricted Subsidiary of the assets of any Person, which
constitute all or substantially all of the assets or of an operating unit or
line of business of such Person or which is otherwise outside the ordinary
course of business.
"ASSET DISPOSITION" means any sale, transfer, conveyance, lease or other
disposition (including, without limitation, by way of merger, consolidation or
sale and leaseback or sale of shares of Capital Stock in any Subsidiary) (each,
a "TRANSACTION") by the Company or any Restricted Subsidiary to any Person of
any Property having a fair market value in any transaction or series of related
transactions of at least $10 million. The term "ASSET DISPOSITION" shall not
include:
(1) a transaction between the Company and any Restricted Subsidiary or a
transaction between Restricted Subsidiaries,
(2) a transaction in the ordinary course of business, including, without
limitation, sales (directly or indirectly), dedications and other
donations to governmental authorities, leases and sales and leasebacks
of (A) homes, improved land and unimproved land and (B) real estate
(including related amenities and improvements),
(3) a transaction involving the sale of Capital Stock of, or the disposition
of assets in, an Unrestricted Subsidiary,
(4) any exchange or swap of assets of the Company or any Restricted
Subsidiary for assets that (x) are to be used by the Company or any
Restricted Subsidiary in the ordinary course of its Real Estate Business
and (y) have a Fair Market Value not less than the Fair Market Value of
the assets exchanged or swapped,
(5) any sale, transfer, conveyance, lease or other disposition of assets and
properties of the Company that is governed by the provisions relating to
"Limitations on Mergers, Consolidation and Sales of Assets," or
(6) dispositions of mortgage loans and related assets and mortgage-backed
securities in the ordinary course of a mortgage lending business.
"ATTRIBUTABLE DEBT" means, with respect to any Capitalized Lease
Obligations, the capitalized amount thereof determined in accordance with GAAP.
"BANKRUPTCY LAW" means title 11 of the United States Code, as amended, or
any similar federal or state law for the relief of debtors.
"CAPITAL STOCK" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated) of or in
such Person's capital stock or other equity interests, and options, rights or
warrants to purchase such capital stock or other equity interests, whether now
outstanding or issued after the Issue Date, including, without limitation, all
Disqualified Stock and Preferred Stock.
40
"CAPITALIZED LEASE OBLIGATIONS" of any Person means the obligations of such
Person to pay rent or other amounts under a lease that is required to be
capitalized for financial reporting purposes in accordance with GAAP, and the
amount of such obligations will be the capitalized amount thereof determined in
accordance with GAAP.
"CASH EQUIVALENTS" means:
(1) U.S. dollars;
(2) securities issued or directly and fully guaranteed or insured by the
U.S. government or any agency or instrumentality thereof having
maturities of one year or less from the date of acquisition;
(3) certificates of deposit and eurodollar time deposits with maturities of
one year or less from the date of acquisition, bankers' acceptances with
maturities not exceeding six months and overnight bank deposits, in each
case with any domestic commercial bank having capital and surplus in
excess of $500 million;
(4) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (2) and (3)
entered into with any financial institution meeting the qualifications
specified in clause (3) above;
(5) commercial paper rated P-1, A-1 or the equivalent thereof by Moody's
Investors Service, Inc. or Standard & Poor's Ratings Group,
respectively, and in each case maturing within six months after the date
of acquisition; and
(6) investments in money market funds substantially all of the assets of
which consist of securities described in the foregoing clauses (1)
through (5).
"CHANGE OF CONTROL" means:
(1) any sale, lease or other transfer (in one transaction or a series of
transactions) of all or substantially all of the consolidated assets of
the Company and its Restricted Subsidiaries to any Person (other than a
Restricted Subsidiary); provided, however, that a transaction where the
holders of all classes of Common Equity of the Company immediately prior
to such transaction own, directly or indirectly, more than 50% of all
classes of Common Equity of such Person immediately after such
transaction shall not be a Change of Control;
(2) a "person" or "group" (within the meaning of Section 13(d) of the
Exchange Act (other than (x) the Company or (y) Donald R. Horton,
Terrill J. Horton, or their respective wives, children, grandchildren
and other descendants, or any trust or other entity formed or controlled
by any of such individuals)) becomes the "beneficial owner" (as defined
in Rule 13d-3 under the Exchange Act) of Common Equity of the Company
representing more than 50% of the voting power of the Common Equity of
the Company;
(3) Continuing Directors cease to constitute at least a majority of the
Board of Directors of the Company; or
(4) the stockholders of the Company approve any plan or proposal for the
liquidation or dissolution of the Company; provided, however, that a
liquidation or dissolution of the Company which is part of a transaction
that does not constitute a Change of Control under the proviso contained
in clause (1) above shall not constitute a Change of Control.
"COMMON EQUITY" of any Person means Capital Stock of such Person that is
generally entitled to (1) vote in the election of directors of such Person or
(2) if such Person is not a corporation, vote or otherwise participate in the
selection of the governing body, partners, managers or others that will control
the management or policies of such Person.
"CONSOLIDATED ADJUSTED TANGIBLE ASSETS" of the Company as of any date means
the Consolidated Tangible Assets of the Company and the Restricted Subsidiaries
at the end of the fiscal quarter immediately preceding the date less any assets
securing any Non-Recourse Indebtedness, as determined in accordance with GAAP.
"CONSOLIDATED CASH FLOW AVAILABLE FOR FIXED CHARGES" means, for any period,
on a consolidated basis for the Company and the Restricted Subsidiaries,
Consolidated Net Income for such period plus (each to the extent deducted in
calculating such Consolidated Net Income and determined in accordance with GAAP)
the sum for such period, without duplication, of:
(1) income taxes,
(2) Consolidated Interest Expense,
(3) depreciation and amortization expenses and other non-cash charges to
earnings and
(4) interest and financing fees and expenses which were previously
capitalized and which are amortized to cost of sales, minus
41
all other non-cash items (other than the receipt of notes receivable) increasing
such Consolidated Net Income.
"CONSOLIDATED FIXED CHARGE COVERAGE RATIO" means, with respect to any
determination date, the ratio of (x) Consolidated Cash Flow Available for Fixed
Charges for the prior four full fiscal quarters (the "FOUR QUARTER PERIOD") for
which financial results have been reported immediately preceding the
determination date (the "TRANSACTION DATE"), to (y) the aggregate Consolidated
Interest Incurred for the Four Quarter Period. For purposes of this definition,
"Consolidated Cash Flow Available for Fixed Charges" and "Consolidated Interest
Incurred" shall be calculated after giving effect on a pro forma basis for the
period of such calculation to
(1) the incurrence or the repayment, repurchase, defeasance or other
discharge or the assumption by another Person that is not an Affiliate
(collectively, "REPAYMENT") of any Indebtedness of the Company or any
Restricted Subsidiary (and the application of the proceeds thereof) giving
rise to the need to make such calculation, and any incurrence or repayment
of other Indebtedness (and the application of the proceeds thereof), at any
time on or after the first day of the Four Quarter Period and on or prior to
the Transaction Date, as if such incurrence or repayment, as the case may be
(and the application of the proceeds thereof), occurred on the first day of
the Four Quarter Period, except that Indebtedness under revolving credit
facilities shall be deemed to be the average daily balance of such
Indebtedness during the Four Quarter Period (as reduced on such pro forma
basis by the application of any proceeds of the incurrence of Indebtedness
giving rise to the need to make such calculation);
(2) any Asset Disposition or Asset Acquisition (including, without
limitation, any Asset Acquisition giving rise to the need to make such
calculation as a result of the Company or any Restricted Subsidiary
(including any Person that becomes a Restricted Subsidiary as a result of
any such Asset Acquisition) incurring Acquired Indebtedness at any time on
or after the first day of the Four Quarter Period and on or prior to the
Transaction Date), as if such Asset Disposition or Asset Acquisition
(including the incurrence or repayment of any such Indebtedness) and the
inclusion, notwithstanding clause (2) of the definition of "Consolidated Net
Income," of any Consolidated Cash Flow Available for Fixed Charges
associated with such Asset Acquisition as if it occurred on the first day of
the Four Quarter Period; provided, however, that the Consolidated Cash Flow
Available for Fixed Charges associated with any Asset Acquisition shall not
be included to the extent the net income so associated would be excluded
pursuant to the definition of "Consolidated Net Income," other than clause
(2) thereof, as if it applied to the Person or assets involved before they
were acquired; and
(3) the Consolidated Cash Flow Available for Fixed Charges and the
Consolidated Interest Incurred attributable to discontinued operations, as
determined in accordance with GAAP, shall be excluded.
Furthermore, in calculating "Consolidated Cash Flow Available for Fixed
Charges" for purposes of determining the denominator (but not the numerator) of
this "Consolidated Fixed Charge Coverage Ratio,"
(a) interest on Indebtedness in respect of which a pro forma calculation
is required that is determined on a fluctuating basis as of the Transaction
Date (including Indebtedness actually incurred on the Transaction Date) and
which will continue to be so determined thereafter shall be deemed to have
accrued at a fixed rate per annum equal to the rate of interest on such
Indebtedness in effect on the Transaction Date; and
(b) notwithstanding clause (a) above, interest on such Indebtedness
determined on a fluctuating basis, to the extent such interest is covered by
agreements relating to Interest Protection Agreements, shall be deemed to
accrue at the rate per annum resulting after giving effect to the operation
of such agreements.
"CONSOLIDATED INTEREST EXPENSE" of the Company for any period means the
Interest Expense of the Company and the Restricted Subsidiaries for such period,
determined on a consolidated basis in accordance with GAAP.
"CONSOLIDATED INTEREST INCURRED" for any period means the Interest Incurred
of the Company and the Restricted Subsidiaries for such period, determined on a
consolidated basis in accordance with GAAP.
