UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
Current Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
August 27, 1997
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Date of Report (Date of earliest event reported)
THE FORTRESS GROUP, INC.
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(Exact name of registrant as specified in its charter)
Delaware 0-28024 54-1774997
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(State or other jurisdiction (Commission (IRS Employer
of incorporation or organization) File No.) Identification No.)
1921 Gallows Road, Suite 730, Vienna, Virginia 22182
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(Address of principal executive offices and zip code)
(703) 442-4545
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(Registrant's telephone number, including area code)
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Item 2. Acquisition or Disposition of Assets.
On August 18, 1997, The Fortress Group, Inc. (the Company) executed a
definitive agreement (the Agreement) to acquire the homebuilding business
conducted by Don Galloway Homes, Inc. through the purchase of the stock Don
Galloway Homes, Inc. and certain related interests (collectively, Galloway) from
Don A. Galloway and certain members of his family. The transaction closed on
August 27, 1997.
The consideration paid after arm's-length negotiations is up to $39.6
million with an initial consideration of $34.6 million consisting of $5 million
in cash, $5 million in a short-term note, 60,000 shares of the Company's Series
D Convertible Preferred Stock ($6 million liquidation value) and approximately
$18.6 million in assumed debt. Based upon the financial performance of Galloway
through December 31, 2000, an additional amount, not to exceed $5 million, would
be payable to the seller in cash (Additional Consideration). The Agreement
requires the Company to advance to the seller up to $2 million to be applied
against the Additional Consideration with any unearned advance to be repaid with
interest by March 31, 2001.
Each share of the Series D Convertible Preferred Stock, with a $.01
par value and a $100 liquidation value, is non-voting and is convertible into 10
shares of common stock. Additionally, one quarter of the Series D Convertible
Preferred Stock is redeemable on the first through fourth anniversaries of the
issue date with the redemption amount payable in cash or in common stock at the
Company's option.
The $5 million short-term note accrues interest at the prime rate plus
1% and is due on or before September 30, 1997. The note may be extended on a
monthly basis through December 31, 1997 upon the payment of all accrued interest
and issuance of 2,500 shares of Series D Convertible Preferred Stock per month
during the extension.
The Company intends to continue homebuilding operations under the
Galloway name in North Carolina and South Carolina.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Financial Statements of Business Acquired.
The required financial statements for Galloway are not available and
will be filed by amendment hereto no later than 60 days after the date
this report is required to be filed.
(b) Pro Forma Financial Information.
The required pro forma financial information will be filed at the time
the required financial statements for Galloway are filed.
(c) Exhibits.
1 Purchase Agreement dated August 18, 1997 among The Fortress Group,
Inc.; Fortress Galloway, Inc.; Don Galloway Homes, Inc.; Don
Galloway Land, LLC; Galloway Limited Partnership; Thornblade, LLC,
and the Persons named herein.
2 Certificate of Designations, Preferences and Rights of Series D
Convertible Preferred Stock of The Fortress Group, Inc.
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
THE FORTRESS GROUP, INC.
Dated: September 10, 1997 By: /s/ Jamie M. Pirrello
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Jamie M. Pirrello
Chief Financial Officer
PURCHASE AGREEMENT
AMONG
THE FORTRESS GROUP, INC.
FORTRESS GALLOWAY, INC.
DON GALLOWAY HOMES INC.
DON GALLOWAY LAND, LLC
GALLOWAY LIMITED PARTNERSHIP
THORNBLADE, LLC
AND
THE PERSONS NAMED HEREIN
DATED: AUGUST 18, 1997
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PURCHASE AGREEMENT
This purchase agreement (this "Agreement") is made as of this 18th day
of August, 1997, between The Fortress Group, Inc., a Delaware corporation
("Fortress"), Fortress Galloway, Inc., a Delaware corporation ("Fortress
Galloway" and the "Purchaser"), Don Galloway Homes Inc., a North Carolina
corporation ("Galloway Homes"), Don Galloway Land, LLC, a North Carolina limited
liability company ("Galloway Land"), Galloway Limited Partnership, a Colorado
limited partnership ("Galloway Partnership") and Thornblade, LLC, a North
Carolina limited liability company ("Thornblade" and collectively with Galloway
Homes, Galloway Land and Galloway Partnership, the "Acquired Companies"), and
Don A. Galloway, an individual residing in Cheyenne, Wyoming ("Seller").
WHEREAS, the Acquired Companies are engaged in the business of
developing residential lots, and constructing, selling, and financing the sale
of unattached residential single-family homes in North Carolina and South
Carolina (the "Business").
WHEREAS, the Seller desires to sell, and Purchaser desires to purchase,
all of the issued and outstanding shares of capital stock (the "Shares") and the
ownership interests ("Interests) of the Acquired Companies (except Thornblade,
in which Purchaser shall acquire a 99% interest) for the consideration and on
the terms set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants of the parties
set forth in this Agreement, $100 paid to the Acquired Companies, and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
ARTICLE I
SALE OF SHARES AND INTERESTS
1.1 Shares and Interests. Upon the terms and subject to the conditions
set forth herein and in reliance on the respective representations and
warranties of the parties, Seller will sell and transfer all of the issued and
outstanding Shares and existing Interests to Purchaser, and Purchaser will
purchase the Shares and Interests from Seller on the Closing Date and at the
time and place of Closing referred to below, for the consideration and in
accordance with the provisions of Article II hereof.
ARTICLE II
CONSIDERATION AND MANNER OF PAYMENT
2.1 Purchase Price. The purchase price (the "Purchase Price") for the
Shares and Interests and terms of payment will be as follows:
(a) $5,000,000 Cash.
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(i) Earnest Money. Within one day from the execution
of this Agreement Fortress shall deliver $250,000 cash to Mr.
Eric Bland, Attorney at Law, in escrow to be held by Mr. Bland
until the Closing date. Provided the conditions precedent set
forth in Section 7.1 below, are reasonably met, Mr. Bland
shall deliver the amount in escrow to Seller and the amount
($250,000) shall be credited against the $5,000,000 cash
portion of the purchase price at Closing. If Seller fails to
reasonably meet the conditions precedent set forth in Section
7.1 below, does not close, Mr. Bland shall return the amount
held in escrow to Purchaser. Mr. Bland will be indemnified and
held harmless as escrow agent for the earnest money, note, and
pledged stock.
(ii) Subject to a post-closing adjustment pursuant
to Section 2.2, below, at Closing Fortress shall wire transfer
in immediately available funds to an account or accounts
designated by Seller, for the account of Seller, at a bank or
banks specified in writing at least one (1) business day prior
to the Closing Date, $4,750,000.
(b) $6,000,000 in Convertible Preferred Stock. At Closing
Fortress shall deliver to Seller 60,000 shares in Fortress Series D
Convertible Preferred Stock (the "Preferred Stock"), the terms of which
shall be as set forth in the Certificate of Designation annexed hereto
as Exhibit A.
(c) $5,000,000 Promissory Note. At Closing Fortress will
deliver to Seller a promissory notes in the form of Exhibit E totaling
$5,000,000 and it will deliver to Eric Bland as escrow agent the common
stock of Purchaser, a security agreement, stock power and pledge to
secure the note. The note will bear interest at the rate of prime plus
1% as reported in the Wall Street Journal.
(d) Contingent Consideration. Contingent consideration shall
be paid to Seller based upon the Pre-Tax earnings of Acquired Companies
(or any other entity that continues the business operated by the
Acquired Companies) for the years ended December 31, 1997, 1998, 1999,
and 2000 (the "Earn-out"), as set forth in Annex I attached hereto and
made a part hereof.
2.2 Post-Closing Audit.
(a) Closing Combined Balance Sheet. (1) Within forty-five (45)
days of Closing, Purchaser will cause the Acquired Companies to deliver
to Seller audited financial statements of the Acquired Companies for
the calendar year ended December 31, 1996 and an audited combined
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balance sheet for the Acquired Companies dated as of the close of
business on the date of the Closing (the "Closing Combined Balance
Sheet") which Closing Combined Balance Sheet shall set forth the
financial condition, assets and liabilities of the Acquired Companies
as of the close of business on the date of the Closing. Seller shall
cooperate with the preparation of such Closing Combined Balance Sheet
and shall provide such assistance as Fortress shall reasonably request.
The Closing Combined Balance Sheet shall be prepared in accordance with
generally accepted accounting principles ("GAAP") which shall be
applied consistent with past practices of the Acquired Companies;
provided, however, no adjustment will be recognized for purposes of
this Section 2.2 based upon a change in accounting treatment or policy
with respect to an item. The Closing Combined Balance Sheet shall
include footnotes and shall include all adjustments which would be made
if the date of the Closing were year-end. The Acquired Companies will
accrue $20,000 on their financial statements for engaging their pubic
auditor. The year-end audit and the Closing date audit will be prepared
by Price Waterhouse, appointed by and paid for by Fortress. It is the
understanding of the parties that to the extent, if any, the fees
charged by the Acquired Companies' public auditor are less than
$20,000, the surplus will be used to apply against the fees charged by
Price Waterhouse for its services in connection with the year-end audit
and the Closing audit. The Seller's public auditor will have an
opportunity to review the Closing Combined Balance Sheet for a period
of thirty (30) days after Seller's receipt of such balance sheet.
(b) If the Seller shall dispute in good faith any of the
items, calculations, or conclusions of Purchaser's public auditor, the
Seller shall notify Purchaser in writing thereof ("Seller's Notice")
within thirty (30) days after delivery of the Closing Combined Balance
Sheet to the Seller, which notice shall set forth in reasonable detail
the procedures and the amount(s) in dispute. If the Seller does not so
notify Purchaser within such period, the Closing Combined Balance Sheet
shall become final and binding upon all parties at the end of such
period.
(c) If the Seller does so notify Purchaser, the Seller and
Purchaser shall attempt in good faith to resolve such dispute(s). If
Purchaser and the Seller are unable to resolve any disputed item within
ten (10) days after receipt of Seller' Notice, such disputed item(s)
shall be submitted to one of the five largest nationally recognized
accounting firms or any of their successors (other than Purchaser's
public auditor or the auditor of the Acquired Companies or regular
auditors or their successors) chosen by lot which shall be instructed
to arbitrate such disputed item(s) and determine the Net Worth of the
Acquired Companies (as defined below) as of the close of business on
the date of the Closing within thirty (30) days thereafter. The
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resolution of disputes by the accounting firm so selected shall be set
forth in writing and shall be conclusive and binding upon and
non-appealable by the parties, and the Closing Combined Balance Sheet
shall become final and binding upon the date of such resolution. The
costs of such resolution by such accounting firm shall be borne by the
Seller unless the final determination of Net Worth shall exceed that
determined by Purchaser's public auditor by greater than $100,000, in
which case Purchaser shall bear the costs of such resolution. The term
"Net Worth" means the excess of the total assets of the Acquired
Companies over their total liabilities, determined in accordance with
GAAP applied consistent with past practices of the Acquired Companies;
provided, however, no adjustment will be recognized for purposes of
this Section 2.2 based upon a change in accounting treatment or policy
with respect to an item.
(d) Adjustment. The cash portion of the consideration set
forth in Section 2.1 shall be adjusted upward or downward, as the case
may be (the "Adjustment"), on a dollar-for-dollar basis, to the extent
that the Net Worth reflected on the Closing Combined Balance Sheet is
less or more than $5,000,000. It shall be paid ten (10) business days
after completion of the post-closing audit procedure described in
subsections (a)-(c), above.
2.3 Tax Reporting and Allocations. The Purchaser and Seller agree to
treat the transaction for tax purposes as if those companies among the Acquired
Companies which are corporations sold all of their assets in a single
transaction and to make elections under Sections 338(h)(10) and 754 of the Code.
The parties agree to allocate the purchase price, other than the contingent
consideration as set forth in Schedule 2.3, attached.
2.4. Loan. In partial consideration of Seller's promise to sell his
Shares and Interests, Fortress agrees to loan to Seller $2,000,000 at such time
as it pays the promissory note attached as Exhibit E pursuant to the terms of a
promissory note substantially as set forth in Exhibit B attached hereto and made
a part hereof.
ARTICLE III
CLOSING
3.1 Time and Place of Closing. The purchase and sale (the "Closing")
provided for in this Agreement will take place at the offices of Galloway Homes,
11231 Carmel Commons Boulevard, Charlotte, NC 28226, or such other place as the
parties mutually agree upon, at 10:00 a.m. (local time) on August 27, 1997 or at
such earlier time at Purchaser's option described below (the "Closing Date"),
with an effective date for all purposes except tax of 11:59 p.m., August 1, 1997
and with an effective date for tax purposes of 12:01 a.m., September 1, 1997.
Time is of the essence. It is recognized that Seller is entitled pursuant to
Section 6.2(b) to make such cash dividends to the shareholders, partners and
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members of the Acquired Companies up to the Date of Closing as the Acquired
Companies shall deem appropriate, provided the Acquired Companies act reasonably
and in good faith so that no such cash dividends will cause the Net Worth of the
Acquired Companies, on a combined basis, to drop below approximately $5,000,000.
3.2 Deliveries. At the Closing Seller and Fortress will respectively
deliver the closing documents as set forth on the Deliveries Check List for the
Closing of the Agreement among The Fortress Group, Inc., Fortress Galloway,
Inc., Don A. Galloway, Don Galloway Homes Inc., Don Galloway Land, LLC, Galloway
Limited Partnership, and Thornblade, LLC, (the "Deliveries Check List") attached
as Exhibit C hereto and herein incorporated by reference.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE SELLER AND
ACQUIRED COMPANIES
The Seller and the Acquired Companies each jointly and severally
represent and warrant that all of the following representations and warranties
in this Article IV will be true and correct at the time of Closing and the
Seller and the Acquired Companies further jointly and severally represent and
warrant that such representations and warranties as made at the time of Closing
shall survive the Closing for the period specified in Section 9.1.
4.1 Corporate Power and Authority; Effect of Agreement. Schedule 4.1
contains a complete and accurate list for each Acquired Company of its name, its
jurisdiction of organization, and other jurisdictions in which it is authorized
to do business. Each Acquired Company is duly organized, validly existing, and
in good standing under the laws of its state of organization and has all
requisite power and authority to carry on its operations as it is now being
conducted, to own or use the properties and assets it purports to own or use,
and to perform all of its obligations under the Material Contracts. Each
Acquired Company is duly qualified to do business as a foreign entity in good
standing under the laws of each state or other jurisdiction in which either the
ownership or use of properties owned or used by it, or the nature of the
activities conducted by it, requires such qualification and where failure to so
qualify would have a material adverse effect on the Business of the Acquired
Companies taken as a whole. Each Acquired Company which is a corporation has all
requisite corporate power and authority, each Acquired Company which is a
limited partnership has all requisite power and authority under the applicable
limited partnership statutes and each Acquired Company which is a limited
liability company has all requisite power and authority under the applicable
limited liability statutes, to execute and deliver this Agreement, to consummate
the transactions contemplated hereby and thereby and to perform its obligations
hereunder and thereunder. The execution and delivery of this Agreement by the
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Acquired Companies and performance by the Acquired Companies of their
obligations under this Agreement have been duly authorized by all necessary
action on the part of each Acquired Company, in accordance with applicable law
and the respective Articles of Incorporation and Bylaws, Articles of
Organization, Certificate of Limited Partnership, partnership agreement and
operating agreements of the entities. This Agreement has been duly and validly
executed and delivered by the Acquired Companies and constitutes the valid and
binding obligations of the Acquired Companies, enforceable in accordance with
their respective terms, except to the extent that such enforceability may be
limited by bankruptcy, insolvency, reorganization, moratorium or other similar
laws of general applicability relating to or affecting creditors' rights
generally.
