SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No. )
Filed by the Registrant /x/
Filed by a Party other than the Registrant /_/
Check the appropriate box:
/x/ Preliminary Proxy Statement
/_/ Definitive Proxy Statement
/_/ Definitive Additional Materials
/_/ Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
The Fortress Group, Inc.
________________________________________________________________________________
(Name of Registrant as Specified In Its Charter)
________________________________________________________________________________
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[x] No fee required.
[_] Fee computed on table below per Exchange Act Rule 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
_____________________________________________________________________________
2) Aggregate number of securities to which transaction applies:
_____________________________________________________________________________
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing
fee is calculated and state how it was determined):
_____________________________________________________________________________
4) Proposed maximum aggregate value of transaction:
_____________________________________________________________________________
/_/ Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the form or schedule
and the date of its filing.
1) Amount previously paid: _________________________________________________
2) Form, Schedule or Registration No. ______________________________________
3) Filing party: ___________________________________________________________
4) Date filed: _____________________________________________________________
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THE FORTRESS GROUP, INC.
1921 Gallows Road, Suite 730
Vienna, Virginia 22182
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NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To Be Held on _______________, 1997
A Special Meeting of stockholders of The Fortress Group, Inc. (the
"Company") will be held on ___________, 1997 at _______________, at ___ a.m.,
local time, to consider and act upon:
1. a proposal to approve certain investment transactions involving the
purchase by an affiliate of Lazard Freres Real Estate Investors, LLC
of up to $100,000,000 of the Company's newly issued convertible
preferred stock and debt instruments convertible into common stock
(which debt, if any, would be in lieu of a portion of the preferred
stock), and amendments to the Company's certificate of incorporation
which, among other things, would increase the Company's authorized
common stock and would require the affirmative vote of more than 81%
of the Company's board of directors or executive committee for the
Company to engage in certain significant acts or transactions;
2. a proposal to authorize an increase in the common stock subject to the
Company's 1996 Stock Incentive Plan; and
3. any other matter that may properly come before the Special Meeting.
Stockholders of record at the close of business on October 3, 1997 will be
entitled to notice of and to vote at the Special Meeting or any adjournment
thereof.
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All stockholders are cordially invited to attend the Special Meeting.
By Order of the Board of Directors,
JAMES J. MARTELL, JR., President
and Chief Executive Officer
Vienna, Virginia
October __, 1997
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE
FOLLOW THE INSTRUCTIONS ON THE ENCLOSED PROXY IN ORDER TO
ENSURE REPRESENTATION OF YOUR SHARES AT THE MEETING.
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TABLE OF CONTENTS
Page
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GENERAL INFORMATION
SUMMARY
Introduction
Stockholders Approval
Recommendation of Board
Closings
Use of Proceeds
Other Purchases
Apportionment of Class AB Preferred Stock
Class AA Preferred Stock
Class AB Preferred Stock
Debt Alternative
Voting Rights and Board Representation
Supermajority Approval
Consent Rights
Warrants
Covenants and Actions Prior to Closing; No Solicitation
Conditions
Fees and Expenses
Termination
Registration Rights
Participation Rights and Tag-Along Rights
Proposed Increase in Authorized Common Stock
Proposal to Amend 1996 Stock Incentive Plan
Interests of Certain Persons in the Transactions
and the Stock Option Proposal
Intention of Directors and Officers
Market Price of Common Stock
FORWARD-LOOKING STATEMENTS
THE TRANSACTIONS
Background
Certain Effects of the Transactions
Use of Proceeds
Recommendation of the Board; Reasons for the Transactions
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Consequences if the Transactions Are Not Consummated
Absence of Appraisal Rights
Interests of Certain Persons in the Transactions
Expenses of the Transactions
Stock Purchase Agreement
Purchase and Sale of Securities
First Closing
Second Closing
Subsequent Closings
Apportionment of Class AB Preferred Stock
Further Purchases
Right of First Refusal
Class AA Preferred Stock
Number of Shares
Rank
Dividends
Liquidation Preference
Conversion
No Redemption
Voting Rights
Preferred Stock Director Designees
Consent Rights
Financial Statements
Modification and Waiver
Class AB Preferred Stock
Number of Shares
Rank
Dividends
Liquidation Preference
Conversion
Redemption
Voting Rights
Consent Rights
Financial Statements
Modification and Waiver
Debt Alternative
Warrants
Initial Exercise Price and Payment
Exercise Period
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Adjustments Based on Common Stock Market Price
Adjustment of Exercise Price and Number of
Warrant Shares
Listing and Registration
HSR Act
Certain Covenants and Actions Prior to Closing
No Solicitation
Conditions to Closings
Representations and Warranties
Indemnification
Fees and Expenses
Termination
Registration Rights Agreement
Stockholders Agreement
Members of the Board
Conduct of Business
Participation Rights
Tag-Along Rights
Certificate of Incorporation and Bylaws Amendments
Amendments to the Certificate of Incorporation
Conduct of Business
Adoption or Amendment of Bylaws
Termination
Increase in Authorized Common Stock
Amendments to the Bylaws
Number of Directors
Quorum
Removal of Directors
Election of Directors Following Adverse Event
Committees
Executive Committee
Conduct of Business
Termination
Stockholders Voting Agreement
Stockholders Approval
PROPOSAL TO AUTHORIZE AN INCREASE IN THE COMMON
STOCK SUBJECT TO THE COMPANY'S 1996 STOCK INCENTIVE
PLAN
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BENEFICIAL OWNERSHIP OF SECURITIES
Ownership by Persons Owning More Than Five Percent
Ownership by Directors and Executive Officers
COMPENSATION
Compensation of Executive Officers and Directors
Summary Compensation Table
Stock Options
Aggregated Option Exercises and Fiscal Year-End Option
Value
Employment Agreements
Compensation of Directors
Compensation Committee Interlocks and Insider Participation
CERTAIN TRANSACTIONS
OTHER PROPOSALS
ANNEXES
Annex A - Certificate of Designations, Preferences and Relative
Participating, Optional and Other Special Rights of
Preferred Stock and Qualifications, Limitations and
Restrictions Thereof of Class AA Convertible Preferred
Stock
Annex B - Certificate of Designations, Preferences and Relative
Participating, Optional and Other Special Rights of
Preferred Stock and Qualifications, Limitations and
Restrictions Thereof of Class ABI Convertible Preferred
Stock
Annex C - Certificate of Designations, Preferences and Relative
Participating, Optional and Other Special Rights of
Preferred Stock and Qualifications, Limitations and
Restrictions Thereof of Class ABII Convertible Preferred
Stock
Annex D - Certificate of Amendment of Certificate of Incorporation
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THE FORTRESS GROUP, INC.
1921 Gallows Road, Suite 730
Vienna, Virginia 22182
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PROXY STATEMENT FOR A SPECIAL MEETING OF STOCKHOLDERS
To Be Held ____________, 1997
GENERAL INFORMATION
A Special Meeting of stockholders of The Fortress Group, Inc. (the
"Company") will be held at _______________ on _____________, 1997 at _____ a.m.,
local time, for the purposes set forth in the accompanying Notice of Special
Meeting of Stockholders (the "Special Meeting"). The approximate mailing date
for this proxy statement and proxy is October __, 1997.
Holders of record of shares of the Company's common stock, $.01 par value
(the "Common Stock"), at the close of business on October 3, 1997 (the "Record
Date") are entitled to notice of, and to vote at, the Special Meeting or at any
adjournment of the Special Meeting. Each share of Common Stock has one vote. On
the Record Date, there were issued and outstanding 11,745,275 shares of Common
Stock.
In addition, holders of record of shares of the Company's Class AA
Convertible Preferred Stock, $.01 par value, at the close of business on the
Record Date are entitled to vote at the Special Meeting or at any adjournment of
the Special Meeting. On the Record Date, there were issued and outstanding
11,700 shares of Class AA Convertible Preferred Stock, entitling the holder
thereof to cast 1,950,000 votes at the Special Meeting. The holder has agreed
not to vote on certain of the proposals to be considered at the Special Meeting.
It is important that your shares be represented at the Special Meeting. If
it is impossible for you to attend the Special Meeting, please sign and date the
enclosed proxy and return it in the envelope provided. The proxy is solicited by
the board of directors of the Company (the "Board"). Shares represented by valid
proxies in the enclosed form will be voted if received in time for the Special
Meeting. Expenses in connection with the solicitation of proxies will be borne
by the Company and may include requests by mail, telephone and personal contact
by its directors, officers and employees. The Company will reimburse brokers or
other nominees for their out-of-pocket expenses in forwarding proxy materials to
principals. If you return the enclosed proxy, you still have the right to vote
in person at the Special Meeting. If you give a proxy, you have the
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power to revoke it any time before it is voted. You may revoke a proxy at any
time prior to its exercise by sending a notice of revocation in writing to the
Secretary of the Company, by presenting to the Company a later-dated proxy card
executed by the person executing the prior proxy card or by attending the
Special Meeting and voting in person.
Shares of Common Stock represented by properly executed proxy cards
received by the Company in time for the Special Meeting will be voted in
accordance with the choices specified in the proxies. Abstentions and broker
non-votes (proxies that do not indicate that brokers or nominees have received
instructions from the beneficial owner of shares) will be counted for purposes
of determining the presence or absence of a quorum for the transaction of
business. Abstentions are counted in tabulating the total number of votes cast
on proposals presented to stockholders, whereas broker non-votes are not counted
for purposes of determining the total number of votes cast.
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SUMMARY
The following summary provides selected information regarding a proposal to
approve certain investment transactions, including the amendment of the
Company's certificate of incorporation, and a proposal to amend the 1996 Stock
Incentive Plan. This summary is not intended to be complete and is qualified in
all respects by reference to the detailed information contained elsewhere in
this Proxy Statement and the annexes attached to this Proxy Statement (the
"Annexes"). You are urged to review carefully the entire Proxy Statement
including the Annexes.
Introduction. The Company and Prometheus Homebuilders LLC ("Prometheus")
entered into a Stock Purchase Agreement dated as of August 14, 1997 and an
Amended and Restated Stock Purchase Agreement dated as of September 30, 1997
(the "Stock Purchase Agreement"). Prometheus is owned by Lazard Freres Strategic
Realty Investors II L.P., which is an affiliate of Lazard Freres Real Estate
Investors, LLC ("Lazard"). The activities of Lazard consist principally of
acting as general partner of several real estate investment partnerships that
are affiliated with Lazard Freres & Co. LLC, an investment banking firm.
Prometheus is a special purpose investment vehicle formed by Lazard to acquire
the Company's securities as contemplated by the Stock Purchase Agreement.
Subject to the terms and conditions of the Stock Purchase Agreement,
Prometheus will purchase from the Company for an aggregate purchase price of
$75,000,000 (a) an aggregate of $35,000,000 initial liquidation value (35,000
shares) of Class AA Convertible Preferred Stock, $0.01 par value per share (the
"Class AA Preferred Stock"), (b) an aggregate of $40,000,000 initial liquidation
value (40,000 shares) of Class AB Preferred Stock, apportioned between Class ABI
Convertible Redeemable Preferred Stock, $0.01 par value per share (the "Class
ABI Preferred Stock") and Class ABII Convertible Redeemable Preferred Stock,
$0.01 par value per share (the "Class ABII Preferred Stock") (the Class ABI
Preferred Stock and the Class ABII Preferred Stock together are referred to as
the "Class AB Preferred Stock"), and (c) 1,000,000 warrants to purchase Common
Stock (the "Warrants"). The Company may issue a debt instrument in lieu of all
or a portion of the Class AB Preferred Stock. See "The Transactions--Stock
Purchase Agreement--Purchase and Sale of Securities."
Stockholders Approval. The approval at the Special Meeting by the holders
of a majority of the outstanding voting stock (the "Stockholders Approval") is
required to effect the transactions contemplated by the Stock Purchase Agreement
(the "Transactions"), except for certain of the Transactions effected at the
First Closing (as
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defined below). Stockholders Approval is assured because certain principal
stockholders who are parties to an Amended and Restated Stockholders Voting
Agreement dated September 30, 1997 and who own in the aggregate a majority of
the outstanding voting stock have agreed to vote in favor of the Transactions.
See "The Transactions--Stock-holders Voting Agreement" and "--Stockholders
Approval." As of the Record Date, Prometheus owns 11,700 shares of Class AA
Preferred Stock, which shares entitle Prometheus to 1,950,000 votes (calculated
on an as-converted basis) at the Special Meeting. The Stock Purchase Agreement
provides that Prometheus will not vote on the proposal to approve the
Transactions.
Recommendation of Board. The Board believes that the Transactions are
advisable and in the best interests of the Company and its stockholders and
unanimously recommends that the stockholders vote for the proposal to approve
the Transactions. In arriving at its recommendation, the Board considered the
expected benefits and advantages of the Transactions, the likelihood of
realizing such benefits and advantages, and the risks, costs and disadvantages
of the Transactions. See "The Transactions--Background;" "--Certain Effects of
the Transactions;" and "--Recommendation of the Board; Reasons for the
Transactions."
Closings. Effective September 30, 1997, Prometheus purchased $11,700,000
initial liquidation value (11,700 shares) of Class AA Preferred Stock and
375,000 Warrants, for a purchase price of $11,700,000 (the "First Closing").
Subject to the terms and conditions of the Stock Purchase Agreement, at a second
closing Prometheus will purchase $4,633,000 initial liquidation value (4,633
shares) of Class AA Preferred Stock and $18,667,000 initial liquidation value
(18,667 shares) of Class ABI Preferred Stock, and/or a debt instrument in lieu
of all or some of the Class ABI Preferred Stock, and 625,000 Warrants, for a
purchase price of $23,300,000 (the "Second Closing"). The Second Closing will
occur on December 30, 1997, or on a mutually agreeable earlier date after
Stockholders Approval. If Stockholders Approval has not been obtained by
December 30, 1997, the Company may extend the date of the Second Closing to
January 31, 1998. Upon consummation of the Second Closing, Prometheus will have
invested $35,000,000 in the Company and will have acquired $16,333,000 initial
liquidation value (16,333 shares) of Class AA Preferred Stock, $18,667,000
initial liquidation value (18,667 shares) of Class ABI Preferred Stock, and/or a
debt instrument in lieu of all or some of the Class ABI Preferred Stock, and
1,000,000 Warrants. Subject to the terms and conditions of the Stock Purchase
Agreement, at subsequent closings, to occur by December 31, 1998, Prometheus
will purchase an aggregate of $18,667,000 initial liquidation value (18,667
shares) of Class AA Preferred Stock and $21,333,000 initial
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liquidation value (21,333 shares) of Class ABI Preferred Stock, and/or a debt
instrument in lieu of all or some of the Class ABI Preferred Stock, for an
aggregate purchase price of $40,000,000 ("Subsequent Purchases"). Upon
consummation of all of the Subsequent Purchases, Prometheus will have invested
$75,000,000 in the Company and will have acquired $35,000,000 initial
liquidation value (35,000 shares) of Class AA Preferred Stock, $40,000,000
initial liquidation value (40,000 shares) of Class AB Preferred Stock, and/or a
debt instrument in lieu of all or some of the Class AB Preferred Stock, and
1,000,000 Warrants. Any debt instrument will have terms and conditions that are
as favorable to Prometheus as the terms and conditions of the Class ABI
Preferred Stock and will have a maturity date of December 31, 2004. See "The
Transactions--Stock Purchase Agreement--First Closing;" "--Second Closing;" and
"--Subsequent Closings." See "Debt Alternative."
Use of Proceeds. The aggregate net proceeds from the sale of the
$75,000,000 in newly issued preferred stock and any debt instrument are expected
to be approximately $72,500,000, after payment of related fees and expenses.
Under the Stock Purchase Agreement, the Company has the right to use such net
proceeds for any business purpose. The Company currently expects to use such net
proceeds primarily for the acquisition of established homebuilding companies.
Proceeds from the First Closing were used to pay certain obligations relating to
the Company's acquisition of Don Galloway Homes, Inc. See "The Transactions--Use
of Proceeds."
Other Purchases. Prometheus may also purchase approximately 900,000 shares
of Common Stock from certain stockholders who are the Company's founders, for a
purchase price of approximately $4,900,000. See "The Transactions--Interests of
Certain Persons in the Transactions." After the Subsequent Purchases, the
Company and Prometheus may, in their discretion, agree upon the sale to
Prometheus of up to an additional $11,667,000 initial liquidation value (11,667
shares) of Class AA Preferred Stock, up to an additional $13,333,000 initial
liquidation value (13,333 shares) of Class AB Preferred stock, and/or a debt
instrument in lieu of all or some of the Class AB Preferred Stock, and up to an
additional 333,250 Warrants, for an aggregate purchase price of up to
$25,000,000. In addition, Prometheus will have a right of first refusal with
respect to any bona fide offer to purchase up to $25,000,000 of equity capital
of the Company. See "The Transactions--Stock Purchase Agreement--Further
Purchases" and "--Right of First Refusal."
Apportionment of Class AB Preferred Stock. The Class AB Preferred Stock
proposed to be issued to Prometheus will be apportioned between Class ABI
Preferred Stock and Class ABII Preferred Stock so that as a result of such
purchases, along with the
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purchases of the Class AA Preferred Stock, Prometheus has no more than 45% of
the total voting power of the Company on the date of issuance of such Class AB
Preferred Stock with respect to the election of directors to the Board generally
(other than directors elected exclusively by holders of Class AA and Class AB
Preferred Stock) and so that the Company will issue the maximum amount of Class
ABI Preferred Stock before issuing any Class ABII Preferred Stock. See "The
Transactions--Stock Purchase Agreement--Apportionment of Class AB Preferred
Stock."
Class AA Preferred Stock. The Class AA Preferred Stock will rank senior to
the Common Stock with respect to dividends and distributions. Dividends will be
payable in cash at the annual rate of 12% until the Second Closing, and
thereafter at the annual rate of 6%, in each case cumulative and compounded
quarterly, on the liquidation value of $1,000 per share. The Company will be
required to declare and pay such dividends to the extent that funds are legally
available therefor. See "The Transactions--Stock Purchase Agreement--Class AA
Preferred Stock--Rank;" "--Dividends;" and "--Liquidation Preference."
The Class AA Preferred Stock will be convertible, in whole or in part, at
the option of the holder, into Common Stock, at any time after issuance, at an
initial conversion price of $6.00 per share, subject to certain adjustments. The
conversion price is subject to decrease, at the option of the holder, up to five
times per year, between September 30, 2001 and September 30, 2003, if the
average closing price of Common Stock for the 60 days prior to such adjustment
is $12.00 or less. The amount of adjustment will vary based on the average
closing price of the Common Stock. After the Second Closing, the Company will
have the option to require conversion of all, but not less than all, of the
Class AA Preferred Stock into Common Stock if the average closing price of the
Common Stock for the 90 days preceding such conversion is $12.00 per share or
more. In either case, the conversion price is subject to certain antidilution
adjustments. The Company will not have the right to redeem the Class AA
Preferred Stock. See "The Transactions--Stock Purchase Agreement--Class AA
Preferred Stock--Conversion" and "--No Redemption."
Class AB Preferred Stock. The Class AB Preferred Stock will rank senior to
the Common Stock with respect to dividends and distributions. Dividends will be
payable in cash at the annual rate of 12%, cumulative and compounded quarterly,
on the liquidation value of $1,000 per share. The Company will be required to
declare and pay such dividends to the extent that funds are legally available
therefor. See "The Transactions--
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Stock Purchase Agreement--Class AB Preferred Stock--Rank;" "--Dividends;" and
"--Liquidation Preference."
Class AB Preferred Stock will be convertible, in whole or in part, at the
option of the holder, into Common Stock, on or after September 30, 2001, the
fourth anniversary of the date of the First Closing. The Company will have the
option to require conversion of all, but not less than all, of the Class AB
Preferred Stock into Common Stock, on or after September 30, 2002, the fifth
anniversary of the date of the First Closing. Whether conversion is at the
election of the holders of Class AB Preferred Stock or the Company, the
conversion price will be equal to 95% of the average of the closing prices of
the Common Stock for the 30 trading days commencing 45 trading days before the
applicable conversion date. In addition, the Company will have the right, on or
after September 30, 2002, to redeem in whole the Class AB Preferred Stock at a
price per share equal to the liquidation value plus an amount equal to accrued
and unpaid dividends. See "The Transactions--Stock Purchase Agreement--Class AB
Preferred Stock--Conversion" and "--Redemption."
Debt Alternative. The Company has the right to issue debt instruments in
lieu of all or any portion of the Class AB Preferred Stock to be issued under
the Stock Purchase Agreement, provided that such debt instruments contain terms
and conditions that are as favorable to Prometheus as the terms and conditions
of the Class ABI Preferred Stock, with such debt to have a maturity date of
December 31, 2004. Before the Second Closing, the parties will try to structure
the issuance of a portion of any such debt through a limited liability company
subsidiary formed by the Company; however, Prometheus is not obligated to agree
to any such structure. See "The Transactions--Stock Purchase Agreement--Debt
Alternative."
Voting Rights and Board Representation. Holders of Class AA Preferred Stock
and Class ABI Preferred Stock will vote on an as-converted basis with the
holders of Common Stock as a single class on all matters on which the Common
Stock is entitled to vote, including the election of directors. Holders of Class
ABII Preferred Stock will vote on an as-converted basis with the holders of
Common Stock (along with the holders of Class AA Preferred Stock and Class ABI
Preferred Stock) as a single class on all matters on which the Common Stock is
entitled to vote, except for the election of directors generally. Holders of the
Class ABII Preferred Stock will not vote on the election of directors generally
unless the average of the closing prices of the Common Stock for the 30 trading
days commencing 45 trading days before the applicable date is less than $3.00
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per share and such holders provide notice to the Company of their intention to
vote on the election of directors generally. See "The Transactions--Stock
Purchase Agreement--Class AA Preferred Stock--Voting Rights" and "--Class AB
Preferred Stock--Voting Rights."
Until a Termination Event (defined below), holders of Class AA Preferred
Stock and Class AB Preferred Stock, voting together as a single class
(separately from other stockholders), will have the exclusive right to elect
three directors (each, a "Preferred Stock Director") of a 15-member Board. Two
of such Preferred Stock Directors will be designated to a five-member executive
committee of the Board (the "Executive Committee"), which will have substantial
operational authority with respect to the management of the Company. Prometheus
has not, as of the date of this Proxy Statement, exercised its right to elect
Preferred Stock Directors. Prometheus has indicated that it does not intend to
exercise such rights until Stockholders Approval, although it reserves the right
to do so at any time. After the Second Closing, holders of Class AA Preferred
Stock and Class AB Preferred Stock will be entitled to elect additional
Preferred Stock Directors sufficient to cause the Preferred Stock Directors to
constitute a majority of the Board and all committees of the Board (the
"Additional Preferred Stock Directors") in the event (an "Adverse Event") that
on any date that is 60 days after the end of a fiscal quarter both (a) the
average trading price of the Common Stock is less than $4.375 per share (as
adjusted) and (b) the percentage change in the Company's earnings before
interest expense, income taxes and extraordinary or non-recurring items ("EBT")
per share for the most recent two fiscal quarters as measured against the same
two fiscal quarters of the prior year is less than the percentage change in the
EBT per share for a specified comparable group of companies for the two most
recent fiscal quarters as measured against the same two fiscal quarters of the
prior year. The right to elect Additional Preferred Stock Directors will
continue until such time as neither of the conditions constituting an Adverse
Event exists for two consecutive fiscal quarters. A "Termination Event" will
occur when, after all closings under the Stock Purchase Agreement have occurred,
(a) the aggregate amount of Class AA Preferred Stock and Class AB Preferred
stock is less than 20% of the maximum amount of such stock issued as of such
date or (b) the aggregate remaining investment or commitment to invest by
Prometheus and any of its affiliates (or any single or related group of
transferees) is less than the greater of $10,000,000 or 10% of the market value
of the Company's outstanding Common Stock as measured by the 30 preceding
trading days. See "The Transactions--Stock Purchase Agreement--Class AA
Preferred Stock--Voting Rights" and "--Class AB Preferred Stock--Voting Rights."
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Supermajority Approval. Under a Stockholders Agreement entered into at the
First Closing, among the Company, Prometheus and certain stockholders, who
beneficially own in the aggregate a majority of the voting stock, and pursuant
to amendments to the Company's certificate of incorporation and bylaws effective
upon Stockholders Approval, the Company will not, and will not permit any of its
subsidiaries to, engage in or agree to engage in certain significant actions or
transactions, without the affirmative vote of over 81% of the directors or over
81% of the members of the Executive Committee. Accordingly, the Company will
need the approval of at least one of the three Preferred Stock Directors on the
Board (together with 12 non-Preferred Stock Directors) or the unanimous approval
of the Executive Committee, which will include two Preferred Stock Directors, to
engage in certain significant actions or transactions. Upon the occurrence of a
Termination Event, the provisions of the Company's certificate of incorporation
and bylaws regarding matters subject to approval of over 81% of the directors or
members of the Executive Committee will be of no further force and effect. See
"The Transactions--Stockholders Agreement--Conduct of Business"and
"--Certificate of Incorporation and Bylaws Amendments."
Consent Rights. Holders of the Class AA Preferred Stock and the Class AB
Preferred Stock will have certain consent rights. The consent of the holders of
at least 66 2/3% of the outstanding shares of each of the Class AA Preferred
Stock, Class ABI Preferred Stock and Class AB II Preferred Stock will be
necessary to effect certain actions or transactions, including, for example, (a)
any amendment of the certificate of incorporation or bylaws which adversely
affects the rights of such class; any authorization or increase in the amount of
any shares of any class ranking senior to or on a parity with such class; any
increase or decrease in the number of authorized shares of such class; any sale
or transfer of substantially all of the assets of the Company or any of its
material subsidiaries; any consolidation or merger involving the Company or any
of such subsidiaries; any reclassification of any stock or any dissolution,
liquidation or winding up of the Company; any purchase or redemption of any
Common stock or other capital stock of the Company; or any declaration or
payment of any dividends or other distributions on the Common Stock unless all
accrued and unpaid dividends on such class have been paid in cash. See "The
Transactions--Stock Purchase Agreement--Class AA Preferred Stock--Consent
Rights" and "--Class AB Preferred Stock--Consent Rights."
Warrants. Under the Stock Purchase Agreement, Prometheus will acquire
1,000,000 Warrants to purchase Common Stock. The Warrants will be exercisable
between September 30, 1999, and September 30, 2004, at an exercise price of
$7.00 per share of Common Stock, subject to adjustment. Between September 30,
2001, and
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September 30, 2003, the exercise price of the Warrants is subject to decrease,
at the option of the holder, if the average closing price of the Common Stock is
$12 per share or less for the 60 preceding days, and the number of shares of
Common Stock into which each Warrant will convert upon exercise of the Warrants
is subject to increase if the average closing price of the Common Stock is $20
per share or less for the 60 preceding days. The exercise price and the number
of shares of Common Stock into which each Warrant will convert are also subject
to certain antidilution adjustments. If the Stock Purchase Agreement is
terminated under certain circumstances prior to the Second Closing, the exercise
price of each outstanding Warrant will be decreased to $0.01 per share. See "The
Transactions--Stock Purchase Agreement--Warrants."
Covenants and Actions Prior to Closing; No Solicitation. The Stock Purchase
Agreement contains certain covenants to be performed by the Company and other
provisions regarding actions to be taken with respect to the consummation of the
Transactions and the conduct of business. The Stock Purchase Agreement contains
certain provisions that preclude the Company, its directors, officers and other
representatives from soliciting or initiating proposals or offers regarding
transactions alternative to the Transactions. The Board is not prohibited from
taking certain actions to comply with its fiduciary duties in response to an
unsolicited proposal to enter into an alternative transaction. See "The
Transactions--Stock Purchase Agreement--Certain Covenants and Actions Prior to
Closing" and "--No Solicitation."
Conditions. Under the Stock Purchase Agreement, consummation of the
Transactions is subject to a number of conditions including Stockholders
Approval with respect to all closings other than the First Closing, which has
occurred. See "The Transactions--Stock Purchase Agreement--Conditions to
Closings."
Fees and Expenses. The Company has agreed to reimburse Prometheus for its
reasonable fees and expenses, including fees and expenses of legal counsel,
accountants and consultants in connection with the preparation of the Stock
Purchase Agreement and its due diligence examination relating to the
Transactions. Such fees and expenses are estimated to total approximately
$1,500,000. In addition, the costs and expenses of the Company in connection
with the Transactions are estimated to total approximately $1,000,000. If the
Stock Purchase Agreement is terminated under certain conditions prior to the
Second Closing (other than as a result of a material breach by Prometheus of its
representations, warranties or obligations thereunder), the Company will be
obligated to pay Prometheus a termination fee in the amount of $4,000,000, in
addition to the fees and
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expenses incurred by Prometheus. See "The Transactions--Stock Purchase
Agreement--Fees and Expenses."
Termination. The Stock Purchase Agreement may be terminated prior to the
Second Closing (a) by the Company or Prometheus if Stockholders Approval has not
been obtained by January 31, 1998, (b) by Prometheus if the Second Closing has
not occurred by January 31, 1998, (c) by Prometheus if the Company breaches any
representation, warranty, covenant or agreement except for any breach which
would not have a material adverse effect on the Company or Prometheus, and (d)
by the Company if Prometheus materially breaches any representation, warranty,
covenant or agreement except for any breach which would not have a material
adverse effect on the Company. See "The Transactions--Stock Purchase
Agreement--Termination."
Registration Rights. Pursuant to a Registration Rights Agreement between
the Company and Prometheus, entered into at the First Closing, holders of the
Class AA Preferred Stock, the Class AB Preferred Stock, the debt instruments (if
issued), shares of Common Stock issued upon conversion of such Preferred Stock
or the debt instruments, and shares of Common Stock issued upon exercise of any
Warrants will have certain "demand" registration rights and "piggyback"
registration rights with respect to the registration of such securities under
the Securities Act of 1933, as amended. See "The Transactions--Registration
Rights Agreement."
Participation Rights and Tag-Along Rights. Under the Stockholders
Agreement, Prometheus will have certain participation rights to purchase or
subscribe for additional shares of capital stock that the Company sells or
issues such that Prometheus will be able to maintain its relative percentage
ownership of the Company's capital stock. Prometheus will also have certain
"tag-along" rights to sell certain amounts of the Class AA Preferred Stock,
Class AB Preferred Stock and Common Stock held by Prometheus, if stockholders
who are parties to the Stockholders Agreement propose to sell their Common Stock
to third parties. The participation rights and tag-along rights will terminate
upon a Termination Event (defined above). See "The Transactions--Stock-holders
Agreement --Participation Rights" and "--Tag-Along Rights."