"CONSOLIDATED NET INCOME" for any period means the aggregate net income (or
loss) of the Company and its Subsidiaries for such period, determined on a
consolidated basis in accordance with GAAP; provided that there will be excluded
from such net income (loss) (to the extent otherwise included therein), without
duplication:
(1) the net income (or loss) of (x) any Unrestricted Subsidiary (other
than a Mortgage Subsidiary) or (y) any Person (other than a Restricted
Subsidiary) in which any Person other than the Company or any Restricted
Subsidiary has an
42
ownership interest, except, in each case, to the extent that any such income
has actually been received by the Company or any Restricted Subsidiary in
the form of cash dividends or similar cash distributions during such period,
which dividends or distributions are not in excess of the Company's or such
Restricted Subsidiary's (as applicable) pro rata share of such Unrestricted
Subsidiary's or such other Person's net income earned during such period,
(2) except to the extent includable in Consolidated Net Income pursuant
to the foregoing clause (1), the net income (or loss) of any Person that
accrued prior to the date that (a) such Person becomes a Restricted
Subsidiary or is merged with or into or consolidated with the Company or any
of its Restricted Subsidiaries (except, in the case of an Unrestricted
Subsidiary that is redesignated a Restricted Subsidiary during such period,
to the extent of its retained earnings from the beginning of such period to
the date of such redesignation) or (b) the assets of such Person are
acquired by the Company or any Restricted Subsidiary,
(3) the net income of any Restricted Subsidiary to the extent that (but
only so long as) the declaration or payment of dividends or similar
distributions by such Restricted Subsidiary of that income is not permitted
by operation of the terms of its charter or any agreement, instrument,
judgment, decree, order, statute, rule or governmental regulation applicable
to that Restricted Subsidiary during such period,
(4) the gains or losses, together with any related provision for taxes,
realized during such period by the Company or any Restricted Subsidiary
resulting from (a) the acquisition of securities, or extinguishment of
Indebtedness, of the Company or any Restricted Subsidiary or (b) any Asset
Disposition by the Company or any Restricted Subsidiary,
(5) any extraordinary gain or loss together with any related provision
for taxes, realized by the Company or any Restricted Subsidiary, and
(6) any non-recurring expense recorded by the Company or any Restricted
Subsidiary in connection with a merger accounted for as a
"pooling-of-interests" transaction;
provided, further, that for purposes of calculating Consolidated Net Income
solely as it relates to clause (3) of the first paragraph of the "Limitations on
Restricted Payments" covenant, clause (4)(b) above shall not be applicable.
"CONSOLIDATED NET WORTH" of any Person as of any date means the
stockholders' equity (including any Preferred Stock that is classified as equity
under GAAP, other than Disqualified Stock) of such Person and its Restricted
Subsidiaries on a consolidated basis at the end of the fiscal quarter
immediately preceding such date, as determined in accordance with GAAP, less any
amount attributable to Unrestricted Subsidiaries.
"CONSOLIDATED TANGIBLE ASSETS" of the Company as of any date means the total
amount of assets of the Company and its Restricted Subsidiaries (less applicable
reserves) on a consolidated basis at the end of the fiscal quarter immediately
preceding such date, as determined in accordance with GAAP, less (1) Intangible
Assets and (2) appropriate adjustments on account of minority interests of other
Persons holding equity investments in Restricted Subsidiaries.
"CONTINUING DIRECTOR" means a director who either was a member of the Board
of Directors of the Company on the date of the Indenture or who became a
director of the Company subsequent to such date and whose election, or
nomination for election by the Company's stockholders, was duly approved by a
majority of the Continuing Directors on the Board of Directors of the Company at
the time of such approval, either by a specific vote or by approval of the proxy
statement issued by the Company on behalf of the entire Board of Directors of
the Company in which such individual is named as nominee for director.
"CONTROL", when used with respect to any Person, means the power to direct
the management and policies of such Person, directly or indirectly, whether
through the ownership of voting securities, by contract or otherwise; and the
terms "CONTROLLING" and "CONTROLLED" have meanings correlative to the foregoing.
"CREDIT FACILITIES" means, collectively, each of the credit facilities of
the Company or one or more Restricted Subsidiaries in existence on the date of
the Indenture and one or more other facilities among or between the Company or
one or more Restricted Subsidiaries and one or more lenders pursuant to which
the Company or any Restricted Subsidiary may incur indebtedness for working
capital and general corporate purposes (including acquisitions), as any such
facility or line of credit may be amended, restated, supplemented or otherwise
modified from time to time, and includes any agreement extending the maturity
of, increasing the amount of, or restructuring, all or any portion of the
Indebtedness under any such facility or line of credit or any successor
facilities or lines of credit and includes any facility or line of credit with
one or
43
more lenders refinancing or replacing all or any portion of the Indebtedness
under any such facility or line of credit or any successor facility or line of
credit.
"CURRENCY AGREEMENT" of any Person means any foreign exchange contract,
currency swap agreement or other similar agreement or arrangement designed to
protect such Person or any of its Subsidiaries against fluctuations in currency
values.
"CUSTODIAN" means any receiver, trustee, assignee, liquidator or similar
official under any Bankruptcy Law.
"DEFAULT" means any event, act or condition that is, or after notice or the
passage of time or both would be, an Event of Default.
"DESIGNATION AMOUNT" has the meaning provided in the definition of
Unrestricted Subsidiary.
"DISQUALIFIED STOCK" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, (1) matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable
at the option of the holder thereof, in whole or in part, on or prior to the
final maturity date of the Notes or (2) is convertible into or exchangeable or
exercisable for (whether at the option of the issuer or the holder thereof) (a)
debt securities or (b) any Capital Stock referred to in (1) above, in each case,
at any time prior to the final maturity date of the Notes; provided, however,
that any Capital Stock that would not constitute Disqualified Stock but for
provisions thereof giving holders thereof (or the holders of any security into
or for which such Capital Stock is convertible, exchangeable or exercisable) the
right to require the Company to repurchase or redeem such Capital Stock upon the
occurrence of a change in control occurring prior to the final maturity date of
the Notes shall not constitute Disqualified Stock if the change in control
provisions applicable to such Capital Stock are no more favorable to such
holders than the provisions described under the caption "Certain
Covenants--Repurchase of Notes upon Change of Control" and such Capital Stock
specifically provides that the Company will not repurchase or redeem any such
Capital Stock pursuant to such provisions prior to the Company's purchase of the
Notes as are required pursuant to the provisions described under the caption
"Certain Covenants-Repurchase of Notes upon Change of Control."
"EVENT OF DEFAULT" has the meaning set forth in "Default."
"FAIR MARKET VALUE" means, with respect to any asset, the price (after
taking into account any liabilities relating to such assets) that would be
negotiated in an arm's-length transaction for cash between a willing seller and
a willing and able buyer, neither of which is under any compulsion to complete
the transaction, as such price is determined in good faith by the Board of
Directors of the Company or a duly authorized committee thereof, as evidenced by
a resolution of such Board or committee.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States, as in effect from time to time.
"GUARANTEE" means the guarantee of the Notes by each Guarantor under the
Indenture.
"GUARANTORS" means (i) initially, each of:
<Table>
Allegra, LLC, a California limited liability company
AP LHI, Inc., a California corporation
AP Western GP Corporation, a Delaware corporation
AP WP Operating Corporation, a Delaware corporation
AP WP Partners, L.P., a Delaware limited partnership
APLAM, LLC, a California limited liability company
C. Richard Dobson Builders, Inc., a Virginia corporation
CH Investments of Texas, Inc., a Delaware corporation
CHI Construction Company, an Arizona corporation
CHTEX of Texas, Inc., a Delaware corporation
Continental Homes of Florida, Inc., a Florida corporation
Continental Homes of Texas, L.P., a Texas limited partnership
</Table>
44
<Table>
Continental Homes, Inc., a Delaware corporation
Continental Residential, Inc., a California corporation
D.R. Horton -- Emerald, Ltd., a Texas limited partnership
D.R. Horton -- Texas, Ltd., a Texas limited partnership
D.R. Horton Los Angeles Holding Company, Inc., a California corporation
D.R. Horton Management Company, Ltd., a Texas limited partnership
D.R. Horton San Diego Holding Company, Inc., a California corporation
D.R. Horton, Inc. -- Birmingham, an Alabama corporation
D.R. Horton, Inc. -- Chicago, a Delaware corporation
D.R. Horton, Inc. -- Denver, a Delaware corporation
D.R. Horton, Inc. -- Dietz-Crane, a Delaware corporation
D.R. Horton, Inc. -- Greensboro, a Delaware corporation
D.R. Horton, Inc. -- Jacksonville, a Delaware corporation
D.R. Horton, Inc. -- Louisville, a Delaware corporation
D.R. Horton, Inc. -- Minnesota, a Delaware corporation
D.R. Horton, Inc. -- New Jersey, a Delaware corporation
D.R. Horton, Inc. -- Portland, a Delaware corporation
D.R. Horton, Inc. -- Sacramento, a California corporation
D.R. Horton, Inc. -- Torrey, a Delaware corporation
D.R. Horton-Schuler Homes, LLC, a Delaware limited liability company
DRH Cambridge Homes, Inc., a California corporation
DRH Cambridge Homes, LLC, a Delaware limited liability company
DRH Construction, Inc., a Delaware corporation
DRH Regrem II, Inc., a Delaware corporation
DRH Regrem III, Inc., a Delaware corporation
DRH Regrem IV, Inc., a Delaware corporation
DRH Regrem V, Inc., a Delaware corporation
DRH Regrem VII, LP, a Texas limited partnership
DRH Regrem VIII, LLC, a Delaware limited liability company
DRH Southwest Construction, Inc., a California corporation
DRH Title Company of Colorado, Inc., a Colorado corporation
DRH Tucson Construction, Inc., a Delaware corporation
DRHI, Inc., a Delaware corporation
HPH Homebuilders 2000 L.P., a California limited partnership
KDB Homes, Inc., a Delaware corporation
LAMCO Housing, Inc., a California corporation
Meadows I, Ltd., a Delaware limited partnership
Meadows II, Ltd., a Delaware limited partnership
Meadows VIII, Ltd., a Delaware limited partnership
Meadows IX, Inc., a New Jersey corporation
Meadows X, Inc., a New Jersey corporation
Melody Homes, Inc., a Delaware corporation
Melmort Co., a Colorado corporation
Porter GP LLC, a Delaware limited liability company