4.2 Authority; No Conflict
(a) Except as set forth on Schedule 4.2 and except to the
extent consents are required from third parties or Governmental
Authorities (the "Consents"), the execution, delivery or performance of
this Agreement and the consummation of the transactions contemplated
hereby and thereby will not:
(i) Violate or conflict with or result in a breach of
any provision of any Law, order, permit, judgment, injunction,
decree or other decision of any court or other tribunal or any
Governmental Authority binding on an Acquired Company, or any
of their respective Affiliates, or conflict with or result in
the breach of any of the terms, conditions or provisions
thereof.
(ii) Constitute a default under the respective
Articles of Incorporation the By-laws, Articles of
Organization or Operating Agreement, as the case may be, of an
Acquired Company or of any contract, agreement, commitment,
indenture, mortgage, note, bond, license or other instrument
or obligation to which Acquired Company is a party.
(iii) Constitute an event which would permit any
party to terminate any Material Contract or accelerate the
maturity of any material indebtedness or other material
obligation.
(iv) Result in the creation or imposition of any
material Encumbrance upon the assets of the Acquired
Companies.
(v) Require any authorization, consent, approval,
exemption or other action by or notice to any court or
Governmental Authority.
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Under a heading "Consents", Schedule 4.2 describes each Consent which
to the Knowledge of the Seller is required.
4.3 Minute Books. The minute books of the Acquired Companies which are
corporations contain true and correct copies of (i) the minutes of most of the
materially important meetings of and (ii) all written consents of the board of
directors and owners of the Acquired Companies which are corporations.
4.4 Capitalization. The entire authorized and issued capital stock or
capital interests, as the case may be, of each Acquired Company is listed on
Schedule 4.4, and is issued only to the holders reflected on such Schedule. The
Seller and the are and will be on the Closing date the record and beneficial
owners and holders of the Shares and Interests (other than the one percent
Interest in Thornblade owned by Ridgeline Development Corporation and Hayden
McMahon Development Corporation, which Interest is not being sold pursuant to
this Agreement), free and clear of all Encumbrances, other than the Shareholder
Agreement. No legend or other reference to any purported Encumbrance appears
upon any certificate representing the Shares or Interests of any Acquired
Company. All of the outstanding equity securities and interests of each Acquired
Company have been duly authorized and validly issued and are fully paid and
nonassessable. There are no voting agreements, voting trusts or other agreements
(including cumulative voting rights), commitments or understandings with respect
to any of the Shares or Interests except as disclosed on Schedule 4.4. Except as
disclosed in Schedule 4.4 there are no Contracts relating to the issuance, sale,
or transfer of any equity securities or other securities of any Acquired
Company.
4.5 Articles of Incorporation, Bylaws, Officers and Directors. True and
complete copies of the Articles of Incorporation, and all amendments thereof to
date, and Bylaws of each corporation among the Acquired Companies, as amended to
date, together with the Articles of Organization, Certificate of Limited
Partnership, partnership agreement and operating agreements, as amended to date,
of the other entities making up the Acquired Companies, have been delivered to
Purchaser. Schedule 4.5 is a true and complete list of all of the officers,
directors, managers and general partners, as the case may be, of each Acquired
Company.
4.6 Financial Statements. The Acquired Companies have delivered to
Fortress copies of the following financial statements (the "Financial
Statements").
(a) Audited financial statements of the Acquired Companies for
the fiscal years ended June 30, 1994, 1995, and 1996.
(b) Unaudited financial statements of the Acquired Companies
for the fiscal year ended June 30, 1997.
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Each of the Financial Statements is accurate and complete in all material
respects, is consistent with the books and records of the Acquired
Companies (which in turn, are accurate and complete in all material
respects) and fairly and accurately present the Acquired Companies'
financial condition, assets and liabilities as of their respective dates
and the results of operations for the fiscal years then ended in accordance
with GAAP, consistently applied during the periods which are the subject of
the Financial Statements, except unaudited financial statements which were
or are subject to normal and recurring year-end adjustments which were not
and are not expected to be material in amount and the addition of required
footnotes thereto.
As of the date hereof and as of the Closing, no Acquired Company has any
debts, liabilities or obligations of any nature (whether accrued, absolute,
contingent, direct, indirect, perfected, inchoate, unliquidated or
otherwise), except
(i) to the extent clearly and accurately reflected
and accrued for or fully reserved against in the Financial
Statements, or
(ii) for liabilities specifically delineated as to
nature and amount on the Schedules to this Agreement, or
(iii) for liabilities and obligations which have
arisen after June 30, 1997 in the ordinary course of business
consistent with past custom and practice (none of which is a
liability resulting from breach of contract, material breach
of warranty, tort, infringement claim or lawsuit).
4.7 Material Contracts. Seller has disclosed to Purchaser Material
Contracts to which the Acquired Companies are a party, and except as disclosed
as of or on the date hereof, to the Knowledge of the Acquired Companies, no
Acquired Company is a party to or bound by any Contract that is of a type
described below:
(a) any collective bargaining arrangement with any labor union
nor are any such agreements currently in negotiation or proposed;
(b) any contract in excess of $50,000 for capital expenditures
or the acquisition or construction of fixed assets for or in respect to
real property other than in the ordinary course of business;
(c) any contract with a term in excess of one year for the
purchase, maintenance, acquisition, sale or furnishing of materials,
supplies, merchandise, machinery, equipment, parts or other property or
services (except that the Acquired Companies need not list any such
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contract made in the ordinary course of business which requires
aggregate future payments of less than $100,000);
(d) any contract relating to the borrowing of money, or the
guaranty of another person's borrowing of money, including, without
limitation, all notes, mortgages, indentures and other obligations,
agreements and other instruments for or relating to any lending or
borrowing, including assumed indebtedness;
(e) any contract granting any person an Encumbrance on any of
the assets of an Acquired Company, in whole or in part;
(f) any contract for the cleanup, abatement or other actions
in connection with Hazardous Materials (as defined in Section 4.15),
the remediation of any existing environmental liabilities or relating
to the performance of any environmental audit or study;
(g) any contract granting to any person a first-refusal,
first-offer or similar preferential right to purchase or acquire any of
the assets of the Business other than in the ordinary course of
business;
(h) any contract under which an Acquired Company is--
(i) a lessee or sublessee of any machinery,
equipment, vehicle or other tangible personal property or real
property, or
(ii) a lessor of any real property or tangible
personal property owned by an Acquired Company,
in either case where such personal or real property had an
original value in excess of $50,000 or in the case of leased
real property where the lease payments required were in excess
of $50,000;
(i) any contract providing for the indemnification of any
officer, director, Seller or other person; where such indemnification
may exceed the sum of $50,000;
(j) any joint venture or partnership contract; and
(k) any other contract with a term in excess of one year,
whether or not made in the ordinary course of business, which involves
payments in excess of $100,000.
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The Acquired Companies have provided Fortress with a true and complete
copy of each written Material Contract, including all amendments or other
modifications thereto. Each Material Contract is a valid and binding obligation
of the Acquired Company enforceable in accordance with its terms, and to the
Knowledge of the Acquired Companies is in full force and effect, subject to
bankruptcy, reorganization, receivership and other laws affecting creditors'
rights generally. To the Knowledge of the Acquired Companies the Acquired
Companies have performed all obligations required to be performed by them under
each Material Contract and the Acquired Companies are not, nor, to the Knowledge
of any Acquired Company, is any other party to any Material Contract (with or
without the lapse of time or the giving of notice, or both) in breach or default
in any material respect thereunder; and there exists no condition which, to the
Knowledge of any Acquired Company, would constitute a breach or default
thereunder. No Acquired Company has been notified that any party to any Material
Contract intends to cancel, terminate, not renew or exercise an option under any
Material Contract, whether in connection with the transactions contemplated
hereby or otherwise.
4.8 Home Contracts. Seller has disclosed to Purchaser as of the date
hereof, all Contracts an Acquired Company is a party to or entered into on
behalf thereof pursuant to which an Acquired Company is obligated to construct a
residence or other building or improvement or which relates to the development
of any real property or interest in real property in connection with the
Business.
4.9 Permits. To the Knowledge of the Acquired Companies the Acquired
Companies possess all approvals, authorizations, certificates, consents,
franchises, licenses, permits, rights, variances, and waivers necessary for the
lawful conduct of their operations, the absence of which would materially
adversely affect the conduct of the Acquired Companies' business operations.
(collectively, the "Permits"). Each of the Permits which the Acquired Companies
have is listed on Schedule 4.9 hereto. To the Knowledge of the Acquired
Companies, all Permits are in full force and effect, no violations have occurred
with respect thereto, and to the Knowledge of each Acquired Company no basis
exists for any limitation, revocation, or withdrawal thereof or any denial of
any extension or renewal with respect thereto.
4.10 Properties. Schedule 4.10-1 hereto contains a complete and
accurate list of all real property, leaseholds, or other interests in real
property owned by any Acquired Company. Schedule 4.10-1 shall be organized into
four categories: Owned Property, Leased Real Property, Land Contracts, and
Option Real Property. Under the heading "Owned Property" Schedule 4.10-1
discloses the current list price of each (x) owned lot, (y) model house, and (z)
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`spec' house. Seller will deliver or make available to Fortress copies of deeds
and other instruments (as recorded) by which the Acquired Companies acquired
such real property interests and copies of all title insurance policies,
opinions, abstracts, and surveys in the possession of Seller or the Acquired
Companies and relating to such property or interests.
(a) Access. Except as indicated in Schedule 4.10(a), to the
Knowledge of the Acquired Companies, the Owned Property has all
necessary access to and from public highways, streets, and roads and no
pending or, to the Knowledge of the Acquired Companies, threatened
proceeding or other fact or condition exists that could limit or result
in the termination of such access. Except as indicated in Schedule
4.10(a), the Owned Property is connected to and serviced by electric,
gas, sewage, telephone, and water facilities, which facilities are in
compliance, in all material respects, with all applicable Laws and
installation and connection charges with respect thereto have been paid
in full.
(b) Good and Marketable Title. Except as indicated in Schedule
4.10(b), to the Knowledge of the Acquired Companies each Acquired
Company has good and marketable title in fee simple to its Owned
Property. To the Knowledge of the Acquired Companies, the Owned
Property is free and clear of all Encumbrances and is not subject to
rights of way, building use restrictions, exceptions, variances,
reservations, or limitations of any nature except (i) mortgages or
security interests shown on the Pro-forma Balance Sheet as securing
specified liabilities or obligations, with respect to which no default
(or event that, with notice or lapse of time or both, would constitute
a default) exists, (ii) mortgages or security interests incurred in
connection with the purchase of property or assets after the date of
the Pro-forma Balance Sheet, with respect to which no default (or event
that, with notice or lapse of time or both, would constitute a default)
exists, (iii) liens for current taxes not yet due, and (iv) minor
imperfections of title, if any, none of which is substantial in amount,
materially detracts from the value or impairs the use of the property
subject thereto, or impairs the operations of any Acquired Company, and
(v) zoning laws and other land use restrictions that do not prevent the
present or anticipated use of the property subject thereto.
(c) No Material Breach or Material Default. Except as set
forth in Schedule 4.10(c) hereto, with respect to any agreements,
arrangements, contracts, covenants, conditions, deeds, deeds-of-trust,
rights-of-way, easements, mortgages, restrictions, surveys, title
insurance policies, and other documents granting to the Acquired
Companies title to or an interest in or otherwise affecting their Owned
Property, to the Knowledge of the Acquired Companies, no material
breach or event has occurred that with the giving of notice, the lapse
of time, or both, would constitute a breach or event of default, by a
Acquired Company, or to the Knowledge of the Acquired Companies, any
other Person.
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(d) No Condemnation. Except as indicated in Schedule 4.10(d),
no condemnation, eminent domain, or similar proceeding exists, is
pending or, to the Knowledge of the Acquired Companies, is threatened
with respect to any real property owned by the Acquired Companies.
(e) Compliance with Laws. Except as indicated in Schedule
4.10(e), to the Knowledge of the Acquired Companies, the buildings and
improvements on the Owned Property and the subdivisions of the Owned
Property do not violate, in any material respect, (i) any applicable
Law, including any building, set-back, or zoning law, ordinance,
regulation, or statute, or other governmental restriction in the nature
thereof, or (ii) any restrictive covenant affecting any such property.
(f) Parties in Possession. Except as previously disclosed to
Purchaser, to the Knowledge of the Acquired Companies there are no
parties in possession of any portion of the real property owned by the
Acquired Companies as lessees, tenants at sufferance, or trespassers.
(g) Assessments. Except as set forth in Schedule 4.10(g), no
developer-related charges or assessments for public improvements or
otherwise made against the Owned Property or any lots included therein
are unpaid, including without limitation those for construction of
sewer lines, water lines, storm drainage systems, electric lines,
natural gas lines, streets (including perimeter streets), roads and
curbs.
(h) Subdivision Standards. Except as indicated in Schedule
4.10(h), to the Knowledge of the Acquired Companies, the Owned Property
and all lots included therein conform in all material respects to the
appropriate governmental authority's subdivision standards.
(i) Moratoria. Except as indicated in Schedule 4.10(i), to the
Knowledge of the Acquired Companies, there is no moratorium applicable
to any of the Owned Property on (i) the issuance of building permits
for the construction of houses, or certificates of occupancy therefor,
or (ii) the purchase of sewer or water taps.
(j) Construction Conditions. Except as indicated in Schedule
4.10(j), to the Knowledge of the Acquired Companies, each of the lots
included in the Owned Property is stable and otherwise suitable for the
construction of a residential structure by customary means and without
extraordinary site preparation measures, defined as the expenditure of
more than $2000 over and above customary means.
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(k) Environmental Matters. Except as set forth in Schedule
4.10(k), to the Knowledge of the Acquired Companies, the Owned Property
does not contain wetlands and is not located within a "critical",
"preservation", "conservation" or similar type of area. Except as set
forth in Schedule 4.10(k), to the Knowledge of the Acquired Companies
no portion of the Real Property is situated within a "noise cone" such
that the Federal Housing Administration will not approve mortgages due
to the noise level classification of such Real Property.
(l) Certain Prior Uses. Except as set forth in Schedule
4.10(l), to the Knowledge of the Acquired Companies, none of the Owned
Property has been used as a grave site.
(m) Claims. Except as set forth in Schedule 4.11, no legal
proceeding is pending or, to the Knowledge of the Acquired Companies,
threatened which involves any of the Owned Property or against an
Acquired Company with respect to any of the Owned Property; to the
Knowledge of the Acquired Companies, all of the Owned Property and the
lots included therein are in compliance, in all material respects, with
all applicable zoning and subdivision ordinances; to the Knowledge of
the Acquired Companies, none of the development-site preparation and
construction work performed on the Owned Property has concentrated or
diverted surface water or percolating water improperly onto or from the
Owned Property.
(n) Third Party Rights. Except as set forth in Schedule
4.10(n) or title insurance policies made available to Purchaser, no
Acquired Company has granted to any Person any contract or other right
to the use of any portion of the real property or to the furnishing of
use of any facility or amenity on or relating to the real property.