Proposed Increase in Authorized Common Stock. The Company's certificate of
incorporation will be amended, upon Stockholders Approval, to increase the
number of authorized shares of Common Stock from 49,000,000 to 99,000,000. An
increase in the number of authorized shares of Common Stock is needed to permit,
under certain
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circumstances, the conversion of the Class AA Preferred Stock, the Class AB
Preferred Stock, the debt instruments (if any) and the Warrants to be issued in
the Transactions. Additional authorized Common Stock also would provide the
Board with flexibility in the management of the Company's capitalization. See
"Certificate of Incorporation and Bylaws Amendments."
Proposal to Amend the 1996 Stock Incentive Plan. At the Special Meeting,
the stockholders will vote on a proposal to authorize a 275,000 share increase
in the Common Stock subject to the Company's 1996 Stock Incentive Plan (the
"Stock Option Proposal"). The Board proposes to increase the shares of Common
Stock available for grant under the Plan from 1,125,000 shares to 1,400,000. The
Board recommends that stockholders vote for the proposal. As required by the
Stockholders Agreement, Prometheus will vote in favor of the proposal the 11,700
shares of Class AA Preferred Stock it acquired at the First Closing, which
shares entitle Prometheus to 1,950,000 votes (calculated on an as-converted
basis), equal to approximately 14% of the total votes entitled to be cast at the
Special Meeting. See "Proposal to Authorize an Increase in the Common Stock
Subject to the Company's 1996 Stock Incentive Plan."
Interests of Certain Persons in the Transactions and the Stock Option
Proposal. As described above, the Company is proposing to authorize a 275,000
share increase in the Common Stock subject to the 1996 Stock Incentive Plan. In
addition, Prometheus may purchase from certain stockholders, who are parties to
the Stockholders Agreement and Stockholders Voting Agreement, approximately
900,000 shares of Common Stock owned by such stockholders for approximately
$4,900,000. Accordingly, in considering the Board's recommendation, stockholders
should consider that certain directors and officers have certain interests in
the Transactions. See "The Transactions--Interests of Certain Persons in the
Transactions."
Intention of Directors and Officers. Under the Stockholders Voting
Agreement, certain stockholders, six of whom are directors and officers of the
Company, have agreed to vote in favor of the Transactions. Such stockholders own
in the aggregate a majority of the outstanding voting stock. The Company's other
directors and executive officers, who own in the aggregate approximately 5% of
the outstanding voting stock, have indicated that they intend to vote in favor
of the Transactions. The Company's directors and executive officers, who own in
the aggregate approximately 49% of the outstanding voting stock, and Prometheus,
which owns approximately 14% of the outstanding voting stock, intend to vote in
favor of the Stock Option Proposal. Therefore, approval of the Transactions and
the Stock Option Proposal is assured. See "The Transactions--Stock-
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holders Voting Agreement."
Market Price of Common Stock. The closing sales price of the Common
Stock, as quoted on the Nasdaq National Market System, on August 14, 1997, the
last trading day prior to the public announcement of the Company's execution of
the August 14 Agreement, was $6.00 per share. On October __, 1997, the last
trading day before the date of this Proxy Statement, the closing sales price was
$_______ per share.
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FORWARD-LOOKING STATEMENTS
This Proxy Statement includes "forward-looking" statements that are subject
to risks and uncertainties. Such "forward-looking" statements include (a) the
Company's ability to realize the business advantages and benefits expected to
result from the Company's use of the net proceeds from the transactions (the
"Transactions") contemplated by the Amended and Restated Stock Purchase
Agreement dated as of September 30, 1997 between the Company and Prometheus
Homebuilders LLC (the "Stock Purchase Agreement"), including (i) the expectation
that the Company will be able to use the net proceeds to improve its financial
condition and performance, (ii) the expectation that the availability of such
funds will enable the Company to make additional acquisitions of homebuilders,
and achieve additional market diversification and increased economies of scale
in purchasing power and spreading of overhead expenses in connection with such
additional acquisitions and (iii) the expectation that such additional
acquisitions or other uses of the net proceeds could have a positive impact on
the Company's earnings; (b) the possibility that Lazard's significant investment
in the Company could increase investors' awareness and interest in the Company;
(c) the possibility that, as a result of the expected benefits of the
Transactions, the market price of the Common Stock could increase, both directly
benefitting the Company's stockholders and enabling the Company to raise capital
in the future by additional public offerings of Common Stock; and (d) other
statements preceded by, followed by or that include the words "believes,"
"expects," "intends," "anticipates," "potential" or other similar expressions.
For these statements, the Company claims the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995. The following important factors, in addition to those discussed
elsewhere in this Proxy Statement, could affect the Company's future results and
could cause those results to differ materially from those expressed in the
forward-looking statements: (a) the inability of the Company to identify or
acquire homebuilders meeting the Company's acquisition criteria; (b) the failure
of acquired homebuilders, or the Company's existing operations, to perform at
anticipated levels; (c) the incurrence of unanticipated liabilities or other
adverse contingencies associated with the Company's acquired homebuilders or the
Company's existing operations; (d) the competitive environment in markets in
which the acquired homebuilders or the Company's existing businesses operate;
(e) fluctuations in interest rates, which may effect the availability of
financing to home purchasers and also may affect the Company's cost of capital;
(f) the availability of capital; (g) changes in local, regional or national
economic conditions; (h) the availability and cost of labor and materials; (i)
the effect of government regulations; (j) the availability and cost of land; (k)
changes in home prices; and (l) adverse weather conditions.
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THE TRANSACTIONS
Background
The Company was founded on the belief that homebuilding is localized and is
most successfully managed by experienced and cycle-tested local managers who
have developed the in-depth market knowledge and strong local relationships
necessary to succeed in their local markets. Homebuilding, however, is a capital
intensive industry due to the need to fund land acquisition and development and
home construction, and local builders' capital structure and limited access to
capital is a perceived weakness in their operations. The Company's objective is
to combine experienced local homebuilders and to provide more capital, on better
terms, than would be available to the local homebuilders individually.
The Company intends to implement its objective of combining local
homebuilders through a long-term strategy of the selective acquisition of
established homebuilding companies. Management believes that, because of the
fragmented nature of the homebuilding industry, there are significant
opportunities to acquire a number of existing homebuilding companies that
satisfy the Company's profitability, investment return and other criteria. The
Company intends to acquire homebuilding companies that the Company believes
should have a positive impact on the Company's earnings.
Since the Company's initial public offering in May 1996, the Company has
acquired five additional homebuilders. These acquisitions have been financed by
a combination of cash on hand, the issuance of preferred stock and Common Stock
and, to a limited extent, the incurrence of additional debt. The acquisitions in
1997 have included the following: On February 28, 1997, the Company acquired the
homebuilding assets of D.W. Hutson Construction Company, a homebuilder in the
Jacksonville, Florida area, for $9,000,000 in cash, $1,200,000 liquidation value
of the Company's Series B Preferred Stock and approximately $8,500,000 in
assumed debt. In addition, the Company agreed to issue up to $6,000,000
liquidation value of the Company's Series C Preferred Stock to be issued over a
period of up to six years based upon the future financial performance of the
acquired business. Effective April 1, 1997, the Company acquired the stock of
Wilshire Homes, Inc. (and other related interests), a homebuilding company
operating in the areas of Austin and San Antonio, Texas, for $2,900,000 in cash
and Common Stock and approximately $13,800,000 of assumed debt. On August 27,
1997, the Company acquired the stock of Don Galloway Homes, Inc. (and other
related interests), a homebuilding company operating primarily in Charlotte,
North Carolina and in Charleston, South Carolina, for $5,000,000 in cash, a
$5,000,000 note, $6,000,000 liquidation value of the Company's Series D
Preferred Stock and an
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earn-out of up to $5,000,000 which will be paid through the year 2000. In
addition, the Company assumed debt of approximately $18,600,000.
Based upon the Company's long-term growth strategy and its rapid pace of
acquisition of homebuilders, the Company's management determined that it was
necessary to increase the Company's capital. After discussions with several
investment bankers and an evaluation of the market for the Common Stock,
management concluded that a private sale of equity or debt securities would more
likely be completed than a public offering. Management met with several
investment bankers and potential investors, and several of them expressed
interest in some level of investment in the Company. After evaluation of several
preliminary proposals and discussions with certain of the Company's directors,
management determined to pursue further its discussions with Lazard Freres Real
Estate Investors, LLC ("Lazard"). This determination was based particularly upon
Lazard's expressed willingness to invest $75,000,000 to $100,000,000 in the form
of an equity investment.
In May 1997, representatives of Lazard and the Company discussed a
potential equity investment in the Company by Lazard or a controlled affiliate.
On May 21, 1997, management made an initial presentation to the Board describing
Lazard's preliminary proposal.
Following a series of meetings in late May and early June 1997, the
Company's management and Lazard developed a preliminary term sheet for a
proposed investment by Lazard in the Company. On June 4, 1997, Lazard made a
presentation to the Board with respect to the terms of the preliminary term
sheet. Following the presentation, the Board discussed the terms of the
preliminary term sheet. The Board unanimously approved the Company entering into
the preliminary term sheet with Lazard and authorized management to negotiate
definitive transaction documents with Lazard. The Board also authorized the
Company to reimburse up to $825,000 of Lazard's expenses in engaging counsel and
accountants to assist in the conduct of a thorough due diligence review of the
Company and engaging counsel to prepare drafts of the transaction documents.
During late June, July and August, Lazard and its representative engaged in
an extensive due diligence review of the Company's operations and financial
condition. Lazard's counsel prepared drafts of proposed transaction documents,
and representatives of the Company and its counsel and representatives of Lazard
and its counsel engaged in numerous discussions and negotiations with respect to
the terms of the proposed transactions.
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<PAGE>
On August 13, 1997, management made a presentation to the Board with
respect to the proposed transactions, including the terms of the proposed
transactions and the variations of the transaction documents from the
preliminary term sheet. The Board unanimously approved the proposed transactions
and documents and authorized the Company's management to finalize and execute
the documents.
The Company and Prometheus Homebuilders LLC ("Prometheus"), an affiliate of
Lazard, entered into a stock purchase agreement dated as of August 14, 1997 (the
"August 14 Agreement"). Certain principal stockholders of the Company and
Prometheus entered into a stockholders voting agreement dated as of August 14,
1997. On August 15, 1997, the Company announced the principal terms of the
transactions under the August 14 Agreement.
Prior to entering into the August 14 Agreement, the Company requested the
advice of the staff of the Nasdaq Stock Market with respect to the compliance of
certain voting rights and other provisions included in the transactions with
applicable Nasdaq rules. On September 16, 1997, after discussions with the
Company's representatives, the Nasdaq staff advised the Company that the
transactions as described to the staff complied with the applicable rules,
provided that certain changes were made to the terms, including that (i) the
market price of the Common Stock included in the test for an Adverse Event (as
defined in the certificates of designations for the Class AA Preferred Stock and
Class AB Preferred Stock) must represent a significant decrease from the market
price at the time of the First Closing, (ii) an Adverse Event must not occur
prior to the Second Closing, (iii) in fixing the voting power of the Class AB
Preferred Stock on an "as converted" basis, the number of votes must be
determined as if the conversion price were 100 percent of the market price of
the Common Stock immediately prior to the First Closing and (iv) the vote of the
preferred stock issued at the First Closing must not be counted in determining
the receipt of Stockholders Approval.
In addition, the Company and Prometheus, as contemplated by the August 14
Agreement, continued discussions as to the possibility of the issuance of a
portion of the Class ABI Preferred Stock through a limited liability company to
be formed by the Company. Ultimately, the Company and Prometheus concluded that
they could not agree on a mutually acceptable structure for such an issuance.
The Company and Prometheus agreed to amend the August 14 Agreement to (a)
provide that Class AA Preferred Stock, rather than Class AB Preferred Stock,
would be issued at the First Closing, (b) delete provisions regarding the
possible issuance of a portion of the Class ABI Preferred Stock through a
limited liability company to be formed
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<PAGE>
by the Company, (c) provide for the possible issuance of debt instruments
through a limited liability company subsidiary formed by the Company in lieu of
all or a portion of the Class AB Preferred Stock, subject to further negotiation
between the Company and Prometheus, (d) revise certain provisions in accordance
with the comments of the Nasdaq staff and (e) revise certain terms of the August
14 Agreement in other respects. The Company's directors reviewed and approved
the proposed amendments.
On September 30, 1997, the Company and Prometheus entered into the Stock
Purchase Agreement (as amended and restated). At the First Closing effective
September 30, 1997, Prometheus purchased 11,700 shares of Class AA Preferred
Stock and 375,000 Warrants for a purchase price of $11,700,000. See "Stock
Purchase Agreement -- First Closing."
Certain Effects of the Transactions
The holders of Class AA Preferred Stock and Class AB Preferred Stock,
voting as a single class, will have the exclusive right to elect three directors
(each, a "Preferred Stock Director") of a 15-member Board and a proportionate
number will serve on each committee of the Board, except for the Executive
Committee. The Executive Committee, which will have substantial operational
authority, will consist of five members of which two will be Preferred Stock
Directors. As the holder of 11,700 shares of Class AA Preferred Stock, which
were issued at the First Closing, Prometheus currently has the right to elect
three Preferred Stock Directors. Prometheus has not exercised such right as of
the date of this Proxy Statement and has informed the Company that Prometheus
does not intend to exercise such right until Stockholders Approval, although it
reserves the right to do so at any time.
After the Second Closing, upon the occurrence of an Adverse Event (as
defined), the holders of Class AA Preferred Stock and Class AB Preferred Stock,
voting as a single class, will be entitled to elect additional Preferred Stock
Directors sufficient to cause the Preferred Stock Directors to constitute a
majority of the Board and all committees of the Board, including the Executive
Committee. See "Stock Purchase Agreement--Class AA Preferred Stock--Voting
Rights" and "--Class AB Preferred Stock--Voting Rights."
In addition, holders of Class AA Preferred Stock and holders of Class AB
Preferred Stock will be entitled to vote on all matters voted on by holders of
Common Stock, voting together with the Common Stock as a single class at all
meetings of the stockholders, except that holders of Class ABII Preferred Stock
will not be entitled to vote in the election of directors generally unless the
market price of the Common Stock is
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less than $3.00 per share. Each share of Class AA Preferred Stock will entitle
its holder to cast the number of votes equal to the number of votes which could
be cast in such vote by a holder of the number of shares of Common Stock into
which such share of Class AA Preferred Stock is convertible based on the
Mandatory Conversion Price (as defined) of $6.00 per share. Each share of Class
AB Preferred Stock will entitle its holder to cast the number of votes equal to
the number of votes which could be cast in such vote by a holder of the number
of shares of Common Stock into which such share of Class AB Preferred Stock is
convertible based on the closing trading price of the Common Stock on the day
immediately preceding the First Closing, which price was $5.25 per share.
Upon consummation of the Second Closing (as defined) on or before December
30, 1997 (which date is subject to extension to January 31, 1998), Prometheus
will have purchased an aggregate of $16,333,000 initial liquidation value
(16,333 shares) of Class AA Preferred Stock and $18,667,000 initial liquidation
value (18,667 shares) of Class ABI Preferred Stock (and/or a debt instrument in
lieu of all or a portion of the Class AB Preferred Stock), having an aggregate
of up to approximately 35% of the total voting power of the Company (based on
the Mandatory Conversion Price (as defined) of $6.00 per share for the Class AA
Preferred Stock, a conversion price (only for the purpose of determining voting
rights) of $5.25 per share for the Class ABI Preferred Stock and assuming no
other issuances of Common Stock or securities convertible into Common Stock are
effected and no Warrants or options have been exercised). Upon consummation of
all of the Subsequent Purchases by December 31, 1998, Prometheus will have
purchased an aggregate of $35,000,000 initial liquidation value (35,000 shares)
of Class AA Preferred Stock and $40,000,000 initial liquidation value (40,000
shares) of Class AB Preferred Stock (and/or a debt instrument in lieu of all or
a portion of the Class AB Preferred Stock), having an aggregate of up to
approximately 53% of the total voting power of the Company and up to
approximately 45% of the total voting power of the Company with respect to the
election of directors generally (other than directors elected exclusively by
holders of Class AA and Class AB Preferred Stock), subject to increase to up to
approximately 53% if the market price of the Common Stock is less than $3.00 per
share (based on the same assumptions as above). If the conversion price is
adjusted at the option of the holders between September 30, 2001 and September
30, 2003, and the holders of Class AA Preferred Stock thereafter convert such
stock into Common Stock, then the voting power of the holders may increase. See
"Stock Purchase Agreement--Class AA Preferred Stock--Voting Rights;" "--Class AB
Preferred Stock--Voting Rights;" "--Second Closing;" "--Subsequent Closings;"
and "--Apportionment of Class AB Preferred Stock."
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In addition, Prometheus may acquire approximately 900,000 shares of Common
Stock from certain stockholders. See "The Transactions--Stock Purchase
Agreement--Further Purchases."
Upon consummation of the Second Closing, Prometheus will have acquired
1,000,000 Warrants to purchase one share of Common Stock for each Warrant
(subject to adjustment) at an initial exercise price of $7.00 per share (subject
to adjustment). The Warrants will be exercisable between September 30, 1999, and
September 30, 2004. If the 1,000,000 Warrants are exercised, the holders would
have an additional 3% of the total voting power of the Company (based on the
same assumptions as above other than the exercise of the Warrants). If the
exercise price and the number of shares of Common Stock into which each Warrant
will convert upon exercise are adjusted at the option of the holders between
September 30, 2001 and September 30, 2003, and the holders of Warrants
thereafter exercise the Warrants, then the voting power of the holders may
increase. See "Stock Purchase Agreement--Warrants."
The holders of the Class AA Preferred Stock and the holders of Class AB
Preferred Stock will also have certain consent rights. The consent of the
holders of at least 66 2/3% of each of the Class AA Preferred Stock, the Class
ABI Preferred Stock and the Class ABII Preferred Stock will be necessary to
effect or validate certain actions or transactions. See "Stock Purchase
Agreement--Class A Preferred Stock--Consent Rights" and "--Class AB Preferred
Stock--Consent Rights."
Further, under the Company's amended certificate of incorporation and
bylaws, and the amended bylaws of the Company's subsidiaries, the Company will
not, and will not permit any of its subsidiaries to, engage in or agree to
engage in certain significant actions or transactions, without either the
affirmative vote of over 81% of the directors ("Supermajority Director
Approval") or the affirmative vote of over 81% of the members of the Executive
Committee ("Supermajority Executive Committee Approval"). Therefore, the Company
will need the approval of at least one of the three Preferred Stock Directors on
the Board (together with 12 non-Preferred Stock Directors) or the unanimous
approval of the Executive Committee, which will include two Preferred Stock
Directors, to undertake such significant actions or transactions, which may
include the use of proceeds from the Transactions for acquisitions or other
purposes. See "Stockholders Agreement--Conduct of Business and "--Certificate of
Incorporation and Bylaws Amendments."
As a result of the foregoing, upon consummation of the Second Closing
Prometheus or its transferees who hold the Class AA Preferred Stock and Class AB
Preferred Stock will have substantial influence over, and could under certain
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<PAGE>
circumstances exercise effective control of, the direction and management of the
Company and the conduct of its business.
Prometheus's representation on the Board and the Executive Committee, its
voting rights, its consent rights and the requirements of Supermajority Director
Approval and Supermajority Executive Committee Approval for certain significant
actions and transactions and other aspects of the Transactions, including the
amendments to the certificate of incorporation increasing the number of
authorized shares of Common Stock, could have certain anti-takeover effects,
including deterring, delaying or preventing tender offers or other takeover
proposals or attempts that might result in the payment to stockholders of a
premium over the market price of the Common Stock. The Company, however, did not
enter into, and does not view, the Stock Purchase Agreement, the Stockholders
Voting Agreement, the Stockholders Agreement, the other Ancillary Agreements,
and the Transactions as an anti-takeover measure. The Board is not aware of any
current effort by any person or group to obtain control of the Company.
The Board expects the Transactions to result in substantial benefits for
the Company and its stockholders. The Transactions, however, could have the
effect of diluting the economic interests and will have the effect of diluting
the voting rights, of the existing stockholders. The Company expects to benefit
from the participation of Prometheus's designees on the Board and the Executive
Committee and other committees; however, there can be no assurances regarding
the effect that the influence and participation of Prometheus and the Preferred
Stock Directors in the direction and management of the Company will have on the
Company's financial performance and condition.
Use of Proceeds
The Company expects the aggregate net proceeds from the sale of the
$35,000,000 initial liquidation value (35,000 shares) of Class AA Preferred
Stock, the $40,000,000 initial liquidation value (40,000 shares) of Class AB
Preferred Stock, and/or any debt instruments in lieu of all or a portion of the
Class AB Preferred Stock, and the 1,000,000 Warrants to be approximately
$72,500,000, after payment of related fees and expenses. The Stock Purchase
Agreement does not restrict the Company's use of proceeds from the Transactions
and, accordingly, the Company may use the net proceeds for any business purpose
consistent with the fiduciary duties of the Company's directors and officers.
The Company currently expects to use such net proceeds primarily for the
selective acquisition of established homebuilding companies. However, the
Company may decide to use proceeds from the Transactions for other purposes
although the Company currently has no specific plan to do so.
While, as of the date of this Proxy Statement, the Company is evaluating
several prospective acquisitions of homebuilding companies, no determination has
been made by the Company to invest net proceeds in such acquisitions, other than
as described below. In evaluating potential acquisitions of
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homebuilders, the Company seeks transactions in which the financial results of
the acquired company are expected to be accretive to the Company's earnings per
share and financial ratios, both on an historical pro forma basis and on a
prospective basis. In addition, the Company seeks homebuilders that are expected
to provide strong local management committed to working with the Company and are
intended to add geographic and/or product diversification.
On August 27, 1997, the Company completed the acquisition of Don Galloway
Homes, Inc. and related interests ("Galloway"), a homebuilding company operating
primarily in Charlotte, North Carolina and in Charleston, South Carolina, for a
total transaction price of up to $21,000,000, consisting of $5,000,000 in cash,
a $5,000,000 note bearing interest at one percent per annum over the prime rate
and initially due on September 30, 1997, $6,000,000 in newly-issued zero
dividend convertible and redeemable Series D preferred stock, and an earn-out of
up to $5,000,000 which will be paid through the year 2000. In addition, the
Company assumed debt of $18,600,000. For the fiscal year ended June 30, 1997,
Galloway delivered approximately 470 homes, generating gross revenues of
$66,000,000 and pre-tax profit of approximately $7,800,000. As of June 30, 1997,
Galloway had a backlog of 235 homes under contract with an aggregate value of
approximately $33,000,000.
Proceeds from the First Closing were used to pay the above-referenced note
and to repay advances made for the purchase of Galloway under working capital
lines maintained by several of the Company's subsidiaries. Advances under these
lines bear interest at floating rates between one-half and two points above the
lenders' prime rates, and borrowings under the lines mature annually.
Recommendation of the Board; Reasons for the Transactions
The Board believes that the Transactions are advisable and in the best
interests of the Company and its stockholders, and accordingly, the Board
unanimously recommends to the stockholders that they vote their Common Stock in
favor of the Transactions. Certain principal stockholders who are members of the
Board and who own in the aggregate Common Stock having a majority of the votes
entitled to be cast at the Special Meeting have agreed to vote in favor of the
Transactions and, accordingly, the Transactions can be approved without the vote
of any other stockholders. See "Stockholders Voting Agreement." As of the Record
Date, Prometheus was the owner of 11,700 shares of Class AA Preferred Stock,
which entitles Prometheus to cast 1,950,000 votes at the Special Meeting. Under
the Stock Purchase Agreement, Prometheus will not vote on the proposal to
approve the Transactions.
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As part of its review in respect of the Transactions, the Board considered
(a) information concerning the Company's financial performance, condition,
business operations and prospects; (b) the proposed terms and conditions of the
Transactions documents and the Transactions, including the terms and conditions
of the Stock Purchase Agreement, the Class AA Preferred Stock, the Class AB
Preferred Stock, the debt alternative, the Warrants, the certificate of
incorporation and bylaws amendments and the Stockholders Agreement; (c) the
negotiations that led to the terms and conditions of the Transactions documents;
(d) management's assessment of the other preliminary proposals for financing
received by the Company; (e) the likelihood of completion of the Transactions;
(f) the potential dilutive effect on the outstanding Common Stock resulting from
the issuance of the Class AA Preferred Stock and the Class AB Preferred Stock
and the conversion thereof into Common Stock, including the potential downward
adjustment of the conversion price of the Class AA Preferred Stock, the issuance
of the Warrants and the exercise thereof for Common Stock, including the
potential adjustments to increase the number of shares issuable upon exercise
and to decrease the exercise price; (g) the business advantages and benefits
expected to result from the Company's use of the net proceeds from the
Transactions, including the expectation that the Company's financial condition
and performance will be improved by the use of the net proceeds and that the
availability of such funds will enable the Company to make additional
acquisitions which the Company believes could have a positive impact on the
Company's earnings; (h) the potential effect of the Class AA Preferred Stock and
the Class AB Preferred Stock, and/or debt in lieu of the Class AB Preferred
Stock, on the Company's earnings and earnings per share; (i) the possibility
that Lazard's significant investment in the Company could increase investors'
awareness and interest in the Company; and (j) the possibility that, as a result
of the expected benefits of the Transactions, the market price of the Common
Stock could increase, both directly benefitting the Company's stockholders and
enabling the Company to raise capital in the future by additional public
offerings of Common Stock. The Board also noted Lazard's stated interest in
purchasing Common Stock from the Company's principal stockholders, potentially
providing these stockholders with liquidity for a portion of their shares, which
benefit had been anticipated in connection with the Company's initial public
offering but had not been realized to date.
The Board believes that the Transactions are in the best interest of the
Company and its stockholders for the following reasons:
The Board believes that a key to the Company's long-term success is
continuing growth through acquisitions. Growth will allow additional market
diversification and increased economies of scale in purchasing power and
spreading of overhead expenses. The availability of the funds from the
Transactions will enable the Company to make
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additional acquisitions which the Board believes should have a positive impact
on the Company's earnings.
The Board believes that the Transactions should increase investors'
awareness and interest in the Company. This may increase the trading market for
the Common Stock and may facilitate additional public offerings of the Common
Stock in the future.
The Board believes that the Company's cost of funds from the Transactions
is favorable as compared to the other options available to and considered by the
Company. Lazard's willingness to permit the Transactions to be completed in a
series of closings should permit funding to be coordinated with acquisition
closings and help avoid underutilization of the invested funds. Also, the
Transactions, as private transactions, permit completion on a rapid schedule.
The Board considered that the "exclusivity" provisions of the Stock
Purchase Agreement preclude the Company during a specified period of time from
soliciting alternative transactions. See "Stock Purchase Agreement--No
Solicitation." The Stock Purchase Agreement provides, however, that the Company
may furnish information to, and enter into discussions or negotiations with, any
party that makes an unsolicited bona fide proposal to consummate an alternative
transaction, if the Company receives written advice of outside legal counsel
that such action is advisable to enable the Board to comply with its fiduciary
duties, the Company provides written notice to Lazard and the third party enters
into a customary confidentiality agreement with such third person. The Board
also noted that the Stock Purchase Agreement provides for the payment by the
Company on the closing dates of Lazard's fees and expenses in connection with
the Transactions. The Board further noted that the Stock Purchase Agreement
provides for the payment of a $4,000,000 termination fee to Lazard as liquidated
damages if the Stock Purchase Agreement is terminated under certain
circumstances prior to the Second Closing. See "Stock Purchase Agreement--Fees
and Expenses." The Board concluded that Lazard would not enter into the Stock
Purchase Agreement without those provisions. The Board concluded that, while the
existence of the termination fee and transaction expense provisions might reduce
the likelihood that a third party would propose an alternative transaction, the
Company had determined that it was unlikely that the Company would receive any
further third party proposals or that any such proposal would be more favorable
to the Company than the Transactions.
In considering the Transactions, the Board acknowledged that there are
certain risks and costs associated with the Transactions, including (a) the
possibility that the potential benefits to the Company and the stockholders may
not be realized,
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and that the Company's financial condition and performance may not improve by
using the net proceeds including that the Company may not succeed in making
timely acquisitions of additional homebuilders or that the acquisitions may not
have a positive impact on the Company's earnings; (b) the dilutive effect on the
outstanding Common Stock resulting from the issuance of the Class AA Preferred
Stock and the Class AB Preferred Stock and/or debt and the conversion thereof
into Common Stock, including the potential downward adjustment of the conversion
price of the Class AA Preferred Stock, and from the issuance of the Warrants and
the exercise thereof for Common Stock, including the potential adjustments to
increase the number of shares issuable upon exercise and to decrease the
exercise price; (c) the possibility that the cost to the Company of the
preferred stock and/or debt may exceed the income from the acquisitions of
additional homebuilders; and (d) the possibility that the Second Closing may not
occur, resulting in the payment of a termination fee to Lazard and a potential
adverse effect on the market price of the Common Stock.
The Board concluded that the expected benefits and advantages described
above, and the likelihood of realizing such benefits, outweighed the risks,
costs and disadvantages. In view of the wide variety of factors considered in
connection with its evaluation of the Transactions, the Board did not find it
practical to, and did not, quantify or otherwise attempt to assign relative
weights to the specific factors considered in reaching its determination.
The Board unanimously recommends that stockholders vote "FOR" the
Transactions.
Consequences if the Transactions Are Not Consummated
If the Stock Purchase Agreement is terminated under certain conditions
prior to the Second Closing (other than as a result of a material breach by
Prometheus of its representations, warranties or obligations thereunder), then,
in addition to any other rights of Prometheus thereunder, the Company will be
obligated to pay Prometheus a termination fee in the amount of $4,000,000 plus
the reasonable fees and expenses incurred by Prometheus estimated in the
approximate amount of $1,500,000. See "Stock Purchase Agreement--Fees and
Expenses." In addition, if the Stock Purchase Agreement is terminated prior to
the Second Closing, other than as a result of a material breach by Prometheus of
its representations, warranties or obligations thereunder, the exercise price of
each outstanding Warrant will immediately be reduced to $0.01 per share.
Further, if the Second Closing does not occur, the dividend rate on the Class AA
Preferred Stock will remain 12% per annum and the Company will not have the
right to require conversion of the Class AA Preferred Stock into Common Stock.
See "Stock Purchase
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Agreement--Warrants--Adjustment of Exercise Price and Number of Warrant Shares"
and "--Class AA Preferred Stock--Dividends."
Absence of Appraisal Rights.