Schuler Homes of Arizona LLC, a Delaware limited liability company
Schuler Homes of California, Inc., a California corporation
Schuler Homes of Oregon, Inc., an Oregon corporation
Schuler Homes of Washington, Inc., a Washington corporation
Schuler Mortgage, Inc., a Delaware corporation
Schuler Realty Hawaii, Inc., a Hawaii corporation
Schuler Realty/Maui, Inc., a Hawaii corporation
SGS Communities at Grande Quay, LLC, a New Jersey limited liability company
SHA Construction LLC, a Delaware limited liability company
SHLR of California, Inc., a California corporation
SHLR of Colorado, Inc., a Colorado corporation
SHLR of Nevada, Inc., a Nevada corporation
SHLR of Utah, Inc., a Utah corporation
SHLR of Washington, Inc., a Washington corporation
</Table>
45
<Table>
SRHI LLC, a Delaware limited liability company
SSHI LLC, a Delaware limited liability company
Vertical Construction Corporation, a Delaware corporation
Western Pacific Funding, Inc., a California corporation
Western Pacific Housing Co., a California corporation
Western Pacific Housing Management, Inc., a California corporation
Western Pacific Housing, Inc., a Delaware corporation
Western Pacific Housing -- Antigua, LLC, a Delaware limited liability company
Western Pacific Housing -- Aviara, L.P., a California limited partnership
Western Pacific Housing -- Boardwalk, LLC, a Delaware limited liability company
Western Pacific Housing -- Broadway, LLC, a Delaware limited liability company
Western Pacific Housing -- Canyon Park, LLC, a Delaware limited liability company
Western Pacific Housing -- Carmel, LLC, a Delaware limited liability company
Western Pacific Housing -- Carrillo, LLC, a Delaware limited liability company
Western Pacific Housing -- Communications Hill, LLC, a Delaware limited liability company
Western Pacific Housing -- Copper Canyon, LLC, a Delaware limited liability company
Western Pacific Housing -- Creekside, LLC, a Delaware limited liability company
Western Pacific Housing -- Culver City, L.P., a California limited partnership
Western Pacific Housing -- Del Valle, LLC, a Delaware limited liability company
Western Pacific Housing -- Lomas Verdes, LLC, a Delaware limited liability company
Western Pacific Housing -- Lost Hills Park, LLC, a Delaware limited liability company
Western Pacific Housing -- McGonigle Canyon, LLC, a Delaware limited liability company
Western Pacific Housing -- Mountaingate, L.P., a California limited partnership
Western Pacific Housing -- Norco Estates, LLC, a Delaware limited liability company
Western Pacific Housing -- Oso, L.P., a California limited partnership
Western Pacific Housing -- Pacific Park II, LLC, a Delaware limited liability company
Western Pacific Housing -- Park Avenue East, LLC, a Delaware limited liability company
Western Pacific Housing -- Park Avenue West, LLC, a Delaware limited liability company
Western Pacific Housing -- Playa Vista, LLC, a Delaware limited liability company
Western Pacific Housing -- Poinsettia, L.P., a California limited partnership
Western Pacific Housing -- River Ridge, LLC, a Delaware limited liability company
Western Pacific Housing -- Robinhood Ridge, LLC, a Delaware limited liability company
Western Pacific Housing -- Santa Fe, LLC, a Delaware limited liability company
Western Pacific Housing -- Scripps II, LLC, a Delaware limited liability company
Western Pacific Housing -- Scripps, L.P., a California limited partnership
Western Pacific Housing -- Seacove, L.P., a California limited partnership
Western Pacific Housing -- Studio 528, LLC, a Delaware limited liability company
Western Pacific Housing -- Terra Bay Duets, LLC, a Delaware limited liability company
Western Pacific Housing -- Torrance, LLC, a Delaware limited liability company
Western Pacific Housing -- Torrey Commercial, LLC, a Delaware limited liability company
Western Pacific Housing -- Torrey Meadows, LLC, a Delaware limited liability company
Western Pacific Housing -- Torrey Multi-Family, LLC, a Delaware limited liability company
Western Pacific Housing -- Torrey Village Center, LLC, a Delaware limited liability company
Western Pacific Housing -- Vineyard Terrace, LLC, a Delaware limited liability company
Western Pacific Housing -- Windemere, LLC, a Delaware limited liability company
Western Pacific Housing -- Windflower, L.P., a California limited partnership
WPH -- Camino Ruiz, LLC, a Delaware limited liability company
WPH -- HPH, LLC, a Delaware limited liability company
</Table>
and (ii) each of the Company's Subsidiaries which becomes a guarantor of the
Notes pursuant to the provisions of the Indenture.
"HOLDER" means the Person in whose name a Note is registered in the books of
the Registrar for the Notes.
"INCURRENCE" has the meaning set forth in "-- Certain Covenants --
Limitations on Indebtedness."
"INDEBTEDNESS" of any Person means, without duplication,
46
(1) any liability of such Person (a) for borrowed money or under any
reimbursement obligation relating to a letter of credit or other similar
instruments (other than standby letters of credit or similar instruments
issued for the benefit of or surety, performance, completion or payment
bonds, earnest money notes or similar purpose undertakings or
indemnifications issued by, such Person in the ordinary course of business),
(b) evidenced by a bond, note, debenture or similar instrument (including a
purchase money obligation) given in connection with the acquisition of any
businesses, properties or assets of any kind or with services incurred in
connection with capital expenditures (other than any obligation to pay a
contingent purchase price which, as of the date of incurrence thereof is not
required to be recorded as a liability in accordance with GAAP), or (c) in
respect of Capitalized Lease Obligations (to the extent of the Attributable
Debt in respect thereof),
(2) any Indebtedness of others that such Person has guaranteed to the
extent of the guarantee,
(3) to the extent not otherwise included, the obligations of such Person
under Currency Agreements or Interest Protection Agreements to the extent
recorded as liabilities not constituting Interest Incurred, net of amounts
recorded as assets in respect of such agreements, in accordance with GAAP,
and
(4) all Indebtedness of others secured by a Lien on any asset of such
Person, whether or not such Indebtedness is assumed by such Person;
provided, that Indebtedness shall not include accounts payable, liabilities to
trade creditors of such Person or other accrued expenses arising in the ordinary
course of business. The amount of Indebtedness of any Person at any date shall
be (a) the outstanding balance at such date of all unconditional obligations as
described above, net of any unamortized discount to be accounted for as Interest
Expense, in accordance with GAAP, (b) the maximum liability of such Person for
any contingent obligations under clause (2) above at such date, net of any
unamortized discount to be accounted for as Interest Expense in accordance with
GAAP, and (c) in the case of clause (4) above, the lesser of (x) the fair market
value of any asset subject to a Lien securing the Indebtedness of others on the
date that the Lien attaches and (y) the amount of the Indebtedness secured.
"INTANGIBLE ASSETS" of the Company means all unamortized debt discount and
expense, unamortized deferred charges, goodwill, patents, trademarks, service
marks, trade names, copyrights, write-ups of assets over their prior carrying
value (other than write-ups which occurred prior to the Issue Date and other
than, in connection with the acquisition of an asset, the write-up of the value
of such asset (within one year of its acquisition) to its fair market value in
accordance with GAAP) and all other items which would be treated as intangible
on the consolidated balance sheet of the Company and the Restricted Subsidiaries
prepared in accordance with GAAP.
"INTEREST" means, with respect to the Notes, the sum of any interest and any
Liquidated Damages on the Notes.
"INTEREST EXPENSE" of any Person for any period means, without duplication,
the aggregate amount of (i) interest which, in conformity with GAAP, would be
set opposite the caption "interest expense" or any like caption on an income
statement for such Person (including, without limitation, imputed interest
included in Capitalized Lease Obligations, all commissions, discounts and other
fees and charges owed with respect to letters of credit and bankers' acceptance
financing, the net costs (but reduced by net gains) associated with Currency
Agreements and Interest Protection Agreements, amortization of other financing
fees and expenses, the interest portion of any deferred payment obligation,
amortization of discount or premium, if any, and all other noncash interest
expense other than interest and other charges amortized to cost of sales), and
(ii) all interest actually paid by the Company or a Restricted Subsidiary under
any guarantee of Indebtedness (including, without limitation, a guarantee of
principal, interest or any combination thereof) of any Person other than the
Company or any Restricted Subsidiary during such period; provided, that Interest
Expense shall exclude any expense associated with the complete write-off of
financing fees and expenses in connection with the repayment of any
Indebtedness.
"INTEREST INCURRED" of any Person for any period means, without duplication,
the aggregate amount of (1) Interest Expense and (2) all capitalized interest
and amortized debt issuance costs.
"INTEREST PROTECTION AGREEMENT" of any Person means any interest rate swap
agreement, interest rate collar agreement, option or futures contract or other
similar agreement or arrangement designed to protect such Person or any of its
Subsidiaries against fluctuations in interest rates with respect to Debt
permitted to be incurred under the Indenture.
"INVESTMENT GRADE" shall mean BBB- or higher by S&P or Baa3 or higher by
Moody's or the equivalent of such ratings by S&P or Moody's.
47
"INVESTMENTS" of any Person means (i) all investments by such Person in any
other Person in the form of loans, advances or capital contributions, (ii) all
guarantees of Indebtedness or other obligations of any other Person by such
Person, (iii) all purchases (or other acquisitions for consideration) by such
Person of Indebtedness, Capital Stock or other securities of any other Person
and (iv) all other items that would be classified as investments in any other
Person (including, without limitation, purchases of assets outside the ordinary
course of business) on a balance sheet of such Person prepared in accordance
with GAAP.
"ISSUE DATE" means the date on which the Notes are originally issued under
the Indenture.
"LIEN" means, with respect to any Property, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such
Property. For purposes of this definition, a Person shall be deemed to own,
subject to a Lien, any Property which it has acquired or holds subject to the
interest of a vendor or lessor under any conditional sale agreement, capital
lease or other title retention agreement relating to such Property.
"LIQUIDATED DAMAGES" shall have the meaning set forth in the Indenture.
"MARKETABLE SECURITIES" means (a) equity securities that are listed on the
New York Stock Exchange, the American Stock Exchange or The Nasdaq National
Market and (b) debt securities that are rated by a nationally recognized rating
agency, listed on the New York Stock Exchange or the American Stock Exchange or
covered by at least two reputable market makers.