(o) Zoning. Except as set forth in Schedule 4.10(o), to the
Knowledge of the Acquired Companies all of the Owned Property is zoned
to permit single-family home construction and occupancy thereon.
(p) No Foreign Seller. No Seller is a "foreign person" within
the meaning of Sections 1445 and 7701 of the Code.
Schedule 4.10-2 is to the Knowledge of the Acquired Companies a true
and complete list of each of the trucks, automobiles, machinery, equipment,
furniture, supplies, tools, and other tangible personal property, and assets
owned by, in the possession of, or used by the Acquired Companies in connection
with the Business with a value in excess of $1,000 located on the real property
or reflected on the Pro-forma Balance Sheet (except property sold or otherwise
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disposed of in the ordinary course of Business consistent with past custom and
practices). The Acquired Companies have good and marketable title to, or a valid
leasehold interest in (as indicated on such Schedule), each item listed on
Schedule 4.10-2.
4.11 Litigation. Except as set forth in Schedule 4.11(a) (which shall
disclose the parties to, nature of, and relief sought for each matter to be
disclosed on Schedule 4.11(a)):
(a) There is no suit, action, proceeding, investigation, claim
or order pending or, to the Knowledge of an Acquired Company,
threatened against an Acquired Company, any of the officers or
directors of an Acquired Company, the Seller or the with respect to an
Acquired Company's business or proposed business activities which is
material to an Acquired Company or to which an Acquired Company is
otherwise a party, or which may have a material adverse affect either
on an Acquired Company, its assets, or the Business, before any court,
or before any Governmental Authority (collectively, "Claims"); nor, to
the Knowledge of any Acquired Company, is there any basis for any such
Claims.
(b) No Acquired Company is subject to any judgment, order or
decree of any court or Governmental Authority; nor has it received any
opinion or memorandum from legal counsel to the effect that it is
exposed, from a legal standpoint, to any liability or disadvantage
which may be material to the Business except as set forth in Schedule
4.11(b). No Acquired Company is engaged in any legal action to recover
money due it or damages sustained by it.
(c) To the Knowledge of the Acquired Companies the current
insurance carried by the Acquired Companies is adequate to cover all
pending or threatened Claims and the Acquired Companies have given all
required notice of such Claims to its appropriate insurance carrier(s).
Schedule 4.11 lists the insurer for each Claim covered by insurance or
designates each Claim, or portion of each Claim, as uninsured and the
individual and aggregate policy limits for the insurance covering each
insured Claim and the applicable policy deductibles for each insured
Claim.
(d) Schedule 4.11(d) sets forth all closed litigation matters
(other than workers compensation claims) to which an Acquired Company
was a party during the three years preceding the Closing, the date such
litigation was commenced and concluded, and the nature of the
resolution thereof (including amounts paid in settlement or judgment).
4.12 Compliance with Applicable Material Laws. Except as set forth on
Schedule 4.12, to the Knowledge of the Acquired Companies, each Acquired Company
has complied with all material laws, rules, regulations, writs, injunctions,
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decrees, and orders applicable to it or to the operation of its business
(collectively, "Laws") and has not received any notice of any alleged claim or
threatened claim, violation of, liability or potential responsibility under, any
such Law which has not heretofore been cured and for which there is no remaining
liability other than those not having a material adverse effect on its
operations taken as a whole. Without limiting the generality of the foregoing,
to the Knowledge of the Acquired Companies, each Acquired Company has complied
in all material respects with all applicable federal, state and local Laws
relating to antitrust and trade regulations.
4.13 Seller Benefit Plans. The Seller has delivered to Fortress copies
of all benefit plans of the Acquired Companies, including all "employee benefit
plans" described in Section 3(1) of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), "employee pension benefit plans" described in
Section 3(2) of ERISA, employment agreements and other agreements or
arrangements containing "golden parachute" or other similar provisions, and
deferred compensation agreements (herein referred to as an "employee benefit
plan"), together with true, complete and correct copies of such plans,
agreements and any trusts related thereto, and classifications of employees
covered thereby as of December 31, 1996. Except for the employee benefit plans
disclosed, the Acquired Companies do not sponsor, maintain, or contribute to any
plan, program, fund or arrangement that constitutes an "employee pension benefit
plan," nor have the Acquired Companies any obligation to contribute to or accrue
or pay any benefits under any deferred compensation or retirement funding
arrangement on behalf of any employee or employees (such as, for example, and
without limitation, any individual retirement account or annuity, any "excess
benefit plan" (within the meaning of Section 3(36) of ERISA or any non-qualified
deferred compensation arrangement). Except as disclosed the Acquired Companies
have not, for the five-year period ended June 30, 1997 sponsored, maintained or
contributed to any employee pension benefit nor are the Acquired Companies
required to contribute to any multi-employer plan pursuant to the provisions of
any collective bargaining agreement establishing the terms and conditions or
employment of any employee of an Acquired Company. With respect to each employee
benefit plan to the Knowledge of the Acquired Companies,:
(a) No Acquired Company is now liable to the Pension Benefit
Guaranty Corporation or to any multi-employer employee pension benefit
plan under the provisions of Title IV of ERISA.
(b) All of its employee benefit plans are in substantial
compliance with all applicable provisions of ERISA and the regulations
issued thereunder, as well as with all other applicable federal, state
and local statutes, ordinances and regulations.
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(c) All accrued contribution obligations of the Acquired
Companies with respect to its employee benefit plans have either been
fulfilled in their entirety or are fully reflected on the Pro-forma
Balance Sheet other than those for transition periods.
(d) All such plans that are intended to qualify (the
"Qualified Plans") under Section 401(a) of the Code have been
determined by the Internal Revenue Service to be so qualified, and
copies of such determination letters have been supplied to Purchaser.
(e) All reports and other documents required to be filed with
any governmental agency or distributed to plan participants or
beneficiaries (including, but not limited to, actuarial reports, audits
or tax returns) have been timely filed or distributed.
(f) None of the Seller, any such plan listed in Schedule 4.13,
or an Acquired Company has engaged in any transaction prohibited under
the provisions of Section 4975 of the Code or Section 406 of ERISA.
(g) No such plan has incurred, nor is there any reason for it
to have incurred, a lien under Code Section 412(n) or 401(a)(29) or
ERISA Section 302(f) or 306.
(h) No such plan has incurred an accumulated funding
deficiency, as defined in Section 412 (a) of the Code and Section 302
(1) of ERISA.
(i) There have been no terminations, partial terminations or
discontinuances of contributions to any such Qualified Plan intended to
qualify under Section 401 (a) of the Code without notice to and
approval by the Internal Revenue Service.
(j) No such plan which is subject to the provisions of Title
IV of ERISA has been terminated.
(k) There have been no "reportable events" (as that phrase is
defined in Section 4043 of ERISA) with respect to any such plans.
(l) No Acquired Company has incurred liability under Section
4062 of ERISA.
(m) No event has occurred with respect to a multi-employer
plan which constitutes a complete or partial withdrawal under Title IV
of ERISA.
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4.14 Insurance Policies.
(a) The Acquired Companies have delivered to Purchaser:
(i) true and complete copies of all policies of
insurance to which an Acquired Company is a party or under
which an Acquired Company, or any director of an Acquired
Company, is or has been covered at any time within two years
preceding the date of this Agreement;
(ii) true and complete copies of all pending
applications for policies of insurance; and
(iii) any statement by the auditor of an Acquired
Company's financial statements with regard to the adequacy of
such entity's coverage or of the reserves for claims.
(b) Schedule 4.14(b) describes:
(i) any self-insurance arrangement by or affecting an
Acquired Company, including any reserves established
thereunder;
(ii) any contract or arrangement, other than a policy
of insurance, for the transfer or sharing of any risk by an
Acquired Company; and
(iii) all obligations of the Acquired Companies to
third parties with respect to insurance (including such
obligations under leases and service agreements) and
identifies the policy under which such coverage is provided.
(c) Except as set forth on Schedule 4.14(c), to the Knowledge
of the Acquired Companies:
(i) All insurance policies to which an Acquired
Company is a party or that provide coverage to Seller, or any
director or officer of an Acquired Company:
(A) are valid, outstanding, and
enforceable;
(B) are issued by an insurer that is
financially sound and reputable;
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(C) taken together, provide adequate
insurance for the assets and the operations of the
Acquired Companies for all risks normally insured
against by a Person carrying on the same business or
businesses of the Acquired Companies;
(D) are sufficient for compliance with all
Laws and Contracts to which any of the Acquired
Companies is a party or by which any of them is
bound;
(E) do not provide for any retrospective
premium adjustment or other experience-based
liability on the part of the Acquired Companies;
(ii) The Acquired Companies have not received (A) any
refusal of coverage or any notice that a defense will be
afforded with reservation of rights, or (B) any notice of
cancellation or any other indication that any insurance policy
is no longer in full force or effect or will not be renewed or
that the issuer of any policy is not willing or able to
perform its obligations thereunder.
(iii) The Acquired Companies have paid all premiums
due, and have otherwise performed all of their respective
obligations, under each policy to which any Acquired Company
is a party or that provides coverage to an Acquired Company or
director thereof.
(iv) Except as set forth in Schedule 4.14(e)(iv) the
Acquired Companies have given notice to the insurer of all
claims that may be insured thereby.
4.15 Environment.
(a) Except as set forth in Schedule 4.15, to the Knowledge of
the Acquired Companies --
(i) Each Acquired Company is and at all times has
been, in full compliance with, and has not been and is not in
violation of or liable under, Environmental Requirements, and
(ii) The Acquired Companies possess all required
permits, licenses and certificates, the failure of which to
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have would have a material adverse effect on the Acquired
Companies and have filed all notices or applications required
thereby,
As used herein, "Environmental Requirements" shall mean all applicable
federal, state and local laws, rules, regulations, ordinances and requirements
relating to pollution and protection of the environment, all as amended or
hereafter amended.
(b) Except as disclosed in Schedule 4.15,
(i) No Acquired Company has been subject to, or
received any notice of any private, administrative or judicial
action, or notice of any intended private, administrative or
judicial action relating to the presence or alleged presence
of Hazardous Materials in, under or upon any Real Property
currently or formerly owned, leased or used by (A) an Acquired
Company, or (B) any other person that has, at any time,
disposed of Hazardous Materials on behalf of an Acquired
Company; and
(ii) There is no basis for any such notice or action;
and
(iii) there are no pending or, to the Knowledge of an
Acquired Company, threatened actions or proceedings (or notice
of potential actions or proceedings) by or from any
Governmental Authority or any other entity regarding any
matter relating to health, safety or protection of the
environment.
"Hazardous Materials" for purposes of this Agreement shall include,
without limitation: (A) hazardous materials, hazardous substances, extremely
hazardous substances or hazardous wastes, as those terms are defined by the
Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C.
ss.9601 et seq. ("CERCLA"), the Resource Conservation and Recovery Act, 42
U.S.C. ss.6901 et seq. ("RCRA"), and any other Environmental Requirements; (B)
petroleum, including, without limitation, crude oil or any fraction thereof
which is liquid at standard conditions of temperature and pressure (60 degrees
Fahrenheit and 14.7 pounds per square inch absolute); (C) any radioactive
material, including, without limitation, any source, special nuclear, or
by-product material as defined in 42 U.S.C. ss.2011 et seq.; and (D) asbestos in
any form or condition.
(c) There are and have been no past or present events,
conditions, circumstances, activities, practices, incidents or actions
which could reasonably be expected to interfere with or prevent
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continued compliance with any Environmental Requirements, give rise to
any legal obligation or liability, or otherwise form the basis of any
claim, action, suit, proceeding, hearing or investigation against or
involving an Acquired Company or any Real Property presently or
previously owned or used by an Acquired Company under any Environmental
Requirements or related common law theories, except as identified in
Schedule 4.15.
(d) To the Knowledge of the Acquired Companies, Schedule 4.15
sets forth the name and principal place of business of every off-site
waste disposal organization, and each of the haulers, transporters or
cartage organization engaged now or in the preceding three years by the
Acquired Companies to dispose of Hazardous Materials to any such
off-site waste disposal location on behalf of the Acquired Companies.
4.16 Compensation: Employment Agreements. Schedule 4.16 set forth (i)
all current officers, directors and key employees of the Acquired Companies and
the rate of compensation (and the portions thereof attributable to salary, bonus
and other compensation, respectively) of each of such persons as of June 30,
1997 and the date hereof and ( ii) separately listing all employment agreements
with such officers, directors and key employees. The Acquired Companies have
provided to Fortress true, complete and correct copies of any employment
agreements for persons listed on Schedule 4.16.
4.17 Labor Matters. Except as set forth in Schedule 4.17, there is not
presently pending, and within the last three years the Acquired Companies have
not experienced any, strike, picketing, boycott, work stoppage or slowdown,
union organizational activity, allegation, charge or complaint of unfair labor
practice relating to the employment of labor pending or, to the Knowledge of the
Acquired Companies, is any threatened against an Acquired Company; nor, to the
Knowledge of the Acquired Companies, is there any basis for any such allegation,
charge, or complaint. To the Knowledge of the Acquired Companies, no key
employee and no group of employees has any plans to terminate employment. To the
Knowledge of the Acquired Companies, each Acquired Company has complied in all
material respects with all applicable laws relating to the employment of labor,
including provisions thereof relating to wages, hours, equal opportunity,
collective bargaining and the payment of social security and other taxes. To the
Knowledge of the Acquired Companies, no Acquired Company is liable for any
arrears of wages or any taxes or penalties for failure to comply with any such
laws, ordinances or regulations.
4.18 Business Conduct. Except as set forth on Schedule 4.18, since June
30, 1996 the Acquired Companies have conducted their operations only in the
ordinary course of business consistent with past custom and practices and have
incurred no liabilities other than in the ordinary course of business consistent
with past custom and practices. Except as set forth on Schedule 4.18, since June
30, 1996 there has not been any:
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(a) material adverse change in any of the Acquired Companies'
operations, condition (financial or otherwise), operating results,
employee, customer or supplier relations or business prospects;
(b) damage, destruction or loss of any property owned by the
Acquired Companies or used in their operations, whether or not covered
by insurance, having a replacement cost or fair market value in excess
of $50,000;
(c) loan or advance by a Acquired Company to any party other
than sales to customers on credit or advances in the ordinary course of
business consistent with past custom and practices;
(d) notice (formal or otherwise) of any liability, potential
liability or claimed liability relating to environmental matters;
(e) incurrence of debts, liabilities or obligations except
current liabilities incurred in connection with or for services
rendered or goods supplied in the ordinary course of business
consistent with past custom and practices, liabilities on account of
taxes and governmental charges but not penalties, interest or fines in
respect thereof, and obligations or liabilities incurred by virtue of
the execution of this Agreement;
(f) cancellation, waiver or release by Acquired Company of any
debts, rights or claims, except in each case in the ordinary course of
business consistent with past custom and practices;
(g) termination of any Material Contract other than expiration
of such contract in accordance with its terms;
(h) change in accounting principles, methods or practices
(including, without limitation, any change in depreciation or
amortization policies or rates) utilized by the Acquired Companies;
(i) discharge or satisfaction of any material liability,
encumbrance or payment or any material obligation or liability, other
than current liabilities paid in the ordinary course of business
consistent with past custom and practices or cancellation of any
material debts or claims;
(j) sale or assignment by the Acquired Companies of any
tangible assets other than in the ordinary course of business;
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(k) mortgage, pledge or other encumbrance of any asset of its
Business other than in the ordinary course of business;
(l) an occurrence or event not included in clauses (a) through
(k) that has resulted or would reasonably be expected to result in a
material adverse change in the Business operations, condition
(financial or otherwise), operation results, assets, liabilities,
employee, customer or supplier relations or business prospects.