Under Delaware law, objecting stockholders will have no appraisal,
dissenters' or similar rights (i.e., the right to seek a judicial determination
of the "fair value" of the Common Stock and to compel the Company to purchase
their Common Stock for cash in that amount) with respect to matters presented at
the Special Meeting or otherwise with respect to the Transactions, nor will the
Company voluntarily accord such rights to stockholders. Therefore, approval by
the requisite number of shares of the matters presented at the Special Meeting
will bind all stockholders and objecting stockholders will be able to liquidate
their Common Stock only by selling it in the market.
Interests of Certain Persons in the Transactions
In considering the Board's recommendation to vote in favor of the
Transactions, stockholders should consider that the Company's directors and
officers have certain interests in the Transactions that are different from, or
in addition to, the interests of stockholders generally. The Company is
submitting for approval of the stockholders and, pursuant to the Stockholders
Agreement, Prometheus will vote in favor of, a proposal to increase the number
of shares of Common Stock available for grant under the 1996 Stock Incentive
Plan. See "Proposal to Authorize an Increase in the Common Stock Subject to the
Company's 1996 Stock Incentive Plan." In addition, Prometheus may purchase from
certain stockholders, including those stockholders who are parties to the
Stockholders Agreement and the Stockholders Voting Agreement, approximately
900,000 shares of Common Stock owned by such stockholders for approximately
$4,900,000. As of the date of this Proxy Statement, no agreement has been
entered into with respect to such purchases. Further, one of the Company's
directors is a director of Furman Selz LLC ("Furman Selz"), which will be paid
an investment banking fee in connection with the Transactions.
Expenses of the Transactions
The Company expects to incur expenses incident to the Transactions of
approximately $2,500,000, including (a) reimbursement of fees and expenses
incurred by Lazard of approximately $1,500,000, of which approximately $825,000
has been paid to date, and (b) legal fees, an investment banking fee to be paid
to Furman Selz, and other expenses. See "Stock Purchase Agreement--Fees and
Expenses."
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Stock Purchase Agreement
Purchase and Sale of Securities. Subject to the terms and conditions of the
Stock Purchase Agreement, Prometheus will purchase from the Company, and the
Company will issue and sell to Prometheus, for an aggregate purchase price of
$75,000,000 (a) an aggregate of 35,000 shares, having an initial liquidation
value of $35,000,000, of Class AA Convertible Preferred Stock, $0.01 par value
per share (the "Class AA Preferred Stock"); (b) an aggregate of 40,000 shares,
having an initial liquidation value of $40,000,000, of Class AB Preferred Stock
which will be apportioned (as described below) between the Class ABI Convertible
Redeemable Preferred Stock, $0.01 par value per share (the "Class ABI Preferred
Stock") and the Class ABII Convertible Redeemable Preferred Stock, $0.01 par
value per share (the "Class ABII Preferred Stock"); and (c) warrants (the
"Warrants") to purchase up to an aggregate of 1,000,000 shares of Common Stock,
subject to adjustment in accordance with the terms of the Warrant Agreement.
"Class AB Preferred Stock" means the Class ABI Preferred Stock and the Class
ABII Preferred Stock. The Company has the right to issue in lieu of all or a
portion of the Class AB Preferred Stock, a debt instrument on terms and
conditions substantially as favorable to Prometheus as those of the Class ABI
Preferred Stock, with the debt to mature on December 31, 2004.
First Closing. Effective September 30, 1997, Prometheus purchased from the
Company 11,700 shares, having an initial liquidation value of $11,700,000 of
Class AA Preferred Stock and 375,000 Warrants (the "First Closing") for an
aggregate purchase price of $11,700,000. The First Closing was not conditioned
on Stockholders Approval (defined below).
Pursuant to the Stock Purchase Agreement, at the First Closing the Company
and Prometheus entered into the Warrant Agreement, the Stockholders Agreement
and the Registration Rights Agreement (the "Ancillary Agreements"), all of which
are described below. See "Warrants;" "Stockholders Agreement;" and "Registration
Rights Agreement." In addition, certain principal stockholders of the Company
and Prometheus entered into an Amended and Restated Stockholders Voting
Agreement.
Second Closing. Subject to the terms and conditions of the Stock Purchase
Agreement, including Stockholders Approval, at a second closing, Prometheus will
purchase from the Company (a) 4,633 shares, having an initial liquidation value
of $4,633,000, of Class AA Preferred Stock, (b) 18,667 shares, having an initial
liquidation value of $18,667,000, of Class ABI Preferred Stock, and/or a debt
instrument in lieu of all or some of the Class ABI Preferred Stock, and (c)
625,000 Warrants, for an aggregate
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purchase price of $23,300,000 (the "Second Closing"). "Stockholders Approval"
means approval by the record holders of the requisite number of shares of
outstanding Common Stock of all items necessary to effectuate the transactions
contemplated by the Stock Purchase Agreement and the Ancillary Agreements. Under
the Stock Purchase Agreement, the Second Closing is to occur on December 30,
1997, or earlier if the Company and Prometheus mutually agree. If Stockholders
Approval has not been obtained by December 30, 1997, the Company has the right
to extend the date of the Second Closing to January 31, 1998. Stockholders
Approval is assured because certain principal stockholders who hold in the
aggregate Common Stock having a majority of the votes entitled to be cast at the
Special Meeting have agreed to vote in favor of the Transactions. See
"Stockholders Voting Agreement" and "Stockholders Approval."
Upon the consummation of the Second Closing, Prometheus will have purchased
16,333 shares, having an initial liquidation value of $16,333,000, of Class AA
Preferred Stock and 18,667 shares, having an initial liquidation value of
$18,667,000, of Class AB Preferred Stock, and/or a debt instrument in lieu of
all or some of the Class ABI Preferred Stock, and 1,000,000 Warrants and will
have paid the Company $35,000,000 for such securities.
Subsequent Closings. Subject to the terms and conditions of the Stock
Purchase Agreement, following the Second Closing, the Company will sell to
Prometheus, from time to time at one or more subsequent closings, an aggregate
of 18,667 shares, having an initial liquidation value of $18,667,000, of Class
AA Preferred Stock and 21,333 shares, having an initial liquidation value of
$21,333,000, of Class AB Preferred Stock, apportioned between the Class AA
Preferred Stock and the Class AB Preferred Stock in proportionate amounts and
apportioned between the Class ABI Preferred Stock and the Class ABII Preferred
Stock as described below, and/or a debt instrument in lieu of all or some of the
Class AB Preferred Stock, for an aggregate purchase price of $40,000,000 (the
"Subsequent Purchases"). At least 20 business days prior to any Subsequent
Purchase, the Company is obligated to notify Prometheus of the anticipated date
of the subsequent closing and the number of shares of Class AA and Class AB
Preferred Stock (and/or the principal amount of the debt instrument) the Company
is requiring Prometheus to purchase, which will not be fewer than 10,000 shares
of such preferred stock (or less than $10,000,000 principal amount of debt
instrument) unless such purchase is of the balance of such preferred stock (or
debt). The Company will be obligated to require Prometheus to make all of the
Subsequent Purchases on or before December 31, 1998. After the Second Closing,
if Prometheus defaults in any of its obligations to fund Subsequent Purchases
(other than because of a default of the Company), Prometheus is required to
redeliver to the Company for cancellation all Warrants received in excess of
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one Warrant for every $75 of the amount of Liquidation Preference (defined
below) of preferred stock (or debt) issued under the Stock Purchase Agreement.
Upon the consummation of all of the Subsequent Purchases, Prometheus will
have purchased 35,000 shares, having an initial liquidation value of
$35,000,000, of Class AA Preferred Stock, 40,000 shares, having an initial
liquidation value of $40,000,000, of Class AB Preferred Stock (or $40,000,000 of
debt instruments (if issued) or some combination of Class AB Preferred Stock and
debt instruments) and 1,000,000 Warrants, for an aggregate price of $75,000,000.
Apportionment of Class AB Preferred Stock. Under the Stock Purchase
Agreement, the parties will apportion the Class AB Preferred Stock to be issued
between the Class ABI Preferred Stock and the Class ABII Preferred Stock to
ensure that Prometheus has no more than 45% of the total voting power of the
Company on the date of issuance of such Class AB Preferred Stock with respect to
the election of directors to the Board generally (other than directors elected
exclusively by holders of Class AA Preferred Stock and Class AB Preferred
Stock), and so that the Company will issue the maximum amount of Class ABI
Preferred Stock that it is permitted to issue before issuing any Class ABII
Preferred Stock. Such apportionment will not be required until a Subsequent
Purchase.
Further Purchases. Provided that the Company has sold all Subsequent
Purchases to Prometheus, the Company may, at its option, request, on not less
than 30 business days notice, that Prometheus purchase in the aggregate from the
Company, in proportionate amounts and on terms otherwise identical to the terms
of the securities referred to above, up to an additional 11,667 shares, having
an initial liquidation value of $11,667,000, of Class AA Preferred Stock, up to
an additional 13,333 shares, having an initial liquidation value of $13,333,000,
of Class AB Preferred Stock, apportioned between Class ABI Preferred Stock and
Class ABII Preferred Stock as described above, and/or a debt instrument in lieu
of all or some of the Class AB Preferred Stock, and up to an additional 333,250
Warrants (a "Further Purchase"), for an aggregate purchase price of up to
$25,000,000. Prometheus may, in its sole discretion, agree to or refuse any such
request for a Further Purchase.
Right of First Refusal. Prometheus will have a right of first refusal with
respect to any bona fide offer to purchase up to $25,000,000 of equity capital
of the Company. Prometheus must respond to such offer within 30 days and if it
does not accept such offer, the Company may proceed with such issuance but is
prohibited from raising such capital
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on terms materially less favorable to the Company without first offering the
securities again to Prometheus.
Class AA Preferred Stock. The following is a summary of the preferences,
powers and rights of the Class AA Preferred Stock set forth in a Certificate of
Designations, Preferences and Relative Participating, Optional and Other Special
Rights of Preferred Stock and Qualifications, Limitations and Restrictions
Thereof ("Class AA Certificate of Designations"). The summary is qualified in
its entirety by reference to the full text of the Class AA Certificate of
Designations, which is attached hereto as Annex A.
Number of Shares. The number of authorized shares of Class AA Preferred
Stock will be 46,670 shares.
Rank. With respect to dividends and distributions upon liquidation,
dissolution or winding up of the Company, the Class AA Preferred Stock will rank
equally with any Parity Stock and senior to the Common Stock and any other
equity or other securities into which any convertible indebtedness is
convertible which are issued by the Company. "Parity Stock" means (a) the Series
A Cumulative Convertible Preferred Stock, (b) the Series B Convertible Preferred
Stock, (c) the Series C Convertible Preferred Stock, (d) the Series D
Convertible Redeemable Preferred Stock, (e) the Class ABI Preferred Stock, (f)
the Class ABII Preferred Stock, and (g) any class or series of stock of the
Company authorized after the date that the Company first issues (the "Initial
Issue Date") the Class AA Preferred Stock which is entitled to receive payment
of dividends, or assets upon liquidation, dissolution or winding up of the
Company, on a parity with the Class AA Preferred Stock. See "Certificate of
Incorporation and Bylaws Amendments" with respect to the shares of Series A,
Series B, Series C and Series D Preferred Stock authorized, issued and
outstanding.
Dividends. The record holders of Class AA Preferred Stock will be entitled
to receive dividends, when and as declared by the Board, out of funds legally
available for payment of dividends. Such dividends will be payable in cash at
the annual rate of 12% of the Liquidation Preference until such time, if any, as
the Second Closing occurs. If the Second Closing occurs, such dividends will be
payable in cash from and after the Second Closing at the annual rate of 6% of
the Liquidation Preference. "Liquidation Preference" means $1,000 per share.
Dividends on shares of Class AA Preferred Stock will accrue and be cumulative
from the date of issuance of such shares. Dividends will be payable quarterly in
arrears when and as declared by the Board on March 31, June 30, September 30 and
December 31 of each year (a "Dividend Payment Date"), commencing on
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December 31, 1997. For any Dividend Period in which dividends are not paid in
full on the Dividend Payment Date first succeeding the end of such Dividend
Period, then such accrued and unpaid dividends will be added (solely for the
purpose of calculating dividends payable on the Class AA Preferred Stock) to the
Liquidation Preference of the Class AA Preferred Stock effective at the
beginning of the Dividend Period succeeding the Dividend Period as to which such
dividends were not paid and will thereafter accrue additional dividends at the
applicable dividend rate until such accrued and unpaid dividends have been paid
in full. "Dividend Period" means the period from, and including, the Initial
Issue Date to, but not including, the first Dividend Payment Date and
thereafter, each quarterly period from, and including, the Dividend Payment Date
to, but not including, the next Dividend Payment Date.
The Company will be required to declare and pay dividends at the applicable
dividend rate on each Dividend Payment Date to the extent that funds are legally
available for declaration of such dividends. If full dividends are not paid to
the holders of Class AA Preferred Stock and of any Parity Stock with respect to
any Dividend Period and funds available for payment of dividends are
insufficient to permit payment in full to holders of all such stock, then the
entire amount legally available for payment of dividends will be distributed
ratably among all such holders of Class AA Preferred Stock and of any Parity
Stock. The dividends payable in respect of the Class AA Preferred Stock will be
a mandatory obligation to the Company, subject only to the limitations set forth
in the Delaware General Corporation Law with respect to funds legally permitted
to be used for the payment of dividends.
While any Class AA Preferred Stock is outstanding, (a) the Company will not
declare, pay or set apart for payment on any Junior Stock any dividends (other
than dividends payable in shares of the class or series upon which such
dividends are declared or paid, or payable in shares of Common Stock with
respect to Junior Stock other than Common Stock, together with cash in lieu of
fractional shares), (b) the Company will not make any distribution on any Junior
Stock, (c) the Company or any of its majority-owned subsidiaries will not
purchase, redeem or otherwise acquire any Junior Stock, and (d) no money will be
paid or made available for a sinking fund for the purchase or redemption of any
Junior Stock, unless all dividends to which the holders of Class AA Preferred
Stock will have been entitled for all previous Dividend Periods have been paid
or declared and a sum of money sufficient for such payment has been set apart.
"Junior Stock" means the Common Stock, other Common Equity and any class or
series of stock of the Company authorized after the Initial Issue Date which is
not entitled to receive any dividends in any Dividend Period unless all
dividends required to have been paid or declared and set apart for payment on
the Class AA Preferred Stock and on any Parity Stock have been so paid
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or declared and set apart for payment or which is not entitled to receive any
assets upon liquidation, dissolution or winding up of the Company until the
Class AA Preferred Stock and any Parity Stock have received the entire amount to
which such stock is entitled upon such liquidation, dissolution or winding up.
"Common Equity" means all shares of any class of common stock of the Company,
including the Common Stock, and any other stock of the Company authorized after
the Initial Issue Date, which has the right to participate in the distribution
of the assets and earnings of the Company without limit as to per share amount.
Liquidation Preference. In the event of any voluntary or involuntary
liquidation, dissolution or other winding up of the Company, before any payment
or distribution will be made to the holders of Junior Stock, the holders of
Class AA Preferred Stock will be entitled to be paid out of the Company's assets
in cash or property at its fair market value as determined by the Board, the
Liquidation Preference per share plus an amount equal to all dividends accrued
and unpaid thereon to the date of such liquidation, dissolution or such other
winding up. If, upon any such liquidation, dissolution or other winding up of
the Company the Company's assets are insufficient to permit the payment in full
of the Liquidation Preference per share plus an amount equal to all dividends
accrued and unpaid on the Class AA Preferred Stock and the full liquidating
payments on all Parity Stock, then the Company's assets will be ratably
distributed among the holders of Class AA Preferred Stock and any Parity Stock
in proportion to the full amounts to which they would otherwise be respectively
entitled if all amounts thereon were paid in full. For the purposes of the
foregoing, neither the consolidation or merger of the Company into or with
another entity or entities, nor the sale, lease, transfer or conveyance of all
or substantially all of the Company's assets to another entity, will be deemed a
liquidation, dissolution or winding up of the Company.
Conversion. Holders of shares of Class AA Preferred Stock will have the
right at any time after the Initial Issue Date to convert such shares into
Common Stock at the then prevailing Optional Conversion Price. "Optional
Conversion Price" means initially $6.00 per share subject thereafter to
adjustment at the option of the holder during the period between September 30,
2001 and September 30, 2003 (the "Adjustment Period"). A holder of Class AA
Preferred Stock will have the right during the Adjustment Period to elect to
adjust up to five times per year the Optional Conversion Price for the Class AA
Preferred Stock held by such holder, by reference to the then prevailing
Adjustment Price as follows:
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Adjustment Price(s) Optional Conversion Price(s)
$ 10.01 - 12.00 $ 5.50
8.01 - 10.00 5.00
6.01 - 8.00 4.00
4.01 - 6.00 3.00
2.01 - 4.00 2.00
0.00 - 2.00 1.00
"Adjustment Price" means, on any date of determination, the average of the
closing prices of the Common Stock over the 60 day period prior to such date. If
and when the Company makes any adjustment to the Conversion Prices as referred
to below (the "Antidilution Adjustments"), the Company will make a like
adjustment to the Adjustment Prices set forth above.
After the date of the Second Closing (if any), at any time during a period
when the Average Trading Price is equal to or exceeds $12.00, subject to the
Antidilution Adjustments referred to below, the Company will have the right to
convert all, but not less than all, of the Class AA Preferred Stock outstanding
at such time into Common Stock at the then prevailing Mandatory Conversion
Price, provided that on the mandatory conversion date, the Company will have
paid all accrued dividends on all shares of Class AA Preferred Stock then
outstanding. "Average Trading Price" means, on any date of determination, the
average of the closing prices of the Common Stock over the 90 day period prior
to such date. "Mandatory Conversion Price" means initially $6.00 per share
subject thereafter to the Antidilution Adjustments referred to below.
For the purposes of conversion, each share of Class AA Preferred Stock will
be valued at the Liquidation Preference plus all accrued but unpaid dividends
thereon through the relevant conversion date, which value will be divided by the
Optional Conversion Price or Mandatory Conversion Price, as applicable, in
effect on the conversion date to determine the number of shares issuable upon
conversion.
Certain Antidilution Adjustments will be made to the Optional Conversion
Price and the Mandatory Conversion Price (the "Conversion Prices") from time to
time upon the following events, subject to certain exceptions and limitations:
(a) if the Company (i) pays a dividend or makes a distribution on its Common
Stock in shares of its Common Stock, (ii) subdivides its outstanding shares of
Common Stock into a greater number of shares, (iii) combines its outstanding
shares of Common Stock into a smaller number of shares, (iv) issues by
reclassification of its Common Stock any shares of its capital stock; (b) if the
Company distributes any rights or warrants to all holders of its Common Stock
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entitling them to purchase shares of Common Stock at a price per share less than
the current market price per share on the applicable record date; (c) if the
Company distributes to all holders of its Common Stock (i) any class of capital
stock of the Company other than its Common Stock, (ii) any evidence of
indebtedness or other securities of the Company or any subsidiary of the
Company, (iii) any other assets of the Company or any subsidiary of the Company
(other than cash), (iv) distributions in cash in excess of 3% of the net
earnings before extraordinary items of the Company for the previous fiscal year,
or (v) any rights, options or warrants to acquire any of the foregoing; (d) if
the Company issues Common Stock for a consideration per share less than the
Current Market Price per share on the date the Company fixes the offering price
of such additional shares; (e) if the Company issues any options, warrants or
other securities convertible into or exchangeable or exercisable for Common
Stock (other than certain preferred stock or securities described in (b) or (c)
above) and for a consideration per share of Common Stock initially deliverable
upon conversion, exchange or exercise of such securities less than the Current
Market Price per share on the date of issuance of such options, warrants or
other securities. "Current Market Price" means, for a share of Common Stock on
any date, the average of Quoted Prices for the 30 consecutive trading days
commencing 45 trading days before the date in question. "Quoted Price" means the
last reported sales price for Common Stock as reported by the National
Association of Securities Dealers, Inc. Automated Quotations System, National
Market System, or, if the Common Stock is listed or admitted for trading on a
securities exchange, the last reported sales price of the Common Stock on the
principal exchange on which the Common Stock is listed or admitted for trading,
or if not so reported or listed or admitted for trading, the last reported bid
price of the applicable security in the over-the-counter market. The formulas
for calculating the Antidilution Adjustments upon the events described above are
set forth in the Class AA Certificate of Designations, which is attached hereto
as Annex A.
The Company from time to time may reduce the Conversion Prices by any
amount for any period of time if the period is at least 20 business days and if
the reduction is irrevocable during the period, but in no event may the
Conversion Prices be less than the par value of a share of Common Stock.
If the Company is party to a merger which reclassifies or changes its
Common Stock, upon consummation of such transaction Class AA Preferred Stock
will automatically become convertible into the kind and amount of securities,
cash or other assets which the holder of Class AA Preferred Stock would have
owned immediately after the consolidation or merger, if such holder had
converted Class AA Preferred Stock immediately before the effective date of the
transaction.
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The Company has reserved and will continue to reserve out of its authorized
but unissued Common Stock or its Common Stock held in treasury enough shares of
Common Stock to permit the conversion of the Class AA Preferred Stock in full.
No Redemption. The Company will not have the right to redeem the Class AA
Preferred Stock.
Voting Rights. The record holders of Class AA Preferred Stock will be
entitled to vote on all matters voted on by holders of Common Stock, voting
together with the Common Stock as a single class (together with all other
classes and series of stock of the Company that are entitled to vote as a single
class with the Common Stock) at all meetings of the stockholders of the Company.
In any such vote, each share of Class AA Preferred Stock will entitle the holder
thereof to cast the number of votes equal to the number of votes which could be
cast in such vote by a holder of the number of shares of Common Stock into which
such share of Class AA Preferred Stock is convertible based on the Mandatory
Conversion Price of the Class AA Preferred Stock
On any matter on which the holders of Class AA Preferred Stock are entitled
by law or under the Certificate of Incorporation to vote separately as a class,
each such holder will be entitled to one vote for each share held, and such
matter will be determined by a majority of the votes cast unless Delaware law or
the Class AA Certificate of Designations requires approval by a higher
percentage.
From the earlier of the Stockholders Approval or the request by Prometheus,
until a Termination Event (defined below), the number of directors comprising
the Board will be equal to 15 and the holders of Class AA Preferred Stock and
Class AB Preferred Stock, voting as a single class (separately from other
stockholders), will have the exclusive right to elect 3 directors (each such
director, a "Preferred Stock Director"). Any increases in the size of the Board
will require a proportional increase in the number of Preferred Stock Directors
(rounded up to the next whole number) such that the Preferred Stock Directors
represent not less than 20% of the votes of the Board. A proportionate number of
Preferred Stock Directors will serve on each committee of the Board, provided
that the Executive Committee will consist of five members of which two members
will be Preferred Stock Directors. The "Executive Committee" means the
five-member executive committee of the Board to which substantial operational
matters regarding the Company will be delegated. At least one Preferred Stock
Director may serve on the board or other governing body of each of the Company's
subsidiaries and affiliates, other than operational home building companies. See
"Stockholders Agreement--Members of the Board."
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A "Termination Event" means the date on which (a) the aggregate amount of
Class AA and Class AB Preferred Stock outstanding is less than 20% of the
maximum amount of the Class AA and Class AB Preferred Stock issued or (b) the
aggregate remaining investment or commitment to invest in the Company by
Prometheus and any of its affiliates (or any single transferee or related group
of transferees) is less than the greater of $10,000,000 or 10% of the Company's
Market Capitalization, provided that a Termination Event will not occur prior to
all closings being consummated under the Stock Purchase Agreement. With respect
to (b) above, the value of such investment will be based on the sum of: (i) the
greater of the Liquidation Preference of the Preferred Stock and the value of
the Common Stock underlying such Preferred Stock (as measured by the Conversion
Price) then held by it; (ii) the value of the Common Stock then held by it; and
(iii) the value of the Warrants then held by it. "Market Capitalization" means
the market value of the outstanding Common Stock as measured by the 30 trading
days preceding any measurement date.
As a result of the acquisition by Prometheus of 11,700 shares of Class AA
Preferred Stock at the First Closing, Prometheus at this time, upon request, has
the right, among other things, to require the Company to take all necessary
action to permit Prometheus to elect three Preferred Stock Directors to the
Board, to have two of such Preferred Stock Directors appointed to the Executive
Committee and to have a proportionate number of Preferred Stock Directors serve
on each other committee of the Board. Prometheus has indicated that it does not
intend to exercise such rights until Stockholders Approval, although it reserves
the right to do so at any time.
The holders of Class AA Preferred Stock and Class AB Preferred Stock,
voting as a single class (separately from other stockholders), will be entitled
to elect additional Preferred Stock Directors sufficient to cause the Preferred
Stock Directors to constitute a majority of the Board and all committees of the
Board, including the Executive Committee (the "Additional Preferred Stock
Directors") in the following event (an "Adverse Event"): that on any date
following the Second Closing that is 60 days after the end of a fiscal quarter
of the Company (a "Test Date") both (a) the Average Trading Price of the Common
Stock is below $4.375 per share (adjusted in the same manner as the Mandatory
Conversion Price to take account of any of the occurrences that would require an
Antidilution Adjustment) and (b)(i) the percentage change in the EBT per share
of the issued and outstanding Common Stock for the most recent two fiscal
quarters as measured against the same two fiscal quarters from the prior fiscal
year is less than (ii) the percentage change in the EBT per share of the issued
and outstanding common stock of the Comparable Group for the same period as
compared against the EBT per share (calculated on the same basis) of the
Comparable Group during the same period in the
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prior fiscal year. "EBT" means earnings before interest expense, income taxes
and extraordinary or non-recurring items, all calculated in accordance with
generally accepted accounting principles. "Comparable Group" means the following
entities: Pulte Corporation; The Ryland Group, Inc.; U.S. Home Corporation; NVR
Inc.; Hovnanian Enterprises, Inc.; Toll Brothers, Inc.; Washington Homes, Inc.;
Zaring National Corporation; M/I Schottenstein Homes, Inc.; Continental Homes
Holding Corp.; Engle Homes, Inc.; Crossman Communities; Beazer Homes USA, Inc.;
and D.R. Horton, Inc. The size of the Board and all committees will be
automatically increased in order to effect any Additional Preferred Stock
Directors. The right of the holders of Preferred Stock to elect Additional
Preferred Stock Directors will continue until such time as neither (a) nor (b)
above is true for two consecutive Test Dates. See "Stockholders
Agreement--Members of the Board."
The Preferred Stock Directors elected will serve until the next annual
meeting or until their respective successors are elected and qualify. Upon the
termination of the right to elect Additional Preferred Stock Directors, any
Additional Preferred Stock Directors will resign. Any Preferred Stock Director
may be removed with or without cause by the vote of the holders of a majority of
the outstanding shares of Preferred Stock, voting separately as a single class.
Preferred Stock Director Designees. Prometheus, which holds 11,700 shares
of Class AA Preferred Stock, has informed the Company that of the three
Preferred Stock Directors it is entitled to elect, two will be Anthony E. Meyer
and Murry N. Gunty. Prometheus has not yet determined its third designee.
Anthony E. Meyer, age 36, is the Chief Investment Officer and Managing
Director of Lazard. In that capacity, Mr. Meyer is responsible for Lazard's
investment activities. Prior to joining Lazard in 1994, Mr. Meyer spent nearly
ten years in a variety of senior roles with Trammell Crow Group, where he was a
general partner and co-founder of Trammell Crow Ventures, the real estate
investment and finance affiliate of Trammell Crow Group. From 1990 to 1993 he
served as the chief investment officer of Trammell Crow Ventures. Mr. Meyer is a
director of Alexander Haagen Properties Inc.
Murry N. Gunty, age 30, is a vice president of Lazard. In that capacity,
Mr. Gunty works on Lazard's investments. Prior to joining Lazard in 1995. Mr.
Gunty was employed by J.E. Robert Company where he worked on investment
activities involving real estate investment trusts, commercial mortgage-backed
securities, and other corporate real estate opportunities. Prior to that, he
worked at Trammell Crow Ventures.
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Consent Rights. In addition to any vote or consent of shareholders required
by law or the Certificate of Incorporation, the consent of the holders of at
least 66 2/3% of the shares of Class AA Preferred Stock at the time outstanding
will be necessary to effect or validate the following actions or transactions:
(a) any amendment, alteration or repeal of any provision of the Certificate of
Incorporation or of the by-laws of the Company, which affects adversely the
voting powers, preferences and rights of the holders of Class AA Preferred
Stock; (b) any authorization or creation of or increase in the amount of any
shares of any class or any security convertible into shares of any class ranking
senior to or on parity with shares of Class AA Preferred Stock (other than the
Class AB Preferred Stock) in the distribution of assets on any liquidation,
dissolution or winding up of the Company or in the payment of dividends or
otherwise; (c) any increase or decrease (other than by conversion) in the total
number of authorized shares of Class AA Preferred Stock; (d) any sale, lease,
assignment, transfer or other conveyance of all or substantially all of the
assets of the Company or any of its material subsidiaries of which it owns 50%
or more of the voting power, or any consolidation or merger involving the
Company or any of such subsidiaries (except mergers between the Company's
subsidiaries), or any reclassification or other change of any stock, or any
liquidation, dissolution, or winding up of the Company or, unless the Company's
obligations under an agreement are expressly conditioned upon the requisite
approval of the holders of 66 2/3% of the Class AA Preferred Stock then
outstanding, make any agreement or become obligated to do so; (e) any purchase,
redemption or other acquisition for value (or payment into or setting aside as a
sinking fund for such purpose) of any shares of Common Stock or other capital
stock of the Company; or (f) any declaration or payment of any dividends on or
declaration or making of any other distribution on account of the Common Stock
or setting apart any sum for any such purpose unless all accrued unpaid
dividends on Class AA Preferred Stock have been paid in cash.
Financial Statements. Until the occurrence of a Termination Event, the
Company will furnish to the holders of Class AA Preferred Stock all quarterly
and annual financial information required to be filed with the Securities and
Exchange Commission ("SEC") on Forms 10-Q and 10-K and, with respect to the
annual information, a report thereon by the Company's certified independent
accountants, and all current reports required to be filed with the SEC on Form
8-K.
Modification and Waiver. The Class AA Certificate of Designations may be
amended and the rights of the holders of the Class AA Preferred Stock waived
with the consent of holders of at least 66 2/3% of the shares of the Class AA
Preferred Stock then outstanding.
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Class AB Preferred Stock. The following is a summary of the preferences,
powers and rights of the Class ABI Preferred Stock set forth in a Certificate of
Designations, Preferences and Relative, Participating, Optional and Other
Special Rights of Preferred Stock and Qualifications, Limitations and
Restrictions Thereof ("Class ABI Certificate of Designations") and the Class
ABII Preferred Stock set forth in a Certificate of Designations, Preferences and
Relative, Participating, Optional and Other Special Rights of Preferred Stock
and Qualifications, Limitations and Restrictions Thereof ("Class ABII
Certificate of Designations"). The summary is qualified in its entirety by
reference to the full text of the Class ABI Certificate of Designations and the
Class ABII Certificate of Designations, which are attached hereto as Annexes B
and C.