"MOODY'S" means Moody's Investors Service, Inc. or any successor to its debt
rating business.
"MORTGAGE SUBSIDIARY" means any Subsidiary of the Company substantially all
of whose operations consist of the mortgage lending business.
"NET CASH PROCEEDS" means, with respect to an Asset Disposition, cash
payments received (including any cash payments received by way of deferred
payment of principal pursuant to a note or installment receivable or otherwise
(including any cash received upon sale or disposition of such note or
receivable), but only as and when received), excluding any other consideration
received in the form of assumption by the acquiring Person of Indebtedness or
other obligations relating to the Property disposed of in such Asset Disposition
or received in any other non-cash form unless and until such non-cash
consideration is converted into cash therefrom, in each case, net of all legal,
title and recording tax expenses, commissions and other fees and expenses
incurred, and all federal, state and local taxes required to be accrued as a
liability under GAAP as a consequence of such Asset Disposition, and in each
case net of a reasonable reserve for the after-tax cost of any indemnification
or other payments (fixed and contingent) attributable to the seller's
indemnities or other obligations to the purchaser undertaken by the Company or
any of its Restricted Subsidiaries in connection with such Asset Disposition,
and net of all payments made on any Indebtedness which is secured by or relates
to such Property, in accordance with the terms of any Lien or agreement upon or
with respect to such Property or which must by its terms or by applicable law be
repaid out of the proceeds from such Asset Disposition, and net of all
contractually required distributions and payments made to minority interest
holders in Restricted Subsidiaries or joint ventures as a result of such Asset
Disposition.
"NON-RECOURSE INDEBTEDNESS" with respect to any Person means Indebtedness of
such Person for which (1) the sole legal recourse for collection of principal
and interest on such Indebtedness is against the specific property identified in
the instruments evidencing or securing such Indebtedness and such property was
acquired with the proceeds of such Indebtedness or such Indebtedness was
incurred within 90 days after the acquisition of such property and (2) no other
assets of such Person may be realized upon in collection of principal or
interest on such Indebtedness. Indebtedness which is otherwise Non-Recourse
Indebtedness will not lose its character as Non-Recourse Indebtedness because
there is recourse to the borrower, any guarantor or any other Person for (a)
environmental warranties and indemnities, or (b) indemnities for and liabilities
arising from fraud, misrepresentation, misapplication or non-payment of rents,
profits, insurance and condemnation proceeds and other sums actually received by
the borrower from secured assets to be paid to the lender, waste and mechanics'
liens.
"PERMITTED INDEBTEDNESS" means:
(1) Indebtedness under Credit Facilities which does not exceed $1.0
billion principal amount outstanding at any one time;
(2) Indebtedness in respect of obligations of the Company and its
Subsidiaries to the trustees under indentures for debt securities;
48
(3) intercompany debt obligations of the Company to any Restricted
Subsidiary and of any Restricted Subsidiary to the Company or any other
Restricted Subsidiary; provided, however, that any Indebtedness of any
Restricted Subsidiary or the Company owed to any Restricted Subsidiary that
ceases to be a Restricted Subsidiary shall be deemed to be incurred and
shall be treated as an incurrence for purposes of the first paragraph of the
covenant described under "Limitations on Indebtedness" at the time the
Restricted Subsidiary in question ceases to be a Restricted Subsidiary;
(4) Indebtedness of the Company or any Restricted Subsidiary under any
Currency Agreements or Interest Protection Agreements in a notional amount
no greater than the payments due (at the time the related Currency Agreement
or Interest Protection Agreement is entered into) with respect to the
Indebtedness or currency being hedged;
(5) Purchase Money Indebtedness;
(6) Capitalized Lease Obligations;
(7) obligations for, pledge of assets in respect of, and guaranties of,
bond financings of political subdivisions or enterprises thereof in the
ordinary course of business;
(8) Indebtedness secured only by office buildings owned or occupied by
the Company or any Restricted Subsidiary, which Indebtedness does not exceed
$20 million aggregate principal amount outstanding at any one time;
(9) Indebtedness under warehouse lines of credit, repurchase agreements
and Indebtedness secured by mortgage loans and related assets of mortgage
lending Subsidiaries in the ordinary course of a mortgage lending business;
and
(10) Indebtedness of the Company or any Restricted Subsidiary which,
together with all other Indebtedness under this clause (10), does not exceed
$30 million aggregate principal amount outstanding at any one time.
"PERMITTED INVESTMENT" means:
(1) Cash Equivalents;
(2) any Investment in the Company or any Restricted Subsidiary or any
Person that becomes a Restricted Subsidiary as a result of such Investment
or that is consolidated or merged with or into, or transfers all or
substantially all of the assets of it or an operating unit or line of
business to, the Company or a Restricted Subsidiary;
(3) any receivables, loans or other consideration taken by the Company
or any Restricted Subsidiary in connection with any asset sale otherwise
permitted by the Indenture;
(4) Investments received in connection with any bankruptcy or
reorganization proceeding, or as a result of foreclosure, perfection or
enforcement of any Lien or any judgment or settlement of any Person in
exchange for or satisfaction of Indebtedness or other obligations or other
property received from such Person, or for other liabilities or obligations
of such Person created, in accordance with the terms of the Indenture;
(5) Investments in Currency Agreements or Interest Protection Agreements
described in the definition of Permitted Indebtedness;
(6) any loan or advance to an executive officer or director of the
Company or any Restricted Subsidiary made in the ordinary course of
business; provided, however, that any such loan or advance exceeding $1
million shall have been approved by the Board of Directors of the Company or
a committee thereof consisting of disinterested members;
(7) Investments in joint ventures in a Real Estate Business with
unaffiliated third parties in an aggregate amount at any time outstanding
not to exceed 10% of Consolidated Tangible Assets at such time;
(8) Investments in interests in issuances of collateralized mortgage
obligations, mortgages, mortgage loan servicing or other mortgage related
assets; and
(9) Investments in an aggregate amount outstanding not to exceed $100
million.
"PERMITTED LIENS" means:
(1) Liens for taxes, assessments or governmental or quasi-government
charges or claims that (a) are not yet delinquent, (b) are being contested
in good faith by appropriate proceedings and as to which appropriate
reserves have been established or other provisions have been made in
accordance with GAAP, if required, or (c) encumber solely property abandoned
or in the process of being abandoned,
49
(2) statutory Liens of landlords and carriers', warehousemen's,
mechanics', suppliers', materialmen's, repairmen's or other Liens imposed by
law and arising in the ordinary course of business and with respect to
amounts that, to the extent applicable, either (a) are not yet delinquent or
(b) are being contested in good faith by appropriate proceedings and as to
which appropriate reserves have been established or other provisions have
been made in accordance with GAAP, if required,
(3) Liens (other than any Lien imposed by the Employer Retirement Income
Security Act of 1974, as amended) incurred or deposits made in the ordinary
course of business in connection with workers' compensation, unemployment
insurance and other types of social security,
(4) Liens incurred or deposits made to secure the performance of
tenders, bids, leases, statutory obligations, surety and appeal bonds,
development obligations, progress payments, government contracts, utility
services, developer's or other obligations to make on-site or off-site
improvements and other obligations of like nature (exclusive of obligations
for the payment of borrowed money but including the items referred to in the
parenthetical in clause (1)(a) of the definition of "Indebtedness"), in each
case incurred in the ordinary course of business of the Company and the
Restricted Subsidiaries,
(5) attachment or judgment Liens not giving rise to a Default or an
Event of Default,
(6) easements, dedications, assessment district or similar liens in
connection with municipal or special district financing, rights-of-way,
restrictions, reservations and other similar charges, burdens, and other
similar charges or encumbrances not materially interfering with the ordinary
course of business of the Company and the Restricted Subsidiaries,
(7) zoning restrictions, licenses, restrictions on the use of real
property or minor irregularities in title thereto, which do not materially
impair the use of such real property in the ordinary course of business of
the Company and the Restricted Subsidiaries,
(8) Liens securing Indebtedness incurred pursuant to clause (8) or (9)
of the definition of Permitted Indebtedness,
(9) Liens securing Indebtedness of the Company or any Restricted
Subsidiary permitted to be incurred under the Indenture; provided, that the
aggregate amount of all consolidated Indebtedness of the Company and the
Restricted Subsidiaries (including, with respect to Capitalized Lease
Obligations, the Attributable Debt in respect thereof) secured by Liens
(other than Non-Recourse Indebtedness and Indebtedness incurred pursuant to
clause (9) of the definition of Permitted Indebtedness) shall not exceed 40%
of Consolidated Adjusted Tangible Assets at any one time outstanding (after
giving effect to the incurrence of such Indebtedness and the use of the
proceeds thereof),
(10) Liens securing Non-Recourse Indebtedness of the Company or any
Restricted Subsidiary; provided, that such Liens apply only to the property
financed out of the net proceeds of such Non-Recourse Indebtedness within 90
days after the incurrence of such Non-Recourse Indebtedness,
(11) Liens securing Purchase Money Indebtedness; provided that such
Liens apply only to the property acquired, constructed or improved with the
proceeds of such Purchase Money Indebtedness within 90 days after the
incurrence of such Purchase Money Indebtedness,
(12) Liens on property or assets of the Company or any Restricted
Subsidiary securing Indebtedness of the Company or any Restricted Subsidiary
owing to the Company or one or more Restricted Subsidiaries,
(13) leases or subleases granted to others not materially interfering
with the ordinary course of business of the Company and the Restricted
Subsidiaries,
(14) purchase money security interests (including, without limitation,
Capitalized Lease Obligations); provided, that such Liens apply only to the
Property acquired and the related Indebtedness is incurred within 90 days
after the acquisition of such Property,
(15) any right of first refusal, right of first offer, option, contract
or other agreement to sell an asset; provided, that such sale is not
otherwise prohibited under the Indenture,
(16) any right of a lender or lenders to which the Company or a
Restricted Subsidiary may be indebted to offset against, or appropriate and
apply to the payment of such, Indebtedness any and all balances, credits,
deposits, accounts or money of the Company or a Restricted Subsidiary with
or held by such lender or lenders or its Affiliates,
(17) any pledge or deposit of cash or property in conjunction with
obtaining surety, performance, completion or payment bonds and letters of
credit or other similar instruments or providing earnest money obligations,
escrows or similar purpose undertakings or indemnifications in the ordinary
course of business of the Company and its Restricted Subsidiaries,
50
(18) Liens for homeowner and property owner association developments and
assessments,
(19) Liens securing Refinancing Indebtedness; provided, that such Liens
extend only to the assets securing the Indebtedness being refinanced, and
(20) Liens incurred in the ordinary course of business as security for
the obligations of the Company and its Restricted Subsidiaries with respect
to indemnification in respect of title insurance providers.