For purposes of this Section 4.18, the activities directly involved with the
sale, construction, and delivery of individual homes are deemed activities in
the "ordinary course".
4.19 Trademarks, Service Marks, Trade Names, and Copyrights. Except as
disclosed in Schedule 4.19, all trademarks, service marks, trade names, and
copyrights (including computer software and data) ("Intellectual Property") used
by the Acquired Companies in the conduct of the Business are described and set
forth with particularity in Schedule 4.19, along with information as to the
ownership thereof. All such Intellectual Property is owned by the Acquired
Companies, except for such as are licensed under licenses referred to in
Schedule 4.19. All such Intellectual Property is valid and in good standing,
free and clear of any Encumbrances and is not being challenged in any way. The
Acquired Companies have not infringed on nor are they now infringing on any
trademark, service mark, trade name, or copyright of or belonging to another
person. There is no claim pending or, to the Knowledge of the Acquired
Companies, threatened against an Acquired Company with respect to alleged
infringement of any trademark, service mark, trade name, or copyright owned by
any person nor, to the Knowledge of the Acquired Companies, does the operation
of any aspect of the Business in the manner in which it has heretofore been
operated or is presently operated give rise to any such infringement.
4.20 Taxes.
(a) Definitions.
(i) The term "Tax" shall mean any federal, state, local or
foreign income, gross receipts, franchise, estimated,
alternative minimum, add-on minimum, sales, use, transfer,
registration, value added, excise, natural resources,
severance, stamp, occupation, premium, windfall profit,
environmental, customs, duties, real property, personal
property, capital stock, social security, unemployment,
disability, payroll, license, Seller or other withholding, or
other tax of any kind whatsoever, including any interest,
penalties or additions to tax or additional amounts in respect
to the foregoing.
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(ii) The term "Tax Return(s)" shall mean returns,
declarations, reports, claims for refund, information returns
or other documents (including any related or supporting
schedules, statements or information) filed or required to be
filed in connection with the determination, assessment or
collection of any Taxes of an Acquired Company or the
administration of any laws, regulations or administrative
requirements relating to any Taxes.
(b) The Acquired Companies have completed and filed all Tax
Returns that are or were required to be filed by or with respect to any
of them, either separately or as a member of a group of corporations,
pursuant to applicable Law. Seller has delivered or made available to
Fortress copies of all such Tax Returns filed since 1995. The Acquired
Companies have paid, or made provision for the payment of, all Taxes
that have or may have become due pursuant to those Tax Returns or
otherwise, or pursuant to any assessment received by Seller or any
Acquired Company, except such Taxes, if any, as are being contested in
good faith and as to which adequate reserves (determined in accordance
with GAAP) have been provided in the Pro-forma Balance Sheet.
(c) The charges, accruals, and reserves with respect to Taxes
on the respective books of each Acquired Company are adequate
(determined in accordance with GAAP). There exists no proposed tax
assessment relating to any Acquired Company except as disclosed in the
Pro-forma Balance Sheet other than real property taxes and other taxes
incurred in the ordinary course of business. No consent to the
application of Section 341(f)(2) of the Code has been filed with
respect to any property or assets held, acquired, or to be acquired by
any Acquired Company. All Taxes that any Acquired Company is or was
required by Law to withhold or collect have been duly withheld or
collected and, to the extent required, have been paid to the proper
Governmental Authority or other Person.
(e) All Tax Returns filed by (or that include on a
consolidated basis) any Acquired Company are true, correct, and
complete in all material respects. There is no tax sharing agreement
that will require any payment by any Acquired Company after the date of
this Agreement.
4.21 Misrepresentation. To the Knowledge of the Acquired Companies,
none of the material representations and material warranties set forth in this
Agreement or in any of the certificates, schedules, exhibits, lists, documents,
exhibits, or other instruments delivered, or to be delivered, to Purchaser as
contemplated by any provision hereof, contains any untrue statement of a
material fact or omits to state a material fact necessary to make the statements
contained herein or therein not misleading.
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4.22 Representations as to Ownership of Shares and Interests and
Authority. Seller represents and warrants to Purchaser that the following
statements are, as of the date hereof and will be as of the Closing Date, true
and correct:
(a) Ownership of Shares and Interests. Except as set forth in
Schedule 4.22(a) hereof, Seller owns of record and beneficially the
number of Shares and/or the Interests of the Acquired Companies
indicated opposite Seller's name in Schedule 4.22(a) hereto, with full
right and authority to sell such Shares and/or Interests hereunder, and
upon delivery of such Shares and/or Interests hereunder, the Purchaser
will receive good title thereto, free and clear of all liens,
mortgages, pledges or security interests or the rights of any third
person and not subject to any agreements or understandings among any
persons with respect to the voting or transfer of such Shares or
Interests, other than those arising under agreements to which the
Purchaser is a party.
(b) Execution, Delivery and Enforceability of Agreement;
Violation. This Agreement has been duly executed and delivered by or on
behalf of Seller, and at the Closing any other documents required
hereunder to be executed and delivered by or on behalf of Seller will
have been duly executed and delivered. This Agreement constitutes the
legal, valid and binding obligation of Seller, enforceable against such
Seller in accordance with its terms, except as enforcement may be
limited by applicable bankruptcy, insolvency, reorganization,
fraudulent conveyance, moratorium or other laws affecting creditors'
rights generally. Any other agreements required hereto to be executed
and delivered by the Seller at Closing will constitute the legal, valid
and binding agreements of the Seller executing the same, enforceable
against such Seller in accordance with their respective terms, except
as may be limited by applicable bankruptcy, insolvency, reorganization,
fraudulent conveyance, moratorium or other laws affecting creditors'
rights generally. Neither the execution of this Agreement nor the
consummation of the transactions provided for herein by the Seller will
violate or constitute a default under, or permit the acceleration or
maturity of, except to the extent waived, the Seller's organizational
documents or any indentures, mortgages, promissory notes, contracts or
agreements to which Seller is a party or by which such Seller's
properties are bound.
(c) Residence and Domicile; Bankruptcy. The Seller is a
resident of, and domiciled in, the state of Wyoming. No bankruptcy,
insolvency, or receivership proceedings have been instituted or are
pending against Seller, and Seller is able to satisfy his respective
liabilities as they become due.
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ARTICLE V
REPRESENTATIONS AND WARRANTIES OF FORTRESS AND PURCHASER
Fortress and Purchaser jointly and severally represent and warrant to
the Seller that the representations and warranties set forth below are true and
correct as of the date of this Agreement and shall be true and correct at the
time of Closing and that such representations and warranties as made at the time
of Closing shall survive the Closing.
5.1 Organization. Fortress and Purchaser are duly organized, validly
existing, and in good standing under the laws of the state of Delaware.
5.2 Authorization. Fortress and Purchaser have full power, right and
authority to execute and deliver this Agreement and to perform their obligations
hereunder and thereunder. The execution and delivery of this Agreement by
Fortress and Purchaser have been duly and properly authorized by all requisite
corporate action in accordance with applicable law and with the Certificate of
Incorporation and By-laws of each. This Agreement is valid and binding upon
Fortress and Purchaser in accordance with their respective terms, subject to
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and
similar laws of general applicability relating to or affecting creditors' rights
generally.
5.3 Transaction Not a Breach. Neither the execution and delivery of
this Agreement, nor their performance will violate, conflict with, or result in
a breach of any provision of any Law, rule, regulation, order, permit, judgment,
injunction, decree or other decision of any court or other tribunal or any
Governmental Authority binding on Fortress or Purchaser or conflict with or
result in the breach of any of the terms, conditions or provisions of the
Certificate of Incorporation or the By-laws of Fortress or Purchaser or of any
contract, agreement, mortgage or other instrument or obligation of any nature to
which Fortress or Purchaser is a party or by which Fortress or Purchaser is
bound.
5.4 Misrepresentation. None of the representations and warranties set
forth in this Agreement or in any of the certificates, schedules, exhibits,
lists, documents, exhibits, or other instruments delivered, or to be delivered,
to the Seller as contemplated by any provision hereof, contains any untrue
statement of a material fact or omits to state a material fact necessary to make
the statements contained herein or therein not misleading.
5.5 Consents and Approvals; No Violation. There is no requirement
applicable to the Purchaser or Fortress to make any filing with, or obtain any
permit or authorization, consent or approval of, any governmental or regulatory
authority as a condition of the lawful consummation by the Purchaser and
Fortress of the transactions contemplated by this Agreement.
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5.6 Investment Representations.
(a) Fortress and Purchaser are acquiring the Shares and the
Interests for their own account, with the present intention of holding
such Shares and Interests for the purpose of investment, and have no
intention of selling such Shares or Interests in a public distribution
in violation of the federal securities laws or any applicable state
securities laws.
(b) Purchaser and Fortress have been given access to the
information regarding the Acquired Companies that they have requested
from the Acquired Companies and have had an opportunity to ask
questions and receive answers concerning the Acquired Companies, their
operations, management and financial condition and the Shares and
Interests to be purchased by them hereunder. The Purchaser and Fortress
are capable of evaluating and have evaluated the merits and risks of
the purchase of the Shares and Interests hereunder and are able to bear
the economic risk of their investment in the Shares and Interests.
(c) Fortress and Purchaser are "accredited investors" as
defined in Rule 501(a) under the Securities Act and have knowledge,
sophistication, and experience in business and financial matters so as
to be capable of evaluating the merits and risks of this prospective
investment in the Shares and Interests, are able to bear the economic
risk of such investment and, at the present time, are able to afford a
complete loss of such investment.
(d) Purchaser and Fortress understand that the Shares and
Interests have not been registered under the Securities Act on the
basis that the sale provided for in this Agreement is exempt from the
registration provisions thereof and that the Seller's reliance upon
such exemption is predicated upon the representations of the Purchaser
set forth herein.
(e) Nothing contained in this Section 5.6 shall limit the
ability of the Purchaser or Fortress to rely on the representations or
warranties given to the Purchaser and Fortress by the Seller and the
Acquired Companies under this Agreement or any other document or
agreement.
ARTICLE VI
COVENANTS PRIOR TO CLOSING
6.1 Access and Cooperation; Due Diligence. Between the date of this
Agreement and Closing the Acquired Companies will afford to the officers and
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authorized representatives of Fortress reasonable access to all of the Acquired
Companies' sites, properties, books and records during normal business hours and
with prior notice and will furnish Fortress with such additional financial and
operating data and other information as to the business and properties of the
Acquired Companies as Fortress may from time to time reasonably request which is
in the possession of the Acquired Companies. The Acquired Companies will
cooperate with Fortress, its representatives, engineers, auditors and counsel in
the preparation of any documents or other material which may be required in
connection with any documents or materials required by this Agreement. Fortress
and the Acquired Companies will treat with strict confidence all information
obtained in connection with the negotiation and performance of this Agreement.
6.2 Business Conduct. From the date hereof through the Closing Date,
except as otherwise provided for in, or contemplated by, this Agreement, the
Acquired Companies covenant and agree that:
(a) The Business will be operated in the ordinary and usual
course in substantially the same manner as it is presently operated.
(b) Except in the ordinary course of business or as required
by Law or contractual obligations or other understandings or
arrangements existing on the date hereof, the Acquired Companies will
not (i) increase in any manner the base compensation of, or enter into
any new bonus or incentive agreement or arrangement with any of the
employees of the Acquired Companies in excess of 10% for any single
employee; (ii) pay or agree to pay any additional pension, retirement
allowance or other benefit to any such employee, whether past or
present, (iii) enter into any new employment, severance, consulting, or
other compensation agreement with any existing employer, (iv) engage in
any Affiliate Transaction, except as is consistent with past practice.
Notwithstanding anything to the contrary in this Agreement, the
Acquired Companies shall be entitled after the signing of this
Agreement and up to the Date of Closing to make such cash dividends to
the Shareholder, partners and members of the Acquired Companies as the
Acquired Companies shall deem appropriate. The Acquired Companies shall
act reasonably and in good faith so that no such cash dividends (i)
would cause the Net Worth of the Acquired Companies, on a combined
basis, to drop below approximately $5,000,000 and (ii) are attributable
to Pre-Tax earnings generated during the month of August, 1997.
(c) Subject to the terms and conditions of this Agreement, the
Acquired Companies will use their reasonable commercial efforts to keep
available the services of its present employees, and preserve the
goodwill, reputation and present relationships of the Business with its
suppliers, customers, and others having business relations with the
Business.
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(d) The Acquired Companies will use their reasonable
commercial efforts to (i) maintain and keep in full force existing
insurance, (ii) maintain the records of the Acquired Companies in the
usual, regular and ordinary manner on a basis consistent with the past
practices, and (iii) perform and comply with its obligations under all
Material Contracts.
(e) Except in the ordinary course of business or as otherwise
provided for in, or contemplated by this Agreement, the Acquired
Companies will not (i) sell, lease, transfer or otherwise dispose of
any of the assets of the Acquired Companies, (ii) create or permit to
exist any new Encumbrance on the assets of the Acquired Companies,
(iii) enter into any joint venture, partnership or other similar
arrangement or form any other new arrangement for the operation of the
assets of the Acquired Companies, or (iv) accelerate or delay the sale
or construction of any inventory in a manner inconsistent with past
practices.
(f) The Acquired Companies will use their commercially
reasonable efforts between the date hereof and the Closing to secure
fulfillment of all of the conditions precedent to Fortress's
obligations hereunder.
(h) The Acquired Companies will comply in all material
respects with all Laws.
(i) The Acquired Companies will not, without the prior consent
of Fortress,:
(A) make changes in their Articles of Incorporation
or Articles of Organization, as the case may be;
(B) issue any securities, options, warrants, calls,
conversion rights or commitments relating to its securities;
6.3 Non-Negotiation. In consideration of the substantial expenditure of
time, effort and expense undertaken by Fortress in connection with its due
diligence review and the preparation and execution of this Agreement, the
Acquired Companies and the Seller agree that neither they nor their
representatives, agents, or employees will, after the execution of this
Agreement until the earlier of (i) the termination of this Agreement, or (ii)
the Closing, directly or indirectly, solicit, encourage, negotiate or discuss
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with any third party (including by way of furnishing any information concerning
an Acquired Company) any acquisition proposal relating to or affecting the
Acquired Companies or any part of them, or any direct or indirect interests in
the Acquired Companies, whether by purchase of assets or stock, purchase of
interest, merger or other transaction ("Acquisition Transaction"), and that the
Acquired Companies will promptly advise Fortress of the terms of any
communications an Acquired Company or Seller may receive or become aware of
relating to any bid for all or any part of the assets of the Acquired Companies
other than in the ordinary course of business.