Number of Shares. The number of authorized shares of Class AB Preferred
Stock will be 53,333 shares, which will be apportioned between Class ABI
Preferred Stock and Class ABII Preferred Stock.
Rank. With respect to dividends and distributions upon liquidation,
dissolution or winding up of the Company, the Class ABI Preferred Stock and the
Class ABII Preferred Stock will rank equally with the Class AA Preferred Stock
and any other Parity Stock and senior to the Common Stock and any other equity
or other securities into which any convertible indebtedness is convertible which
are issued by the Company. With respect to Class ABI Preferred Stock and Class
ABII Preferred Stock, "Parity Stock" means (a) the Series A Preferred Stock, (b)
the Series B Preferred Stock, (c) the Series C Preferred Stock, (d) the Series D
Preferred Stock, (e) the Class AA Preferred Stock, (f) the Class ABII Preferred
Stock (with respect to the Class ABI Preferred Stock) and the Class ABI
Preferred Stock (with respect to the Class ABII Preferred Stock), and (g) any
class or series of stock of the Company authorized after the Initial Issue Date
which is entitled to receive payment of dividends, or assets upon liquidation,
dissolution or winding up of the Company, on a parity with the Class ABI
Preferred Stock and the Class ABII Preferred Stock.
Dividends. The record holders of Class ABI Preferred Stock and Class ABII
Preferred Stock will be entitled to receive dividends, when and as declared by
the Board, out of funds legally available for payment of dividends. Such
dividends will be payable in cash at the annual rate of 12% of the Liquidation
Preference. As with the Class AA Preferred Stock, "Liquidation Preference" with
respect to the Class ABI Preferred Stock and Class ABII Preferred Stock means
$1,000 per share. Dividends on shares of Class ABI Preferred Stock and Class
ABII Preferred Stock will accrue and be cumulative from the date of issuance of
such shares. Dividends will be payable quarterly in arrears when and as declared
by the Board on March 31, June 30, September 30 and December 31 of
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each year (a "Dividend Payment Date"), commencing on the Dividend Payment Date
following the issuance of any such Class AB Preferred Stock. For any Dividend
Period in which dividends are not paid in full on the Dividend Payment Date
first succeeding the end of such Dividend Period, then such accrued and unpaid
dividends will be added (solely for the purpose of calculating dividends payable
on the Class ABI Preferred Stock or the Class ABII Preferred Stock, as
applicable) to the Liquidation Preference of the Class ABI Preferred Stock or
the Class ABII Preferred Stock, as applicable, effective at the beginning of the
Dividend Period succeeding the Dividend Period as to which such dividends were
not paid and will thereafter accrue additional dividends at the annual rate of
12% until such accrued and unpaid dividends have been paid in full.
The Company will be required to declare and pay dividends at the rate of
12% per annum of the Liquidation Preference on each Dividend Payment Date to the
extent that funds are legally available for declaration of such dividends. If
full dividends are not paid to the holders of Class ABI Preferred Stock, Class
ABII Preferred Stock and of any Parity Stock with respect to any Dividend Period
and funds available for payment of dividends are insufficient to permit payment
in full to holders of all such stock, then the entire amount legally available
for payment of dividends will be distributed ratably among all such holders of
Class ABI Preferred Stock, Class ABII Preferred Stock and any Parity Stock. The
dividends payable in respect of the Class ABI Preferred Stock and the Class ABII
Preferred Stock will be a mandatory obligation of the Company, subject only to
the limitations set forth in the Delaware General Corporation Law with respect
to funds legally permitted to be used for the payment of dividends.
While any Class ABI Preferred Stock or Class ABII Preferred Stock is
outstanding, (a) the Company will not declare, pay or set apart for payment on
any Junior Stock any dividends (other than dividends payable in shares of the
class or series upon which such dividends are declared or paid, or payable in
shares of Common Stock with respect to Junior Stock other than Common Stock,
together with cash in lieu of fractional shares), (b) the Company will not make
any distribution on any Junior Stock, (c) the Company or any of its
majority-owned subsidiaries will not purchase, redeem or otherwise acquire any
Junior Stock, and (d) no money will be paid or made available for a sinking fund
for the purchase or redemption of any Junior Stock, unless all dividends to
which the holders of Class ABI Preferred Stock and Class ABII Preferred Stock
will have been entitled for all previous Dividend Periods have been paid or
declared and a sum of money sufficient for such payment has been set apart. With
respect to Class ABI Preferred Stock as well as Class ABII Preferred Stock,
"Junior Stock" means the Common Stock, other Common Equity and any class or
series of stock of the Company authorized after the Initial Issue Date which is
not entitled to receive any dividends in any
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Dividend Period unless all dividends required to have been paid or declared and
set apart for payment on the Class AB Preferred Stock and on any Parity Stock
have been so paid or declared and set apart for payment or which is not entitled
to receive any assets upon liquidation, dissolution or winding up of the Company
until the Class ABI Preferred Stock, the Class ABII Preferred Stock and any
Parity Stock have received the entire amount to which such stock is entitled
upon such liquidation, dissolution or winding up.
Liquidation Preference. In the event of any voluntary or involuntary
liquidation, dissolution or other winding up of the Company, before any payment
or distribution will be made to the holders of Junior Stock, the holders of
Class ABI Preferred Stock and Class ABII Preferred Stock will be entitled to be
paid out of the Company's assets in cash or property at its fair market value as
determined by the Board, the Liquidation Preference per share plus an amount
equal to all dividends accrued and unpaid thereon to the date of such
liquidation, dissolution or such other winding up. If, upon any such
liquidation, dissolution or other winding up of the Company the Company's assets
are insufficient to permit the payment in full of the Liquidation Preference per
share plus an amount equal to all dividends accrued and unpaid on the Class ABI
Preferred Stock and the Class ABII Preferred Stock and the full liquidating
payments on all Parity Stock, then the Company's assets will be ratably
distributed among the holders of Class ABI Preferred Stock, Class ABII Preferred
Stock and any Parity Stock in proportion to the full amounts to which they would
otherwise be respectively entitled if all amounts thereon were paid in full. For
the purposes of the foregoing, neither the consolidation or merger of the
Company into or with another entity or entities, nor the sale, lease, transfer
or conveyance of all or substantially all of the Company's assets to another
entity will be deemed a liquidation, dissolution or winding up of the Company.
Conversion. Holders of shares of Class ABI Preferred Stock and holders of
shares of Class ABII Preferred Stock will have the right at any time on or after
September 30, 2001, the fourth anniversary of the date of the First Closing, but
before the redemption date, to convert such shares into Common Stock at the
Conversion Price described below.
The Company, at its option, will have the right at any time on or after
September 30, 2002, the fifth anniversary of the date of the First Closing, but
before the redemption date, to convert all, but not less than all, of the Class
ABI Preferred Stock and the Class ABII Preferred Stock outstanding at such time
into Common Stock at the Conversion Price described below, provided that on the
conversion date the Company will have paid all accrued dividends on all Class
ABI Preferred Stock and Class ABII Preferred Stock then outstanding.
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For the purposes of conversion, whether at the election of either the
holders of shares of Class ABI Preferred Stock or Class ABII Preferred Stock or
the Company as described above, the Conversion Price will be equal to 95% of the
Current Market Price (defined above) on the applicable conversation date. Each
share of Class ABI Preferred Stock and Class ABII Preferred Stock will be valued
at the Liquidation Preference plus all accrued but unpaid dividends thereon
through the relevant conversion date, which value will be divided by the
Conversion Price in effect on the conversion date to determine the number of
shares issuable upon conversion.
The Company from time to time may reduce the Conversion Price by any amount
for any period of time if the period is at least 20 business days and if the
reduction is irrevocable during the period, but in no event may the Conversion
Price be less than the par value of a share of Common Stock.
If the Company consolidates or merges with or into, transfers or leases all
or substantially all its assets to any person, upon consummation of such
transaction Class ABI Preferred Stock and Class ABII Preferred Stock will
automatically become convertible into the kind and amount of securities, cash or
other assets which the holders thereof would have owned immediately after the
consolidation, merger, transfer or lease if such holders had converted such
Preferred Stock immediately before the effective date of the transaction.
The Company has reserved and will continue to reserve out of its authorized
but unissued Common Stock or its Common Stock held in treasury enough shares of
Common Stock to permit the conversion of the Class ABI Preferred Stock and Class
ABII Preferred Stock in full.
Redemption. The Company will have the right at its option at any time on or
after September 30, 2002, the fifth anniversary of the First Closing, to redeem
in whole the Class ABI Preferred Stock and the Class ABII Preferred Stock
together at the Redemption Price. The "Redemption Price" means a price per share
equal to the Liquidation Preference, plus an amount equal to all cumulative
dividends accrued and unpaid on such share to the redemption date.
Voting Rights. The record holders of Class ABI Preferred Stock will be
entitled to vote on all matters voted on by holders of Common Stock, voting
together with the Common Stock as a single class (together with all other
classes and series of stock of the Company that are entitled to vote as a single
class with the Common Stock) at all meetings of the stockholders of the Company.
In any such vote, each share of Class ABI
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Preferred Stock will entitle the holder thereof to cast the number of votes
equal to the number of votes which could be cast in such vote by a holder of the
number of shares of Common Stock into which such share of Class ABI Preferred
Stock would be convertible if the conversion price were $5.25 per share (the
closing trading price of the Common Stock on the date immediately preceding the
First Closing).
The record holders of Class ABII Preferred Stock will be entitled to
vote on all matters voted on by holders of Common Stock, voting together with
the Common Stock as a single class (together with all other classes and series
of stock of the Company that are entitled to vote as a single class with the
Common Stock) at all meetings of the stockholders of the Company other than in
respect of the election of directors, except that the Class ABII Preferred Stock
will vote in the election of directors if (a) the price of the Common Stock (as
measured by the Current Market Price) is less than $3.00 per share (such amount
to be adjusted for stock splits and recombinations as appropriate) and (b) the
holder provides notice to the Company that it elects to obtain such voting
right. In any vote with respect to which the holders of Class ABII Preferred
Stock are entitled to vote with the holders of Common stock as a single class,
each share of Class ABII Preferred Stock will entitle the holder thereof to cast
the number of votes equal to the number of votes which could be cast in such
vote by a holder of the number of shares of Common Stock into which such share
of Class ABII Preferred Stock would be convertible if the conversion price were
$5.25 per share (the closing trading price of the Common Stock on the date
immediately preceding the First Closing).
On any matter on which the holders of Class ABI Preferred Stock or Class
ABII Preferred Stock are entitled by law or under the Certificate of
Incorporation to vote separately as a class, each such holder will be entitled
to one vote for each share held, and such matter will be determined by a
majority of the votes cast unless Delaware law or the Certificate of
Designations requires approval by a higher percentage.
As discussed above with respect to the Class AA Preferred Stock, from the
earlier of the Stockholders Approval or the request by Prometheus, until a
Termination Event (as defined above), the number of directors comprising the
Board will be equal to 15 and the holders of Class AA Preferred Stock and Class
AB Preferred Stock, voting as a single class (separately from other
stockholders), will have the exclusive right to elect 3 Preferred Stock
Directors. Any increases in the size of the Board will require a proportional
increase in the number of Preferred Stock Directors (rounded up to the next
whole number) such that the Preferred Stock Directors represent not less than
20% of the votes of the Board. A proportionate number of Preferred Stock
Directors will serve on each committee of the Board, provided that the Executive
Committee will consist of five
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members of which two members will be Preferred Stock Directors. At least one
Preferred Stock Director may serve on the board or other governing body of each
of the Company's subsidiaries and affiliates, other than operational home
building companies. See "The Transactions--Stock Purchase Agreement--Class AA
Preferred Stock--Voting Rights" and "--Stockholders Agreement--Members of the
Board."
As discussed above with respect to the Class AA Preferred Stock, upon the
occurrence of an Adverse Event (as defined above), which follows the Second
Closing, the holders of Class AA Preferred Stock and Class AB Preferred Stock,
voting as a single class (separately from other stockholders), will be entitled
to elect Additional Preferred Stock Directors sufficient to cause the Preferred
Stock Directors to constitute a majority of the Board and all committees of the
Board, including the Executive Committee. The size of the Board and all
committees will be automatically increased in order to effect any Additional
Preferred Stock Directors. The right to elect Additional Preferred Stock
Directors will continue until such time as certain conditions are met, as
discussed above. See "Class AA Preferred Stock--Voting Rights" and "Stockholders
Agreement--Members of the Board."
Consent Rights. In addition to any vote or consent of stockholders required
by law or the Certificate of Incorporation, the consent of the holders of at
least 66 2/3% of the shares of Class ABI Preferred Stock or Class ABII Preferred
Stock, as applicable, at the time outstanding, will be necessary to effect or
validate the following actions or transactions: (a) any amendment, alteration or
repeal of any provision of the Certificate of Incorporation or of the by-laws of
the Company, which affects adversely the voting powers, preferences and rights
of the holders of Class ABI Preferred Stock or Class ABII Preferred Stock; (b)
any authorization or creation of or increase in the amount of any shares of any
class or any security convertible into shares of any class ranking senior to or
on parity with shares of Class ABI Preferred Stock or Class ABII Preferred Stock
(other than the Class AA Preferred Stock) in the distribution of assets on any
liquidation, dissolution or winding up of the Company or in the payment of
dividends or otherwise; (c) any increase or decrease (other than by conversion)
in the total number of authorized shares of Class ABI Preferred Stock or Class
ABII Preferred Stock; (d) any sale, lease, assignment, transfer or other
conveyance of all or substantially all of the assets of the Company or any of
its material subsidiaries of which it owns 50% or more of the voting power, or
any consolidation or merger involving the Company or any of such subsidiaries
(except mergers between the Company's subsidiaries), or any reclassification or
other change of any stock, or any dissolution, liquidation, or winding up of the
Company or, unless the Company's obligations under an agreement are expressly
conditioned upon the requisite approval of the holders of 66 2/3% of the Class
ABI Preferred Stock and the
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Class ABII Preferred Stock then outstanding, make any agreement or become
obligated to do so; (e) any purchase, redemption or other acquisition for value
(or payment into or setting aside as a sinking fund for such purpose) of any
shares of Common Stock or other capital stock of the Company; or (f) any
declaration or payment of any dividends on or declaration or making of any other
distribution on account of the Common Stock or setting apart any sum for any
such purpose unless all accrued unpaid dividends on Class ABI Preferred Stock
and Class ABII Preferred Stock have been paid in cash.
Financial Statements. Until a Termination Event occurs, the Company will
furnish to the holders of Class ABI Preferred Stock and Class ABII Preferred
stock all quarterly and annual financial information required to be filed with
the SEC on Forms 10- Q and 10-K and, with respect to the annual information, a
report thereon by the Company's certified independent accountants and all
current reports required to be filed with the SEC on Form 8-K.
Modification and Waiver. The Class ABI Certificate of Designations or the
Class ABII Certificate of Designations may be amended and the rights of holders
of the Class ABI Preferred Stock or the Class ABII Preferred Stock waived with
the consent of holders of at least 66 2/3% of the shares of the Class ABI
Preferred Stock or the Class ABII Preferred Stock, respectively, then
outstanding.
Debt Alternative. The Company and Prometheus have agreed that the Company,
at its option, may issue a debt instrument in lieu of all or any portion of the
Class AB Preferred Stock, provided that such debt instrument has terms and
conditions, including voting rights, no less favorable to Prometheus than the
terms and conditions of the Class ABI Preferred Stock and that such debt would
mature on December 31, 2004. The Company may consider issuing debt in lieu of a
portion of the Class AB Preferred Stock depending upon the Company's evaluation
of (i) the relative cost of the issuance of debt versus the cost of issuance of
preferred stock, including the federal income tax impact on the Company and (ii)
the benefit to the Company, including the financial and accounting impact and
the financial markets' evaluation, of the issuance of additional debt as opposed
to the issuance of additional equity.
The Company has not made any determination as to the amount of debt, if
any, it might seek to issue in lieu of Class AB Preferred Stock, and the
Company's ability to utilize this right to issue debt in lieu of Class AB
Preferred Stock is subject to compliance with the Indenture governing the
Company's Senior Notes, which, with certain exceptions, restricts the Company's
ability to incur additional indebtedness.
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The Stock Purchase Agreement also provides that, prior to the Second
Closing, the Company and Prometheus shall cooperate with a view to structuring
the issuance of a portion of any debt issued in lieu of Class AB Preferred Stock
through a limited liability company subsidiary of the Company. Under the
Indenture, a debt issuance by such a subsidiary could be structured in such a
manner so as not to be subject to the Indenture's restrictions on the issuance
of additional debt. The Company has currently proposed to Prometheus that the
Company would organize a new subsidiary in the form of a limited liability
company (the "LLC") and that Prometheus make a portion of its investment through
the acquisition of debt issued by the LLC in place of the issuance of an equal
amount of Class AB Preferred Stock (the "LLC Debt Proposal"). Although the
Company and Prometheus are engaged in discussions with respect to the LLC Debt
Proposal, Prometheus is not obligated to agree to any such structure, and there
can be no assurance that the Company and Prometheus will agree on the LLC Debt
Proposal or a similar proposal or as to the portion, if any, of Prometheus'
investment which would be made through debt of the LLC.
Warrants. Under the Stock Purchase Agreement, Prometheus will receive an
aggregate of 1,000,000 Warrants. In accordance with the Stock Purchase
Agreement, the Company and Prometheus entered into a Warrant Agreement at the
First Closing. Prometheus acquired 375,000 Warrants at the First Closing. See
"First Closing." Prometheus will receive 625,000 Warrants at the Second Closing.
See "Second Closing."
The following is a summary of certain terms and conditions of the Warrants
as set forth in the Stock Purchase Agreement and the Warrant Agreement.
Initial Exercise Price and Payment. Pursuant to the Stock Purchase
Agreement, each Warrant entitles the holder to purchase initially one share of
Common Stock at an initial exercise price of $7.00 per share, subject to certain
adjustments (the "Exercise Price") set forth in the Warrant Agreement. The
Common Stock issuable on exercise of the Warrants is referred to as the "Warrant
Shares."
Payment of the Exercise Price may be made at the Warrant holder's option in
cash or through the surrender of debt or preferred equity securities of the
Company having a principal amount or liquidation preference, as the case may be,
equal to the aggregate Exercise Price to be paid. As an alternative to the
payment of the Exercise Price, each Warrant holder may exercise his right to
receive Warrant Shares on a net basis, such that, without the payment of any
funds, the Warrant holder receives that number of Warrant Shares otherwise
issuable upon exercise of his Warrants less that number of Warrant Shares having
an aggregate fair market value at the time of exercise equal to the
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aggregate Exercise Price that would otherwise have been paid by the holder of
the Warrant Shares. Fair market value of the Warrant Shares will be determined
in good faith by a majority of the Non-Preferred Stock Directors of the Company,
as of the date of any such exercise, subject to the right of the holders of a
majority of the Warrants to challenge such determination. Any such dispute will
be resolved by an investment banking firm selected by the Company and acceptable
to such Warrant holders. "Non-Preferred Stock Directors" means directors of the
Company excluding any director elected by the holders of the Preferred Stock
voting as a separate class.
Exercise Period. The Warrants are exercisable during the period commencing
on September 30, 1999, until September 30, 2004.
Adjustments Based on Common Stock Market Price. Between September 30, 2001
and September 30, 2003, a holder of Warrants will have the right to elect to
adjust up to five times per year (a) the Exercise Price of each Warrant and (b)
the number of shares of Common Stock into which each Warrant held by such holder
will convert upon exercise of the Warrants, by reference to the Adjustment
Price, as follows:
Adjustment Price($) Exercise Price($) Additional Shares Per Warrant
20.01 or greater 7.00 0.00
17.51 - 20.00 7.00 0.33
15.01 - 17.50 7.00 0.667
12.01 - 15.00 7.00 1.00
10.01 - 12.00 6.50 1.25
8.01 - 10.00 6.00 1.50
6.01 - 8.00 5.00 1.75
4.01 - 6.00 4.00 2.00
2.01 - 4.00 3.00 2.25
0.00 - 2.00 2.00 2.50
The "Adjustment Price"with respect to the Warrants means the average of the
Quoted Price (as defined above) of the Common Stock for the 60 days preceding
such adjustment. For purposes of illustration, assuming the holder makes an
election during the adjustment period, if the average of the closing prices of
the Common stock for the 60 days preceding is $9.00 per share, the total number
of Warrant Shares will be 2,500,000 and the Exercise Price will be $6.00 per
share.
If the Company makes any adjustment to the Exercise Price as referred to
below, the Adjustment Prices set forth above will be adjusted in like manner.
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Adjustment of Exercise Price and Number of Warrant Shares. The Exercise
Price and the number of Warrant Shares issuable upon the exercise of each
Warrant are subject to adjustment from time to time upon the following events,
subject to certain exceptions and limitations: (a) if the Company (i) pays a
dividend or makes a distribution on its Common Stock in shares of its Common
Stock, (ii) subdivides its outstanding shares of Common Stock into a greater
number of shares, (iii) combines its outstanding shares of Common Stock into a
smaller number of shares, (iv) issues by reclassification of its Common Stock
any shares of its capital stock; (b) if the Company distributes any rights or
warrants to all holders of its Common Stock entitling them to purchase shares of
Common Stock at a price per share less than the Current Market Price (as defined
above) per share on the applicable record date; (c) if the Company distributes
to all holders of its Common Stock (i) any class of capital stock of the Company
other than its Common Stock, (ii) any evidence of indebtedness or other
securities of the Company or any subsidiary of the Company, (iii) any other
assets of the Company or any subsidiary of the Company (other than cash), (iv)
distributions in cash in excess of 3% of the net earnings before extraordinary
items of the Company for the previous fiscal year, or (v) any rights, options or
warrants to acquire any of the foregoing; (d) if the Company issues Common Stock
for a consideration per share less than the Current Market Price per share on
the date the Company fixes the offering price of such additional shares; (e) if
the Company issues any options, warrants or other securities convertible into or
exchangeable or exercisable for Common Stock (other than certain preferred stock
or securities described in (b) or (c) above) and for a consideration per share
of Common Stock initially deliverable upon conversion, exchange or exercise of
such securities less than the Current Market Price per share on the date of
issuance of such options, warrants or other securities. The formulas for
calculating the adjustments upon the events described above, which are set forth
in the Warrant Agreement, are substantially similar to the comparable formulas
in the Class AA Certificate of Designations.
The Company from time to time may reduce the Exercise Price by any amount
for any period of time if the period is at least 20 business days and if the
reduction is irrevocable during the period, but in no event may the Conversion
Prices be less than the par value of a share of Common Stock.
If the Company consolidates or merges with or into, or transfers or leases
all or substantially all of its assets to any person, upon consummation of such
transaction the Warrants will automatically become exercisable for the kind and
amount of securities, cash or other assets which the holder of a Warrant would
have owned immediately after the consolidation, merger, transfer or lease if
such holder had exercised the Warrant immediately before the effective date of
the transaction.
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Upon each adjustment of the Exercise Price as described above, each Warrant
outstanding prior to the making of the adjustment in the Exercise Price will be
adjusted with respect to the number of shares of Common Stock that each Warrant
entitles the holder to purchase. The formula for calculating such adjustment to
the number of Warrant Shares is set forth in the Warrant Agreement.
Notwithstanding the foregoing, if the Stock Purchase Agreement is
terminated prior to the Second Closing (other than as a result of a default by
Prometheus of its obligations thereunder), the Exercise Price of each Warrant
then outstanding will immediately be reduced to $0.01.
The Company will reserve and keep available, free from preemptive rights,
out of the aggregate of its authorized but unissued Common Stock or its
authorized and issued Common Stock held in treasury, to enable it to satisfy its
obligation to issue Warrant Shares upon exercise of the Warrants, the maximum
number of shares of Common Stock which may be deliverable upon the exercise of
all outstanding Warrants as determined in good faith by the Board from time to
time based on the Exercise Price in effect at such time.
Listing and Registration. The Company will from time to time, at its
expense, (a) take all action necessary so that the Warrant Shares, immediately
upon their issuance and upon the exercise of Warrants, will be listed and
maintained on the principal securities exchanges and markets on which other
shares of Common Stock are then listed and (b) register under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), all shares of Common
Stock issuable upon exercise if and at the time that any existing shares of the
Company's capital stock are so registered.
HSR Act. Promptly after receipt of notice from any Warrant holder of its
intention to exercise any Warrants, the Company will make any filings required
to be made under the Hart-Scott-Rodino Improvements Act of 1976 (the "HSR Act")
in connection with such exercise. The applicable waiting period, including any
extension thereof, under the HSR Act must expire or terminate prior to the
issuance of any Warrant Shares upon exercise of Warrants.
Certain Covenants and Actions Prior to Second Closing. The Stock Purchase
Agreement provides that upon the terms and conditions contained therein, the
Company, both before and after each closing, will use all reasonable efforts to
consummate the Transactions. In addition, the Company has agreed that from the
date of the Stock Purchase Agreement to the earlier of the Second Closing or
termination of the Stock
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Purchase Agreement in accordance with its terms, the Company and its
subsidiaries will conduct their business in the ordinary and usual course, and
neither the Company nor any of its subsidiaries will engage in certain
significant actions or transactions without the prior consent of Prometheus. See
"Stockholders Agreement."
The Company and Prometheus have also agreed that from the date of the Stock
Purchase Agreement through the Second Closing: (a) the Company will take all
actions necessary to hold a meeting of stockholders to consider and vote upon
the adoption and approval of the Transactions, and, except to the extent
otherwise determined in good faith by the Board in the exercise of its fiduciary
duties (taking into account the advice of outside counsel), the Board will (i)
recommend to the Company's stockholders that they vote in favor of the adoption
and approval of all matters necessary to effectuate the Transactions, (ii) use
its reasonable best efforts to solicit from the Company's stockholders proxies
in favor of such adoption and approval, and (iii) take all actions reasonably
necessary to secure a vote of the stockholders in favor of such adoption and
approval; (b) the Company will use its reasonable best efforts and take all
action reasonably necessary to obtain the confirmation of Nasdaq that the
Transactions will not violate certain rules set forth in the National
Association of Securities Dealers, Inc. ("NASD") Manual applicable to issuers
listed on the Nasdaq National Market System; (c) neither the Company nor
Prometheus will issue any press release with respect to the Stock Purchase
Agreement or the Transactions without the other's reasonable consent, except as
required by applicable laws; (d) the Company will provide Prometheus with access
to the Company's premises, books and records; (e) the Company and Prometheus
will each give prompt notice to the other of any event likely to cause a
representation or warranty in the Stock Purchase Agreement to be materially
untrue or inaccurate, or any material failure to comply with or satisfy any
covenant or condition contained therein, and will use all reasonable efforts to
remedy such failure, and the Company will promptly notify Prometheus of any
material development involving the operations or activities of the Company or
its subsidiaries; (f) the Company, its affiliates and their respective
directors, officers, employees, representative or agents will not solicit
certain proposals or transactions alternative to the Transactions (see "The
Transactions--Stock Purchase Agreement--No Solicitation"); (g) to the extent
that the HSR Act is determined to be applicable to the Transactions, the Company
and Prometheus will file all documents and items required under the HSR Act; (h)
the Company will take all actions reasonably necessary to ensure that the
Transactions will not result in the acceleration or creation of any rights of
any persons under any employee plan of the Company; (i) on the date of the
Stockholders Approval, the Board will take or cause to be taken all actions
necessary or desirable (x) to cause the Board to consist of 15 directors, three
of whom will be elected by Prometheus, and (y) to effect certain bylaws
amendments; (j) prior to the Second
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Closing, the Board will take or cause to be taken all actions necessary or
desirable to file certain amendments to the Certificate of Incorporation with
the Secretary of State of the State of Delaware; (k) on or prior to the
appointment of the Preferred Stock Directors to the Board, the Company will
ensure that each director of the Company on and after the date of such
appointment will receive certain liability insurance coverage, in no event less
than $25,000,000; and (l) the Company and Prometheus will keep confidential all
information provided to each pursuant to the Stock Purchase Agreement, subject
to certain exceptions.
Immediately after Stockholders Approval, (a) the Board and the board of
directors of each subsidiary of the Company will adopt certain bylaws
amendments, (b) certain amendments to the certificates of incorporation of the
Company and its subsidiaries will be filed with the Secretary of State of the
State of Delaware, and (c) the Preferred Stock Directors will be appointed to
the Board. Upon the request of Prometheus, however, the Company will take the
actions set forth in clauses (a) and (c) above prior to Stockholders Approval.
No Solicitation. Under the Stock Purchase Agreement, until the Second
Closing has occurred, neither the Company nor any of its affiliates nor any of
their respective directors, officers, employees, representatives or agents will
solicit or initiate any discussions, submissions of proposals or offers or
negotiations with, participate in any negotiations or discussions with, provide
any information or data of any nature whatsoever to, or otherwise cooperate in
any way with, or assist or participate in, facilitate or encourage any effort or
attempt by, any third party concerning any Alternative Transaction. "Alternative
Transaction" means any merger, consolidation (other than insofar as such merger
or consolidation relates exclusively to the acquisition by the Company or one of
its subsidiaries of companies or businesses engaged primarily in the same
business as the Company), sale of substantial assets not in the ordinary course,
sale of shares of existing or future capital stock or other equity securities or
securities convertible into equity securities or derivatives thereof (other than
pursuant to employee stock options), recapitalization, capital infusion,
incurrence of material additional indebtedness except pursuant to existing lines
of credit or refinancings thereof, debt restructuring or similar transaction
involving the Company or any of its subsidiaries, or any division of the Company
or any of its subsidiaries.
Notwithstanding the foregoing, nothing contained in the Stock Purchase
Agreement will prohibit the Board from (a) furnishing information or affording
access to properties, books or records to, or entering into discussions or
negotiations with, any person or entity in connection with any unsolicited bona
fide proposal by such person or
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entity to enter into any Alternative Transaction or entering into an Alternative
Transaction if, and only to the extent that, (i) the Company receives the
written advice of outside legal counsel that such action is advisable to enable
the Board to comply with its fiduciary duties imposed by applicable law and (ii)
prior to furnishing such information to, or entering into discussions or
negotiations with, such person or entity, the Company (X) provides written
notice to Prometheus to the effect that it is furnishing information or
affording access to properties, books or records to, or entering into
discussions or negotiations with, such person or entity and (Y) receives from
such person or entity an executed confidentiality agreement on terms and in form
customary for similar transactions or (b) with regard to an Alternative
Transaction, complying with Rule 14e-2 promulgated under the Exchange Act, which
requires, following the publication or announcement of a tender offer for a
company, the publication or other dissemination to the subject company's
security holders of such company's recommendations with respect to the tender
offer and its reasons therefor. As part of the written notice to be provided to
Prometheus as described above, the Company will indicate the identity of the
offeror and the terms and conditions of any proposals or offers or the nature of
any inquiries or contacts, and thereafter will use reasonable efforts to keep
Prometheus informed, on a current basis, of the status and terms of any such
proposals or offers and the status of any such discussions or negotiations. The
Company will not release any third party from, or waive any provision of, any
confidentiality or standstill agreement to which the Company is a party.