"PERSON" means any individual, corporation, partnership, limited liability
company, joint venture, incorporated or unincorporated association, joint stock
company, trust, unincorporated organization or government or any agency or
political subdivision thereof.
"PREFERRED STOCK" of any Person means all Capital Stock of such Person which
has a preference in liquidation or with respect to the payment of dividends.
"PROPERTY" of any Person means all types of real, personal, tangible,
intangible or mixed property owned by such Person, whether or not included in
the most recent consolidated balance sheet of such Person and its Subsidiaries
under GAAP.
"PUBLIC EQUITY OFFERING" means an underwritten public offering of Common
Equity of the Company pursuant to an effective registration statement filed
under the Securities Act (excluding registration statements filed on Form S-8 or
any successor form).
"PURCHASE MONEY INDEBTEDNESS" means Indebtedness of the Company or any
Restricted Subsidiary incurred for the purpose of financing all or any part of
the purchase price, or the cost of construction or improvement, of any property
to be used in the ordinary course of business by the Company and the Restricted
Subsidiaries; provided, however, that (1) the aggregate principal amount of such
Indebtedness shall not exceed such purchase price or cost and (2) such
Indebtedness shall be incurred no later than 90 days after the acquisition of
such property or completion of such construction or improvement.
"QUALIFIED STOCK" means Capital Stock of the Company other than Disqualified
Stock.
"RATING AGENCIES" shall mean (1) S&P and (2) Moody's.
"REAL ESTATE BUSINESS" means homebuilding, housing construction, real estate
development or construction and related real estate activities, including the
provision of mortgage financing or title insurance.
"REFINANCING INDEBTEDNESS" means Indebtedness (to the extent not Permitted
Indebtedness) that refunds, refinances or extends any Indebtedness of the
Company or any Restricted Subsidiary (to the extent not Permitted Indebtedness)
outstanding on the Issue Date or other Indebtedness (to the extent not Permitted
Indebtedness) permitted to be incurred by the Company or any Restricted
Subsidiary pursuant to the terms of the Indenture, but only to the extent that
(1) the Refinancing Indebtedness is subordinated to the Notes or the
Guarantees, as the case may be, to the same extent as the Indebtedness being
refunded, refinanced or extended, if at all,
(2) the Refinancing Indebtedness is scheduled to mature either (a) no
earlier than the Indebtedness being refunded, refinanced or extended or (b)
after the maturity date of the Notes,
(3) the portion, if any, of the Refinancing Indebtedness that is
scheduled to mature on or prior to the maturity date of the Notes has a
Weighted Average Life to Maturity at the time such Refinancing Indebtedness
is incurred that is equal to or greater than the Weighted Average Life to
Maturity of the portion of the Indebtedness being refunded, refinanced or
extended that is scheduled to mature on or prior to the maturity date of the
Notes, and
(4) such Refinancing Indebtedness is in an aggregate principal amount
that is equal to or less than the aggregate principal amount then
outstanding under the Indebtedness being refunded, refinanced or extended.
51
"RESTRICTED PAYMENT" means any of the following:
(1) the declaration or payment of any dividend or any other distribution
on Capital Stock of the Company or any Restricted Subsidiary or any payment
made to the direct or indirect holders (in their capacities as such) of
Capital Stock of the Company or any Restricted Subsidiary (other than (a)
dividends or distributions payable solely in Qualified Stock and (b) in the
case of Restricted Subsidiaries, dividends or distributions payable to the
Company or to a Restricted Subsidiary);
(2) the purchase, redemption or other acquisition or retirement for
value of any Capital Stock of the Company or any Restricted Subsidiary
(other than a payment made to the Company or any Restricted Subsidiary); and
(3) any Investment (other than any Permitted Investment), including any
Investment in an Unrestricted Subsidiary (including by the designation of a
Subsidiary of the Company as an Unrestricted Subsidiary).
"RESTRICTED SUBSIDIARY" means any Subsidiary of the Company which is not an
Unrestricted Subsidiary.
"S&P" means Standard and Poor's Ratings Group or any successor to its debt
rating business.
"SIGNIFICANT SUBSIDIARY" means any Subsidiary of the Company which would
constitute a "significant subsidiary" as defined in Rule 1-02 of Regulation S-X
under the Securities Act and the Exchange Act.
"SUBSIDIARY" of any Person means any corporation or other entity of which a
majority of the Capital Stock having ordinary voting power to elect a majority
of the Board of Directors or other persons performing similar functions is at
the time directly or indirectly owned or controlled by such Person.
"SUCCESSOR" has the meaning set forth in "-- Certain Covenants --
Limitations on Mergers, Consolidations and Sale of Assets."
"TRUSTEE" means the party named as such above until a successor replaces
such party in accordance with the applicable provisions of the Indenture and
thereafter means the successor serving hereunder.
"UNRESTRICTED SUBSIDIARY" means any Subsidiary of the Company so designated
by a resolution adopted by the Board of Directors of the Company or a duly
authorized committee thereof as provided below; provided that (a) the holders of
Indebtedness thereof do not have direct or indirect recourse against the Company
or any Restricted Subsidiary, and neither the Company nor any Restricted
Subsidiary otherwise has liability for, any payment obligations in respect of
such Indebtedness (including any undertaking, agreement or instrument evidencing
such Indebtedness), except, in each case, to the extent that the amount thereof
constitutes a Restricted Payment permitted by the Indenture, in the case of
Non-Recourse Indebtedness, to the extent such recourse or liability is for the
matters discussed in the last sentence of the definition of "Non-Recourse
Indebtedness," or to the extent such Indebtedness is a guarantee by such
Subsidiary of Indebtedness of the Company or a Restricted Subsidiary and (b) no
holder of any Indebtedness of such Subsidiary shall have a right to declare a
default on such Indebtedness or cause the payment thereof to be accelerated or
payable prior to its stated maturity as a result of a default on any
Indebtedness of the Company or any Restricted Subsidiary.
Subject to the foregoing, the Board of Directors of the Company or a duly
authorized committee thereof may designate any Subsidiary to be an Unrestricted
Subsidiary; provided, however, that (1) the net amount (the "DESIGNATION
AMOUNT") then outstanding of all previous Investments by the Company and the
Restricted Subsidiaries in such Subsidiary will be deemed to be a Restricted
Payment at the time of such designation and will reduce the amount available for
Restricted Payments under the "Limitations on Restricted Payments" covenant set
forth in the Indenture, to the extent provided therein, (2) the Company must be
permitted under the "Limitations on Restricted Payments" covenant set forth in
the Indenture to make the Restricted Payment deemed to have been made pursuant
to clause (1), and (3) after giving effect to such designation, no Default or
Event of Default shall have occurred or be continuing. In accordance with the
foregoing, and not in limitation thereof, Investments made by any Person in any
Subsidiary of such Person prior to such Person's merger with the Company or any
Restricted Subsidiary (but not in contemplation or anticipation of such merger)
shall not be counted as an Investment by the Company or such Restricted
Subsidiary if such Subsidiary of such Person is designated as an Unrestricted
Subsidiary.
The Board of Directors of the Company or a duly authorized committee thereof
may also redesignate an Unrestricted Subsidiary to be a Restricted Subsidiary;
provided, however, that (1) the Indebtedness of such Unrestricted Subsidiary as
of the date of such redesignation could then be incurred under the "Limitations
on Indebtedness" covenant and (2) immediately after giving effect to such
redesignation and the incurrence of any such additional Indebtedness, the
Company and the Restricted Subsidiaries could incur $1.00 of additional
Indebtedness under the first paragraph of the "Limitations on Indebtedness"
covenant. Any such designation or redesignation by the Board of Directors of the
Company or a committee
52
thereof will be evidenced to the Trustee by the filing with the Trustee of a
certified copy of the resolution of the Board of Directors of the Company or a
committee thereof giving effect to such designation or redesignation and an
Officers' Certificate certifying that such designation or redesignation complied
with the foregoing conditions and setting forth the underlying calculations of
such Officers' Certificate. The designation of any Person as an Unrestricted
Subsidiary shall be deemed to include a designation of all Subsidiaries of such
Person as Unrestricted Subsidiaries; provided, however, that the ownership of
the general partnership interest (or a similar member's interest in a limited
liability company) by an Unrestricted Subsidiary shall not cause a Subsidiary of
the Company of which more than 95% of the equity interest is held by the Company
or one or more Restricted Subsidiaries to be deemed an Unrestricted Subsidiary.
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness
or portion thereof at any date, the number of years obtained by dividing (i) the
sum of the products obtained by multiplying (a) the amount of each then
remaining installment, sinking fund, serial maturity or other required payment
of principal, including, without limitation, payment at final maturity, in
respect thereof, by (b) the number of years (calculated to the nearest
one-twelfth) that will elapse between such date and the making of such payment
by (ii) the sum of all such payments described in clause (i)(a) above.
BOOK-ENTRY, DELIVERY AND FORM OF NOTES
The exchange notes will be represented by one or more global notes (the
"Global Note") in definitive form. The Global Note will be deposited with, or on
behalf of, The Depository Trust Company (the "DTC") and registered in the name
of Cede & Co., as nominee of the DTC (such nominee being referred to herein as
the "Global Note Holder").
The DTC is a limited-purpose trust company which was created to hold
securities for its participating organizations (collectively, the "Participants"
or the "DTC's Participants") and to facilitate the clearance and settlement of
transactions in such securities between Participants through electronic
book-entry changes in accounts of its Participants. The DTC's Participants
include securities brokers and dealers (including the initial purchasers), banks
and trust companies, clearing corporations and certain other organizations.