6.4 Schedules. Notwithstanding language that implies otherwise, as of
the execution of this Agreement, most Schedules referred to in this Agreement
have not been delivered to the other party and have not yet been attached to the
Agreement. The Schedules will be provided within a reasonable time from the date
hereof and in all events prior to Closing. Each party hereto agrees that with
respect to the material representations and material warranties of such party
contained in this Agreement, such party shall have the continuing obligation
until the Closing timely to supplement or amend promptly all the schedules to
this Agreement (the "Schedules"), to correct any matter which would constitute a
breach of any such party's representations and warranties herein, or to reflect
any change in the information disclosed therein. For all purposes of this
Agreement, including without limitation for purposes of determining whether the
conditions set forth in Sections 7.1 and 7.2 have been fulfilled, the Schedules
hereto shall be deemed to be the Schedules as amended or supplemented pursuant
to this Section 6.4.
ARTICLE VII
CONDITIONS PRECEDENT TO THE CLOSING
7.1 Conditions Precedent to Obligations of Purchaser and Fortress. The
obligations of Fortress and Purchaser under this Agreement to consummate the
transactions contemplated hereby will be subject to the reasonable satisfaction,
at or prior to the Closing, of all of the following conditions, any one or more
of which may be waived at the option of Purchaser:
(a) No Breach of Covenants; True and Correct Representations
and Warranties. There shall have been no material breach by the
Acquired Companies in the performance of any of their covenants herein
to be performed by them in whole or in part prior to Closing, and the
representations and warranties of the Acquired Companies and Seller
contained in this Agreement shall be true and correct in all material
respects as of the Closing, except for representations or warranties
that are made by their terms as of a specified date, which shall be
true and correct in all material respects as of the specified date.
Purchaser shall receive at the Closing a certificate dated and validly
executed on behalf of the Acquired Companies by an executive officer
certifying, in such detail as Purchaser may reasonably require, the
fulfillment of the foregoing conditions, and restating and reconfirming
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as of the Closing all of the representations and warranties of the
Acquired Companies contained in this Agreement.
(b) Delivery of Documents. Purchaser shall have received all
documents and other items to be delivered under section (a) of the
Deliveries Check List.
(c) Section 338(h)(10) Election. Fortress has received an
opinion from its auditors, Price Waterhouse, that the transaction
qualifies under the Code to permit the parties to make a valid election
under Section 338(h)(10) and Section 754 of the Code, as the case may
be, with respect to the Acquired Companies.
(d) No Legal Obstruction. The Consents required for Purchaser
to conduct the business of the Acquired Companies in the normal course
after the Closing shall have been given or obtained, as the case may
be. No suit, action or proceeding by any person or Governmental
Authority shall be pending or threatened in writing, which if
determined adverse to an Acquired Company or Purchaser's interest,
could have a material adverse effect upon (i) an Acquired Company or
the Business, (ii) Purchaser, or (iii) the benefits of the transactions
contemplated hereby. No injunction, restraining order or order of any
nature shall have been issued by or be pending before any court of
competent jurisdiction or any Governmental Authority challenging the
validity or legality of the transactions contemplated hereby or
restraining or prohibiting the consummation of such transactions or
compelling Purchaser to dispose of or discontinue or materially
restrict the operations of a significant portion of the Business of the
Acquired Companies or of the business conducted by Purchaser as a
result of the consummation of the transactions contemplated hereby.
Ridgeline Development Corporation and Hayden McMahon Development
Corporation shall have consented to the transfer of the 99 percent
Interest in Thornblade owned by Seller to the Purchaser.
(e) Damage or Destruction. From the date of this Agreement
until the Closing Date, there shall have been no Material Loss or
Destruction of any portion of the assets of the Acquired Companies,
taken as a whole, nor any institution or threat of condemnation or
other proceedings to acquire or limit the use of any material portion
of the assets of the Acquired Companies. Risk of loss for the assets of
the Business shall be that of the Acquired Companies until the Closing.
For purposes of this subsection (e), "Material Loss or Destruction"
shall mean a destruction or damage claim of more than $250,000 which is
not covered by insurance carried by an Acquired Company.
(f) No Material Adverse Change. From the date of this
Agreement until the Closing Date there shall have been no material
adverse change in the assets, condition (financial or otherwise),
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operating results, Seller, customer or supplier relations, business
activities or prospects of the Acquired Companies.
(g) Approval by Purchaser's Counsel. All actions, proceedings,
instruments and documents reasonably required to carry out this
Agreement and all other related legal matters shall have been approved
as to form and substance by counsel for Purchaser which shall not be
unreasonably withheld.
(h) Employment Agreement. Galloway Homes and Don A. Galloway
shall have executed an employment agreement substantially conforming to
Exhibit D attached hereto and made a part hereof (the "Employment
Agreement").
(i) Review. Based upon a review, conducted through its
authorized representatives, of the practices and procedures of the
Acquired Companies including, but not limited to, compliance with
federal, state, and local laws and regulations governing the respective
operations of the Acquired Companies and the methodology used to
construct future revenue models, Fortress shall not have found any
matter which would have a materially adverse effect on Fortress or the
Acquired Companies.
7.2 Conditions Precedent to Obligations to the Seller. The obligations
of the Seller under this Agreement to consummate the transactions contemplated
hereby will be subject to the satisfaction, at or prior to the Closing, of all
the following conditions, any one or more of which may be waived at the option
of the Seller:
(a) No Breach of Covenants; True and Correct Representations
and Warranties. There shall have been no material breach by Fortress or
Purchaser in the performance of any of the covenants herein to be
performed by them in whole or in part prior to the Closing, and the
representations and warranties of Fortress and Purchaser contained in
this Agreement shall be true and correct in all material respects as of
the Closing, except for representations or warranties that are made by
their terms as of a specified date, which shall be true and correct in
all material respects as of the specified date. The Seller shall
receive at Closing a certificate dated as of the Closing and executed
by an executive officer on behalf of Fortress and Purchaser, certifying
in such detail as Seller may reasonably require, the fulfillment of the
foregoing conditions, and restating and reconfirming as of Closing all
of the representations and warranties of Fortress and Purchaser
contained in this Agreement.
(b) Delivery of Documents. Seller shall have received all
documents and other items to be delivered by Purchaser under section
(b) of the Deliveries Check List.
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(c) No Legal Obstruction. No suit, action or proceeding by any
person or Governmental Authority shall be pending or threatened in
writing, which if determined adverse to an Acquired Company or
Purchaser's interest, could have a material adverse effect upon (i) an
Acquired Company or the Business, (ii) Purchaser, or (iii) the benefits
of the transactions contemplated hereby. No injunction, restraining
order or order of any nature shall have been issued by or be pending
before any court of competent jurisdiction or any Governmental
Authority challenging the validity or legality of the transactions
contemplated hereby or restraining or prohibiting the consummation of
such transactions or compelling Purchaser to dispose of or discontinue
or materially restrict the operations of a significant portion of the
Business or of the business conducted by Purchaser as a result of the
consummation of the transactions contemplated hereby.
(d) Approval by Seller' Counsel. All actions, proceedings,
instruments and documents reasonably required to carry out this
Agreement and all other related legal matters shall have been approved
as to form and substance by counsel for Seller which shall not be
unreasonably withheld.
(e) Employment Agreement. Galloway Homes and Don A. Galloway
shall have executed the Employment Agreement.
(f) Office Lease. Fortress has approved an extension of the
office lease between Seller and Don Galloway Homes, Inc. to July 31,
2002 under terms summarized in Schedule 7.2(f) and which have been
memorialized in a lease agreement dated July 25, 1997.
ARTICLE VIII
POST CLOSING COVENANTS AND OTHER AGREEMENTS
8.1 Release of Personal Guarantee. Fortress covenants that within
thirty (30) days of the Closing it will take all action reasonably necessary to
have Seller and his spouse released from all personal guarantees on obligations
of the Acquired Companies to financial institutions and bond issuers. Fortress
covenants that it will act with all deliberate speed to provide such information
and documentation reasonably requested to assist the financial institutions to
be in position to release Seller and his spouse from the personal guarantees as
of the closing date. If notwithstanding such commercially reasonable actions,
any such personal guarantee shall not be released, Fortress shall indemnify and
hold Seller and his spouse harmless with respect to all such personal guarantees
and all costs and actual attorneys' fees.
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8.2 Covenant not to Compete.
(a) (a) Seller hereby agrees that from the date of Closing through December
31, 2002 (the "Restrictive Period"), he shall not without the approval
of Fortress, for any reason whatsoever, directly or indirectly, for
himself or on behalf of or in conjunction with any other person,
persons, company, partnership, corporation or business of whatever
nature:
(i) engage, as an officer, director, shareholder,
owner, partner, joint venturer, or in a managerial capacity,
whether as an employee, independent contractor, consultant or
advisor, or as a sales representative, in any business which
constructs or sells single-family residential homes in the
counties of Mecklenburg, Gaston, Cabarrus, and Iredell, North
Carolina and York, Greenville, Richland, and Charleston, South
Carolina ("Territory").
(ii) call upon any person who is, at that time,
within the Territory, an employee of an Acquired Company in a
managerial capacity for the purpose or with the intent of
enticing such employee away from or out of the employ of the
Acquired Company; provided, that the Seller shall be permitted
to call upon and hire any member of his or her immediate
family.
It is understood between the parties that the acquisition of
raw, unimproved land and its improvement up to, but not including, the
construction of a residential structure upon it is not prohibited under
this Section 8.2. In addition, Seller may personally supervise and have
built, or have an Acquired Company build, one home designed and
intended for use as his personal residence and one home designed and
intended for use as his secondary residence. If built by the Acquired
Company, Seller will be sold the home[s] at a sales price to the Seller
equal to the Acquired Company's cost of goods sold for the construction
of the home in question. In the event Seller personally supervises and
has built a home, Fortress acknowledges that the Seller may personally
be given discounts from suppliers and vendors for materials and
services provided in the construction of the home, and Fortress
covenants that it will do nothing to prevent or discourage this
benefit. Moreover, notwithstanding the above, the foregoing covenant
shall not be deemed to prohibit the Seller from acquiring as an
investment not more than one (1%) percent of the capital stock of a
competing business whose stock is traded on a national securities
exchange or over the counter so long as the Seller does not consult
with or is not employed by such competitor.
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(b) The provisions of subsection 8.2(a) notwithstanding,
neither this Agreement nor any of the provisions and recitals contained
therein shall prohibit Seller or his Affiliates from engaging, as an
officer, director, shareholder, owner, partner, joint venturer, or in a
managerial capacity, whether as an employee, independent contractor,
consultant or advisor, or as a sales representative, in any business
which develops real estate for commercial, industrial, or multi-family
uses, provided Seller and his Affiliates give to the Purchaser and the
Acquired Companies a right of first refusal on all detached single
family real estate so developed.
(c) Other than in the performance of his duties as an employee
of the Acquired Companies, during the Restrictive Period, Seller shall
not, directly or indirectly, as Seller, agent, consultant, stockholder,
director, co-partner or in any other individual or representative
capacity solicit or encourage any present or future customer, supplier
or other third party to terminate or otherwise alter his, her or its
relationship with the Acquired Companies with respect to the Business
engaged in by the Acquired Companies.
(d) Other than in the performance of his duties under as an
employee for the Acquired Companies during the Restrictive Period and
thereafter, Seller shall keep secret and retain in strictest
confidence, and shall not, without the prior written consent of the
Company, furnish, make available or disclose to any third party or use
for the benefit of himself or any third party, any Confidential
Information. As used in this Agreement, "Confidential Information"
shall mean any information relating to the business or affairs of
Fortress, the Purchaser and the Acquired Companies, including, but not
limited to, information relating to financial statements, suppliers,
construction, manufacturing and servicing methods, equipment, programs,
strategies and information, analyses, profit margins, or other
proprietary information used by Fortress, the Purchaser, the Acquired
Companies or any other subsidiary of Fortress in connection with the
Business; provided, however, that Confidential Information shall not
include any information which is in the public domain or becomes known
in the industry through no wrongful act on the part of Seller. Seller
acknowledges that the Confidential Information is vital, sensitive,
confidential and proprietary to the Acquired Companies, the Purchaser
and Fortress.
(e) If any court of competent jurisdiction shall at any time
deem the term of this Section 8.2 or any particular Restrictive
Covenant (as defined) too lengthy or the territory too extensive, the
other provisions of this Section 8.2 shall nevertheless stand, the
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Restrictive Period herein shall be deemed to be the longest period
permissible by law under the circumstances and the territory herein
shall be deemed to comprise the largest territory permissible by law
under the circumstances. The court in each case shall reduce the time
period and/or territory to permissible duration or size.
(f) Seller acknowledges and agrees that the covenants set
forth in this Section 8.2 (collectively, the "Restrictive Covenants")
are reasonable and necessary for the protection of Fortress' business
interests, that irreparable injury will result to Fortress, the
Purchaser or the Acquired Companies, if Seller breaches any of the
terms of said Restrictive Covenants, and that in the event Seller
breaches or threatens to breach any such Restrictive Covenants,
Fortress, the Purchaser and the Acquired Companies will have no
adequate remedy at law. Seller accordingly agrees that in the event
Seller breaches or threatens to breach any of the Restrictive
Covenants, Fortress, the Purchaser and the Acquired Companies shall be
entitled to immediate temporary injunctive and other equitable relief,
without bond and without the necessity of showing actual monetary
damages, subject to hearing as soon thereafter as possible. Nothing
contained herein shall be construed as prohibiting Fortress, the
Purchaser or the Acquired Companies from pursuing any other remedies
available to them for such breach or the threat of such a breach by
Seller, including the recovery of any damages which it is able to
prove.
8.3 Non-plunder. Subject to the limitation imposed by Section 5.19 of
the Indenture dated as of May 21, 1996 between Fortress and IBJ Schroder Bank &
Trust Company, as amended (including any similar but not more restrictive
provision of debt issued with respect to the refinancing of the debt governed by
such Indenture), Fortress covenants with Seller that it will maintain at the
Acquired Companies the amount of capital reasonably necessary to provide Seller
a reasonable opportunity to achieve the maximum earn-out potential as set forth
in Annex I.
8.4. Access. Seller will have reasonable access to all business records
of the Acquired Companies for legitimate purposes including, but not limited to,
tax audits and third party litigation.
8.5 Pledge of Preferred Stock. Fortress covenants with Seller that it
will cooperate with him in any of his attempts to pledge the Preferred Stock as
collateral to a third-party lender.
8.6. Assistance in Placing Fortress Common Stock.
(a) In the event Fortress issues its Common Stock to redeem
Fortress Class D Preferred Stock pursuant to Section 6 of the
Certificate of Designations, Preferences and Rights of the Series D 6%
Cumulative Convertible Preferred Stock of Fortress (the "Certificate of
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Designations") and on receipt of the Common Stock the holder of the
Class D Preferred Stock (the "Holder") informs Fortress in writing his
desire to liquidate the Common Stock, Fortress covenants that it will
for up to the next forty-five (45) trading days assist the Holder in
finding a buyer for the Common Stock. Any costs, fees, and commissions
involved in placing the stock will be borne by Fortress. If the total
net proceeds received by the Holder in an arms length transaction,
expressed in terms of the per share price, are less than the value
attributed to the Common Stock per share in the redemption under
Section 6 of the Certificate of Designations (a "Short Fall"), Fortress
shall make up the Short Fall in cash or by issuing to the Holder
additional shares having a value equal to the Short Fall, or a
combination of cash and Common Stock. Any proceeds received in excess
of the value attributed to the Common Stock per share in the redemption
may be charged by Fortress as a commission. For purposes of this
Section 8.6 --
i) Common Stock issued to make up a Short Fall will
be deemed to have a value equal to Fair Market Value of the
Common Stock on the date Holder sells the shares if all of the
shares are sold on the same day or if the Holder sells the
shares in a series of transactions, on the latest date shares
are sold;
ii) "Fair Market Value" means the Closing Price; and
iii) "Closing Price" means the last sales price,
regular way, per share of the Common Stock on the day in
question, or if no sale takes place, the average of the
closing bid and asked prices, regular way, as reported in the
principal consolidated transaction reporting system with
respect to Fortress' Common Stock.