Conditions to Closings. The respective obligations of the Company and
Prometheus to consummate the Transactions in respect of each purchase of Class
AA Preferred Stock, Class AB Preferred Stock or Warrants by Prometheus (each a
"Closing") are subject to the satisfaction or waiver, on or prior to the
relevant Closing Date (defined below) of each of the following conditions: (a)
there will be no injunction or court order restraining consummation of the
Transactions and no pending or threatened action or proceeding by or before a
court or governmental body brought by or on behalf of any governmental entity
seeking to restrain or invalidate all or any portion of the Transactions, and no
law or regulation will have been adopted making all or any portion of the
Transactions illegal; (b) any waiting period applicable to the Transactions
under the HSR Act will have expired or been terminated; (c) The Nasdaq Stock
Market, Inc. ("Nasdaq") will have informed the Company that the Transactions
will not violate certain rules set forth in the NASD Manual applicable to
issuers listed on the Nasdaq National Market System; and (d) Nasdaq will not
have indicated any intention to delist the Common Stock. "Closing Date" means,
with respect to any Closing, the date of such Closing, which will be the third
business day following the date on which the conditions set forth in the Stock
Purchase Agreement with respect to such Closing are satisfied or
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duly waived, or if the Company and Prometheus mutually agree on a different
date, the date upon which they have mutually agreed.
The obligation of the Company to consummate the Transactions on the
applicable Closing Date with respect to each Closing is subject to the
satisfaction or waiver, on or prior to the relevant Closing Date, of each of the
following conditions: (a) all representations and warranties of Prometheus in
the Stock Purchase Agreement will be true and correct in all material respects
and Prometheus will have performed in all material respects all agreements and
covenants required to be performed by it under the Stock Purchase Agreement
prior to or at the applicable Closing Date, and will deliver a certificate to
such effect; (b) all consents, approvals, permits and waivers from governmental
entities necessary to consummate the Transactions will have been obtained,
unless the failure to obtain any such consent, approval, permit or waiver would
not have a Material Adverse Effect (defined below) on the Company; (c)
Prometheus will have delivered to the Company an opinion of its counsel in form
and substance reasonably acceptable to the Company; and (d) Prometheus will have
furnished to the Company such certificates to evidence compliance with the
conditions set forth in the Stock Purchase Agreement as may reasonably be
requested by the Company. "Material Adverse Effect" means, with respect to any
person or entity, an event, occurrence or condition that has had or reasonably
would be expected to have a material adverse effect on the business, condition
(financial or otherwise), assets, liabilities, working capital, operations or
prospects of such person or entity and its subsidiaries (if any), taken as a
whole.
The obligation of Prometheus to consummate the Transactions on the
applicable Closing Date with respect to each Closing is subject to the
satisfaction or waiver, on or prior to the relevant Closing Date, of each of the
following conditions: (a) all representations and warranties of the Company in
the Stock Purchase Agreement will be true and correct in all material respects
and the Company will have performed in all material respects all agreements and
covenants required to be performed by it under the Stock Purchase Agreement
prior to or at the applicable Closing Date, and will deliver a certificate to
such effect; (b) all consents, approvals, permits and waivers from governmental
entities necessary to consummate the Transactions will have been obtained,
unless the failure to obtain any such consent, approval, permit or waiver would
not have a Material Adverse Effect on the Company or Prometheus; (c) the Company
will have delivered to Prometheus an opinion of its counsel in form and
substance reasonably acceptable to Prometheus; (d) the Company will have
furnished to Prometheus such certificates to evidence compliance with the
conditions set forth in the Stock Purchase Agreement as may reasonably be
requested by Prometheus; (e) since the date of the Stock Purchase Agreement,
there will not have been any Material Adverse Effect on the
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Company; (f) the Company, its stockholders, and the Board will have taken all
necessary action so that immediately upon Stockholders Approval (i) the Board
will consist of 15 directors, (ii) Prometheus may elect three members of the
Board effective as of Stockholders Approval, (iii) as of the date of
Stockholders Approval, a five-member Executive Committee of the Board of
Directors will have been established, and (iv) two members nominated by
Prometheus will have been appointed to the Executive Committee; (g) the Company
will have entered into and delivered to Prometheus the Ancillary Agreements; and
(h) the Existing Stockholders Agreement (defined below) will be, or will have
been amended, if necessary, to be, consistent with the Stock Purchase Agreement
and the Ancillary Agreements. The "Existing Stockholders Agreement" means that
certain Stockholders Agreement, dated as of April 15, 1996, by and among certain
stockholders of the Company.
In addition to the foregoing, the respective obligations of the Company and
Prometheus to consummate the Transactions on the Second Closing and Subsequent
Closings are subject to the satisfaction or waiver, on or prior to the Second
Closing or the date of any Subsequent Closing (as the case may be), of the
condition that the Stockholders Approval will have been obtained. Further, the
obligation of Prometheus to consummate the Transactions on the Second Closing or
on Subsequent Closings are subject to the satisfaction or waiver, on or prior to
the Second Closing or the date of any Subsequent Closing (as the case may be),
of the following conditions: (a) the certificate of incorporation amendments and
the bylaws amendments in a form satisfactory to Prometheus will have become
effective; (b) the Company will have provided evidence of compliance with
certain insurance provisions under the Stock Purchase Agreement; and (c) the
Company will have amended the employment agreement of James J. Martell, Jr. in
form and substance satisfactory to Prometheus to require that he devote at least
95% of his working time to conducting the Company's business affairs and to
include customary non-compete provisions and, if Prometheus in its sole
discretion requires, the Company will have entered into an employment agreement
on similar terms with J. Marshall Coleman. "See "Second Closing;" "Stockholders
Voting Agreement;" and "Stockholders Approval."
Representations and Warranties. The Stock Purchase Agreement contains
representations and warranties by the Company concerning, among other things:
(a) due organization, existence and good standing of the Company and its
subsidiaries and similar corporate matters; (b) capitalization of the Company on
the date of the Stock Purchase Agreement and the absence of preemptive rights or
obligations to issue or sell, repurchase, redeem or register shares of the
Company's or any subsidiary's capital stock; (c) authorization and validity of
the Class AA Preferred Stock, the Class AB Preferred
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Stock, Common Stock issuable upon conversion of the Class AA Preferred stock or
Class AB Preferred Stock ("Conversion Shares") and Warrant Shares; (d) the
Company's authority to enter into and, subject to obtaining Stockholders
Approval, perform, and the execution, delivery, validity and enforceability of,
the Stock Purchase Agreement and the Ancillary Agreements; (e) the absence of
(i) conflict with or violation of the certificate of incorporation or bylaws of
the Company or any of its subsidiaries, (ii) conflict with or violation of or
default, right of termination, cancellation or acceleration under any Material
Agreement (defined below), (iii) loss of a benefit which would have a Material
Adverse Effect, (iv) the creation of any encumbrance upon the properties of the
Company or any of its subsidiaries or (v) the violation of any applicable law,
as a result of the Company entering into and performing the transactions
contemplated by the Stock Purchase Agreement and the Ancillary Agreements; (f)
governmental approvals required to enter into the Stock Purchase Agreement and
the Ancillary Agreements and to consummate the Transactions; (g) ownership and
valid issuance of the outstanding capital stock or other equity interests of
each subsidiary of the Company; (h) employee benefit plans and similar
agreements; (i) filing of required documents with the SEC, absence of untrue or
misleading statements of material facts or omissions of material facts in such
documents and compliance with applicable requirements of the federal securities
laws and generally accepted accounting principles; (j) the absence of (i)
undisclosed liabilities of the Company or any of its subsidiaries expected to
have a Material Adverse Effect on the Company or (ii) undisclosed Material
Agreements (defined below); (k) the absence of certain undisclosed material
events, occurrences, liabilities, transactions, agreements, commitments or
changes in the Company since December 31, 1996; (l) compliance with all
applicable laws; (m) the absence of any undisclosed litigation, investigation or
proceeding pending or threatened with respect to the Company, any of its
subsidiaries, the Stock Purchase Agreement or any of the Ancillary Agreements,
and the absence of knowledge of facts likely to give rise to any such proceeding
having a Material Adverse Effect on the Company; (n) the truth and accuracy of
the Company's representations and warranties in the Stock Purchase Agreement,
the schedules thereto and the certificates delivered thereunder, and the good
faith preparation of and reasonableness of assumptions underlying the financial
projections of the Company; (o) taxes; (p) real properties owned by the Company
or any of its subsidiaries; (r) environmental matters; (s) insurance policies;
(t) sufficiency of the tangible assets of the Company and its subsidiaries for
the conduct of their businesses, and the conformity thereof with applicable
laws; (u) the absence of undisclosed Material Agreements of the Company and each
of its Subsidiaries and the absence of any undisclosed breach or default
thereunder having a Material Adverse Effect on the Company; (v) accuracy and
fairness of books and records; (w) labor matters; (x) the absence of illegal
finder's fees or commissions; (y) the absence of false or misleading statements
or omissions in this Proxy Statement, other than with
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respect to information provided by Prometheus, as to which the Company makes no
representations, and the compliance of this Proxy Statement with the Exchange
Act and the rules and regulations thereunder; (z) resolutions of the Board
relating to the approval of the Transactions; (aa) intellectual property; (bb)
the absence of any undisclosed sale by the Company of unregistered securities
since the date of the Company's initial public offering and the compliance of
the Transactions with federal and state securities laws; (cc) the absence of
agreements to sell the capital stock, material assets or business of the Company
or any of its subsidiaries, other than with respect to the Stock Purchase
Agreement or to effect any merger, liquidation, dissolution, recapitalization or
other reorganization of the Company; (dd) the absence of broker's fees, finder's
fees or other fees or commissions in connection with the Transactions; and (ee)
the absence of undisclosed related party transactions.
In addition, the Stock Purchase Agreement contains representations and
warranties by Prometheus concerning, among other things: (a) due organization,
existence and good standing of Prometheus and similar corporate matters; (b)
authority to enter into and perform, and the execution and delivery, validity
and enforceability of, the Stock Purchase Agreement and the Ancillary
Agreements; (c) the absence of conflict with, violation of, or default under, or
the creation of any encumbrance under, any applicable legal requirement,
governing instrument or contractual obligation, except as would not materially
adversely effect Prometheus's ability to consummate the Transactions; (d)
governmental approvals required to enter into the Stock Purchase Agreement and
the Ancillary Agreements and to consummate the Transactions; (e) purchase of the
Class AA Preferred Stock, Class AB Preferred Stock and Warrants by and for
Prometheus's own account and for investment purposes only, acknowledgment of the
restrictions on resale of the Class AA Preferred Stock, Class AB Preferred
Stock, Warrants, Conversion Shares and Warrant Shares, and other matters under
federal securities laws; (f) the absence of false or misleading statements or
omissions in the information supplied by Prometheus or any of its affiliates for
inclusion in this Proxy Statement; and (g) the absence of any broker, finder or
other intermediary employed by Prometheus or asserting a valid claim against
Prometheus for fees or commissions in connection with the Transactions.
Certain of the representations and warranties of the Company and Prometheus
are subject to exceptions and limitations. The Stock Purchase Agreement provides
that all representations and warranties contained therein will survive all of
the Closings and remain in full force and effect until December 31, 2000, except
that (i) certain representations and warranties will survive until a specified
later date, indefinitely or until the applicable statute of limitations has
expired and (ii) there will be no termination of any representation or warranty
as to which (a) a bona fide claim has been asserted prior to
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such Closing Date or (b) Prometheus had actual knowledge of any breach thereof
prior to such Closing Date.
"Material Agreements" means all of the following Contracts (defined below)
to which the Company or any of its Subsidiaries is a party: (a) all Contracts
which (i) involve payments by or to any Person, of more than $50,000 in cash or
other property or services, (ii) extend for a term of more than 30 days from the
date of the Stock Purchase Agreement (unless the same is (y) cancelable on not
more than 30 days' notice without fee, premium or penalty or (z) motor vehicle
or equipment leases not involving payments in excess of $50,000), (b) all loan
agreements and commitments, credit agreements, indentures, promissory notes,
mortgages, deeds of trust, pledge or security agreements, factoring agreements,
conditional sales Contracts, letters of credit or other agreements or
instruments evidencing, securing or issued in connection with any liability of
the Company or any of its subsidiaries, (c) all operating leases or capital
leases for equipment to which the Company is a party involving annual payments
in excess of $50,000 per lease, (d) all union, labor or collective bargaining
Contracts, (e) all consulting, management, development, leasing brokerage or
similar agreements with total obligations in excess of $50,000, (f) any
guarantee of any liability or other obligations of any person other than
guarantees by the Company of the obligations of its wholly owned subsidiaries,
(g) each joint venture, partnership, operating or similar agreement, (h) each
agreement relating to any outstanding commitment for capital expenditures
involving future payments which, together with future payments under all other
agreements, Contracts or commitments relating to the same capital project,
exceed $50,000, (i) any agreement, Contract or commitment relating to a
disposition or an acquisition of the assets (except in respect of the
disposition or acquisition of assets with a fair market value of less than
$50,000) or securities of, or any interest in, any person or other business
enterprise, (j) any agreement, Contract or commitment in respect of any
liability of whatever nature (including, without limitation, open account
indebtedness) to any affiliate of the Company, (k) any agreement, Contract or
commitment containing any covenant limiting the freedom of the Company to
undertake, conduct or engage in any business or activity or to compete with any
person in any geographic area, (l) any Financial Product Agreement (defined
below), (m) any construction, development, service, supply and maintenance
agreement (unless the same is (y) cancelable on not more than 30 days' notice
without fee, premium or penalty or (z) does not involve payments in excess of
$50,000), (n) all leases of real property and (o) all agreements not entered
into in the ordinary course of business. "Contract" means any written or oral
agreement, contract, lease, commitment, understanding, instrument or obligation
to which the Company or any of its Subsidiaries is a party or by which the
Company or any of its subsidiaries or any of their respective properties may be
bound. "Financial Product Agreement" means any (a)
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interest rate, currency, commodity or other swap, cap, floor, collar, insurance
or similar agreement or arrangement, (b) put, call, futures or forward contract,
straddle, commodities contract, option or warrant other than outstanding options
or warrants for Common Stock, (c) repurchase or reverse repurchase or similar
agreement or arrangement, or (d) any other financial, derivative, hedge, or
speculative product, service or agreement, contract or arrangement.
Indemnification. The Company has agreed to indemnify and hold harmless
Prometheus and its members, affiliates, directors, officers, advisors, agents
and employees (collectively, the "Prometheus Indemnified Parties") to the
fullest extent lawful, from and against any and all demands, damages, penalties,
claims, liabilities, obligations, actions, causes of action, and reasonable
expenses (including without limitation, costs of investigating, preparing or
defending any such claim or action and reasonable legal fees and expenses)
(collectively, "Losses"), (i) arising out of or in connection with the Stock
Purchase Agreement, the Transactions, and/or the delivery, enforcement and
performance of the Stock Purchase Agreement or the Ancillary Agreements except
to the extent that Losses with respect thereto are the result of Prometheus's
actions or omissions, or (ii) arising by reason of or resulting from any breach
of any warranty, representation, covenant or agreement of the Company contained
in the Stock Purchase Agreement, the Ancillary Agreements or in any certificate
delivered pursuant thereto. Prometheus has agreed to indemnify and hold harmless
the Company and its affiliates, directors, officers, advisors, agents and
employees (collectively, the "Company Indemnified Parties," and together with
the Prometheus Indemnified Parties, the "Indemnified Parties") to the fullest
extent lawful, from and against any and all Losses (i) arising from the Stock
Purchase Agreement or the Ancillary Agreements to the extent of Losses from
Prometheus's actions or omissions or (ii) arising by reason of or resulting from
any breach of any warranty, representation, covenant or agreement of Prometheus
contained in the Stock Purchase Agreement or in any certificate delivered
pursuant thereto. The foregoing indemnification provisions will remain in full
force and effect indefinitely.
The parties have agreed that any indemnification payments made pursuant to
the Stock Purchase Agreement will be treated for tax purposes as an adjustment
to the consideration for the purchase of the Class AA Preferred Stock, the Class
AB Preferred Stock and the Warrants issued under the Stock Purchase Agreement,
unless otherwise required by applicable law, in which event indemnification
payments will be made in an amount sufficient to indemnify the party on a net
after-tax basis. After the First Closing, all decisions on behalf of the Company
as to payment of indemnification pursuant to the Stock Purchase Agreement and
otherwise regarding the Company's rights and obligations
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pursuant to the Stock Purchase Agreement and the Ancillary Agreements will be
made by a committee of the Board consisting of all directors not elected by the
holders of the Class AA Preferred Stock and the Class AB Preferred Stock, voting
together as a separate class, and a decision of a majority of such directors
will be a decision of the committee. Nothing contained in the Stock Purchase
Agreement will prevent any Indemnified Party from receiving indemnification
pursuant to some other source (such as, by way of example, the bylaws of the
Company in the event that such Indemnified Party is a director of the Company
and such director seeks indemnification due to circumstances that do not pertain
to an alleged breach of the Stock Purchase Agreement), and the determination as
to whether indemnification pursuant to such other source is available will be
made in accordance with the procedures applicable thereto.
Fees and Expenses. The Company will be responsible for the payment of all
costs and expenses incurred by the Company in connection with the Transactions,
regardless of whether the Transactions close, including, without limitation, all
fees and expenses incurred in connection with the preparation and distribution
of this Proxy Statement and the fees and expenses of the Company's legal counsel
and all third party consultants engaged by the Company to assist in the
Transactions. Such fees and expenses incurred or to be incurred by the Company
are estimated to total approximately $1,000,000, including legal fees, an
investment banking fee to be paid to Furman Selz and other expenses. On the
closing dates, the Company will reimburse Prometheus for the Transaction
Expenses. "Transaction Expenses" means the reasonable fees and expenses incurred
by Prometheus, including, but not limited to, fees and expenses of legal
counsel, accountants and consultants and travel expenses in connection with the
preparation of the Stock Purchase Agreement and Prometheus's due diligence
examination relating to the Stock Purchase Agreement and the Transactions,
including, without limitation, any fees for filings under the HSR Act. The
Transaction Expenses for which the Company has reimbursed or will reimburse
Prometheus are estimated to total approximately $1,500,000, of which
approximately $825,000 has been reimbursed to date. See "Expenses of the
Transactions."
In the event that the Stock Purchase Agreement is terminated prior to the
Second Closing (i) by the Company or Prometheus if the Stockholders Approval is
not obtained on or before January 31, 1998, (ii) by Prometheus, if the Second
Closing has not occurred by January 31, 1998 or (iii) by Prometheus, if there is
a breach of any representation or warranty set forth in the Stock Purchase
Agreement or any covenant or agreement to be complied with or performed by the
Company pursuant to the terms of the Stock Purchase Agreement except for any
breach which would not have a Material Adverse Effect (defined above) on the
Company or Prometheus, in addition to any other rights of
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Prometheus under the Stock Purchase Agreement, the Company will be obligated
promptly to pay Prometheus, by way of liquidated damages, a termination fee of
$4,000,000 plus the Transaction Expenses (to the extent not already paid or
reimbursed by the Company). The foregoing provision does not apply in the event
that the Stock Purchase Agreement is terminated by the Company prior to the
Second Closing if there is a material breach by Prometheus of any representation
or warranty in the Stock Purchase Agreement or of any covenant or agreement to
be complied with or performed by Prometheus pursuant to the terms of the Stock
Purchase Agreement except for any breach which would not have a Material Adverse
Effect on the Company.
Termination. The Stock Purchase Agreement (other than certain portions
thereof) may be terminated prior to the Second Closing (i) by the Company or
Prometheus if Stockholder Approval has not been obtained on or before January
31, 1998, provided that the Company will not have the right to elect this
termination if the Company has not complied with all of its obligations under
the Stock Purchase Agreement; (ii) by Prometheus, if the Second Closing has not
occurred by January 31, 1998; (iii) by Prometheus, if there is a breach of any
representation or warranty set forth in the Stock Purchase Agreement or any
covenant or agreement to be complied with or performed by the Company pursuant
to the terms of the Stock Purchase Agreement except for any breach which would
not have Material Adverse Effect on the Company or Prometheus; and (iv) by the
Company, if there is a material breach of any representation or warranty set
forth in the Stock Purchase Agreement or any covenant or agreement to be
complied with or performed by Prometheus pursuant to the terms of the Stock
Purchase Agreement except for any breach which would not have Material Adverse
Effect on the Company.
If the Stock Purchase Agreement is terminated pursuant to the foregoing,
then, except for the provisions relating to indemnification and fees and
expenses, neither the Company nor Prometheus will have any liability or further
obligation to each other relating to the transactions contemplated by the Stock
Purchase Agreement, provided that no such termination will relieve the Company
or Prometheus from liability or a prior breach of the Stock Purchase Agreement.
Registration Rights Agreement
In accordance with the Stock Purchase Agreement, the Company and Prometheus
entered into a Registration Rights Agreement dated as of September 30, 1997 (the
"Registration Rights Agreement") at the First Closing. The Registration Rights
Agreement provides that holders of Registrable Securities (defined below)
constituting at least twenty percent (20%) of the Registrable Securities then
outstanding may request at
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any time that the Company file a registration statement and use its best efforts
to register (a "Demand Registration") under the Securities Act such number of
Registrable Securities that are the subject of such request. "Registrable
Securities" means (a) the shares of Class AA Preferred Stock and Class AB
Preferred Stock, whether or not owned by Prometheus, (b) any debt instrument
issued in lieu of all or a portion of the Class AB Preferred Stock pursuant to
the Stock Purchase Agreement, whether or not owned by Prometheus, (c) the shares
of Common Stock issued or issuable upon conversion of Class AA Preferred Stock
and Class AB Preferred Stock or debt instrument, whether or not owned by
Prometheus, (c) the shares of Common Stock issued or issuable upon exercise of
any Warrants ("Warrant Shares"), whether or not owned by Prometheus and (d) any
securities issued or issuable with respect to such Common Stock by way of a
stock dividend or stock split or in connection with a combination of shares,
recapitalization, merger, consolidation or reorganization whether or not owned
by Prometheus; provided that any such share or other security shall be deemed to
be Registrable Securities only if and so long as it is a Transfer Restricted
Security. "Transfer Restricted Security" means a security that has not been sold
to or through a broker, dealer or underwriter in a public distribution or other
public securities transaction or sold in a transaction exempt from the
registration and prospectus delivery requirements of the Securities Act under
Rule 144 promulgated thereunder (or any successor rule). The foregoing
notwithstanding, a security will remain a Transfer Restricted Security until (i)
all stop transfer instructions or notations and restrictive legends with respect
to such security have been lifted or removed and (ii) the holder of such
security has received at the Company's expense an opinion of counsel to the
Company (which counsel and opinion are reasonably satisfactory to such holder),
to the effect that such shares in such holder's hands are freely transferable in
any public or private transaction without registration under the Securities Act
(or such holder has waived receipt of such opinion).
The Company will be obligated to cause to become effective no more than (a)
two Demand Registrations in any two-year period and (b) three Demand
Registrations in total; provided, however, that a registration statement filed
as part of a Demand Registration shall not be counted as one of the three Demand
Registrations unless it becomes effective and is maintained effective until all
Registrable Securities covered by such registration statement have been sold.
The Company will not be obligated to effect a Demand Registration on Form S-1
unless (a) the proposed aggregate public offering price of the securities to be
included in such Demand Registration is at least $5,000,000 and (b) if the
demand is made by less than fifty percent (50%) of the holders of Registrable
Securities then outstanding, such demand is made not less than 90 days after the
effective date of the Company's most recent registration statement for shares of
Common Stock (other than a registration statement on Form S-4 or Form S-8 or any
successor forms thereto). The
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Company will give written notice to all holders of Registrable Securities upon
receipt of a request for a Demand Registration and will include in such Demand
Registration such shares of Registrable Securities for which it has received
written requests to register within 30 days after such written notice has been
given. The holders of a majority of shares of Registrable Securities to be
included in a Demand Registration will have the right to select the underwriters
for such Demand Registration. The Company may, once per Demand Registration,
require Prometheus not to sell under a Demand Registration or to suspend the
effectiveness thereof if the Company determines, in its good faith judgment,
that such offering or continued effectiveness would interfere with any material
financing, acquisition, disposition, corporate reorganization or other material
transaction involving the Company or any of its subsidiaries or when the Company
is in possession of material information that it deems advisable not to disclose
in a registration statement.
If the Company proposes to register any of its securities under the
Securities Act (other than registrations on Form S-4 or Form S-8 or any
successor forms thereto, and other than a Demand Registration) for sale for
money, the Company is obligated to notify all holders of Registrable Securities
and will include under the registration statement proposed to be filed by the
Company such shares of Registrable Securities for which it has received written
requests to register, and the Company will use its best efforts to register
under the Securities Act the sale of such Registrable Securities (a "Piggyback
Registration"). Following notice to holders of Registrable Securities of a
Piggyback Registration, the Company may decline to file a registration statement
or may withdraw a registration statement prior to effectiveness provided that
the Company notifies each holder of Registrable Securities of such action.
Under certain circumstances, the number of Registrable Securities that the
holders thereof will be entitled to include in either a Demand Registration or a
Piggyback Registration will be limited. If the public offering of Registrable
Securities pursuant to a Demand Registration is to be underwritten and, in the
good faith judgment of the managing underwriter, the inclusion of all the
Registrable Securities requested to be registered thereunder would interfere
with the successful marketing of a smaller number of such shares of Registrable
Securities, the number of shares of Registrable Securities to be included will
be reduced to such smaller number with the participation in such offering to be
pro rata among the holders of Registrable Securities requesting such
registration, based upon the number of shares of Registrable Securities owned by
such holders. If in the good faith judgment of the managing underwriter of a
Piggyback Registration, the inclusion of all of the shares of Registrable
Securities and any other Common Stock requested to be registered would interfere
with the successful marketing of a smaller number of such shares, then the
number of shares of Registrable Securities and other
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Common Stock to be included in the offering (except for shares of Registrable
Securities to be included in a Demand Registration) will be reduced to such
smaller number with the participation in such offering to be in the following
order of priority: (a) first, the shares of Registrable Securities requested to
be included, and (b) second, any other shares of Common stock requested to be
included. Any necessary allocation among the holders of shares within each of
the foregoing groups will be pro rata among such holders requesting such
registration based upon the number of shares of Common Stock and Registrable
Securities owned by such holders. All shares so excluded from the underwritten
public offering pursuant to a Demand Registration or a Piggyback Registration
must be withheld from the market by the holders thereof for a period (not to
exceed 30 days prior to the effective date and 75 days thereafter) that the
managing underwriter reasonably determines is necessary in order to effect the
underwritten public offering.
Upon the written request of the managing underwriter of any underwritten
offering of the company's securities, a holder of Registrable Securities will
not be permitted to sell, make any short sale of, loan, grant any option for the
purchase of, or otherwise dispose of any Registrable Securities (other than
those included in such registration) without the prior written consent of such
managing underwriter for a period (not to exceed 30 days before the effective
date and 75 days thereafter) that such managing underwriter reasonably
determines is necessary in order to effect the underwritten public offering;
provided that each of the officers and directors of the Company have entered
into substantially similar holdback agreements with such managing underwriter
covering at least the same period.
The Company has agreed (i) not to effect any public or private sale or
distribution of its Equity Securities (defined above) during the 30-day period
prior to, and during the 75-day period after, the effective date of each
underwritten offering made pursuant to a Demand Registration or a Piggyback
Registration, if so requested in writing by the managing underwriter (except as
part of such underwritten offering or pursuant to registrations on Forms S-4 or
S-8 or any successor forms thereto), and (ii) not to issue any Equity Securities
other than for sale in a registered public offering unless each of the persons
to which such securities are issued has entered a written agreement binding on
its transferees not to effect any public sale or distribution of such securities
during such period, including, without limitation, a sale pursuant to Rule 144
under the Securities Act (except as part of such underwritten registration, if
and to the extent permitted hereunder).
The Company will bear all Registration Expenses, as defined below, incurred
in connection with all Piggyback Registrations and the first two of the three
Demand Registrations. The Registration Expenses of the third Demand Registration
will be shared
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proportionately between the Company and the holders of Registrable Securities to
be included in such Demand Registration. "Registration Expenses" means all
out-of-pocket expenses, including: registration, filing and NASD fees; all fees
and expenses of complying with securities or blue sky laws; fees and
disbursements of counsel for the Company and not more than one firm of attorneys
for the sellers of Registrable Securities; fees and disbursements of the
Company's independent public accountants; printing costs; premiums and other
costs of securities acts liability insurance; and fees and disbursements of
underwriters, excluding fees or expenses relating to the distribution of
Registrable Securities.
The Registration Rights Agreement contains certain indemnification and
contribution provisions in the event of a registration of any Registrable
Securities under the Securities Act. The Company will (whether or not it shall
then be required to do so) timely file such information, documents and reports
as the SEC may require or prescribe under Section 13 or 15(d) (whichever is
applicable) of the Exchange Act. In addition, the Company will take such other
measures and file such other information, documents and reports, as are
hereafter required by the SEC as a condition to the availability of Rule 144
under the Securities Act (or any successor provision) and the use of Form S-3.
The Company has agreed not to enter into any agreement to register any
equity securities of the Company after the date of the Registration Rights
Agreement, except for an agreement between the Company and one or more
professional underwriters of securities, unless such agreement specifically
provides: (i) the holder of such equity securities may not participate in any
Demand Registration without the consent of the holders of a majority of
Registrable Securities, except under certain conditions; (ii) the holder of such
equity securities may not participate in any Piggyback Registration if the sale
of Registrable Securities is to be underwritten, except under certain
conditions; and (iii) all equity securities excluded from any Demand
Registration or Piggyback Registration as a result of the foregoing limitations
may not be publicly offered or sold for a period (not to exceed 30 days prior to
the effective date and 75 days thereafter) that the managing underwriter
reasonably determines is necessary in order to effect the underwritten public
offering of Registrable Securities registered pursuant to the Registration
Rights Agreement.