Indirect access to the DTC's system is also available to other entities such as
banks, brokers, dealers and trust companies (collectively, the "Indirect
Participants" or the "DTC's Indirect Participants") that clear through or
maintain a custodial relationship with a Participant, either directly or
indirectly. Persons who are not Participants may beneficially own securities
held by or on behalf of the DTC only through the DTC's Participants or the DTC's
Indirect Participants.
The Company expects that pursuant to procedures established by the DTC (i)
upon deposit of the Global Note, the DTC will credit the accounts of
Participants designated by the exchange agent with portions of the principal
amount of the Global Note and (ii) ownership of the exchange notes will be shown
on, and the transfer of ownership thereof will be effected only through, records
maintained by the DTC (with respect to the interests of the DTC's Participants),
the DTC's Participants and the DTC's Indirect Participants. Prospective
purchasers are advised that the laws of some states require that certain Persons
take physical delivery in definitive form of securities that they own.
Consequently, the ability to transfer exchange notes will be limited to such
extent.
So long as the Global Note Holder is the registered owner of any exchange
notes, the Global Note Holder will be considered the sole owner or Holder of
such exchange notes outstanding under the Indenture. Except as provided below,
owners of exchange notes will not be entitled to have exchange notes registered
in their names, will not receive or be entitled to receive physical delivery of
exchange notes in definitive form, and will not be considered the Holders
thereof under the Indenture for any purpose, including with respect to the
giving of any directions, instructions or approvals to the Trustee thereunder.
As a result, the ability of a Person having a beneficial interest in Notes
represented by the Global Note to pledge such interest to Persons or entities
that do not participate in the DTC's system or to otherwise take actions in
respect of such interest may be affected by the lack of a physical certificate
evidencing such interest.
Neither the Company, the Trustee, any paying agent nor any registrar of the
exchange notes will have any responsibility or liability for any aspect of the
records relating to or payments made on account of exchange notes by the DTC, or
for maintaining, supervising or reviewing any records of the DTC relating to
such exchange notes.
Payments in respect of the principal, premium, if any, and interest on any
exchange notes registered in the name of a Global Note Holder on the applicable
record date will be payable by the Trustee to or at the direction of such Global
Note Holder in its capacity as the registered holder under the Indenture. Under
the terms of the Indenture, the Company and the Trustee may treat the Persons in
whose names the exchange notes, including the Global Notes, are registered as
the owners thereof for the purpose of receiving such payments and for any and
all other purposes whatsoever. Consequently, neither the Company nor the Trustee
has or will have any responsibility or liability for the payment of such amounts
to beneficial owners of exchange notes (including principal, premium, if any,
and interest).
53
The Company believes, however, that it is currently the policy of the DTC to
immediately credit the accounts of the relevant Participants with such payment,
in amounts proportionate to their respective holdings in principal amount of
beneficial interests in the relevant security as shown on the records of the
DTC. Payments by the DTC's Participants and the DTC's Indirect Participants to
the beneficial owner of exchange notes will be governed by standing instructions
and customary practice and will be the responsibility of the DTC's Participants
or the DTC's Indirect Participants.
As long as the exchange notes are represented by a Global Note, the DTC's
nominee will be the Holder of the exchange notes and therefore will be the only
entity that can exercise a right to repayment or repurchase of the exchange
notes. See "Certain Covenants" under the headings "Repurchase of Notes Upon
Change of Control" and "Limitations on Dispositions of Assets." Notice by
Participants or Indirect Participants or by owners of beneficial interests in a
Global Note held through such Participants or Indirect Participants of the
exercise of the option to elect repayment of beneficial interests in exchange
notes represented by a Global Note must be transmitted to the DTC in accordance
with its procedures on a form required by the DTC and provided to Participants.
In order to ensure that the DTC's nominee will timely exercise a right to
repayment with respect to a particular exchange note, the beneficial owner of
such exchange note must instruct the broker or the Participant or Indirect
Participant through which it holds an interest in such exchange note to notify
the DTC of its desire to exercise a right to repayment. Different firms have
cut-off times for accepting instructions from their customers and, accordingly,
each beneficial owner should consult the broker or other Participant or Indirect
Participant through which it holds an interest in a exchange notes in order to
ascertain the cut-off time by which such an instruction must be given in order
for timely notice to be delivered to the DTC. The Company will not be liable for
any delay in delivery of notices of the exercise of the option to elect
repayment.
Subject to certain conditions, any Person having a beneficial interest in
the Global Note may, upon request to the Company or the Trustee, exchange such
beneficial interest for exchange notes in the form of certificated securities.
Upon any such issuance, the Trustee is required to register such exchange notes
in the name of, and cause the same to be delivered to, such Person or Persons
(or the nominee of any thereof). In addition, if (i) the Company notifies the
Trustee in writing that the DTC is no longer willing or able to act as a DTC and
the Company is unable to locate a qualified successor within 90 days or (ii) the
Company, at its option, notifies the Trustee in writing that it elects to cause
the issuance of exchange notes in the form of certificated securities under the
Indenture, then, upon surrender by the relevant Global Note Holder of its Global
Note, exchange notes in such form will be issued to each Person that such Global
Note Holder and the DTC identify as the beneficial owner of the related exchange
notes.
Neither the Company nor the Trustee shall be liable for any delay by the
related Global Note Holder or the DTC in identifying the beneficial owners of
exchange notes and each such Person may conclusively rely on and shall be
protected in relying on, instructions from the Global Note Holder or of the DTC
for all purposes (including with respect to the registration and delivery, and
the respective principal amounts of the exchange notes to be issued).
The Indenture requires that payments in respect of the exchange notes
(including principal, premium, if any, and interest) be made by wire transfer of
immediately available funds to the accounts specified by the Global Note
Holders. The Company expects that secondary trading in the exchange notes also
will be settled in immediately available funds.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange the exchange notes in accordance with the
procedures set forth in the Indenture. The registrar may require a Holder, among
other things, to furnish appropriate endorsements and transfer documents, and to
pay any taxes and fees required by law or permitted by the Indenture. The
registrar is not required to transfer or exchange any Note selected for
redemption. Also, the registrar is not required to transfer or exchange any
exchange note for a period of 15 days before a selection of the exchange notes
to be redeemed.
The registered Holder of an exchange note will be treated as the owner of it
for all purposes.
54
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the material United States federal income tax
consequences associated with the exchange of old notes for exchange notes and of
the ownership and disposition of the exchange notes by an initial beneficial
owner of the exchange notes. This summary is based on the Internal Revenue Code
of 1986, as amended, or the "CODE", regulations issued thereunder, judicial
authority and administrative rulings and practice, all of which are subject to
change. Any such change may be applied retroactively and may adversely affect
the federal tax consequences described herein. This summary addresses only tax
consequences to holders that purchased the old notes at initial issuance at the
initial offering price, and own the notes as capital assets and not as part of a
"straddle" or a "conversion transaction" for federal income tax purposes, or as
part of some other integrated investment. This summary does not discuss all of
the tax consequences that may be relevant to particular investors or to
investors subject to special treatment under the federal income tax laws (such
as insurance companies, financial institutions, tax-exempt organizations,
retirement plans, regulated investment companies, securities dealers, or
expatriates). Persons considering the exchange of notes should consult their own
tax advisors concerning the application of U.S. federal tax laws to their
particular situations as well as any consequences of the purchase, ownership and
disposition of notes arising under the laws of any other taxing jurisdiction.
THE EXCHANGE OFFER
The exchange of old notes for exchange notes pursuant to this exchange
offer should not be treated as an "exchange" for United States federal income
tax purposes because the exchange notes will not be considered to differ
materially in kind or extent from the old notes. Rather, any exchange notes
received by you should be treated as a continuation of your investment in the
old notes. As a result, there should be no United States federal income tax
consequences to you resulting from the exchange offer. In addition, you should
have the same adjusted issue price, adjusted basis, and holding period in the
exchange notes as you had in the old notes immediately prior to the exchange.
FEDERAL INCOME TAX CONSEQUENCES TO U.S. HOLDERS
The following is a general discussion of certain United States federal
income tax consequences of the purchase, ownership and disposition of the notes
by a holder that is a United States person, or a "U.S. HOLDER." For purposes of
this discussion, a U.S. Holder means a beneficial owner of the notes who or that
is:
o an individual who is a citizen of the United States or a resident of the
United States, as determined for United States federal income tax
purposes;
o a corporation or other business entity treated as a corporation for
United States income tax purposes created or organized in or under the
laws of the United States or any state or political subdivision thereof
or therein (including the District of Columbia);
o an estate the income of which is subject to U.S. federal income taxation
regardless of its source; or
o a trust with respect to which a court within the United States is able
to exercise primary supervision over its administration, and one or more
United States persons have the authority to control all of its
substantial decisions, or certain electing trusts that were in existence
on August 19, 1996, and were treated as a domestic trusts on that date.
If a partnership or other entity taxable as a partnership holds the notes,
the tax treatment of a partner will generally depend on the status of the
partner and the activities of the partnership. Any such partner should consult
its tax advisor as to the tax consequences.
An individual may, subject to certain exceptions, be deemed to be a resident
of the United States by reason of being present in the United States for at
least 31 days in the calendar year and for an aggregate of at least 183 days
during a three-year period ending in the current calendar year (counting for
such purposes all of the days present in the current year, one-third of the days
present in the immediately preceding year, and one-sixth of the days present in
the second preceding year). The term "United States" as used here refers to the
United States of America, including the states and the District of Columbia.
Treatment of Interest
Stated interest on the notes will be taxable to a U.S. Holder as ordinary
income as the interest accrues or is paid (in accordance with the U.S. Holder's
method of tax accounting).
55
Treatment of Dispositions of Notes
Upon the sale, exchange, retirement or other taxable disposition of a note,
a U.S. Holder will recognize gain or loss equal to the difference between the
amount received on such disposition (other than amounts in respect of accrued
and unpaid interest, which will be taxable as such) and the U.S. Holder's
adjusted tax basis in the note. A U.S. Holder's tax basis in a note will be, in
general, the cost of the note to the U.S. Holder. Gain or loss realized on the
sale, exchange or retirement of a note generally will be capital gain or loss,
and will be long-term capital gain or loss if, at the time of such sale,
exchange or retirement, the note had been held for more than one year. Long term
capital gain recognized by an individual U.S. Holder is generally subject to a
maximum U.S. federal rate of 20%.