(b) In the event Fortress issues its Common Stock to make up a
Short Fall under Section 8.6(a), above, and on receipt of the Common
Stock the holder (the "Holder") informs Fortress in writing his desire
to liquidate the Common Stock, Fortress covenants that it will for up
to the next forty-five (45) trading days assist the Holder in finding a
buyer for the Common Stock. Any costs, fees, and commissions involved
in placing the stock will be borne by Fortress. If the total net
proceeds received by the Holder in an arms length transaction,
expressed in terms of the per share price, are less than the value
attributed to the Common Stock per share in making up the Short Fall,
Fortress shall make up the additional short fall in cash or by issuing
to the Holder additional shares having a value equal to the additional
short fall, or a combination of cash and Common Stock. In the event
Fortress issues its Common Stock to make up the additional short fall,
and on receipt of the Common Stock the holder (the "Holder") informs
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Fortress in writing his desire to liquidate the Common Stock, Fortress
covenants that it will for up to the next forty-five (45) trading days
assist the Holder in finding a buyer for the Common Stock. Any costs,
fees, and commissions involved in placing the stock will be borne by
Fortress. This process of issuing additional Common Stock and assisting
Seller in marketing the stock will be followed until Seller has
realized the value attributed to the Common Stock per share in the
redemption under Section 6 of the Certificate of Designations.
8.7 It is recognized that the cash flow from the operations of the
Acquired Companies may be a source for paying the promissory note attached as
Exhibit E and the Earn-out payments due under Annex I. In the event the
promissory note is not paid in full by September 30, 1997 or an Earn-out payment
due is not timely paid and cash is available for these purposes from the
operations of the Acquired Companies or its or credit facilities, Fortress will
not unreasonably withhold its consent to permit Don A. Galloway as an officer of
the Acquired Companies to make such payments.
8.8 It is recognized and acknowledged that Eric Bland has represented
the Acquired Companies and Seller in the past and will continue to represent
them as well as "Fortress Galloway" after the closing. Fortress, Purchaser and
the Acquired Companies hereby waive any conflict of interest that may arise as a
result of Mr. Bland's previous representation or future representation of the
Acquired Companies and Seller.
ARTICLE IX
INDEMNIFICATION
9.1 Indemnification by Seller. From and after the Closing, the Seller
agrees to indemnify, defend and save Purchaser, and its officers, directors,
employees, agents, Employee Plans, and fiduciaries, plan administrators or other
parties dealing with any such plans (each, a "Purchaser Indemnified Party") at
all times from and after this Agreement through the Expiration Date (as
hereinafter defined) from and against, and to promptly pay to a Purchaser
Indemnified Party or reimburse a Purchaser Indemnified Party for, any and all
liabilities (whether contingent, fixed or unfixed, liquidated or unliquidated,
or otherwise), obligations, deficiencies, demands, claims, suits, actions, or
causes of action, assessments, losses, costs, expenses, interest, fines,
penalties, actual or punitive damages or costs or expenses of any and all
investigations, proceedings, judgments, environmental analyses, remediations,
settlements and compromises (including reasonable fees and expenses of
attorneys, accountants and other experts) (individually and collectively, the
"Losses") sustained or incurred by any Purchaser Indemnified Party relating to,
resulting from, arising out of or otherwise by virtue of any or breach of a
representation or warranty made herein by Seller or an Acquired Company, or
non-compliance with or breach by Seller an Acquired Company of any of the
covenants or agreements contained in this Agreement to be performed by Seller or
such Acquired Company prior to the Closing.
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For purposes of this Agreement the "Expiration Date" shall be thirty-six (36)
months from the Closing.
9.2 Indemnification by Purchaser. From and after the Closing, Fortress
agrees to indemnify, defend and save Seller and his agents, heirs, personal
representatives, successors, and assignees (each, an "Acquired Company
Indemnified Party") forever harmless from and against, and to promptly pay to an
Acquired Company Indemnified Party or reimburse an Acquired Company Indemnified
Party for, any and all Losses sustained or incurred by any Acquired Company
Indemnified Party relating to, resulting from, arising out of or otherwise by
virtue of any of the following: (i) any breach of a representation or warranty
made herein by Fortress or Purchaser (ii) non-compliance with or breach by
Purchaser or Fortress of any of the covenants or agreements contained in this
Agreement or any of the other agreements to be performed by Purchaser or
Fortress; or (iii) action by the Justice Department or the Federal Trade
Commission under the provisions of the Hart-Scott-Rodino Antitrust Improvement
Act of 1976.
9.3 Indemnification Procedure for Third Party Claims. In the event that
subsequent to the Closing any person or entity entitled to indemnification under
this Agreement (an "Indemnified Party") asserts a claim for indemnification or
receives notice of the assertion of any claim or of the commencement of any
action or proceeding by any entity who is not a party to this Agreement or an
Affiliate of such a party (including, but not limited to any domestic or foreign
court, government, or Governmental Authority or instrumentality, federal state
or local) (a "Third Party Claim") against such Indemnified Party, against which
a party to this Agreement is required to provide indemnification under this
Agreement (an "Indemnifying Party"), the Indemnified Party shall give written
notice together with a statement of any available information regarding such
claim to the Indemnifying Party within sixty (60) days after learning of such
claim (or within such shorter time as may be necessary to give the Indemnifying
Party a reasonable opportunity to respond to such claim). The Indemnifying Party
shall have the right, upon written notice to the Indemnified Party (the "Defense
Notice") within thirty (30) days after receipt from the Indemnified Party of
notice of such claim, which notice by the Indemnifying Party shall specify the
counsel it will appoint to defend such claim ("Defense Counsel"), to conduct at
its expense the defense against such claim in its own name, or if necessary in
the name of the Indemnified Party; provided, however, that the Indemnified Party
shall have the right to approve the Defense Counsel, which approval shall not be
unreasonably withheld, and in the event the Indemnifying Party shall propose an
alternate Defense Counsel, it shall be subject again to the Indemnified Party's
reasonable approval.
(a) In the event that the Indemnifying Party shall fail to
give such notice, it shall be deemed to have elected not to conduct the
defense of the subject claim, and in such event the Indemnified Party
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shall have the right to conduct such defense in good faith and to
compromise and settle the claim without prior consent of the
Indemnifying Party and the Indemnifying Party will be liable for all
costs, expense, settlement amounts or other Losses paid or incurred in
connection therewith if it shall be an Indemnifiable Loss.
(b) In the event that the Indemnifying Party does elect to
conduct the defense of the subject claim, the Indemnified Party will
cooperate with and make available to the Indemnifying Party such
assistance and materials as may be reasonably requested by it, all at
the expense of the Indemnifying Party, and the Indemnified Party shall
have the right at its expense to participate in the defense assisted by
counsel of its own choosing, provided that the Indemnified Party shall
have the right to compromise and settle the claim only with the prior
written consent of the Indemnifying Party, which consent shall not be
unreasonably withheld or delayed. Without the prior written consent of
the Indemnified Party, the Indemnifying Party will not enter into any
settlement of any Third Party Claim or cease to defend against such
claim, if pursuant to or as a result of such settlement or cessation,
(i) injunctive or other equitable relief would be imposed against the
Indemnified Party, or (ii) such settlement or cessation would lead to
liability or create any financial or other obligation on the part of
the Indemnified Party for which the Indemnified Party is not entitled
to indemnification hereunder. The Indemnifying Party shall not be
entitled to control, and the Indemnified Party shall be entitled to
have sole control over, the defense or settlement of any claim to the
extent that claim seeks an order, injunction or other equitable relief
against the Indemnified Party which, if successful, could materially
interfere with the business, operations, assets, condition (financial
or otherwise) or prospects of the Indemnified Party (and the cost of
such defense shall constitute a Loss for which the Indemnified Party is
entitled to indemnification hereunder if such Loss is attributable to
an Indemnifiable event). If a firm decision is made to settle a Third
Party Claim, which offer the Indemnifying Party is permitted to settle
under this Section 9.3(b) and the Indemnifying Party desires to accept
and agree to such offer, the Indemnifying Party will give written
notice to the Indemnified Party to that effect. If the Indemnified
Party fails to consent to such firm offer within 15 calendar days after
its receipt of such notice, the Indemnified Party may continue to
contest or defend such third Party Claim and, in such event, the
maximum liability of the Indemnifying Party as to such Third Party
Claim will not exceed the amount of such settlement offer, plus costs
and expenses paid or incurred by the Indemnified Party through the end
of such 15 day period.
9.4 Direct Claims. It is the intent of the parties hereto that all
direct claims by an Indemnified Party against a party hereto not arising out of
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Third Party Claims shall be subject to and benefit from this Article IX. Any
claim under this Article IX by an Indemnified Party for indemnification other
than indemnification against a Third Party Claim (a "Direct Claim") will be
asserted by giving the Indemnifying Party reasonably prompt written notice
thereof, and the Indemnifying Party will have a period of 60 calendar days
within which to satisfy such Direct Claim, during which time the Indemnifying
Party will be given full and complete access to all relevant business records of
the Indemnified Party on which the Direct Claim is based. If the Indemnifying
Party does not so respond within such 60 calendar day period, the Indemnifying
Party will be deemed to have rejected such claim, in which event the Indemnified
Party will be free to pursue such remedies as may be available to the
Indemnified Party under this Article IX.
9.5 Failure to Give Timely Notice. A failure by an Indemnified Party to
give timely, complete or accurate notice as provided in Sections 9.3 and 9.4
will not affect the rights or obligations of any party hereunder except and only
to the extent that, as a result of such failure, any party entitled to receive
such notice was deprived of its right to recover any payment under its
applicable insurance coverage or was otherwise directly and materially damaged
as a result of such failure to give timely notice.
9.6 Reduction of Loss. To the extent any Loss of an Indemnified Party
is reduced by receipt of payment (i) under insurance policies which are not
subject to retroactive adjustment or other reimbursement to the insurer in
respect of such payment, or (ii) from third parties not affiliated with the
Indemnified Party, such payments (net of the expenses of the recovery thereof)
(such net payment being referred to herein as a "Reimbursement") shall be
credited against such Loss; provided, however, (x) the pendency of such payments
shall not delay or reduce the obligation of the Indemnifying Party to make
payment to the Indemnified Party in respect of such Loss, and (y) the
Indemnified Party shall have no obligation, hereunder or otherwise, to pursue
payment under or from any insurer or third party in respect of such Loss. If any
Reimbursement is obtained subsequent to payment by an Indemnifying Party in
respect of a Loss, such Reimbursement shall be promptly paid over to the
Indemnifying Party.
9.7 Subrogation. The Indemnifying Party shall be subrogated to the
Indemnified Party's rights of recovery to the extent of any Loss satisfied by
the Indemnifying Party. The Indemnified Party shall execute and deliver such
instruments and papers as are necessary to assign such rights and assist in the
exercise thereof, including access to books and records of the Acquired
Companies.
9.8 Limitation of Indemnification. Notwithstanding anything in this
Agreement to the contrary:
(a) Limitation of Years. A party's duty to indemnify under
this Article IX shall cease thirty-six (36) months from the date of
Closing, and, moreover, --
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(i) Seller will have no liability for indemnification
with respect to any representation or warranty unless on or
before thirty-six (36) months from the Date of Closing
Purchaser notifies Seller in writing of a claim specifying the
factual basis of that claim in reasonable detail; and
(ii) Fortress will have no liability for
indemnification with respect to any representation or warranty
unless on or before thirty-six (36) months from the Date of
Closing Seller notifies Fortress in writing of a claim
specifying the factual basis of that claim in reasonable
detail.
(b) Threshold. A party's duty to indemnify under this Article
IX shall not arise until the total of all Losses sustained or incurred
by an Indemnified Party exceed $50,000 and then only for the amount by
which such Losses exceed $50,000.
(c) Dollar Limitation for Breach. The total Losses for which
Seller, in the aggregate, shall provide indemnification under this
Article IX and any other provision of this Agreement shall be
$3,000,000.
(d) Consequential or Special Damages. No Indemnifying Party
shall have any liability to an Indemnified Party for any incidental,
special, consequential, punitive, or statutorily trebeled damages.
(e) Exclusive Remedy. The indemnification obligations of
Seller under this Article IX are the sole and exclusive remedy of
Fortress and the Purchaser, and Fortress and the Purchaser waive any
other remedies, whether available at law or in equity.
9.9 Arbitration. Excluding the right of the Purchaser or Seller to seek
injunctive relief, all claims (pursuant to Federal or state statutes or by
common law), controversies, differences or disputes between the Purchaser and
Seller arising out of or relating to this Agreement or the alleged breach
thereof including, but not limited to, indemnification claims under Article 9.3
and/or 9.4 (but excluding audit disputes under Article 2.2(c) or any other
provision specifically adopting that procedure) shall be settled by arbitration
in accordance with the rules then in effect of the American Arbitration
Association at the time of the dispute. After an award is rendered by the
arbitrator(s), a judgment may be entered in any court of competent Jurisdiction.
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The arbitration shall occur in Washington, D.C. to the exclusion of all other
locations. The arbitrators can only award actual and not punitive, trebled or
exemplary damages and cannot add to or subtract from the terms of this
Agreement. The parties agree that the arbitrators may include provisions for the
payment of costs and expenses, including reasonable attorneys fees as part of
any ruling or award made thereunder. The parties acknowledge that arbitration
shall be the sole, final, binding and exclusive remedy of the parties with
respect to any such matter for which arbitration is undertaken hereunder;
provided, however, Fortress may set off against any amounts it owes to Seller as
an Earn-out payment in the amount of any judgment entered against Seller
pursuant to the procedures provided in this Section 9.9. In preparation for the
arbitration process described herein, the parties shall be given at least 120
days for discovery and each party may utilize all methods of discovery
authorized by the procedural rules and statutes of the Commonwealth of Virginia
for civil litigation and may enforce the right to obtain such discovery in the
manner provided by such rules and statutes.
ARTICLE X
FEDERAL SECURITIES LAW
10.1 Economic Risk: Sophistication. Seller is able to bear the economic
risk of an investment in Fortress stock issued pursuant to this Agreement and
can afford to sustain a total loss of such investment and has such knowledge and
experience in financial and business matters that he is capable of evaluating
the merits and risks of the proposed investment in Fortress common stock. Seller
or his respective purchaser representative has had an adequate opportunity to
ask questions and receive answers from the officers of Fortress concerning any
and all matters relating to the background and experience of the current and
proposed officers and directors of Fortress, the business, operations and
financial condition of Fortress, and the plans for additional acquisitions and
the like. Seller or his respective purchaser representative have asked any and
all questions in the nature described in the preceding sentence and all
questions have been answered to his satisfaction. Seller represents that after
taking into consideration the information and advice provided herein he has the
requisite knowledge and experience in financial and business matters to be
capable of evaluating the merits and risks of this investment and is an
"accredited investor" as defined in Regulation D of the Securities Act of 1933,
as amended (the "Securities Act").