Stockholders Agreement
In accordance with the Stock Purchase Agreement, the Company, Prometheus
and certain stockholders entered into a Stockholders Agreement dated as of
September 30, 1997, at the First Closing. The stockholders who are parties to
the Stockholders
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Agreement (the "Stockholder Parties") are: Messrs. J. Marshall Coleman, James J.
Martell, Jr., Robert R. Short, J. Christopher Stuhmer, Thomas B. Buffington,
Lawrence J. Witek, Lanold W. Caldwell, James M. Giddens, Ms. Patricia A.
Donnelly (Mr. Coleman's spouse) and Ms. Mary Ann Martell (Mr. Martell's spouse).
Messrs. Coleman, Martell, Short, Stuhmer, Buffington and Witek are directors of
the Company and constitute a majority, six of 11 directors, of the Board. The
Stockholder Parties own in the aggregate Common Stock representing approximately
50.2% of the votes entitled to be cast at the Special Meeting. "See Beneficial
Ownership of Securities."
Members of the Board. Under the Stockholders Agreement, from the earlier of
the Stockholders Approval or the request by Prometheus, until a Termination
Event (defined above), the Company and the Stockholder Parties will take all
action necessary to cause (a) the number of directors comprising the Board to be
equal to 15, (b) the holders of Class AA Preferred Stock and Class AB Preferred
Stock, voting as a single class, as set forth in the Certificates of
Designations, to have the exclusive right to elect a minimum of three Preferred
Stock Directors , (c) any increases in the size of the Board to result in an
increase in the number of Preferred Stock Directors (rounded up to the next
whole number) such that Preferred Stock Directors represent at least 20% of the
votes exercisable by the Board, (d) at least a proportionate number (rounded up
to the next whole number) of Preferred Stock Directors to serve on each
committee of the Board, provided that with respect to the Executive Committee,
it will consist of five members, of which two will be Preferred Stock Directors,
and (e) at least one Preferred Stock Director to have the right to serve on the
board or other governing body of each of the Company's subsidiaries and
affiliates other than operational home building companies. See "Stock Purchase
Agreement--Class AA Preferred stock--Voting Rights" and " --Class AB Preferred
Stock--Voting Rights."
Upon the occurrence of an Adverse Event (defined above) which follows the
Second Closing, the Company and the Stockholder Parties will take all action
necessary to cause: (a) the holders of Class AA Preferred Stock and Class AB
Preferred Stock, voting as a single class, to elect Additional Preferred Stock
Directors sufficient to cause the Preferred Stock Directors to constitute a
majority of the Board and all committees of the Board, including the Executive
Committee and (b) the size of the Board and all committees to be automatically
increased in order to effect any such additional Directors. The right of the
holders of Class AA Preferred Stock and Class AB Preferred Stock to elect
Additional Preferred Stock Directors will continue until such time as neither of
the two components constituting an Adverse Event is true for two consecutive
Test Dates (defined above). See "Stock Purchase Agreement--Class AA Preferred
stock--Voting Rights" and " --Class AB Preferred Stock--Voting Rights."
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In the event that all of the Class AA Preferred Stock and Class AB
Preferred Stock will have been converted into Common Stock prior to the
occurrence of a Termination Event, the Company will support the nomination and
election of designees to the Board by Prometheus (or its assignees) ("Prometheus
Nominees") and each Stockholder Party will vote all of his shares to elect such
Prometheus Nominees, such that Prometheus will have the same right to elect
directors as set forth above as if Prometheus still owned all of the Class AA
Preferred Stock and Class AB Preferred Stock, and the Company and the
Stockholder Parties will exercise all authority under applicable law to cause
such Prometheus Nominees to be elected to the Board. If a director has been
designated by Prometheus and Prometheus requests that such director be removed
(with or without cause), then such director will be removed with or without
cause, and each Stockholder Party has agreed to vote all shares of Common Stock
owned to effect such removal. Nothing in the Stockholder Agreement will prevent
Prometheus or any of its transferees or assignees from voting securities owned
by them in their sole and absolute discretion, including voting securities to
elect additional directors to the Board in excess of the directors which
Prometheus is entitled to elect pursuant to the Stockholders Agreement.
Conduct of Business. After the bylaws amendments have become effective,
notwithstanding the fact that a vote of the Board or the Executive Committee may
not be required under applicable law, the Company will not, and will not permit
any of its subsidiaries, without either Supermajority Director Approval (the
affirmative vote of over 81% of the entire Board) or Supermajority Executive
Committee Approval (the affirmative vote of over 81% of the members of the
entire Executive Committee), to engage in certain significant actions and
transactions. See "Certificate of Incorporation and Bylaw Amendments."
After the bylaws amendments have become effective, the Board will promptly
establish an Executive Committee, which will be delegated the authority to the
maximum extent permitted by law to approve any matter permissible under law for
authorization by an Executive Committee, including the matters that are subject
to Supermajority Director Approval or Supermajority Executive Committee
Approval.
The bylaws of the Company will provide that the number of directors
required to constitute a Supermajority Director Approval and a Supermajority
Executive Committee Approval will constitute a quorum for the Board and
Executive Committee, respectively, and the Company and the Stockholder Parties
will take all action necessary to amend the Company's certificate of
incorporation and bylaws (and the bylaws and certificates of incorporation of
its subsidiaries) to give effect to terms and conditions of the
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Stockholders Agreement, the forms of such amendments to be reasonably
satisfactory to Prometheus.
Prior to a Termination Event, Prometheus may elect to terminate all or a
portion of the voting provisions of the Stockholders Agreement, such that except
as otherwise required by law, actions requiring Supermajority Director Approval
or Supermajority Executive Committee Approval will require only majority
approval, and the Company and each of the Stockholder Parties agree to take all
such action as may be necessary to give effect to such termination, including
amending the Stockholders Agreement and the bylaws and certificates of
incorporation of the Company and its subsidiaries. Upon the occurrence of a
Termination Event, Prometheus is required to deliver a notice to the Company
electing to terminate certain provisions of the certificate of incorporation
regarding (a) matters subject to Supermajority Director Approval or
Supermajority Executive Committee Approval and (b) the vote of Class AA
Preferred Stock and Class AB Preferred Stock required to adopt or amend the
bylaws. See "Certificate of Incorporation and Bylaws Amendments."
Prometheus has agreed to support, in principle, the adoption by the Company
of a stock option plan in a form reasonably acceptable to Prometheus pursuant to
which the Company may issue options to purchase up to 1,000,000 shares
(inclusive of available options under the existing option plan) of Common Stock
to management of the Company (the "Executive Equity Plan"). See "Interests of
Certain Persons in the Transactions."
Each of the Stockholder Parties has agreed to take all such action as may
be necessary to effect an amendment to the Company's certificate of
incorporation to increase the number of authorized shares of Common Stock if
required to satisfy the conversion/exercise rights of the securities purchased
by Prometheus under the Stock Purchase Agreement.
Participation Rights. Until a Termination Event, if any, Prometheus will be
entitled to a participation right to purchase or subscribe for up to that number
of additional shares of capital stock to be issued or sold by the Company which
represents the same proportion of the total number of shares of capital stock to
be issued or sold by the Company as is represented by the number of shares of
Common Stock owned by Prometheus or into which Prometheus has the right to
convert prior to such sale or issuance at the conversion price in effect at the
relevant time relative to the number of shares of Common Stock outstanding prior
to such sale or issuance. The foregoing participation rights will not apply to
(a) the conversion of the Existing Preferred Stock,
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the Class AA Preferred Stock, the Class AB Preferred Stock or the exercise of
Warrants, or the conversion, exchange or exercise of other securities
convertible into or exchangeable or exercisable for Common Stock whose issuance
was subject to an adjustment pursuant to the Certificates of Designations and
(b) Common Stock issued to the Company's employees under the Executive Equity
Plan and other employee benefit plans adopted by the Board and approved by the
holders of Common Stock when required by law. The purchase or subscription by
Prometheus or an affiliate of Prometheus, as the case may be, will be on the
same price and other terms and conditions, including the date of sale or
issuance, as are applicable to the purchasers or subscribers of the additional
shares of capital stock of the Company whose purchases or subscriptions give
rise to the participation rights (except that the price to Prometheus or its
assignees to make such purchase or subscription will be net of payment of any
underwriting, placement agent or similar fee), which price and other terms and
conditions will be substantially as stated in the relevant notice to be sent by
the Company to Prometheus. Prometheus will have 20 days after its receipt of the
notice to exercise its participation rights.
Tag-Along Rights. Each of Messrs. Coleman and Martell (the "Executive
Shareholders") has agreed that (a) from the date of the Stockholders Agreement
through the third anniversary thereof, he will not sell, transfer, assign,
pledge or hypothecate ("Transfer"), whether in a single transaction or in a
series of linked transactions, more than 10% per year, when aggregated with all
such other Transfers made by such shareholder in such year, of the Common Stock
beneficially owned by him on the date of the Stockholders Agreement, and (b)
from the third anniversary of the date of the Stockholders Agreement through the
fourth anniversary thereof, he will not Transfer, whether in a single
transaction or in a series of linked transactions, more than 5% , when
aggregated with all such other Transfers made by such shareholder during such
period, of the Common Stock beneficially owned by him on the date of the
Stockholders Agreement, unless the terms and conditions of such Transfer will
include an offer to Prometheus to include in the transfer to the proposed
transferee (the "Third Party"), at Prometheus's option and on the same price and
on the same terms and conditions as apply to the Executive Shareholder, an
amount of Class AA Preferred Stock and Class AB Preferred Stock and Common Stock
held by Prometheus, determined as described below.
Each of the Stockholder Parties other than the Executive Shareholders (the
"Homebuilder Shareholders") has agreed that after the date of the Stockholders
Agreement, he will not Transfer, whether in a single transaction or in a series
of linked transactions, more than 50% when aggregated with all such other
Transfers made by such shareholder, of the Common Stock then beneficially owned
by him, unless the terms and conditions of such Transfer will include an offer
to Prometheus to include in the transfer
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to the third party at the option of Prometheus and on the same price and on the
same terms and conditions as apply to the Homebuilder Shareholder, an amount of
Class AA Preferred Stock and Class AB Preferred determined as described below.
The third party will be required to purchase from Prometheus, if Prometheus
desires to participate in such transaction, the number of shares of Common Stock
beneficially owned by Prometheus equaling the lesser of (a) the number derived
by multiplying (i) the total number of shares of Common Stock which the third
party proposes to purchase by (ii) a fraction, the numerator of which will be
the number of shares of Common Stock beneficially owned by Prometheus and the
denominator of which will be the number of shares of Common Stock beneficially
owned by Prometheus and the applicable shareholder or (b) such lesser number of
shares as Prometheus may designate in a notice. Prometheus will have 30 days
after its receipt of the selling shareholder's notice of a proposed Transfer to
exercise its tag-along rights.
For purposes of the above-described provisions regarding tag-along rights,
Prometheus will be deemed to own that number of shares of Common Stock that it
beneficially owns at any given date plus the number of shares of Common Stock
into which the Class AA Preferred Stock and the Class AB Preferred Stock is
convertible, based on the applicable conversion price of such stock in effect on
the relevant date. The parties intend that only Common Stock will be transferred
to the third party pursuant to the tag-along rights provisions and if the
tag-along rights result in Prometheus including more shares of Common Stock
beneficially owned by him in any tag-along notice than will, on the date of
transfer by Prometheus to the third party, have been converted into Common
Stock, Prometheus and the Company will take such steps as are reasonably
required to convert to Common Stock any Class AA Preferred Stock or Class AB
Preferred Stock to be purchased by the third party which Prometheus desires to
transfer immediately prior to such transfer and contingent upon such transfer
occurring.
The tag-along rights will terminate upon a Termination Event (defined
above).
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Certificate of Incorporation and Bylaws Amendments
Amendments to the Certificate of Incorporation. The Stock Purchase
Agreement provides that, upon Stockholders Approval, the Board will file with
the Delaware Secretary of State certain amendments to the Company's certificate
of incorporation. Such amendments, which are summarized below, are set forth in
a Certificate of Amendment of Certificate of Incorporation of the Company. The
summary is qualified in its entirety by reference to the full text of the
Certificate of Amendment of Certificate of Incorporation, which is attached
hereto as Annex D.
Conduct of Business. Under the proposed amendments to the certificate of
incorporation, which are subject to the Stockholders Approval, the Company and
its subsidiaries will not be permitted to engage in certain significant actions
or transactions without Supermajority Director Approval (the affirmative vote of
over 81% of the members of the entire Board) or Supermajority Executive
Committee Approval (the affirmative vote of over 81% of the members of the
entire Executive Committee). Specifically, in addition to any other vote
required by applicable law and notwithstanding the fact that a lesser or no vote
of the Board or the Executive Committee is required under applicable law, the
Company will not, and will not permit any of its subsidiaries to, do any of the
following without Supermajority Director Approval or Supermajority Executive
Committee Approval:
(a) purchase, sell, license, assign, transfer, convey or otherwise acquire
or dispose of any assets, securities, or businesses, unless such transaction is
provided for in the annual budget or is in the ordinary course of business and
does not involve the acquisition or disposition of homebuilding operations or
any homebuilding company or entity;
(b) split (including any reverse split), combine, or reclassify any shares
of its capital stock; adopt resolutions authorizing a liquidation, dissolution,
merger, consolidation, restructuring, recapitalization, or other reorganization
of the capital structure of the Company or any of its subsidiaries; or make any
other material changes in its capital structure;
(c) enter into any new line of business other than the business engaged in
by the Company and its subsidiaries on the date of the amendments to the
certificate of incorporation, cease to be engaged in any material line of
business engaged in by the Company and its subsidiaries on such date or
materially change the nature of the business engaged in by any of them on such
date;
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(d) file any petition seeking relief, or consent to the institution of any
proceeding against itself seeking to adjudicate it a bankrupt or insolvent,
under any law relating to bankruptcy, insolvency or reorganization or relief of
debtors;
(e) amend or otherwise alter the Company's or any subsidiary's certificate
of incorporation or adopt, alter, amend or repeal any bylaw of the Company
(other than the adoption, alteration, amendment or repeal of any bylaw of the
Company by the stockholders of the Company) or any subsidiary of the Company;
(f) declare or pay any dividend or make any other distribution with respect
to its capital stock, other than dividends paid by any subsidiary to the Company
or another subsidiary in the ordinary and usual course of business or to the
holders of the Class AA Preferred Stock, Class AB Preferred Stock or the other
preferred stock outstanding on such date;
(g) issue or sell (whether through the issuance or granting of options,
warrants, commitments, subscriptions, rights to purchase, or otherwise) any of
its capital stock (other than upon conversion of the Class AA Preferred Stock
and Class AB Preferred Stock or other outstanding convertible securities of the
Company, or upon exercise of outstanding warrants or stock options) or deliver
other securities other than as contemplated in the Stockholders Agreement, or
purchase or otherwise acquire any of its capital stock, employee or director
stock options or debt securities; or
(h) agree to do any of the foregoing.
Adoption or Amendment of Bylaws. The proposed amendments to the certificate
of incorporation also provide that the affirmative vote of the holders of at
least a majority in voting power of the then outstanding shares of Class AA
Preferred Stock and Class AB Preferred Stock, voting together as a single class,
will be required in order for the Company's stockholders to adopt, alter, amend
or repeal any bylaw of the Company. The foregoing provision applies
notwithstanding any provision of law which might otherwise permit a lesser vote
or no vote, but in addition to any affirmative vote of the holders of any
particular class or series of stock required by law or the Company's certificate
of incorporation.
Termination. The provisions of the amendments to the certificate of
incorporation described in the preceding paragraphs will be in effect until such
time as Prometheus provides written notice to the Company's Secretary that
Prometheus elects to have such provisions to be of no further force and effect.
The Stockholders Agreement requires
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Prometheus to deliver such notice upon the occurrence of a Termination Event (as
defined above).
Increase in Authorized Common Stock. Under the Company's certificate of
incorporation as currently in effect, the Company's authorized capital stock
consists of 49,000,000 shares of Common Stock and 1,000,000 shares of preferred
stock. Of the 49,000,000 shares of authorized Common Stock, as of the Record
Date (a) 11,745,275 shares were issued and outstanding and (b) 84,100 shares
were held in the Company's treasury. Of the 1,000,000 shares of authorized
preferred stock, as of the Record Date there were: (a) 20,000 shares of Series A
Cumulative Convertible Preferred Stock authorized, of which 10,000 shares
(having an aggregate liquidation value of $1,000,000) were issued and
outstanding; (b) 40,000 shares of Series B Convertible Preferred Stock
authorized of which 8,854 shares (having an aggregate liquidation value of
$885,400) were issued and outstanding; (c) 70,000 shares of Series C Convertible
Preferred Stock authorized of which no shares were issued and outstanding; (d)
67,500 shares of Series D Convertible Redeemable Preferred Stock authorized of
which 60,000 shares (having an aggregate liquidation value of $6,000,000) were
issued and outstanding; and (e) 46,670 shares of Class AA Preferred Stock
authorized, of which 11,700 shares (having an aggregate liquidation value of
$11,700,000) were issued and outstanding.
Under the proposed amendments to the Company's certificate of
incorporation, the number of authorized shares of Common Stock would be
increased from 49,000,000 to 99,000,000. An increase in the number of authorized
shares of Common Stock is needed to permit, under certain circumstances, the
conversion of the Class AA Preferred Stock, the Class AB Preferred Stock, the
debt instruments (if any) and the Warrants to be issued in the Transactions. The
circumstances under which an increase in the number of authorized shares of
Common Stock may be needed include: (a) the conversion of the Class AA Preferred
Stock and the Class AB Preferred Stock and/or debt by the holder(s) after
decrease(s) in the Optional Conversion Price (as defined above), which is
subject to adjustment at the option of the holder during the period between
September 30, 2001 and September 30, 2003, based on the closing prices of the
Common Stock; and (b) the exercise of the Warrants after decrease(s) in the
Exercise Price and increase(s) in the number of Warrant Shares between September
30, 2001 and September 30, 2003, based on the closing prices of the Common
Stock. See "Stock Purchase Agreement--Class AA Preferred Stock--Conversion;" and
"Warrants--Adjustments Based on Common stock Market Price."
The additional 50,000,000 shares of authorized Common Stock would also
provide the Board with flexibility for future capital requirements including the
issuance of
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Common Stock in connection with possible business acquisitions. The Company has
no specific plans to issue Common Stock other than Common Stock issuable: (a)
upon conversion of the Class AA Preferred Stock and the Class AB Preferred
Stock, and/or debt in lieu of all or some of the Class AB Preferred Stock, and
upon exercise of the Warrants; (b) upon conversion of the Company's other
preferred stock issued or issuable; (c) upon exercise of options issued or
issuable under the Company's 1996 Stock Incentive Plan; (d) under the Company's
Employee Stock Purchase Plan; and (e) under the Company's 1996 Bonus Award Plan.
Further, other than as described in this Proxy Statement, there are no
agreements, understanding or arrangements for the issuance of the additional
Common Stock under the amendments to the certificate of incorporation.
Amendments to the Bylaws. The Stock Purchase Agreement provides that, upon
Stockholders Approval, the Board will adopt certain amendments to the Company's
bylaws and that the Company's subsidiaries will adopt certain amendments to
their bylaws. Upon the request of Prometheus, however, the Board will adopt such
amendments prior to Stockholders Approval. The amendments to the Company's
bylaws are described below.
Number of Directors. The number of directors will be 15 unless otherwise
fixed by a majority of the whole Board, subject to the provision governing the
election of directors following an Adverse Event (as defined). Any increase in
the size of the Board over 15 directors will result in an increase in the number
of Preferred Stock Directors (rounded up to the next whole number) such that
Preferred Stock Directors represent at least 20% of the votes exercisable by the
whole Board.
Quorum. A quorum for the transaction of business will require 81% of the
whole Board.
Removal of Directors. Any Preferred Stock Director or Additional Preferred
Stock Director may be removed with or without cause upon the affirmative vote of
the holders of a majority in voting power of the outstanding shares of Class AA
Preferred Stock and Class AB Preferred stock then entitled to vote at an
election of directors.
Election of Directors Following Adverse Event. In the event of an Adverse
Event (as defined), the number of directors on the Board will immediately and
automatically be increased to such number as will enable the appointment or
election of Additional Preferred Stock Directors such that the Preferred stock
Directors together with the Additional Preferred Stock Directors will constitute
a majority of the Board. The Additional Preferred Stock Directors will be
elected exclusively by the holders of Class
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AA Preferred Stock and Class AB Preferred Stock then entitled to vote. The
Additional Preferred Stock Directors will be entitled to serve on the Board
until the second consecutive Test Date (as defined) at which neither component
of an Adverse Event exists.
Committees. Each committee of the Board will consist of at least 3
directors. The number of Preferred Stock Directors to serve on each Committee
(other than the Executive Committee) will be proportionate to the number of
Preferred Stock Directors on the Board.
Executive Committee. The Board will have an Executive Committee composed of
five directors, two of which will be Preferred Stock Directors. A quorum for the
transaction of business will require 81% of the total number of directors
constituting the Executive Committee. The Executive Committee will have all the
powers and authority of the Board in the management of the Company's business
and affairs, including the power to declare dividends and authorize the issuance
of stock, except that the Executive Committee will not have the power or
authority to take action with respect to any matter on which it is prohibited
from taking action under the certificate of incorporation, the bylaws or certain
provisions of the Delaware General Corporation Law ("DGCL"). The bylaws
amendments provide that the Executive Committee will not have the power or
authority to:
(a) amend the certificate of incorporation (except that the Executive
Committee may, to the extent authorized in a resolution of the Board
providing for the issuance of the Company's stock, fix the
designations and any of the preferences or rights of such shares
relating to dividends, redemption, dissolution, any distribution of
the Company's assets or the conversion into, or the exchange of such
shares for, shares of any other class or series of stock or authorize
the increase or decrease of the shares of any series;
(b) adopt an agreement of merger or consolidation (other than a
certificate of ownership and merger with respect to a merger of the
Company and one or more of its subsidiaries pursuant to the DGCL);
(c) recommend to the stockholders the sale, lease or exchange of all or
substantially all of the Company's property and assets;
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(d) recommend to the stockholders a dissolution of the Company or a
revocation of a dissolution; or
(e) amend the Company's bylaws.
Conduct of Business. Under the bylaws amendments of the Company and its
subsidiaries, the Company and its subsidiaries will not be permitted to engage
in certain significant actions or transactions, described below, without
Supermajority Director Approval or Supermajority Executive Committee Approval.
Specifically, in addition to any other vote required by applicable law and
notwithstanding the fact that a vote of the Board or the Executive Committee may
not be required under applicable law, the Company will not, and will not permit
any of its subsidiaries to, do any of the following without Supermajority
Director Approval or Supermajority Executive Committee Approval:
(a) purchase, sell, license, assign, transfer, convey or otherwise acquire
or dispose of any assets, securities, or businesses, unless such transaction is
provided for in the annual budget or is in the ordinary course of business and
does not involve (i) the acquisition or disposition of homebuilding operations
or any homebuilding company or entity or (ii) land acquisitions with a value in
excess of $100,000 for any transaction or group of related transactions or with
an aggregate value in excess of $5,000,000 in any 12 month period;
(b) directly or indirectly incur, refinance, repay, prepay, create, assume,
guarantee or otherwise become liable with respect to any liabilities with an
aggregate face amount in excess of $1,000,000 in the aggregate, other than in
accordance with existing credit facilities and renewals thereof on substantially
the same terms;
(c) enter into any transaction or materially amend any transaction in
effect, with any affiliate of the Company (other than between the Company and
its subsidiaries or between its subsidiaries);
(d) split (including any reverse split), combine, or reclassify any shares
of its capital stock; adopt resolutions authorizing a liquidation, dissolution,
merger, consolidation, restructuring, recapitalization, or other reorganization
of the capital structure of the Company or any of its subsidiaries; or make any
other material changes in its capital structure;
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(e) engage in any new development or redevelopment of any real property for
an amount in excess of $100,000, whether in a single transaction or a series of
related transactions (provided that it is contemplated that such authority will
be delegated to a committee of the Board on guidelines approved by the Executive
Committee);
(f) incur any capital expenditure for an amount, outside of the approved
annual budget, in excess of $50,000 per occurrence or $500,000 in the aggregate,
whether in a single transaction or a series of related transactions, or waive,
release, grant or transfer any rights of value in respect thereof or enter into
any agreement or arrangement that could adversely affect the marketability of
any real estate of the Company or any of its subsidiaries;
(g) enter into any employment agreement with any employee involving
payments in excess of $100,000 per annum or with any director or executive
officer of the Company or any of its subsidiaries or enter into or materially
change any benefit arrangement between the Company and its employees or
consultants;
(h) enter into any new line of business other than the business engaged in
by the Company and its subsidiaries on the date of the bylaws amendments, cease
to be engaged in any material line of business engaged in by the Company and its
subsidiaries on such date or materially change the nature of the business
engaged in by any of them on such date;
(i) approve the annual operating budget of the Company for any year after
1997;
(j) amend or take actions materially inconsistent with the approved annual
operating budget for 1997 or any subsequent year;
(k) make any general assignment for the benefit of creditors;
(l) file any petition seeking relief, or consent to the institution of any
proceeding against itself seeking to adjudicate it a bankrupt or insolvent,
under any law relating to bankruptcy, insolvency or reorganization or relief of
debtors;
(m) institute, voluntarily dismiss, terminate or settle any litigation or
arbitration against any person involving payments for damages and penalties in
excess of $50,000 or otherwise material to the Company and its subsidiaries
taken as a whole;
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(n) engage, retain, pay or agree to pay the fees or expenses of any third
party consultants or advisors (other than advisors retained in the ordinary
course of business), to the extent that such fees and expenses exceed $100,000
in the aggregate;
(o) appoint, ratify or replace the independent accountants, change any
accounting policy or practice other than as mandated by generally accepted
accounting principles then in effect; or change any significant tax methods,
practices, procedures or policies;
(p) enter into or amend any joint venture, partnership or profit sharing
agreement or arrangement;
(q) amend the Company's or any subsidiary's certificate of incorporation or
bylaws;
(r) declare or pay any dividend or make any other distribution with respect
to its capital stock, other than dividends paid by any subsidiary to the Company
or another subsidiary in the ordinary and usual course of business or to the
holders of the Class AA Preferred Stock, Class AB Preferred Stock or the other
existing preferred stock of the Company;
(s) issue or sell (whether through the issuance or granting of options,
warrants, commitments, subscriptions, rights to purchase, or otherwise) any of
its capital stock (other than upon conversion of the Class AA Preferred Stock
and Class AB Preferred Stock or other outstanding convertible securities of the
Company, or upon exercise of outstanding warrants or stock options) or deliver
other securities other than as contemplated in the Stockholders Agreement, or
purchase or otherwise acquire any of its capital stock, employee or director
stock options or debt securities; or
(t) agree to do any of the foregoing.
Termination. The above-described provisions regarding matters subject to
Supermajority Director Approval or Supermajority Executive Committee Approval
will be effective from the date of adoption of the bylaw amendments until such
time, if any, as Prometheus elects to terminate such provisions. The
Stockholders Agreement requires Prometheus to make such election upon the
occurrence of a Termination Event.
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Stockholders Voting Agreement
Concurrently with the execution of the Stock Purchase Agreement at the
First Closing, certain holders of the Common Stock and Prometheus entered into
an Amended and Restated Stockholders Voting Agreement dated as of September 30,
1997 (the "Stockholders Voting Agreement"). The stockholders who are parties to
the Stockholders Voting Agreement are the same stockholders who are parties to
the Stockholders Agreement: Messrs. Coleman, Martell, Short, Stuhmer,
Buffington, Witek, Caldwell, and Giddens, Ms. Donnelly and Ms. Martell. Messrs.
Coleman, Martell, Short, Stuhmer, Buffington and Witek are directors and/or
officers of the Company. The stockholders who are parties to the Stockholders
Voting Agreement own in the aggregate Common Stock representing approximately
50.2% of the votes entitled to be cast at the Special Meeting. See "Beneficial
Ownership of Securities."
Each of such stockholders has agreed to vote his shares of Common Stock in
favor of the Transactions. See "Stockholders Approval." In addition, each of
such stockholders has agreed not to sell, transfer or otherwise dispose of any
of his Common Stock until the Second Closing under the Stock Purchase Agreement.
The Stockholders Voting Agreement will terminate at the Second Closing.
Stockholders Approval
Stockholders Approval will constitute approval of the Transactions
including: (a) the sale and issuance to Prometheus of an aggregate of 35,000
shares, having an initial liquidation value of $35,000,000, of Class AA
Preferred Stock and 40,000 shares, having an initial liquidation value of
$40,000,000, of Class AB Preferred Stock and/or debt and 1,000,000 Warrants, for
an aggregate purchase price of $75,000,000 (except that the sale and issuance of
11,700 shares of Class AA Preferred Stock and 375,000 Warrants at the First
Closing was not subject to Stockholders Approval); (b) the sale and issuance to
Prometheus of up to an additional 11,667 shares, having an initial liquidation
value of $11,667,000, of Class AA Preferred Stock and up to an additional 13,333
shares, having an additional liquidation value of $13,333,000, of Class AB
Preferred Stock and/or debt and 333,250 Warrants, for an aggregate purchase
price of $25,000,000; and (c) the amendments to the certificate of
incorporation.
Under the DGCL, approval of the amendments to the certificate of
incorporation requires the affirmative vote of holders of a majority of the
outstanding Common Stock. Subject to certain exceptions, Nasdaq National Market
System rules require that a Nasdaq
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National Market System-quoted company obtain the affirmative vote of holders of
a majority of the outstanding voting stock voting at a meeting at which a quorum
is present to issue, other than in a public offering, common stock or securities
convertible into or exchangeable for common stock representing 20% or more of
the common stock or voting power outstanding prior to the issuance, at a price
less than the greater of book or market value, or issue securities that will
result in a change in control of the listed company. If the consummation of the
Transactions would result in such an issuance, such requirement would be
satisfied by obtaining Stockholders Approval. Stockholder approval was not
required with respect to the sale and issuance of 11,700 shares of Class AA
Preferred Stock at the First Closing which resulted in Prometheus having less
than 20% of the outstanding voting power of the Company's capital stock and did
not result in a change in control pursuant to the applicable rules. See "Stock
Purchase Agreement--First Closing."
Stockholders Approval is assured by reason of the fact that the
stockholders who are parties to the Stockholders Voting Agreement have agreed to
vote in favor of the Transactions and such stockholders own in the aggregate
Common Stock representing approximately 50.2% of the votes entitled to be cast
at the Special Meeting. See "Beneficial Ownership of Securities."
The Board unanimously recommends that stockholders vote FOR the
Transactions.