Information Reporting and Backup Withholding
When required, we or our paying agent will report to the holders of the
notes and the IRS amounts paid on or with respect to the notes during each
calendar year and the amount of tax, if any, withheld from such payments.
Certain non-corporate U.S. Holders may be subject to backup withholding at a
current rate of 30% on payments made on or with respect to the notes. In
general, backup withholding will apply to a U.S. Holder only if the U.S. Holder:
o fails to furnish its Taxpayer Identification Number (TIN), which for an
individual would be his or her Social Security Number;
o furnishes an incorrect TIN;
o is notified by the IRS that it has failed to properly report payments of
interest and dividends; or
o under certain circumstances, fails to certify, under penalty of perjury,
that it has furnished a correct TIN and has not been notified by the IRS
that it is subject to backup withholding for failure to report interest
and dividend payments.
A U.S. Holder will be eligible for an exemption from withholding by
providing a properly completed IRS Form W-9 to us or our paying agent.
FEDERAL TAX CONSEQUENCES TO NON-U.S. HOLDERS
The following is a general discussion of the U.S. federal income and estate
tax consequences of the ownership and disposition of the notes by a holder that
is not a U.S. Person, or a "NON-U.S. HOLDER." For purposes of the following
discussion, interest and gain on the sale, exchange or other disposition of the
notes will be considered "U.S. trade or business income" if such income or gain
is (i) effectively connected with the conduct of a trade or business in the
United States, and (ii) in the case of a treaty resident, attributable to a
permanent establishment (or in the case of an individual, to a fixed base) in
the United States.
Treatment of Interest
A Non-U.S. Holder will not be subject to U.S. federal income or withholding
tax in respect of interest income on the notes if the interest qualifies for the
so-called portfolio interest exemption. This will be the case if each of the
following requirements is satisfied:
o the interest is not U.S. trade or business income.
o the Non-U.S. Holder provides to us or our paying agent the appropriate
certification.
o the Non-U.S. Holder does not actually or constructively own 10% or more
of the voting power of our stock.
o the Non-U.S. Holder is not a "controlled foreign corporation" that is
actually or constructively related to us.
Under current law, the certification requirement will be satisfied in either
of the following two circumstances:
o if the Non-U.S. Holder provides to us or our paying agent a statement on
IRS Form W-8BEN (or suitable successor form), together with all
appropriate attachments, signed under penalties of perjury, identifying
the Non-U.S. Holder by name and address and stating, among other things,
that the Non-U.S. Holder is not a United States person.
56
o if a note is held through a securities clearing organization, bank or
another financial institution that holds customers' securities in the
ordinary course of its trade or business, (i) the Non-U.S. Holder
provides such a form to the organization or institution, and (ii) the
organization or institution, under penalty of perjury, certifies to us
that it has received such statement from the beneficial owner or another
intermediary and furnishes us or our paying agent with a copy.
Alternative documentation procedures may also be available for satisfying
the certification requirement described above. For instance, under one such
option, a withholding agent would be allowed to rely on an IRS Form W-8IMY, or
suitable substitute or successor form, furnished by a financial institution or
other intermediary on behalf of one or more beneficial owners or other
intermediaries without having to obtain the beneficial owner certificate
described in the preceding paragraph, provided that the financial institution or
intermediary has entered into a withholding agreement with the IRS and thus is a
qualified intermediary. Under another option, an authorized foreign agent of a
U.S. withholding agent would be permitted to act on behalf of the U.S.
withholding agent, provided specified conditions are met. With respect to the
certification requirement for notes that are held by a foreign partnership, the
regulations provide that unless the foreign partnership has entered into a
withholding agreement with the IRS, the foreign partnership will be required, in
addition to providing an intermediary Form W-8IMY, to attach an appropriate
certification by each partner. Prospective investors, including foreign
partnerships and their partners, should consult their tax advisors regarding
possible additional reporting requirements.
If the portfolio interest exemption is not satisfied, a 30% withholding tax
will apply to interest income on the notes paid to such Non-U.S. Holder, unless
one of the following two exceptions is satisfied. The first exception is that an
applicable income tax treaty reduces or eliminates such tax, and a Non-U.S.
Holder claiming the benefit of that treaty provides to us or our paying agent a
properly executed IRS Form W-8BEN (or suitable successor or substitute form).
The second exception is that the interest is U.S. trade or business income and
the Non-U.S. Holder provides an appropriate statement to that effect on an IRS
Form W-8ECI (or suitable successor or substitute form). In the latter case, such
Non-U.S. Holder generally will be subject to U.S. federal income tax with
respect to all income from the notes in the same manner as U.S. Holders, as
described above. Additionally, in such event, Non-U.S. Holders that are
corporations could be subject to a branch profits tax on such income.
Treatment of Dispositions of Notes
Generally, a Non-U.S. Holder will not be subject to federal income tax on
gain realized upon the sale, exchange, retirement or other disposition of a note
unless (i) such holder is an individual present in the United States for 183
days or more in the taxable year of the sale, exchange, retirement or other
disposition and certain other conditions are met, or (ii) the gain is U.S. trade
or business income. If the first exception applies, the Non-U.S. Holder will be
subject to tax at a rate of 30% on the amount by which the gains derived from
the sales that are from U.S. sources exceed capital losses allocable to U.S.
sources. If the second exception applies, generally Non-U.S. Holders will be
subject to U.S. federal income tax with respect to such gain in the same manner
as U.S. Holders, as described above. Additionally, in such event, Non-U.S.
Holders that are corporations could be subject to a branch profits tax on such
income.
Treatment of Notes for U.S. Federal Estate Tax Purposes
A note will not be subject to U.S. federal estate tax, provided the Non-U.S.
Holder does not at the time of death actually or constructively own 10% or more
of the combined voting power of our stock and payments of interest on such notes
would not have been considered U.S. trade or business income.
Information Reporting and Backup Withholding
When required, we or our paying agent will report to the IRS and to each
Non-U.S. Holder the amount of any interest paid on the notes in each calendar
year, and the amount of tax withheld, if any, with respect to the payments.
Treasury regulations provide that backup withholding and additional
information reporting will not apply to payments on the notes by us to a
Non-U.S. Holder if the holder certifies as to its status as a Non-U.S. Holder
under penalties of perjury or otherwise establishes an exemption, provided that
neither we nor our paying agent has actual knowledge that the holder is a United
States person or that the conditions of any other exemption are not, in fact,
satisfied.
Information reporting and backup withholding requirements with respect to
the payment of the proceeds from the disposition of the notes by a Non-U.S.
Holder are as follows:
57
o if the proceeds are paid to or through the United States office of a
broker, they generally will be subject to information reporting and
backup withholding at a rate of 30%. However, no such reporting and
withholding is required if:
-- the holder either certifies as to its status as a Non-U.S. Holder
under penalties of perjury on an IRS Form W-8BEN, or a suitable
substitute or successor form, or otherwise establishes an exemption;
and
-- the broker does not have actual knowledge that the holder is a
United States person or that the conditions of any other exemption
are not, in fact, satisfied.
o if the proceeds are paid to or through a non-United States office of a
broker that is not a United States person or a "United States related
person," as defined below, they will not be subject to backup
withholding or information reporting.
o if the proceeds are paid to or through a non-United States office of a
broker that is either a United States person or a "United States related
person," they generally will be subject to information reporting.
However, no such reporting is required if:
-- the holder certifies as to its status as a Non-U.S. Holder under
penalties of perjury or the broker has certain documentary evidence
in its files as to the Non-U.S. Holder's foreign status; and
-- the broker has no actual knowledge to the contrary.
Backup withholding will generally not apply to payments made through foreign
offices of a United States person or "United States related person."
For purposes of this paragraph, a "UNITED STATES RELATED PERSON" is:
o a "controlled foreign corporation" for United States federal income tax
purposes;
o a foreign person 50% or more of whose gross income from all sources for
the three-year period ending with the close of its taxable year
preceding the payment, or for such part of the period that the broker
has been in existence, is derived from activities that are effectively
connected with the conduct of a United States trade or business; or
o a foreign partnership if at any time during its tax year one or more of
its partners are United States persons who, in the aggregate, hold more
than 50% of the income or capital interest of the partnership or if, at
any time during its taxable year, the partnership is engaged in the
conduct of a United States trade or business.
Any amounts withheld under the backup withholding rules from a payment to a
Non-U.S. Holder will be allowed as a refund or a credit against such Non-U.S.
Holder's United States federal income tax liability provided that the requisite
procedures are followed. The information reporting requirements may apply
regardless of whether withholding is required. Copies of the information returns
reporting such interest and withholding also may be made available to the tax
authorities in the country in which a Non-U.S. Holder is a resident under the
provisions of any applicable income tax treaty or agreement.
THE UNITED STATES FEDERAL TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR
GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A HOLDER'S
PARTICULAR SITUATION. HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT
TO THE TAX CONSEQUENCES TO THEM OF THE OWNERSHIP AND DISPOSITION OF THE NOTES,
INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS
AND THE POSSIBLE EFFECTS OF CHANGES IN UNITED STATES FEDERAL OR OTHER TAX LAWS.
58
PLAN OF DISTRIBUTION
Each broker-dealer that receives exchange notes for its own account
pursuant to the exchange offer must acknowledge that it will deliver a
prospectus in connection with any resale of such exchange notes. This
prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of exchange notes received in
exchange for outstanding exchange notes where such outstanding exchange notes
were acquired as a result of market-making activities or other trading
activities. We have agreed that, starting on the expiration date of the exchange
offer and ending on the earlier of:
o the close of business on the 180th day after the expiration date of the
exchange offer, as it may be extended by the number of days during such
period that any stop order shall be in effect suspending the
effectiveness of the exchange offer registration statement, and
o the close of business on the date upon which all such broker-dealers
have sold all exchange notes held by them,
we will make this prospectus, as amended or supplemented, available to any
broker-dealer for use in connection with any such resale. In addition, until
September 4, 2002, all dealers effecting transactions in the exchange notes may
be required to deliver a prospectus.