ARTICLE XI
DEFINITIONS
For purposes of this Agreement, the following terms have the meanings
referred to in this Article 11:
"Acquired Companies' Schedules" - the Schedules to this Agreement to be provided
by the Acquired Companies and Seller.
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"Affiliate" - any Person or entity that directly or indirectly, through one or
more intermediaries, controls, is controlled by, or is under common control
with, an Acquired Company.
"Affiliate Transaction" - a transaction between an Acquired Company and any
Affiliate.
"Code" - Internal Revenue Code of 1986, as amended, and regulations issued by
the Internal Revenue Service.
"Common Stock" - the common stock of The Fortress Group, Inc.
"Contract" - any agreement, contract, obligation, promise, or undertaking
(whether written or oral and whether express or implied) that is legally
binding.
"Encumbrance" - any charge, claim, equity, judgment, lease, liability, lien,
mortgage, pledge, restriction, security interest, Tax lien, or encumbrance of
any kind.
"Galloway Homes" - Don Galloway Homes, Inc, a North Carolina corporation, and
its two wholly owned subsidiaries, Don Galloway Homes of North Carolina, Inc., a
North Carolina corporation, and Don Galloway Homes of South Carolina, Inc., a
South Carolina corporation.
"Governmental Authority" - the United States or any state, local, or foreign
government, or any subdivision, agency, or authority of any thereof.
"Hazardous Material" -- as defined in Section 4.18(b).
"Knowledge of the Seller" or "Knowledge of the Acquired Companies" - material
facts which Don A. Galloway is actually aware of or of which he should be aware
in light of his position with the Acquired Companies.
"Person" -- any individual, corporation (including non-profit corporation),
general or limited partnership, limited liability company, joint venture,
estate, trust, association, organization, labor union, or other entity of
Governmental Body.
ARTICLE XII
MISCELLANEOUS
12.1 Notices, Consents, Etc. Any notices, consents or other
communication required to be sent or given hereunder by any of the parties shall
in every case be in writing and shall be deemed properly served if (i) delivered
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personally, (ii) sent by registered or certified mail, in all such cases with
first class postage prepaid, return receipt requested, or (iii) delivered by a
recognized overnight courier service, to the parties at the addresses as set
forth below or at such other addresses as may be furnished in writing.
(a) If to Seller:
Don A. Galloway
Don Galloway Homes, Inc.
11231 Carmel Commons Blvd.
Charlotte, NC 28226
Don A. Galloway
5810 Osage, #303
Cheyenne, Wyoming 82009
with a copy to:
James Sack
Sack & Associates
8300 Greensboro Drive
McLean, VA 22102
and: Eric Bland, Esq.
Bland & Arndt LLP
1634 Main Street
Suite 200
Columbia, SC 29202
(b) If to Purchaser:
The Fortress Group, Inc.
1921 Gallows Road, Suite 730
Vienna, VA 22182
Attention: J. Marshall Coleman
Date of service of such notice shall be (x) the date such notice is personally
delivered, (y) three (3) days after the date of mailing if sent by certified or
registered mail, or (z) one (1) day after date of delivery to the overnight
courier if sent by overnight courier.
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12.2 Severability. The unenforceability or invalidity of any provision
of this Agreement shall not affect the enforceability or validity of any other
provision.
12.3 Documents. Each party will execute all documents and take such
other actions as the other party may reasonably request in order to consummate
the transactions provided for herein and to accomplish the purposes of this
Agreement.
12.4 Counterparts. This Agreement may be executed simultaneously in one
or more counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument. Duplicated or facsimile
versions of manual signatures of this Agreement shall be considered manual
signatures.
12.5 Expenses. Except as otherwise specifically provided herein, each
of the parties shall pay all costs and expenses incurred or to be incurred by it
in negotiating and preparing this Agreement and in closing and carrying out the
transactions contemplated by this Agreement.
12.6 Cooperation by the Parties. The parties to this Agreement will use
their reasonable efforts, and will cooperate with each other of them, to secure
all necessary consents, approvals, authorizations, exemptions and waivers from
third parties as shall be required in order to enable each of them to effect the
transactions contemplated hereby, and will otherwise use their commercially
reasonable efforts to cause the consummation of such transactions in accordance
with the terms and conditions hereof.
12.7 Further Assurances. At any time or from time to time up to one
year after the Closing, each of the parties hereto shall, at the request of the
other of the parties hereto and at such other parties' expense, execute and
deliver any further instruments or documents and take all such further actions
as are reasonably requested of it in order to consummate and make effective the
transactions contemplated by this Agreement.
12.8 Governing Law. This Agreement shall be construed and governed in
accordance with the laws of the State of Virginia, without giving effect to
principles of conflicts of law.
12.9 Headings. The subject headings of Articles and Sections of this
Agreement are included for purposes of convenience only and shall not affect the
construction or interpretation of any of its provisions.
12.10 Assignment. This Agreement will be binding upon and inure to the
benefit of the parties hereto and their respective successors and permitted
assigns, but will not be assignable or delegable by any party without the prior
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written consent of the other parties; provided, however, that nothing in the
Agreement is intended to limit Purchaser's ability to assign its rights or
delegate its responsibilities, liabilities and obligations under this Agreement
to any person at any time whether prior to or following the Closing without
consent, but no such assignment shall relieve Purchaser or Fortress of any of
its obligations, duties or liabilities hereunder.
12.11 Entire Agreement. This Agreement and all the Schedules and
Exhibits attached to the Agreement (which shall be deemed incorporated in the
Agreement and made a part hereof) set forth the entire understanding of the
parties and may be modified only by instruments assigned by all of the parties
hereto.
12.12 Third Parties. Nothing herein expressed or implied is intended or
shall be construed to confer upon or give to any person or entity, other than
the parties to this Agreement, any rights or remedies under or by reason of this
Agreement.
12.13 Interpretative Matters. Unless the context otherwise requires,
(i) all references to Articles, Sections, Schedules or Exhibits in this
Agreement, (ii) each accounting term not otherwise defined in this Agreement has
the meaning assigned to it in accordance with GAAP, and (iii) words in the
singular or plural include the singular and plural and pronouns stated in either
the masculine, feminine or neuter gender shall include the masculine, feminine
and neuter.
12.14 Termination. This Agreement may be terminated at any time prior
to the Closing:
(a) By the mutual written consent of Purchaser and the Seller;
(b) By either the Seller or Purchaser in writing, without
liability to the terminating party on account of such termination
(provided the terminating party is not otherwise in default or in
breach of this Agreement), if Purchaser or Seller respectively, shall
(i) fail to perform in any material respect its agreements contained
herein required to be performed on or prior to the Closing, or (ii)
materially breach any of its representations, warranties or covenants
contained herein; or
(c) By Fortress (acting through its Board of Directors) at any
time if (i) in the course of their investigations of or due diligence
with respect to the Acquired Companies if it shall discover a matter
which could (in Fortress' reasonable discretion) have a materially
adverse effect on the Acquired Companies, taken as a whole or the
assets of the Acquired Companies, taken as a whole, (ii) Fortress shall
have given written notice to Seller of such dissatisfaction and of the
particular information and/or issues from which such dissatisfaction
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results, and (iii) Seller shall have failed to satisfy Fortress in its
sole discretion with respect to the information and/or issues
identified in the notice.
Termination of this Agreement pursuant to this Section 12.14
shall terminate all obligations of the parties hereunder; provided,
however, that termination pursuant to clause (b) of Section 12.14 shall
not relieve the defaulting party or breaching party from any
liabilities to the other party hereto, and termination pursuant to
clause (c) of Section 11.14 will result in forfeiture by Purchaser of
all earnest money delivered to Mr. Bland under Section 2.1.
12.15 Brokers. Each party represents and warrants that it employed no
broker or agent in connection with this transaction except for Michael P. Kahn &
Associates, LLC ("Kahn"), and agrees to indemnify the other parties hereto
against all loss, cost, damages or expenses arising out of claims for fees or
commissions of brokers employed or alleged to have been employed by such
indemnifying party. Seller warrants that he will pay any brokerage commission
due to Kahn pursuant to a separate agreement between Seller and Kahn.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date indicated.
Fortress Galloway, Inc.
By: /s/ Illegible Name Date: 8/19/97
--------------------------
The Fortress Group, Inc.
By: /s/ Illegible Name Date: 8/19/97
---------------------------
a duly authorized signatory
/s/ Don A. Galloway Date: 8/18/97
- -------------------
Don A. Galloway
Don Galloway Homes, Inc. Don Galloway Land, LLC
By: /s/ Don A. Galloway Date: 8/18/97 By: /s/ Don A. Galloway Date: 8/18/97
------------------- -------------------
Don A. Galloway Don A. Galloway
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Thornblade, LLC Galloway Limited Partnership
By: /s/ Don A. Galloway Date: 8/18/97 By: /s/ Don A. Galloway Date: 8/18/97
------------------- --------------------
Don A. Galloway Don A. Galloway,
General Partner
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ANNEX I
EARN-OUT
1. Definitions. For purposes of this Annex I the following terms have
the meanings referred to below:
"Average Daily Earnings" means the combined pre-tax earnings of the
Acquired Companies for the month of August, 1997 divided by 31, as set
forth in an audited financial statement of the Acquired Companies
prepared in accordance with generally accepted accounting principles
consistently applied as described below in the definition of Pre-Tax
Earnings.
"Pre-Tax Earnings" means the annual combined calendar year net income
of the Acquired Companies and any other entities managed by them before
any charge for federal, state, or local income taxes, but after
consulting fees paid to Don A. Galloway, as set forth in annual audited
financial statements of the Acquired Companies prepared in accordance
with generally accepted accounting principles consistently applied;
provided, however, in computing income, charges or expenses associated
with the purchase of the Shares and Interests will not be recognized,
including the amortization of the goodwill on the balance sheet from
the transaction, and write-up of assets. No expense will be recognized
for interest on funds borrowed to finance the transaction. Also
excluded from combined income of the Acquired Companies in determining
pre-tax earnings will be overhead allocations or management fees of the
parent, Fortress, or an affiliate.
"Net Assets" means the combined total assets less cash of the Acquired
Companies.
"Return on Net Assets" means the Pre-Tax Earnings of the Acquired
Companies divided by their average (calculated monthly) Net Assets for
the year.
2. Earn-out Payments.
Seller will be entitled to an earn-out payment for each of the
years 1997, 1998, 1999, and 2000 in an amount equal to the lesser of
(x) $2,000,000 and (y) 50% of Pre-Tax Earnings in excess of a 15%
Return on Net Assets for the year in question, limited to a maximum
cumulative earn-out total of $5,000,000.
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3. Payment. Fortress shall pay each Annual Earn-out not later than 10
days after Fortress' independent auditor completes its audit for the year in
question (the "Audit Date"). All payments shall be accompanied by a report
setting forth in reasonable detail the calculation thereof, and if Seller
disputes the calculation, he shall be given full and complete access to the
business records on which the calculation was based. The first Annual Earn-out
payment and, to the extent necessary, subsequent Annual Earn-out payments shall
first be applied to reduce any outstanding balance on the $2,000,000 Promissory
Note between Seller and Fortress.
4. Set-Off. Fortress may set-off against any amounts that Fortress owes
to Seller as an Earn-out payment any judgment rendered in arbitration against
Seller pursuant to Article IX.
51
CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS
OF
SERIES D CONVERTIBLE PREFERRED STOCK
OF
THE FORTRESS GROUP, INC.
Pursuant to Section 151 of the General Corporation Law
of the State of Delaware.
The Fortress Group, Inc., a Delaware corporation (the "Corporation"),
certifies that pursuant to the authority contained in its Certificate of
Incorporation and in accordance with the provisions of Section 151 of the
General Corporation Law of the State of Delaware, its Board of Directors has
adopted the following resolution, creating a series of its Preferred Stock, $.01
par value per share, designated as Series D Convertible Preferred Stock:
RESOLVED, that a Series of the class of authorized Preferred Stock, $.01
par value per share, of the Corporation (the "Preferred Stock") be hereby
created, and that the designation and amount thereof and the voting powers,
preferences and relative, participating, optional and other special rights of
the shares of such series, and the qualifications, limitations and restrictions
thereof are as follows:
Section 1. Designation and Amount. The shares of such Preferred Stock
shall be designated as the "Series D Convertible Preferred Stock" (the "Series D
Preferred Stock") and the number of shares constituting such series shall be
67,500 which number may be decreased (but not increased) by the Board of
Directors without a vote of stockholders; provided, however, that such number
may not be decreased below the number of then currently outstanding shares of
Series D Preferred Stock. The Series D Preferred Stock shall have a par value of
$.01 per share. Certain capitalized terms used herein are defined in Section 13
hereof.
Section 2. Dividends. The holders will not be entitled to receive any
dividends on the Series D Preferred Stock.
Section 3. Liquidation. Upon any liquidation, dissolution or winding up
of the Corporation, the holders of the Series D Preferred Stock will be entitled
to be paid, before any distribution or payment is made upon any Junior
Securities, (as hereinafter defined in Section 13), an amount in cash equal to
the aggregate Liquidation Value of all shares outstanding and the holders of the
Series D Preferred Stock will not be entitled to any further payment. If upon
any such liquidation, dissolution or winding up of the Corporation, the
<PAGE>
Corporation's assets to be distributed among the holders of the Series D
Preferred Stock are insufficient to permit payment to such holders of the
aggregate amount which they are entitled to be paid, then the entire assets to
be distributed will be distributed ratably among such holders and the holders of
Parity Securities based upon the aggregate Liquidation Value of the Series D
Preferred Stock and the Parity Securities held by each such holder. The
Corporation will mail written notice of such liquidation, dissolution or winding
up, not less than 60 days prior to the payment date stated therein, to each
record holder of Series D Preferred Stock. Neither the consolidation or merger
of the Corporation into or with any other corporation or corporations, nor the
sale or transfer by the Corporation of all or any part of its assets, nor the
reduction of the capital stock of the Corporation, will be deemed to be a
liquidation, dissolution or winding up of the Corporation within the meaning of
this Section 3.
Section 4. Voting Rights. Except as otherwise provided by the
Corporation's Certificate of Incorporation or by applicable law, the holders of
the Series D Preferred Stock shall not be entitled to vote.
Section 5. Conversion.
(a) Each share of Series D Preferred Stock may, at the option of the
holder thereof, be converted into ten (10) fully paid and nonassessable shares
of Common Stock on the terms and conditions set forth in this Section 5.