PROPOSAL TO AUTHORIZE AN INCREASE IN THE
COMMON STOCK SUBJECT TO THE COMPANY'S 1996
STOCK INCENTIVE PLAN
The 1996 Stock Incentive Plan as amended (the "1996 Plan") currently
authorizes the grant of stock options, stock appreciation rights, deferred stock
and restricted stock with respect to a maximum of 1,125,000 shares of Common
Stock, subject to certain antidilution adjustments.
The purpose of the 1996 Plan is to promote the overall financial objectives
of the Company and its stockholders by motivating those persons selected to
participate in the Plan to achieve long-term growth in stockholder equity in the
Company and by retaining the association of those individuals who are
instrumental in achieving such growth. The persons eligible to participate are
and will be directors, officers, employees, independent contractors and
consultants of the Company or any of its subsidiaries who will be in a position
to make contributions to the growth, management, protection and success of the
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Company and its subsidiaries. The Company believes that equity participation by
its key employees is an important element in its overall compensation program.
The 1996 Plan originally authorized the grant of stock options, stock
appreciation rights, deferred stock and restricted stock with respect to a
maximum of 575,000 shares of Common Stock. In order to continue its policy of
providing equity participation to the Company's employees and to provide
availability for the issuance of stock options in connection with the Company's
acquisitions, the Board proposed that the 1996 Plan be amended to increase the
shares of Common Stock available for grant under the 1996 Plan from 575,000
shares to 1,125,000 shares. Such proposal was approved at the annual meeting of
stockholders on May 21, 1997. In light of the Transactions which will enable the
Company to effect additional acquisitions of homebuilding companies (see "The
Transactions"), and in furtherance of the purposes of the Plan, the Board
proposes that the 1996 Plan be further amended to increase the shares of Common
Stock available for grant under the 1996 Plan from 1,125,000 shares to 1,400,000
shares.
In May 1997 the Company, pursuant to the decision of the Board, reduced the
exercise price of the stock options issued under the 1996 Plan to $6.00, from a
weighted average exercise price of $8.92 per share, in order to increase the
value of the options as an incentive to the option holders in furtherance of the
purposes of the 1996 Plan. At that time, stock options to purchase 349,200
shares of Common Stock were outstanding of which stock options to purchase
149,200 shares of Common Stock were repriced.
As of October __, 1997, options for the purchase of a total of 490,589
shares of Common Stock at a weighted average of $5.92 per share were
outstanding, 30,000 shares of restricted stock were awarded to be delivered by
the Company in certain amounts and at certain dates, and approximately 320
persons were participating in the Plan. On October __, 1997, the closing price
of the Common Stock on the Nasdaq National Market was $_______ per share.
The 1996 Plan is administered by the Compensation Committee (the
"Committee"). The 1996 Plan authorizes the issuance of up to 1,125,000 shares of
Common Stock pursuant to the grant or exercise of stock options, stock
appreciation rights, restricted stock or deferred stock. Options granted to
certain senior executives, management and other employees vest over varied
periods which have been and will be determined at the time such options are
granted. Directors who are not employees of the Company or any affiliate
("Non-Employee Directors") are automatically granted options to purchase 3,000
shares on the date of each annual stockholder's meeting, beginning in 1996.
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Stock Options may be either "incentive stock options" (within the meaning
of Section 422 of the Internal Revenue Code) or nonqualified stock options. The
exercise price per share purchasable under a stock option is determined by the
Committee except that the price with respect to Non-Employee Directors is the
fair market value on the date of grant and except that options were repriced in
May 1997 in accordance with the decision of the Board as described above.
Generally, participants are given ten years in which to exercise a stock option,
or a shorter period upon termination of employment. Payment may be made in cash,
or, if approved by the Committee, in the form of unrestricted Common Stock the
participant already owns, or by certain other forms of payment. At the Company's
option it may provide a participant with a loan or guarantee of a loan for the
exercise price of an option. The right to exercise an option may be conditioned
upon the completion of a period of service or other conditions. Stock options
are subject to certain restrictions as to transferability.
Stock appreciation rights ("SAR's") entitle a participant, upon exercise,
to receive an amount in cash, shares of Common Stock or both, equal in value to
(i) the excess of the fair market value per share of Common Stock over the
exercise price per share specified in the related agreement multiplied by (ii)
the number of shares to which the SAR relates. The right to exercise a SAR may
be conditioned upon the completion of a period of service or other conditions.
SAR's may be granted in conjunction with stock options or on a stand alone
basis. Generally, participants will be given ten years in which to exercise a
SAR, or a shorter period upon a termination of employment. SAR's are subject to
certain restrictions as to transferability.
Shares of restricted stock may also be awarded under the 1996 Plan, based
on service or the attainment of specified performance goals by the participant
or the Company or an affiliate (including a division or department of the
Company or an affiliate) or such other criteria as the Committee may determine.
Upon a participant's termination of employment, the restricted stock to the
extent then subject to restriction generally will be forfeited by the
participant. The Committee may waive these restrictions.
Deferred stock is stock that can be awarded to a participant for receipt in
the future, at a specified time and under specified conditions. The Committee
will determine the participants to whom, and the time or times at which, any
deferred stock will be awarded, the number of shares of deferred stock to be
awarded to any participant, the duration of the period during which and the
conditions under which receipt of the shares will be deferred and any other
terms and conditions of the award. At the expiration of the deferral period, the
Committee may elect to deliver Common Stock, cash equal to the fair
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market value of such Common stock, or a combination thereof, to the participant
for the shares covered by such award. Upon a participant's termination of
employment, the deferred stock to the extent then subject to restrictions
generally will be forfeited by the participant. The Committee may waive the
remaining deferral limitations.
The 1,250,000 shares of Common Stock issuable under the 1996 Plan have been
registered under the Securities Act pursuant to a Form S-8 Registration
Statement filed with the SEC on September 5, 1997. If the proposal to authorize
an increase in the Common Stock subject to the 1996 Plan is approved by the
stockholders, the Company intends to file a Form S-8 Registration Statement to
register the additional 275,000 shares of Common Stock which would be issuable
under the Plan.
The 1996 Plan is not limited as to its duration. The Board may amend,
alter, or discontinue the 1996 Plan, subject to certain limitations.
In the event of a Change in Control of the Company (as defined in the
Plan):
(a) any SARs and stock options outstanding as of the date of such
Change in Control which are not then exercisable and vested will become
fully exercisable and vested to the full extent of the original grant;
(b) the restrictions and deferral limitations applicable to any shares
of restricted stock and deferred stock will lapse, and such shares of
restricted stock and deferred stock will become free of all restrictions
and become fully vested and transferable to the full extent of the original
grant;
(c) the performance goals and other conditions with respect to any
outstanding award will be deemed to have been satisfied in full and such
award will be fully distributable, if and to the extent provided by the
Committee; and
(d) the Committee will have discretion to (i) cause any award to be
canceled on notice, (ii) provide that the securities of another entity be
substituted under the 1996 Plan for the Common Stock and to make equitable
adjustment with respect thereto, (iii) grant the participant the right to
receive a specified amount of cash upon surrender of a stock-based award,
(iv) require the assumption of the obligation of the Company under the Plan
subject to appropriate adjustment; and (v) take any other action.
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A Change in Control includes, subject to certain exceptions: any
transaction which would result in any person owning, directly or indirectly, 50%
or more of the outstanding Common Stock or the voting power of the Company;
certain changes in the members of the Board of Directors; certain
reorganizations, mergers, consolidations or sales of substantially all of the
Company's assets; and stockholders' approval of a complete liquidation or
dissolution of the Company. The 1996 Plan was amended on September 30, 1997, to
provide that Change in Control does not include any event resulting from or
contemplated by, directly or indirectly, the Stock Purchase Agreement. The
Company is in the process of requesting that the participants consent to such
amendment with respect to the stock options that have been issued. As of the
date of this Proxy Statement, the Company has received consents from more than
75% of the participants.
Tax Consequences. A participant will not recognize taxable income upon the
grant of a stock option or at any time prior to the exercise of the option or a
portion thereof. At the time the participant exercises a nonqualified stock
option or portion thereof, he will recognize compensation taxable as ordinary
income in an amount equal to the excess of the fair market value of the Common
Stock, and the Company will then be entitled to a corresponding deduction.
A participant who exercises an incentive stock option will not be taxed at
the time he exercises his option or a portion thereof. Instead, he will be taxed
at the time he sells the Common Stock acquired pursuant to the option. The
participant will be taxed on the difference between the sales price and the
amount he paid for the stock. If the participant does not sell the stock prior
to two years from the date of grant of the option and one year from the date he
acquired the stock, the gain will be capital gain and the Company will not be
entitled to a corresponding deduction. If the participant sells the stock at a
gain prior to that time, the difference between the amount the participant paid
for the stock and the lesser of the fair market value on the date of exercise or
the sales price will be taxed as ordinary income and the Company will be
entitled to a corresponding deduction. If the participant sells the stock for an
amount in excess of the fair market value on the date of exercise, the excess
amount is taxed as capital gain. If the participant sells the stock for less
than the amount he paid for the stock prior to the one or two year periods
indicated, no amount will be taxed as ordinary income and the loss will be taxed
as a capital loss. Exercise of an incentive stock option may subject a
participant to, or increase a participant's liability for, the alternative
maximum tax.
A participant generally will not recognize income upon the grant of a SAR.
At the time a participant receives a SAR, he generally will recognize
compensation taxable as
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ordinary income in an amount equal to the cash or the fair market value of the
Common Stock received, and the Company will be entitled to a corresponding
deduction.
A participant will not be taxed upon the grant of restricted stock or
deferred stock if such stock is not transferable by the participant or is
subject to a "substantial risk of forfeiture," as defined in the Internal
Revenue Code. When the shares of Common Stock that are subject to the stock
award are transferable by the participant and are no longer subject to a
substantial risk of forfeiture, the participant will recognize compensation
taxable as ordinary income in an amount equal to the fair market value of the
stock subject to the stock award, less any amount paid for such stock, and the
Company then will be entitled to a corresponding deduction. However, if a
participant so elects at the time of receipt of a restricted stock or deferred
stock award, he may include the fair market value of the stock subject to the
stock award, less any amount paid for such stock, in income at that time and the
Company also will be entitled to a corresponding deduction at that time.
As of October __, 1997, there were 715,200 shares available for issuance
under the 1996 Plan. The Board has determined that the 1996 Plan should be
amended to authorize the issuance of an additional 275,000 shares. The Board
believes that the additional shares will be sufficient to meet foreseeable
demand for the next several years.
In accordance with the Stockholders Agreement, Prometheus will vote the
11,700 shares of Class AA Preferred Stock it acquired at the First Closing (see
"The Transactions--Stock Purchase Agreement--First Closing"), which entitles it
to cast 1,950,000 votes, in favor of the adoption of the proposal.
The Board of Directors recommends that stockholders vote FOR the adoption
of the proposal.
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BENEFICIAL OWNERSHIP OF SECURITIES
Ownership by Persons Owning More than Five Percent. The following table
sets forth information with respect to persons known to the Company to be the
beneficial owners of more than five percent of the outstanding Common Stock or
preferred stock with voting rights. Other than the Class AA Preferred Stock held
by Prometheus, all the stock set forth in the table is Common Stock.
<TABLE>
<CAPTION>
Amount and
Nature of Percent of Outstanding
Name and Address of Beneficial Shares of Common Percent of Voting Stock as
Beneficial Owner Ownership Stock as of Record Date of Record Date
- ------------------------------------- --------------------- ------------------------------- ---------------------------------
<S> <C> <C> <C>
Prometheus Homebuilders 11,700(a) 14.2%
LLC
c/o Lazard Freres Real Estate
Investors, LLC
Thirty Rockefeller Plaza
63rd Floor
New York, New York 10020
J. Christopher Stuhmer
9500 Hillwood Drive 1,691,727 14.4% 12.3%
Suite 200
Las Vegas, NV 89134
Robert Short
534 Commons Drive 1,573,517(b) 13.4% 11.5%
Golden, CO 80401
Thomas Buffington
8716 Mopac Expressway 948,949 8.1% 6.9%
Suite 100
Austin, TX 78759
Heartland Advisors, Inc.
790 North Milwaukee Street 752,500(c) 6.4% 5.5%
Milwaukee, WI 53202
Charles F. Smith
P.O. Box 9672 686,748(d) 5.8% 5.0%
McLean, VA 22102
J. Marshall Coleman
1921 Gallows Road 651,585(e) 5.5% 4.8%
Suite 730
Vienna, VA 22812
James J. Martell, Jr.
1921 Gallows Road 624,423(f) 5.3% 4.6%
Suite 730
Vienna, VA 22812
</TABLE>
-85-
<PAGE>
(a) 11,700 shares, having an initial liquidation value of $11,700,000, of Class
AA Preferred Stock are issued and outstanding. Prometheus holds all such
shares, which were issued at the First Closing. Such shares entitle
Prometheus to cast 1,950,000 votes at the Special Meeting. Subject to the
terms and conditions of the Stock Purchase Agreement, Prometheus has the
right to acquire an aggregate of 35,000 shares, having an initial
liquidation value of $35,000,000, of Class AA Preferred Stock (which
includes the 11,700 shares acquired at the First Closing) and up to an
aggregate of 40,000 shares, having an initial liquidation value of
$40,000,000, of Class AB Preferred Stock and/or a debt instrument in lieu
of all or a portion of the Class AB Preferred Stock, and 1,000,000 Warrants
(subject to adjustment). Prometheus, which may be deemed to be the
beneficial owner of the foregoing securities, disclaims beneficial
ownership of all but the 11,700 shares of Class AA Preferred Stock it
acquired at the First Closing.
(b) Of the 1,573,517 shares, Mr. Short's children own 4,000 shares.
(c) This information is based on a Schedule 13G dated February 12, 1997 which
was filed by Heartland Advisors, Inc. According to such Schedule 13G,
Heartland Advisors, Inc. has sole voting power over 747,000 shares of
Common Stock.
(d) Of the 686,748, Mr. Smith's children own 39,805 shares.
(e) Of the 651,585 shares, Mr. Coleman owns 325,792.5 shares and Patricia A.
Donnelly, his wife, owns 325,792.5 shares.
(f) Of the 624,423 shares, Mr. Martell owns 494,423 shares, Mary Ann Martell,
his wife, owns 125,000 shares, and his children own 5,000 shares.
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<PAGE>
Ownership by Directors and Executive Officers.
The following stock ownership information is furnished with respect to each
director and each executive officer of the Company holding Common Stock.
<TABLE>
<CAPTION>
Shares of
Common Percentage
Stock of the of
Company Outstanding
Beneficially Shares of the Percent
Owned as of Company's of
Positions and Offices the Record Common Voting
Name with the Company Date Stock Stock
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
J. Marshall Coleman Chairman of the Board of 651,585(a) 5.5% 4.8%
the Company
James J. Martell, Jr. President, Chief 624,423(b) 5.3% 4.6%
Executive Officer and
Director
George Yeonas Chief Operating Officer 12,500 * *
and Director
Thomas B. Buffington Director 948,949 8.1% 6.9%
Robert Short Director 1,573,517 13.4% 11.5%
J. Christopher Stuhmer Director 1,691,727 14.4% 12.3%
Lawrence J. Witek Director 457,628 3.9% 3.3%
Mark L. Fine Director 7,000(c) * *
Edward J. Mathias Director 16,000(c) * *
Steven D. Rivers Director 6,000(c) * *
William A. Shutzer Director 11,000(c) * *
Charles F. Smith Director 686,748 5.8% 5.0%
Jamie M. Pirrello Chief Financial Officer 22,632 * *
All Directors and Executive Officers as a group (13) 6,709,209 56.8% 48.8%
</TABLE>
* Less than 1%
(a) Of the 651,585 shares, Mr. Coleman owns 325,792.5 shares and Patricia A.
Donnelly, his wife, owns 325,792.5 shares.
(b) Of the 624,423 shares, Mr. Martell owns 494,423 shares, Mary Ann Martell,
his wife, owns 125,000 shares, and his children own 5,000 shares.
(c) Includes 6,000 shares that Messrs. Fine, Shutzer and Rivers have the right
to acquire and 3,000 shares that Mr. Mathias has the right to acquire
pursuant to the Company's Stock Option Plan.
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<PAGE>
COMPENSATION
Compensation of Executive Officers and Directors
Summary Compensation Table
The following table sets forth information for the fiscal year ended
December 31, 1996 concerning the compensation of the Company's Chief Executive
Officer and each of the Company's other executive officers whose total annual
salary and bonus exceeded $100,000.
Summary Compensation
<TABLE>
<CAPTION>
Long Term Compensation All Other
Name and Principal Annual Compensation Compensation
Position ($)
Awards Payouts
Salary ($) Bonus ($) Shares LTIP
Underlying Payouts ($)
Options (#)
<S> <C> <C> <C> <C> <C>
James J. Martell, Jr., 166,667 225,490(1) -0- -0- 75,078(3)
President and Chief
Executive Officer
Thomas B. Buffington, 306,250 161,350 100,000 -0- -0-
President of Buffington
Homes, Inc., a subsidiary
of the Company(2)
Jamie M. Pirrello, Chief 106,667 112,745(1) -0- -0- 36,000(3)
Financial Officer
Brian J. McGregor, 121,875 -0- -0- -0- 75,000(3)
Former Chief Operating
Officer
</TABLE>
- ------------------------
1) Of the bonus paid to Mr. Martell and Mr. Pirrello, 20% was paid in the form
of Common Stock, valued at $6.00 per share.
2) Mr. Buffington served as the Company's Chief Operating Officer from January
through August 1997.
3) Except for Mr. Martell, the entire amount of other compensation represents
payment for consulting services prior to the Company's
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<PAGE>
initial public offering. Mr. Martell's total includes the above and an auto
allowance in the amount of $3,078.
Stock Options
The Company's Employee Stock Option Plan provides for the grant of
options with respect to the Common Stock. The table below sets forth information
on option grants in fiscal 1996 to the named executive officers.
Option Grants In Last Fiscal Year
<TABLE>
<CAPTION>
Percent of
Total
Options
Granted to
Options Employees Grant Date
Granted in Fiscal Exercise Expiration Present Value
Name (1) Year Price Date (2)
<S> <C> <C> <C> <C> <C>
James J. Martell, Jr. 0 0 0 0 0
Thomas B. Buffington 100,000 28.4% $6.00 12/23/06 $229,000
Jamie M. Pirrello 0 0 0 0 0
Brian J. McGregor 0 0 0 0 0
</TABLE>
- ---------------------------
1) All options vest 50% one year from the date of grant and the remainder on
the second anniversary of the date of grant.
2) The grant date present values are calculated based on the Black-Scholes
model. The assumptions used in the calculations include an expected
volatility of .30, a risk free rate of return of 6.138%, a dividend yield
of .017% and a time to exercise of five years.
Aggregated Option Exercises and Fiscal Year-End Option Value Table
The following table sets forth information concerning each exercise of
stock options during the fiscal year ended December 31, 1996 by each of the
executive officers named in the Summary Compensation Table above and the value
of unexercised options held by such persons as of December 31, 1996.
-89-
<PAGE>
Aggregated Option Exercises in last Fiscal Year
and FY-End Option Values
<TABLE>
<CAPTION>
Shares Underlying Value of Unexercised In-the-
Unexercised Options at FY- Money Options at FY-End ($)
Shares Value End (#)
Acquired on Realized ($)
Name Exercise (#)
Exercisable Unexercisable Excercisable Unexercisable
<S> <C> <C> <C> <C> <C> <C>
James J. Martell, Jr. -0- -0- -0- -0- -0- -0-
Thomas B. Buffington -0- -0- -0- 100,000 -0- -0-
Jamie M. Pirrello -0- -0- -0- -0- -0- -0-
Brian J. McGregor -0- -0- -0- -0- -0- -0-
</TABLE>
Employment Agreements
Messrs. Martell and Pirrello have employment agreements with the Company,
effective April 15, 1996, and expiring in the year 2000. The agreements
automatically renew for successive one-year periods, following the initial term,
unless either the Company or employee provides written notice of its intent to
terminate. As amended effective January 1, 1997, the agreements provide for
various benefits including a base salary of $350,000 and $180,000, respectively.
The agreements also provide for additional bonus compensation under the Company
bonus program, which is tied to operational results.
Under an agreement with Mr. Buffington, which was effective April 15, 1996
for a period of three years, Mr. Buffington was to be paid a salary of $250,000
annually as President of Buffington Homes, Inc., a subsidiary of the Company. In
his capacity as Chief Operating Officer from January through August 1997, Mr.
Buffington was paid an annual salary of $350,000. Mr. Buffington is eligible for
additional bonus compensation under the Company bonus plan.
Messrs. Martell, Buffington and Pirrello may be terminated for "cause" as
defined in the agreements, or without cause. If terminated for cause, the
termination will be effective upon receipt of proper notice by the employee. If
Messrs. Martell, Buffington or Pirrello are terminated for other than cause, the
employee shall be entitled to his base salary for the remainder of the agreement
term as well as a pro-rata share of his bonus, as determined by the Board of
Directors.
Compensation of Directors
Under the Company's standard arrangements, each non-employee director of
the Company receives an annual director's fee of $20,000, payable $5,000 each
quarter, and $1,000 for attendance at Board meetings. All directors are
reimbursed for out-of-pocket expenses incurred to attend meetings. Employee
directors of the Company do not receive any additional compensation for services
as a director.
-90-
<PAGE>
Compensation Committee Interlocks and Insider Participation
The current members of the Compensation Committee are William A. Shutzer,
Mark L. Fine and Edward Mathias. Prior to May 21, 1997 Steven D. Rivers was a
member of the Compensation Committee and Mr. Mathias was not a member. Since May
21, 1997, Messrs. Shutzer and Fine have been members of the Executive Committee.
None of the Compensation Committee members are or were officers or employees of
the Company or any of its subsidiaries.
CERTAIN TRANSACTIONS
The Company's Genesee subsidiary leases its administrative office space
from Genesee Holdings Corporation, of which Mr. Short is the president. In 1996,
the Company made lease payments of $108,960 to Genesee Holdings Corporation. The
Company's Christopher Homes subsidiary leases its administrative office space
from Towne Center L.P. Mr. Stuhmer is the president and sole shareholder of the
general partner of this partnership. In 1996, the Company made lease payments of
$149,728 to Towne Center L.P. The Company's Solaris subsidiary leased its
administrative office space from Square LD, LLC, of which Mr. Witek is a
partner. On September 5, 1996, Square LD, LLC sold the building to an unrelated
party. Until that time, Sunstar made lease payments of $57,833 in 1996. The
Company believes that the above referenced leases are at market rates.
In July of 1996, the Company sold its Genesee Custom Homes division to Mr.
Short, a director of the Company. The sale price was $4.9 million, and the
Company took back a one-year note at 12% in the amount of $4.1 million. The
note, which was initially due in July 1997 and was extended for six months at
the borrower's option, carried a balance of $3.3 million at December 31, 1996.
The Company also has a note receivable bearing interest at 13.75% from
another director, Mr. Stuhmer, for approximately $460,000, net of accrued
interest, which is secured by that director's shares in the Company.
Pursuant to an agreement with Commonwealth Homes, Inc., a company owned by
Mr. Coleman, the Company paid $311,311 for consulting services on merger and
acquisitions issues.
Also during 1996, the Company paid fees for legal services to Katten Muchin
& Zavis. Mr. Coleman was the former managing partner of Katten Muchin & Zavis'
Washington D.C. office.
During 1996, the Company paid fees to Furman Selz related to underwriting
the Company's initial public offering. Mr. Shutzer, who was not a director of
the Company at the time of the offering, is a director of Furman Selz. The
Company will pay Furman Selz an investment banking fee in connection with the
Transactions.
OTHER PROPOSALS
Neither the Company nor the members of the Board intend to bring before the
Special Meeting any matters other than those set forth in the Notice of Special
Meeting, and they have no present knowledge that any other matters will be
presented for action at the meeting. If, however, any other
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<PAGE>
matters are properly presented at the Special Meeting, it is the intention of
the persons named in the enclosed form of proxy to vote in accordance with their
best judgment.
By Order of the Board of Directors
James J. Martell, Jr.
President
October __, 1997
-92-
<PAGE>
ANNEX A
<PAGE>
CERTIFICATE OF DESIGNATIONS, PREFERENCES
AND RELATIVE, PARTICIPATING, OPTIONAL AND
OTHER SPECIAL RIGHTS OF PREFERRED
STOCK AND QUALIFICATIONS, LIMITATIONS
AND RESTRICTIONS THEREOF
OF
CLASS AA 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 Article Fourth of its
Certificate of Incorporation (the "Certificate of Incorporation") and in
accordance with the provisions of Section 151 of the General Corporation Law of
the State of Delaware, the Board of Directors by unanimous vote at a meeting of
the Board of Directors at which a quorum was acting and present adopted the
following resolution which resolution remains in full force and effect on the
date hereof:
RESOLVED, that there is hereby established a series of authorized preferred
stock having a par value of $0.01 per share, which series shall be designated as
"Class AA Convertible Preferred Stock" (the "Class AA Preferred Stock"), shall
consist of 46,670 shares and shall have the following voting powers, preferences
and relative, participating, optional and other special rights, and
qualifications, limitations and restrictions thereof as follows:
Certain Definitions; Number of Shares and Designation.
Definitions. Unless the context otherwise requires, the terms defined in
this paragraph 1 shall have, for all purposes of this resolution, the meanings
herein specified (with terms defined in the singular having comparable meanings
when used in the plural).
Additional Preferred Stock Directors. The term "Additional Preferred Stock
<PAGE>
Directors" shall have the meaning set forth in subparagraph 5(d).
Adjustment Period. The term "Adjustment Period" shall have the meaning set
forth in subparagraph 4(a)(i).
Adjustment Price. The term "Adjustment Price" shall mean, on any date of
determination, the average of the closing prices of the Common Stock over the 60
day period prior to such date.
Adverse Event. The term "Adverse Event" shall have the meaning set forth in
subparagraph 5(d)
Average Trading Price. The term "Average Trading Price" shall have the
meaning set forth in subparagraph 5(d).
Board of Directors. The term "Board of Directors" shall mean the Board of
Directors of the Corporation.
Business Day. The term "Business Day" shall mean a day other than a
Saturday or Sunday or a bank holiday in New York.
Class AA Preferred Stock. The term "Class AA Preferred Stock" shall have
the meaning set forth in subparagraph 1(b).
Class ABI Preferred Stock. The term "Class ABI Preferred Stock" shall mean
the shares of Class ABI Convertible Redeemable Preferred Stock, $0.01 par value
per share, of the Corporation.
Class ABII Preferred Stock. The term "Class ABII Preferred Stock shall mean
the shares of Class ABII Convertible Redeemable Preferred Stock, $0.01 par value
per share, of the Corporation.
Commission. The term "Commission" shall mean the United States Securities
and Exchange Commission.
Common Equity. The term "Common Equity" shall mean all shares now or
hereafter authorized of any class of common stock of the Corporation, including
the Common Stock, and any other stock of the Corporation, howsoever designated,
authorized after the Initial Issue Date, which has the right (subject always to
prior rights of any class or series of preferred stock) to participate in the
distribution of the assets and earnings of the Corporation without limit as to
per share amount.
Common Stock. The term "Common Stock" shall mean the common stock, par
value $0.01 per share, of the Corporation.
Comparable Group. The term "Comparable Group" shall mean Pulte Corporation,
The Ryland Group, Inc., U.S. Home Corporation, NVR Inc., Hovnanian Enterprises,
Inc., Toll
2
<PAGE>
Brothers, Inc., Washington Homes, Inc., Zaring National Corporation, M/I
Schottenstein Homes, Inc., Continental Homes Holding Corp., Engle Homes, Inc.,
Crossman Communities, Beazer Homes USA, Inc. and D.R. Horton, Inc.
Conversion Date. The term "Conversion Date" shall mean the Optional
Conversion Date and the Mandatory Conversion Date, as applicable.
Conversion Price. The term "Conversion Price" shall mean the Mandatory
Conversion Price or the Optional Conversion Price(s) (as the context requires)
and "Conversion Prices" shall mean the Mandatory Conversion Price and the
Optional Conversion Price(s).
Corporation Conversion Period. The term "Corporation Conversion Period"
shall mean any date after the date, if any, of the Second Closing when the
Average Trading Price is equal to or exceeds $12.00 provided that, should the
Corporation issue any stock or do any of the other acts or things specified in
subparagraphs 4(f) through (j) hereof, the Corporation shall each time
successively adjust the $12.00 Average Trading Price in a like manner to the
adjustments specified in paragraph 4 hereof, following the procedures and using
the assumptions set forth in such paragraph and shall notify the holder of the
Class AA Preferred Stock of any such adjustment in the manner specified in
paragraph 4 and such adjusted number shall appear in lieu of the $12.00 Average
Trading Price giving rise to a Corporate Conversion Period.
Current Market Price. The term "Current Market Price" means, for a share of
Common Stock on any date, the average of Quoted Prices for the thirty (30)
consecutive Trading Days commencing forty-five (45) Trading Days before the date
in question.
Director. The term "Director" means a member of the Board of Directors.
Dividend Payment Date. The term "Dividend Payment Date" shall have the
meaning set forth in subparagraph 2(b).
Dividend Period. The term "Dividend Period" shall mean the period from, and
including, the Initial Issue Date to, but not including, the first Dividend
Payment Date and thereafter, each quarterly period from, and including, the
Dividend Payment Date to, but not including the next Dividend Payment Date.
Dividend Rate. The term "Dividend Rate" shall mean twelve percent (12%) per
annum until such time, if any, as the Second Closing shall occur. If such Second
Closing shall occur, from and after the Second Closing the term "Dividend Rate"
shall mean six percent (6%) per annum.
EBT. The term "EBT" shall mean earnings before interest expense, income
taxes and extraordinary or non-recurring items, all calculated in accordance
with generally accepted accounting principles.
Executive Committee. The term "Executive Committee" shall mean the
five-member
3
<PAGE>
executive committee of the Board of Directors to which substantial operational
matters regarding the Corporation shall be delegated.
Initial Issue Date. The term "Initial Issue Date" shall mean the date that
shares of Class AA Preferred Stock are first issued by the Corporation.
Investor. The term "Investor" shall mean, at any time, Prometheus
Homebuilders LLC and any of its affiliates, including, but not limited to,
Lazard Freres Real Estate Investors, LLC and its affiliates.
Junior Stock. The term "Junior Stock" shall mean, for purposes of paragraph
2 below, Common Equity and any class or series of stock of the Corporation
authorized after the Initial Issue Date which is not entitled to receive any
dividends in any Dividend Period unless all dividends required to have been paid
or declared and set apart for payment on the Class AA Preferred Stock and any
Parity Stock shall have been so paid or declared and set apart for payment, and
for purposes of paragraph 3 below, shall mean Common Equity and any class or
series of stock of the Corporation authorized after the Initial Issue Date which
is not entitled to receive any assets upon liquidation, dissolution or winding
up of the affairs of the Corporation until the Class AA Preferred Stock and any
Parity Stock shall have received the entire amount to which such stock is
entitled upon such liquidation, dissolution or winding up.