We will not receive any proceeds from any sale of exchange notes by
broker-dealers. Exchange notes received by broker-dealers for their own account
pursuant to the exchange offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the exchange notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or at negotiated prices. Any such resale may be
made directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers of any such exchange notes. Any broker-dealer
that resells exchange notes that were received by it for its own account
pursuant to the exchange offer and any broker or dealer that participates in a
distribution of such exchange notes may be deemed to be an "underwriter" within
the meaning of the Securities Act, and any profit on any such resale of exchange
notes and any commissions or concessions received by such persons may be deemed
to be underwriting compensation under the Securities Act. The letter of
transmittal states that by acknowledging that it will deliver and by delivering
a prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period that is the earlier of
o the close of business on the 180th day after the expiration date of the
exchange offer, as it may be extended by the number of days during such
period that any stop order shall be in effect suspending the
effectiveness of the exchange offer registration statement, and
o the close of business on the date upon which all such broker-dealers
have sold all exchange notes held by them,
we will promptly send additional copies of this prospectus and any amendment or
supplement to this prospectus to any broker-dealer that requests such documents
in the letter of transmittal. We have agreed to pay all expenses incident to the
exchange offer, including the expenses of one counsel for the holders of the old
notes, other than commissions or concessions of any brokers or dealers and will
indemnify holders of the old notes, including any broker-dealers, against
certain liabilities, including liabilities under the Securities Act.
We have not entered into any arrangements or understandings with any person
to distribute the exchange notes to be received in the exchange offer.
LEGAL MATTERS
Gibson, Dunn & Crutcher LLP, Dallas, Texas, has rendered an opinion with
respect to the validity of the exchange notes. We filed the opinion as an
exhibit to the registration statement of which this prospectus is a part.
EXPERTS
The consolidated financial statements of D.R. Horton, Inc. appearing in
D.R. Horton, Inc.'s Annual Report on Form 10-K for the year ended September 30,
2001, and the balance sheet of Schuler Homes, Inc., the consolidated financial
statements of Schuler Residential, Inc. and the combined financial statements of
Western Pacific Housing appearing in Schuler Homes, Inc.'s Annual Report on Form
10-K for the year ended March 31, 2001, have been audited by
59
Ernst & Young LLP, independent auditors, as set forth in their reports thereon,
included therein and incorporated herein by reference. Such financial statements
are incorporated herein by reference in reliance upon such reports given on the
authority of such firm as experts in accounting and auditing.
With respect to the unaudited condensed consolidated interim financial
information of Schuler Homes, Inc. for the three and nine-month periods ended
December 31, 2001 and 2000, incorporated herein by reference, Ernst & Young LLP
have reported that they have applied limited procedures in accordance with
professional standards for a review of such information. However, their separate
report, included in Schuler Homes, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended December 31, 2001, and incorporated herein by reference, states
that they did not audit and they do not express an opinion on that interim
financial information. Accordingly, the degree of reliance on their report on
such information should be restricted considering the limited nature of the
review procedures applied. The independent auditors are not subject to the
liability provisions of Section 11 of the Securities Act of 1933 for their
report on the unaudited interim financial information because that report is not
a "report" or a "part" of the Registration Statement prepared or certified by
the auditors within the meaning of Sections 7 and 11 of the Securities Act of
1933.
AVAILABLE INFORMATION AND INCORPORATION BY REFERENCE
D.R. Horton, Inc. files annual, quarterly and special reports, proxy
statements and other information with the Securities and Exchange Commission
under the Securities Exchange Act of 1934. You may read and copy this
information at the Public Reference Room of the SEC, 450 Fifth Street, N.W.,
Room 10024, Washington, D.C. 20549, at prescribed rates. You may obtain
information on the operation of the Public Reference Room by calling the SEC at
(800) SEC-0330.
The SEC also maintains an internet world wide web site that contains
reports, proxy statements and other information about issuers, like us, who file
electronically with the SEC. The address of that site is http://www.sec.gov.
You can also inspect reports, proxy statements and other information about
us at the offices of the New York Stock Exchange, Inc., 20 Broad Street, New
York, New York 10005.
We have filed with the SEC a registration statement on Form S-4 that
registers the exchange notes we are offering. The registration statement,
including the attached exhibits and schedules, contains additional relevant
information about us and the securities offered. The rules and regulations of
the SEC allow us to omit certain information included in the registration
statement from this prospectus.
The SEC allows us to "incorporate by reference" information into this
prospectus. This means that we can disclose important information to you by
referring you to another document filed separately with the SEC. The information
incorporated by reference is considered to be part of this prospectus, except
for any information that is superseded by information that is included directly
in this or another document.
This prospectus includes by reference the documents listed below that we
have previously filed with the SEC and that are not included in or delivered
with this document. They contain important information about our company and its
financial condition.
<Table>
<Caption>
FILING PERIOD OR DATE
------ --------------
Annual Report on Form 10-K Year ended September 30, 2001
Quarterly Reports on Form 10-Q Quarter ended December 31, 2001
Quarter ended March 31, 2002
Current Reports on Form 8-K October 22, 2001
November 8, 2001
January 22, 2002
January 24, 2002
January 31, 2002
February 15, 2002
February 21, 2002 (as amended on March 25, 2002)
April 3, 2002
May 29, 2002
</Table>
Pages 101 through 109 under the captions "Directors and Executive
Officers" through "Compensation Committee Interlocks and Insider
Participation," and page 115 under the
60
caption "Section 16(a) Beneficial Ownership Reporting Compliance,"
contained in our Proxy Statement/Prospectus, relating to our 2002
annual meeting of stockholders and incorporated into our Annual
Report on Form 10-K.
This prospectus also includes by reference financial statements relating to
Schuler Homes, Inc., which we recently acquired, included in the documents
listed below that we or Schuler previously filed with the SEC and that are not
included in or delivered with this document. Such financial statements contained
important information about Schuler and its financial condition.
The unaudited financial statements of Western Pacific Housing for
the nine months ended December 31, 2000 contained in pages F-3 through
F-15 of Amendment No. 1 to Registration Statement on Form S-3 of Schuler
Holdings, Inc., as filed with the SEC on March 30, 2001 (File No.
333-56354).
The financial statements of Schuler Homes, Inc., Schuler
Residential, Inc. and Western Pacific Housing contained in pages F-1
through F-37 of the Annual Report on Form 10-K of Schuler Homes, Inc.
for the year ended March 31, 2001 (File No. 0-32461).
The financial statements of Schuler Homes, Inc. contained in pages 5
through 16 of the Quarterly Report on Form 10-Q of Schuler Homes, Inc.
for the quarter ended December 31, 2001 (File No. 0-32461).
All documents that we file pursuant to Section 13(a), 13(c), 14 or 15(d) of
the Exchange Act after the date of this prospectus and prior to the date the
exchange offer is terminated will be deemed to be incorporated by reference into
this prospectus and to be part of this prospectus from their date of filing. Any
statement contained in a document incorporated by reference in this prospectus
will be deemed to be modified or superseded for the purposes of this prospectus
to the extent that a statement contained in this prospectus or in any other
subsequently filed document that also is incorporated in this prospectus
modifies or replaces such statement. Any statement so modified or superseded
will not be deemed, except as so modified or superseded, to constitute a part of
this prospectus.
You can obtain any of the documents incorporated by reference in this
prospectus from us without charge, excluding any exhibits to those documents
unless the exhibit is specifically incorporated by reference in this prospectus.
You can obtain documents incorporated by reference in this prospectus by
requesting them in writing or by telephone from us at the following address:
Assistant to Corporate Counsel
D.R. Horton, Inc.
1901 Ascension Boulevard
Suite 100
Arlington, Texas 76006
(817) 856-8200, ext. 1046
In order to ensure timely delivery of the documents incorporated by
reference in this prospectus, any request should be made no later than five
business days prior to the date on which you plan to make a final decision to
exchange your old notes.
61
================================================================================
ALL TENDERED OLD NOTES, EXECUTED LETTERS OF TRANSMITTAL AND OTHER RELATED
DOCUMENTS SHOULD BE DIRECTED TO THE EXCHANGE AGENT. QUESTIONS AND REQUESTS FOR
ADDITIONAL COPIES OF THIS PROSPECTUS, THE LETTER OF TRANSMITTAL AND OTHER
RELATED DOCUMENTS SHOULD BE ADDRESSED TO THE EXCHANGE AGENT AS FOLLOWS:
BY MAIL, OVERNIGHT COURIER OR HAND:
AMERICAN STOCK TRANSFER & TRUST COMPANY
59 MAIDEN LANE
NEW YORK, NEW YORK 10038
TELEPHONE NUMBER: (800) 937-5449
FACSIMILE TRANSMISSION (FOR ELIGIBLE INSTITUTIONS ONLY):
(718) 234-5001
(Originals of all documents submitted by facsimile should be sent promptly
by hand, overnight courier, or registered or certified mail)
No broker-dealer or other person is authorized in connection with any offer
made hereby to give any information or to make any representations not contained
in this prospectus and, if given or made, the unauthorized information or
representations must not be relied upon as having been authorized by us. This
prospectus does not constitute an offer to sell or a solicitation of an offer to
buy any security other than the securities offered hereby nor does it constitute
an offer to sell or a solicitation of an offer to buy any of the securities
offered hereby to any person in any jurisdiction in which it is unlawful to make
such an offer or solicitation to such person. Neither the delivery of this
prospectus nor any sale made hereunder shall under any circumstances create any
implication that the information contained herein is correct as of any time
subsequent to the date hereof.
Until September 4, 2002 all dealers effecting transactions in the exchange
notes, whether or not participating in this exchange offer, may be required to
deliver a prospectus.
================================================================================
================================================================================
----------
PROSPECTUS
----------
$250,000,000
D.R. HORTON, INC.
OFFER TO EXCHANGE
8.5% SENIOR EXCHANGE NOTES DUE 2012
WHICH HAVE BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933
FOR
ANY AND ALL OF OUR OUTSTANDING
8.5% SENIOR NOTES DUE 2012
June 6, 2002
================================================================================