(b) Procedure for Conversion. The holder of any shares of Series D
Preferred Stock may exercise his right to convert such shares into shares of
Common Stock by surrendering for such purpose to the Corporation, at its
principal office or at such other office or agency maintained by the Corporation
for that purpose, a certificate or certificates representing the shares of
Series D Preferred Stock to be converted accompanied by a written notice stating
that such holder elects to convert all or a specified whole number of such
shares in accordance with the provisions of this Section 5 and specifying the
name or names in which such holder wishes the certificate or certificates for
shares of Common Stock to be issued. In case such notice shall specify a name or
names other than that of such holder, such notice shall be accompanied by
payment of all transfer taxes payable upon the issuance of shares of Common
Stock (or other securities) in such name or names. Other than such taxes, the
Corporation will pay any and all transfer and other taxes (other than taxes
based on income) that may be payable in respect of any issue or delivery of
shares of Common Stock on conversion of Series D Preferred Stock pursuant
hereto. As promptly as practicable, and in any event within five business days
after the surrender of such certificate or certificates and the receipt of such
notice relating thereto and, if applicable, payment of all transfer taxes (or
the demonstration to the satisfaction of the Corporation that such taxes have
been paid), the Corporation shall deliver or cause to be delivered (i)
certificates representing the number of validly issued, fully paid and
nonassessable full shares of Common Stock to which the holder of shares of
Series D Preferred Stock so converted shall be entitled and (ii) if less than
the full number of shares of Series D Preferred Stock evidenced by the
surrendered certificate or certificates are to be converted, a new certificate
or certificates of like tenor, for the number of shares of Series D Preferred
Stock evidenced by such surrendered certificate or certificates less the number
<PAGE>
of shares converted. Such conversion shall be deemed to have been made at the
close of business on the date of giving of such notice and of such surrender of
the certificate or certificates representing the shares of Series D Preferred
Stock to be converted so that the rights of the holder thereof as to the shares
being converted shall cease except for the right to receive shares of Common
Stock in accordance herewith, and the person entitled to receive the shares of
Common Stock shall be treated for all purposes as having become the record
holder of such shares of Common Stock at such time.
(c) Status of Converted Shares. Any shares of Series D Preferred Stock
which are converted or otherwise acquired by the Corporation shall be canceled,
and, upon cancellation, shall become authorized but unissued shares of preferred
stock of the Corporation and may be reissued as part of another series of
Preferred Stock.
(d) No Fractional Shares. In connection with the conversion of any
shares of Series D Preferred Stock, no fractions of shares of Common Stock shall
be issued, but in lieu thereof the Corporation shall pay a cash adjustment in
respect of such fractional interest in an amount equal to such fractional
interest multiplied by the Closing Price on the day on which such shares of
Series D Preferred Stock are deemed to have been converted.
(e) Reservation of Shares of Common Stock. The Corporation shall at all
times reserve and keep available out of its authorized and unissued Common
Stock, solely for the purpose of effecting the conversion of the Series D
Preferred Stock, such number of shares of Common Stock as shall from time to
time be sufficient to effect the conversion of all then outstanding shares of
Series D Preferred Stock. The Corporation shall from time to time, subject to
and in accordance with the laws of Delaware, increase the authorized amount of
Common Stock if at any time the number of authorized shares of Common Stock
remaining unissued shall not be sufficient to permit the conversion at such time
of all then outstanding shares of Series D Preferred Stock.
(f) Adjustments. The Conversion Rate shall be subject to adjustment
from time to time as follows: In case the Corporation shall at any time or from
time to time declare a dividend, or make a distribution, on all of the
outstanding shares of Common Stock in shares of Common Stock or subdivide or
reclassify all of the outstanding shares of Common Stock into a greater number
of shares or combine or reclassify all of the outstanding shares of Common Stock
into a smaller number of shares of Common Stock, then, and in each such case,
(i) the number of shares of Common Stock into which each share
of Series D Preferred Stock is convertible shall be adjusted so that
the holder of each share thereof shall be entitled to receive, upon the
conversion thereof, the number of shares of Common Stock which the
holder of a share of Series D Preferred Stock would have been entitled
to receive after the happening of any of the events described above had
such share been converted immediately prior to the happening of such
event or the record date therefor, whichever is earlier; and
(ii) an adjustment made pursuant to this Section 5(f) shall
become effective (x) in the case of any such dividend or distribution,
immediately after the close of business on the record date for the
<PAGE>
determination of holders of shares of Common Stock entitled to receive
such dividend or distribution or (y) in the case of any such
subdivision, reclassification or combination, at the close of business
on the day upon which such corporate action becomes effective.
(g) Organic Change. Any capital reorganization, reclassification,
consolidation, merger or sale of all or substantially all of the Corporation's
assets to another Person which is effected in such a way that holders of Common
Stock are entitled to receive (either directly or upon subsequent liquidation)
stock, securities or assets with respect to or in exchange for Common Stock is
referred to herein as an "Organic Change". Prior to the consummation of any
Organic Change the Corporation will make appropriate provisions (in form and
substance reasonably satisfactory to the holders of a majority of the Series D
Preferred Stock then outstanding) to insure that each of the holders of Series D
Preferred Stock will thereafter have the right to acquire and receive, in lieu
of or in addition to the shares of Common Stock immediately theretofore
acquirable and receivable upon the conversion of such holder's Series D
Preferred Stock, such shares of stock, securities or assets as such holder would
have received in connection with such Organic Change if such holder had
converted his Series D Preferred Stock immediately prior to such Organic change.
In any such case, the Corporation will make appropriate provisions (in form and
substance reasonably satisfactory to the holders of a majority of the Series D
Preferred Stock then outstanding) to insure that the provisions of this Section
5 will thereafter be applicable to the Series D Preferred Stock. The Corporation
will not effect any such consolidation, merger or sale, unless prior to the
consummation thereof, the successor corporation (if other than the Corporation)
resulting from consolidation or merger or the corporation purchasing such assets
assumes by written instrument (in form reasonably satisfactory to the holders of
a majority of the Series D Preferred Stock then outstanding), the obligation to
deliver to each such holder such shares of stock, securities or assets as, in
accordance with the foregoing provisions, such holder may be entitled to
acquire.
(h) DeMinimis Adjustments. If any adjustment in the number of shares of
Common Stock into which each share of Series D Preferred Stock may be converted
required pursuant to this Section 5 would result in an increase or decrease of
less than 1% in the number of shares of Common Stock into which each share of
Series D Preferred Stock is then convertible, the amount of any such adjustment
shall be carried forward and adjustment with respect thereto shall be made at
the time of and together with any subsequent adjustment, which, together with
such amount and any other amount or amounts so carried forward, shall aggregate
at least 1% of the number of shares of Common Stock into which each share of
Series D Preferred Stock is then convertible.
(i) Registration. The Corporation will cause a registration statement
under the Securities Act of 1933, as amended (the "Act"), with respect to the
resale of the Common Stock issued upon such conversion under this Section 5 to
be filed with the Securities and Exchange Commission within 30 days of the
receipt of written notice that the holder elects to convert the Series D
Preferred Stock into Common Stock and will diligently pursue the effectiveness
of such registration, such that in any event, such registration shall be
declared effective within 60 days after the filing thereof, provided, however,
that no such registration statement shall be required to be filed if such shares
<PAGE>
upon issuance are eligible for resale pursuant to Securities Act Rule 144 or
their resale is otherwise exempt from registration under the Act and that any
such registration statement shall not be required to continue in effect after
such shares first become eligible for resale pursuant to Securities Act Rule
144.
Section 6. Redemption at Option of Holder of Series D Preferred Stock.
(a) To the extent permitted under applicable law and the Indenture dated
as of May 21, 1996 between the Corporation and IBJ Schroder Bank & Trust
Company, as amended (including any debt issued with respect to the refinancing
of the debt governed by such Indenture), from and for a period of 30 days after
each respective Series D Redemption Date as set forth in the column below (the
"Series D Redemption Dates"), each holder of the Series D Preferred Stock shall
have the right, at the sole option and election of such holder, to require the
Corporation to redeem up to 25% of the total number of shares of Series D
Preferred Stock issued to such holder for (i) cash, (ii) Common Stock, or (iii)
a combination of cash and Common Stock, equal to $100.00 per share (the
"Redemption Price"). Common Stock issued in redemption hereunder shall be valued
at the Closing Price on the Redemption Date. The make-up of the Redemption Price
between cash, Common Stock, or a combination of both shall be at the sole option
and election of the Corporation.
The Corporation will cause a registration statement under the Act, with
respect to the resale of the Common Stock issued in redemption under this
Section 6 to be filed with the Securities and Exchange Commission within 30 days
of the issuance of such stock and will diligently pursue the effectiveness of
such registration such that, in any event, such registration shall be declared
effective within 60 days after the filing thereof, provided, however, that no
such registration statement shall be required to be filed if such shares upon
issuance are eligible for resale pursuant to Securities Act Rule 144 or their
resale is otherwise exempt from registration under the Act and that any such
registration statement shall not be required to continue in effect after such
shares first become eligible for resale
<PAGE>
pursuant to Securities Act Rule 144.
Series D Redemption Dates Liquidation Value Redeemed
------------------------- --------------------------
1st Trading Day after 1st Anniversary $1,500,000
of the Issue Date
1st Trading Day after 2d Anniversary $1,500,000
of the Issue Date
1st Trading Day after 3rd Anniversary $1,500,000
of the Issue Date
1st Trading Day after 4th Anniversary $1,500,000
of the Issue Date
Each holder's right under this Section 6 shall be cumulative in nature. Shares
that a holder had a right to but did not redeem on a Series D Redemption Date
may be added to the total that may be redeemed on the next Series D Redemption
Date. The stock redeemed pursuant to this Section shall have the rights set
forth in Section 8.6 of that certain Stock Purchase Agreement ("Agreement"),
dated August __, 1997 between the Corporation, Fortress Galloway, Inc., a
Delaware corporation, Don A. Galloway, an individual residing in Cheyenne,
Wyoming; Don Galloway Homes Inc., a North Carolina corporation, Don Galloway
Land, LLC, a North Carolina limited liability company, Galloway Limited
Partnership, a Colorado limited partnership, and Thornblade, LLC, a North
Carolina limited liability company. Moreover, the Liquidation Valued that is
redeemable at each of the dates will be increased to reflect additional Shares
issued pursuant to Exhibit E to the Agreement.
(b) Subject to paragraph (a) the holder of any shares of the Series D
Preferred Stock entitling the holder thereof to redemption rights pursuant to
paragraph (a) may exercise the right to require the Corporation to redeem such
shares by surrendering for such purpose to the Corporation, at its principal
office, a certificate or certificates representing the shares of Series D
Preferred Stock to be redeemed accompanied by a written notice stating that such
holder elects to require the Corporation to redeem the specified integral number
of such shares in accordance with the provisions of this Section 6. As promptly
as practicable, and in any event within 10 business days after such surrender or
such certificate and the receipt of such notice, the Corporation shall deliver
or cause to be delivered to the holder of such shares being redeemed the
Redemption Amount therefor as provided in paragraph (a) and, if applicable, a
new certificate of like tenor for the number of shares evidenced by such
surrendered certificate less the number of shares redeemed. Such redemption
shall be deemed to have been made at the close of business on the date of the
receipt of such notice and of the surrender of the certificate representing the
shares of Series D Preferred to be redeemed.
Section 7. Reports as to Adjustments. Whenever the number of shares of
Common Stock into which each share of Series D Preferred Stock is convertible is
<PAGE>
adjusted as provided in Section 5 hereof, the Corporation shall promptly mail to
the holders of record of the outstanding shares of Series D Preferred Stock at
their respective addresses as the same shall appear in the Corporation's stock
records a notice stating that the number of shares of Common Stock into which
the shares of Series D Preferred Stock are convertible has been adjusted and
setting forth the new number of shares of Common Stock (or describing the new
stock, securities, cash or other property) into which each share of Series D
Preferred Stock is convertible as a result of such adjustment, a brief statement
of the facts requiring such adjustment and the computation thereof, and when
such adjustment became effective.
Section 8. Ranking. The shares of Series D Preferred Stock shall be
superior to all Junior securities as to the payment of distributions of whatever
kind including, without limitation, distributions payable upon the dissolution,
liquidation and winding up of the Corporation. The shares of Series D Preferred
Stock shall always rank pari passu, as to the payment of all such distributions
with the shares of the Corporation's Parity Securities.
Section 9. Registration of Transfer. The Corporation will keep at its
principal office a register for the registration of Series D Preferred Stock.
Upon the surrender of any certificate representing Series D Preferred Stock at
such place, the Corporation will, at the request of the record holder of such
certificate, execute and deliver (at the Corporation's expense) a new
certificate or certificates in exchange therefor representing in the aggregate
the number of shares represented by the surrendered certificate. Each such new
certificate will be registered in such name and will represent such number of
shares as is requested by the holder of the surrendered certificate and will be
substantially identical in form to the surrendered certificate, and dividends
will accrue on the Series D Preferred Stock represented by such new certificate
from the date to which dividends have been fully paid on such Series D Preferred
Stock represented by the surrendered certificate.
Section 10. Replacement. Upon receipt of the evidence reasonably
satisfactory to the Corporation (an affidavit of the registered holder will be
satisfactory) of the ownership and the loss, theft, destruction or mutilation of
any certificate evidencing shares of Series D Preferred Stock, and in the case
of any such loss, theft or destruction, upon receipt of indemnity reasonably
satisfactory to the Corporation, or, in the case of any such mutilation upon
surrender of such certificate, the Corporation will (at its expense) execute and
deliver in lieu of such certificate a new certificate of like kind representing
the number of shares represented by such lost, stolen, or destroyed or mutilated
certificate and dated the date of such lost, stolen, destroyed or mutilated
certificate, and dividends will accrue on the Series D Preferred Stock
represented by such new certificate from the date to which dividends have been
fully paid on such lost, stolen, destroyed or mutilated certificate.
Section 11. Amendment. No amendment, modification or waiver will be
binding or effective with respect to any provision of this Certificate of
Designations, Preferences and Rights of Series D Preferred Stock without the
prior written consent of the holders of at least majority of the then
outstanding shares of Series D Preferred Stock.
<PAGE>
Section 12. Notice. Except as otherwise expressly provided, all notices
referred to herein will be in writing and will be delivered by registered or
certified mail, return receipt requested, postage prepaid and will be deemed to
have been given when so mailed (i) to the Corporation at its principal executive
offices and (ii) to any stockholder, at such holder's address as it appears in
the stock records of the Corporation (unless otherwise indicated by any such
holder).
Section 13. Definitions. For the purposes of the Certificate of
Designation of Series D Preferred Stock which embodies this resolution:
"Closing Price" means the last sales price, regular way, per share of
the Common Stock on the day in question, or if no such sale takes place, the
closing bid price, regular way, as reported in the principal consolidated
transaction reporting system with respect to the Common Stock.
"Common Stock" means the authorized common stock, $.01 par value, of
the Corporation.
"Junior Securities" means any of the Corporation's equity securities
other than the Parity Securities.
"Liquidation Value" means the amount of $100.00 per share of Series D
Preferred Stock plus any accrued but unpaid dividends on such shares.
"Parity Securities" means the Corporation's hereintofore and
hereinafter issued Preferred Stock, which all shall be pari passu with the
Series D Preferred Stock as to distributions made upon dissolution, liquidation
and winding up of the Corporation and any other securities which are expressly
made Parity Securities with the Corporation's Series D Preferred Stock.
"Person" shall mean any individual partnership, joint venture, firm,
corporation, trust or unincorporated organization, or a government or agency or
political subdivision thereof or other entity, and shall include any successor
(by merger or otherwise) of such entity.
"Subsidiary" of any Person means any corporation or other entity of
which a majority of the voting power of the voting equity securities or equity
interest is owned, directly or indirectly, by such Person.
"Trading Day" means a day on which the principal national securities
exchange or market on which shares of the Common Stock are listed is open for
the transaction of business.
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Designations of the Series D Preferred Stock to be duly executed by its Chairman
and attested to by its Secretary this __ day of August, 1997.
THE FORTRESS GROUP, INC.
By: ______________________________
Chairman
ATTEST:
- -------------------------
Secretary