Liquidation Preference. The term "Liquidation Preference" shall mean
$1000.00 per share.
Mandatory Conversion Date. The term "Mandatory Conversion Date" shall mean
the Business Day after the date, if any, of the Second Closing specified in a
notice to holders of Class AA Preferred Stock given by the Corporation in
accordance with the provisions of subparagraph 4(b)(ii), upon which the
Corporation shall convert all outstanding shares of Class AA Preferred Stock
into Common Stock as set forth in such subparagraph.
Mandatory Conversion Price. The term "Mandatory Conversion Price" shall
initially mean $6.00 per share subject thereafter to further adjustment pursuant
to paragraph 4.
Market Capitalization. The term "Market Capitalization" shall mean the
market value of the Corporation's outstanding Common Stock as measured by the
thirty (30) Trading Days preceding any measurement date.
Non-Preferred Stock Director. The term "Non-Preferred Stock Director" means
a Director other than a Preferred Stock Director.
Officers' Certificate. The term "Officers' Certificate" means a certificate
signed on behalf of the Corporation by two officers of the Corporation, one of
whom must be the principal executive officer, the principal financial officer or
the principal accounting officer of the Corporation.
4
<PAGE>
Optional Conversion Date. The term "Optional Conversion Date" shall have
the meaning set forth in subparagraph 4(b)(i) below.
Optional Conversion Price. The term "Optional Conversion Price", in respect
of any share of Class AA Preferred Stock, shall initially mean $6.00 unless
adjusted at the option of the holder thereof during the Adjustment Period, as
adjusted pursuant to paragraph 4.
Parity Stock. The term "Parity Stock" shall mean, for purposes of paragraph
2 below, (i) the Series A Preferred Stock, (ii) the Series B Preferred Stock,
(iii) the Series C Preferred Stock, (iv) the Series D Preferred Stock, (v) the
Class ABI Preferred Stock, (vi) the Class ABII Preferred Stock, and (vii) any
class or series of stock of the Corporation authorized after the Initial Issue
Date which is entitled to receive payment of dividends on a parity with the
Class AA Preferred Stock, and for purposes of paragraph 3 below, shall mean (i)
the Series A Preferred Stock, (ii) the Series B Preferred Stock, (iii) the
Series C Convertible Preferred Stock, (iv) the Series D Preferred Stock, (v) the
Class ABI Preferred Stock, (vi) the Class ABII Preferred Stock and (vii) any
class or series of stock of the Corporation authorized after the Initial Issue
Date which is entitled to receive assets upon liquidation, dissolution or
winding up of the affairs of the Corporation on a parity with the Class AA
Preferred Stock.
Preferred Stock. The term "Preferred Stock" shall mean the Class AA
Preferred Stock, the Class ABI Preferred Stock and the Class ABII Preferred
Stock.
Preferred Stock Director. The term "Preferred Stock Director" has the
meaning set forth in subparagraph 5(d).
Quoted Price. The term "Quoted Price", with respect to the Common Stock,
shall mean the last reported sales price for Common Stock as reported by the
National Association of Securities Dealers, Inc. Automatic Quotations System,
National Market System, or, if the applicable security is listed or admitted for
trading on a securities exchange, the last reported sales price of the
applicable security on the principal exchange on which the applicable security
is listed or admitted for trading (which shall be for consolidated trading if
applicable to such exchange), or if neither so reported or listed or admitted
for trading, the last reported bid price of the applicable security in the
over-the-counter market. In the event that the Quoted Price cannot be determined
as aforesaid, the Board of Directors shall determine the Quoted Price on the
basis of such quotations as it in good faith considers appropriate. Such
determination may be challenged in good faith by a majority of holders of shares
of Class AA Preferred Stock, and any dispute shall be resolved at the
Corporation's cost, by an investment banking firm of recognized national
standing selected by the Corporation and reasonably acceptable to such holders
of Class AA Preferred Stock and shall be made in good faith and be conclusive
absent manifest error; provided, however, if the Quoted Price as determined by
the Board of Directors is more than 110% of the price determined by the
investment banking firm, then the costs incurred by such investment banking firm
shall be borne by the holders of Class AA Preferred Stock who challenged such
price.
Record Date. The term "Record Date" shall mean the date designated by the
Board of Directors at the time a dividend is declared; provided, however, that
such Record Date shall not
5
<PAGE>
be more than thirty (30) days nor less than ten (10) days prior to the
respective Dividend Payment Date or such other date designated by the Board of
Directors for the payment of dividends.
Second Closing. The term "Second Closing" shall have the meaning given to
it in the Stock Purchase Agreement.
Series A Preferred Stock. The term "Series A Preferred Stock" shall mean
the Series A 11% Cumulative Convertible Preferred Stock, $0.01 par value per
share, of the Corporation.
Series B Preferred Stock. The term "Series B Preferred Stock" shall mean
the Series B Convertible Preferred Stock, $0.01 par value per share, of the
Corporation.
Series C Preferred Stock. The term "Series C Preferred Stock" shall mean
the Series C Convertible Preferred Stock, $0.01 par value per share, of the
Corporation.
Series D Preferred Stock. The term "Series D Preferred Stock" shall mean
the Series D 6% Convertible Redeemable Preferred Stock, $0.01 par value per
share, of the Corporation.
Stock Purchase Agreement. The term "Stock Purchase Agreement" shall mean
that certain Amended and Restated Stock Purchase Agreement, dated as of
September 30, 1997, by and between the Corporation and Prometheus Homebuilders
LLC.
Termination Event. The term "Termination Event" shall have the meaning set
forth in subparagraph 6(a) below.
Test Date. The term "Test Date" shall have the meaning set forth in
subparagraph 5(d).
Trading Day. The term "Trading Day" with respect to any security shall mean
any day on which any market in which the applicable security is then traded and
in which a Quoted Price may be ascertained is open for business.
Number of Shares and Designation. 46,670 shares of the preferred stock,
$0.01 par value per share, of the Corporation are hereby constituted as a series
of the preferred stock designated as "Class AA Convertible Preferred Stock" (the
"Class AA Preferred Stock").
Dividends.
The record holders of Class AA Preferred Stock shall be entitled to receive
dividends, when and as declared by the Board of Directors, out of funds legally
available for payment of dividends. Subject to the distributions referred to in
the final sentence of subparagraph 4(m) hereof, such dividends shall be payable
by the Corporation in cash in an amount equal to the Dividend Rate multiplied by
the Liquidation Preference.
Dividends on shares of Class AA Preferred Stock shall accrue and be
cumulative from the date of issuance of such shares. Dividends shall be payable
quarterly in arrears
6
<PAGE>
when and as declared by the Board of Directors on March 31, June 30, September
30 and December 31 of each year (a "Dividend Payment Date"), commencing on
December 31, 1997. If any Dividend Payment Date occurs on a day that is not a
Business Day, any accrued dividends otherwise payable on such Dividend Payment
Date shall be paid on the next succeeding Business Day. The amount of dividends
payable on Class AA Preferred Stock for each full Dividend Period shall be
computed by dividing by four (4) the annual rate per share set forth in
subparagraph 2(a) above, provided, however, that if during a Dividend Period the
Dividend Rate shall change, the dividends payable on Class AA Preferred Stock
for that Dividend Period shall be computed on the basis of Dividend Rates in
effect for the actual number of days elapsed in such Dividend Period at each
Dividend Rate. Dividends shall be paid to the holders of record of the Class AA
Preferred Stock as their names shall appear on the share register of the
Corporation on the Record Date for such dividend. Dividends payable in any
Dividend Period which is less than a full Dividend Period in length will be
computed on the basis of a ninety (90) day quarterly period and actual days
elapsed in such Dividend Period. Dividends on account of arrears for any past
Dividend Periods may be declared and paid at any time to holders of record on
the Record Date therefor. For any Dividend Period in which dividends are not
paid in full on the Dividend Payment Date first succeeding the end of such
Dividend Period, then on such Dividend Payment Date such accrued and unpaid
dividends shall be added (solely for the purpose of calculating dividends
payable on the Class AA Preferred Stock) to the Liquidation Preference of the
Class AA Preferred Stock effective at the beginning of the Dividend Period
succeeding the Dividend Period as to which such dividends were not paid and
shall thereafter accrue additional dividends in respect thereof at the Dividend
Rate until such accrued and unpaid dividends have been paid in full.
So long as any shares of Class AA Preferred Stock shall be outstanding, the
Corporation shall not declare, pay or set apart for payment on any Junior Stock
any dividends whatsoever, whether in cash, property or otherwise (other than
dividends payable in shares of the class or series upon which such dividends are
declared or paid, or payable in shares of Common Stock with respect to Junior
Stock other than Common Stock, together with cash in lieu of fractional shares),
nor shall the Corporation make any distribution on any Junior Stock, nor shall
any Junior Stock be purchased, redeemed or otherwise acquired by the Corporation
or any of its subsidiaries of which it owns not less than a majority of the
outstanding voting power, nor shall any monies be paid or made available for a
sinking fund for the purchase or redemption of any Junior Stock, unless all
dividends to which the holders of Class AA Preferred Stock shall have been
entitled for all previous Dividend Periods shall have been paid or declared and
a sum of money sufficient for the payment thereof has been set apart.
The Corporation shall be obligated to declare and pay dividends in an
amount equal to the Dividend Rate on each Dividend Payment Date to the extent
that funds are legally available for declaration of such dividends. In the event
that full dividends are not paid or made available to the holders of all
outstanding shares of Class AA Preferred Stock and of any Parity Stock with
respect to any Dividend Period and funds available for payment of dividends
shall be insufficient to permit payment in full to holders of all such stock of
the full preferential amounts to which they are then entitled, then the entire
amount legally available for payment of dividends shall be distributed each
Dividend Period ratably among all such holders of Class AA Preferred Stock and
7
<PAGE>
of any Parity Stock in proportion to the full amount to which they would
otherwise be respectively entitled. The dividends payable in respect of the
Class AA Preferred Stock shall be a mandatory obligation of the Corporation,
subject only to the limitations set forth in Section 170 of the Delaware General
Corporation Law with respect to funds legally permitted to be used for the
payment of dividends (the "Legal Funds Requirement"). In stating that the
dividends payable in respect of the Class AA Preferred Stock are a mandatory
obligation, it is the explicit intent of the Corporation to eliminate any and
all discretion of the Board of Directors with respect to the declaration and
payment of such dividends and to require the Board of Directors to declare and
pay such dividends as and when provided herein, subject only to compliance with
the Legal Funds Requirement.
Distributions Upon Liquidation, Dissolution or Winding Up.
In the event of any voluntary or involuntary liquidation, dissolution or
other winding up of the affairs of the Corporation before any payment or
distribution shall be made to the holders of Junior Stock, the holders of Class
AA Preferred Stock shall be entitled to be paid out of the assets of the
Corporation in cash or property at its fair market value as determined by the
Board of Directors the Liquidation Preference per share plus an amount equal to
all dividends accrued and unpaid thereon to the date of such liquidation,
dissolution or such other winding up. Except as provided in this paragraph,
holders of Class AA Preferred Stock shall not be entitled to any distribution in
the event of liquidation, dissolution or winding up of the affairs of the
Corporation.
If, upon any such liquidation, dissolution or other winding up of the
affairs of the Corporation the assets of the Corporation shall be insufficient
to permit the payment in full of the Liquidation Preference per share plus an
amount equal to all dividends accrued and unpaid on the Class AA Preferred Stock
and the full liquidating payments on all Parity Stock, then the assets of the
Corporation shall be ratably distributed among the holders of Class AA Preferred
Stock and of any Parity Stock in proportion to the full amounts to which they
would otherwise be respectively entitled if all amounts thereon were paid in
full. Neither the consolidation or merger of the Corporation into or with
another entity or entities, nor the sale, lease, transfer or conveyance of all
or substantially all of the assets of the Corporation to another corporation or
any other entity shall be deemed a liquidation, dissolution or winding up of the
affairs of the Corporation within the meaning of this paragraph 3.
Conversion Rights.
At any time after the Initial Issue Date a holder of shares of Class AA
Preferred Stock may convert such shares into Common Stock at the then prevailing
Optional Conversion Price. On or after September 30, 2001, and on or before
September 30, 2003 (the "Adjustment Period"), a holder of shares of Class AA
Preferred Stock may elect to adjust up to five (5) times per year the Optional
Conversion Price for the Class AA Preferred Stock held by such holder, by
reference to the then prevailing Adjustment Price as follows:
8
<PAGE>
Adjustment Price(s) Optional Conversion Price
10.01-12.00 5.50
8.01-10.00 5.00
6.01-8.00 4.00
4.01-6.00 3.00
2.01-4.00 2.00
0.00-2.00 1.00
If and whenever the Corporation makes any adjustment to the Conversion
Prices pursuant to subparagraphs 4(f) through 4(j) hereof, the Corporation shall
make a like adjustment to the Adjustment Prices set forth above calculated in
the same manner and in accordance with the conventions, terms and principles set
out in this paragraph 4.
At any time during a Corporation Conversion Period, the Corporation, at its
option, may convert all, but not less than all of the shares of Class AA
Preferred Stock outstanding at such time into Common Stock at the then
prevailing Mandatory Conversion Price; provided that, on the Mandatory
Conversion Date, the Corporation shall have paid all accrued dividends on all
shares of Class AA Preferred Stock then outstanding, up to and including the
most recent Dividend Payment Date.
For the purposes of conversion, each share of Class AA Preferred Stock
shall be valued at the Liquidation Preference plus all accrued but unpaid
dividends thereon through the relevant Conversion Date, which shall be divided
by the Optional Conversion Price or Mandatory Conversion Price (as applicable)
in effect on the Conversion Date to determine the number of shares issuable upon
conversion. Immediately following such conversion, the rights of the holders of
converted Class AA Preferred Stock shall cease (in respect of such converted
stock) and the persons entitled to receive the Common Stock upon the conversion
of Class AA Preferred Stock shall be treated for all purposes as having become
the owners of such Common Stock.
To convert Class AA Preferred Stock pursuant to subparagraph 4(a)(i), a
holder must (i) surrender the certificate or certificates evidencing the shares
of Class AA Preferred Stock to be converted, duly endorsed in a form
satisfactory to the Corporation, at the office of the Corporation or transfer
agent for the Class AA Preferred Stock, (ii) notify the Corporation at such
office that he elects to convert Class AA Preferred Stock, and the number of
shares he wishes to convert, (iii) state in writing the name or names in which
he wishes the certificate or certificates for shares of Common Stock to be
issued, and (iv) pay any transfer or similar tax if required (provided, however,
that no such payment shall be required if the Common Stock issuable upon
conversion is to be issued in the name of the converting holder of Class AA
Preferred Stock). In the case of lost or destroyed certificates evidencing
ownership of shares of Class AA Preferred Stock to be surrendered for
conversion, the holder shall submit proof of loss or destruction, and such
indemnity as shall be reasonably required by the Corporation. In the event that
a holder fails to notify the Corporation of the number of shares of Class AA
Preferred Stock which he wishes to convert, he shall be deemed to have elected
to convert all shares represented by the certificate or certificates
9
<PAGE>
surrendered for conversion. The date on which the holder satisfies all those
requirements is the "Optional Conversion Date." As soon as practical and in any
event within five (5) Business Days of the Optional Conversation Date, the
Corporation shall deliver through the transfer agent a certificate for the
number of full shares of Common Stock issuable upon the conversion, a check for
any fractional share and a new certificate representing the unconverted portion,
if any, of the shares of Class AA Preferred Stock represented by the certificate
or certificates surrendered for conversion. The person in whose name the Common
Stock certificate is registered shall be treated as the stockholder of record on
and after the Optional Conversion Date. All shares of Common Stock issuable upon
conversion of the Class AA Preferred Stock shall be fully paid and nonassessable
and shall rank pari passu with the other shares of Common Stock outstanding from
time to time. In the case of Class AA Preferred Stock that has been converted
after any Record Date but before the next succeeding Dividend Payment Date,
dividends that are payable on such Dividend Payment Date shall be payable on
such Dividend Payment Date notwithstanding such conversion, and such dividends
shall be paid to the holder of such Class AA Preferred Stock on such Record Date
(and shall not constitute "accrued and unpaid dividends" for purposes of
subparagraph 4(a)). Holders of Common Stock issued upon conversion shall not be
entitled to receive any dividend payable to holders of Common Stock as of any
record time before the close of business on the Optional Conversion Date. If a
holder of Class AA Preferred Stock converts more than one share at a time the
number of full shares of Common Stock issuable upon conversion shall be based on
the total value of all shares of Class AA Preferred Stock converted. If during
the Adjustment Period it is possible for a holder of Class AA Preferred Stock to
adjust the Optional Conversion Price and such holder elects to do so, he must
inform the Corporation in writing of such election. The Corporation will then be
obligated to notify such electing holder and all other holders of Class AA
Preferred Stock in writing within three (3) Business Days of receipt of the
election by the holder of the new Optional Conversion Price for such holder's
Class AA Preferred Stock. Such new Optional Conversion Price shall remain the
Optional Conversion Price for such Class AA Preferred Stock until such time, if
any, as the then holder elects to re-adjust the Optional Conversion Price of the
Class AA Preferred Stock then held by such holder. If any other holder of Class
AA Preferred Stock, upon receipt of a notice from the Corporation, wishes to
adjust the Optional Conversion Price in respect of the Class AA Preferred Stock
held by him, he may do so by notifying the Corporation accordingly in writing
within fifteen (15) Business Days of the receipt of notice from the Corporation.
Upon such notification in writing, the Optional Conversion Price of his shares
of Class AA Preferred Stock shall be adjusted by the Corporation with effect
from the date of his receipt of notification from the Corporation.
To convert Class AA Preferred Stock pursuant to subparagraph 4(a)(ii),
notice of any conversion shall be sent by or on behalf of the Corporation not
more than sixty (60) days nor less than thirty (30) days prior to the Mandatory
Conversion Date, by first class mail, postage prepaid, to all holders of record
of the Class AA Preferred Stock at their respective last addresses as they shall
appear on the books of the Corporation; provided, however, that no failure to
give such notice or any defect therein or in the mailing thereof shall affect
the validity of the proceedings for the conversion of any shares of Class AA
Preferred Stock except as to the holder to whom the Corporation has failed to
give notice or except as to the holder to whom notice was defective. In addition
to any information required by law or by the applicable rules of any exchange
10
<PAGE>
upon which Class AA Preferred Stock may be listed or admitted to trading, such
notice shall state: (i) the Mandatory Conversion Date; (ii) the Mandatory
Conversion Price; (iii) the number of shares of Class AA Preferred Stock to be
converted being all the Class AA Preferred Stock held of record by all holders;
(iv) the place or places where certificates for such shares are to be
surrendered for receipt of such Common Stock issuable upon such Mandatory
Conversion; and (v) that dividends on the shares to be converted will cease to
accrue on the Mandatory Conversion Date. Upon the mailing of any such notices of
conversion, the Corporation shall become obligated to convert on the Mandatory
Conversion Date all of the Class AA Preferred Stock.
The person in whose name the Common Stock certificate is registered shall
be treated as the stockholder of record on and after the Mandatory Conversion
Date. All shares of Common Stock issuable upon conversion of the Class AA
Preferred Stock shall be fully paid and nonassessable and shall rank pari passu
with the other shares of Common Stock outstanding from time to time. In the case
of Class AA Preferred Stock that has been converted after any Record Date but
before the next succeeding Dividend Payment Date, dividends that are payable on
such Dividend Payment Date shall be payable on such Dividend Payment Date
notwithstanding such conversion, and such dividends shall be paid to the holder
of such Class AA Preferred Stock on such Record Date (and shall not constitute
"accrued and unpaid dividends" for purposes of subparagraph 4(a)). Holders of
Common Stock issued upon conversion shall not be entitled to receive any
dividend payable to holders of Common Stock as of any record time before the
close of business on the Mandatory Conversion Date. If a holder of Class AA
Preferred Stock converts more than one share at a time the number of full shares
of Common Stock issuable upon conversion shall be based on the total value of
all shares of Class AA Preferred Stock converted.
The Corporation will not issue a fractional share of Common Stock upon
conversion of Class AA Preferred Stock. Instead the Corporation will deliver its
check for the current market value of the fractional share. The current market
value of a fraction of a share is determined as follows: Multiply the closing
market price of a full share by the fraction. Round the result to the nearest
cent. The closing market price of a share of Common Stock is the Quoted Price of
the Common Stock on the last Trading Day prior to the Conversion Date.
If a holder converts shares of Class AA Preferred Stock, the Corporation
shall pay any documentary, stamp or similar issue or transfer tax due on the
issue of shares of Common Stock upon the conversion. However, the holder shall
pay any such tax which is due because the shares are issued in a name other than
the holder's name.
The Corporation has reserved and shall continue to reserve out of its
authorized but unissued Common Stock or its Common Stock held in treasury enough
shares of Common Stock to permit the conversion of the Class AA Preferred Stock
in full as determined in good faith by the Board of Directors from time to time.
All shares of Common Stock which may be issued upon conversion of Class AA
Preferred Stock shall be fully paid and nonassessable. The Corporation will
endeavor to comply with all securities laws regulating the offer and delivery of
shares of Common Stock upon conversion of Class AA Preferred Stock and will
endeavor to list such shares on each national securities exchange on which the
Common Stock is listed.
11
<PAGE>
If the Corporation:
pays a dividend or makes a distribution on its Common Stock in shares of
its Common Stock;
subdivides its outstanding shares of Common Stock into a greater number of
shares;
combines its outstanding shares of Common Stock into a smaller number of
shares; or
issues by reclassification of its Common Stock any shares of its capital
stock;
then the Conversion Prices in effect immediately prior to such action shall be
adjusted so that each holder of Class AA Preferred Stock thereafter converted
may receive the number of shares of capital stock of the Corporation which he
would have owned immediately following such action if he had converted Class AA
Preferred Stock immediately prior to such action. The adjustment shall become
effective immediately after the record date in the case of dividend or
distribution and immediately after the effective date of a subdivision,
combination or reclassification. Such adjustment shall be made successively
whenever any event listed above shall occur. If, after an adjustment referred to
in clauses (i) through (iv) above, a holder of Class AA Preferred Stock upon
conversion of it may receive shares of two or more classes of capital stock of
the Corporation, the Corporation shall determine the allocation of the adjusted
Conversion Prices between the classes of capital stock. After such allocation,
the Conversion Prices of each class of capital stock shall thereafter be subject
to adjustment on terms comparable to those applicable to Common Stock in this
subparagraph (f).
If the Corporation distributes any rights or warrants to all holders of its
Common Stock entitling them to purchase shares of Common Stock at a price per
share less than the current market price per share on the record date mentioned
below, each of the Conversion Prices shall be adjusted in accordance with the
formula:
NxP
---
C'= C x O + M
-----
O + N
where:
C' = the adjusted Conversion Price.
C = the then current Conversion Price.
O = the number of shares of Common Stock outstanding on the record date.
12
<PAGE>
N = the number of additional shares of Common Stock offered.
P = the offering price per share of the additional shares of Common Stock.
M = the Current Market Price per share of Common Stock on the record date.
The adjustment shall be made successively whenever any such rights or
warrants are issued and shall become effective immediately after the record date
for the determination of stockholders entitled to receive the rights or
warrants. If at the end of the period during which such warrants or rights are
exercisable, not all warrants or rights shall have been exercised, the
Conversion Prices shall be immediately readjusted to what it would have been if
"N" in the above formula had been the number of shares actually issued.
If the Corporation distributes to all holders of shares of its Common Stock
(i) any shares of any class of capital stock of the Corporation other than its
Common Stock, (ii) any evidence of indebtedness or other securities of the
Corporation or any subsidiary of the Corporation, (iii) any other assets of the
Corporation or any subsidiary of the Corporation (other than cash), (iv)
distributions in cash in excess of three percent (3%) of the net earnings before
extraordinary items of the Corporation for the previous fiscal year or (v) any
rights, options or warrants to acquire any of the foregoing (other than rights,
options or warrants referred to in subparagraph 4(g) above), each of the
Conversion Prices shall be adjusted in accordance with the formula:
C'= C x M - F
-----
M
where:
C' = the adjusted Conversion Price.
C = the then current Conversion Price.
M = the Current Market Price per share of Common Stock on the record
date mentioned below.
F = the fair market value on the record date of the capital stock,
securities, indebtedness, assets, rights, options or warrants
applicable to one share of Common Stock or if the adjustment pursuant
to this subparagraph 4(h) is being made in respect of a cash dividend,
the total amount of cash to be distributed at such time to holders of
Common Stock. The Board of Directors shall determine the fair market
value.
The adjustment shall be made successively whenever any such distribution is
made
13
<PAGE>
and shall become effective immediately after the record date for the
determination of stockholders entitled to receive the distribution.
If the Corporation issues shares of Common Stock for a consideration per
share less than the Current Market Price per share on the date the Corporation
fixes the offering price of such additional shares, each of the Conversion
Prices shall be adjusted in accordance with the formula:
P
-
C'= C x O + M
-----
A
where:
C' = the adjusted Conversion Price.
C = the then current Conversion Price.
O = the number of shares outstanding immediately prior to the issuance
of such additional shares.
P = the aggregate consideration received for the issuance of such
additional shares.
M = the Current Market Price per share on the date of issuance of such
additional shares.
A = the number of shares outstanding immediately after the issuance of
such additional shares.
The adjustment shall be made successively whenever any such issuance is
made, and shall become effective immediately after such issuance. This
subparagraph 4(i) does not apply to (i) any transaction or issuance described in
subparagraph 4(g) or 4(h) above or subparagraph 4(j) below, (ii) the conversion
of Class AA Preferred Stock, Class AB Preferred Stock, Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock
or the exercise of warrants to purchase Common Stock issued to the initial
holder of the Class AA Preferred Stock on the Initial Issue Date, or the
conversion, exchange or exercise of other securities convertible into or
exchangeable or exercisable for Common Stock whose issuance was subject to an
adjustment pursuant to subparagraph 4(g) or 4(h) above or subparagraph 4(j)
below, (iii) Common Stock issued to the Corporation's employees under bona fide
employee benefit plans adopted by the Board of Directors and approved by the
holders of Common Stock when required by law, if such Common Stock would
otherwise by covered by this subparagraph 4(i) (but only to the extent that the
aggregate number of shares excluded hereby (together with the aggregate number
of shares
14
<PAGE>
issuable upon conversion, exchange or exercise of the securities excluded by
clause (iii) of subparagraph 4(j) below) and issued after the Initial Issue Date
shall not exceed 5% of the Common Stock outstanding at the time of any such
issuance), (iv) Common Stock issued to acquire, or in the acquisition of, all or
any portion of a business, in an arm's-length transaction between the
Corporation and an unaffiliated third party, whether such acquisition shall be
effected by purchase of assets, exchange of securities, merger, consolidation or
otherwise, or (v) Common Stock issued in a bona fide public offering pursuant to
a firm commitment underwriting.
If the Corporation issues any options, warrants or other securities
convertible into or exchangeable or exercisable for Common Stock (other than
Class AA Preferred Stock, Class AB Preferred Stock, Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock
or securities issued in transactions described in subparagraph 4(g) or 4(h)
above) and for a consideration per share of Common Stock initially deliverable
upon conversion, exchange or exercise of such securities less than the Current
Market Price per share on the date of issuance of such options, warrants or
other securities, each of the Conversion Prices shall be adjusted in accordance
with the formula:
P
-
C'= C x O + M
-----
O + D
where:
C' = the adjusted Conversion Price.
C = the then current Conversion Price.
O = the number of shares outstanding immediately prior to the issuance
of such securities.
P = the aggregate consideration received for the issuance of such
securities.
M = the Current Market Price per share on the date of issuance of such
securities.
D = the maximum number of shares deliverable upon conversion or in
exchange for or upon exercise of such securities at the initial
conversion, exchange or exercise rate.
The adjustment shall be made successively whenever any such issuance is
made, and shall become effective immediately after such issuance. If all of the
Common Stock deliverable upon conversion, exchange or exercise of such
securities has not been issued when such securities
15
<PAGE>
are no longer outstanding, then each of the Conversion Prices shall promptly be
readjusted to the Conversion Prices which would then be in effect had the
adjustment upon the issuance of such securities been made on the basis of the
actual number of shares of Common Stock issued upon conversion, exchange or
exercise of such securities. This subparagraph 4(j) does not apply to (i) the
issuance of any such securities to acquire, or in the acquisition of, all or any
portion of a business, in an arm's-length transaction between the Corporation
and an unaffiliated third party, whether such acquisition shall be effected by
purchase of assets, exchange of securities, merger, consolidation or otherwise,
(ii) the issuance of any such securities in a bona fide public offering pursuant
to a firm commitment underwriting, or (iii) the issuance of any such securities
to the Corporation's employees under bona fide employee benefit plans adopted by
the Board of Directors and approved by the holders of Common Stock when required
by law, if such securities would otherwise by covered by this subparagraph 4(j)
(but only to the extent that the aggregate number of shares issuable upon the
conversion, exchange or exercise of the aggregate number of securities excluded
hereby (together with the aggregate number of shares excluded by clause (iii) of
subparagraph 4(i) above) and issued after the Initial Issue Date shall not
exceed 5% of the Common Stock outstanding at the time of any such issuance).
For purposes of any computation respecting consideration received pursuant
to subparagraphs 4(i) and 4(j) above, the following shall apply:
in case of the issuance of shares of Common Stock for cash, the
consideration shall be the amount of such cash, provided that in no case shall
any deduction be made for any commissions, discounts or other expenses incurred
by the Corporation for any underwriting of the issue or otherwise in connection
therewith;
in the case of the issuance of shares of Common Stock for a consideration
in whole or in part other than cash, the consideration other than cash shall be
deemed to be the fair market value thereof as determined by the Board of
Directors (irrespective of the accounting treatment thereof); and
in the case of the issuance of options, warrants or other securities
convertible into or exchangeable or exercisable for shares, the aggregate
consideration received therefor shall be deemed to be the consideration received
by the Corporation for the issuance of such options, warrants or other
securities plus the additional minimum consideration, if any, to be received by
the Corporation upon the conversion or exchange or exercise thereof (the
consideration in each case to be determined in the same manner as provided in
clauses (i) and (ii) of this subparagraph 4(k)).
No adjustment in any Conversion Price need be made unless the adjustment
would require an increase or decrease of at least 1% in that Conversion Price.
Any adjustments that are not made shall be carried forward and taken into
account in any subsequent adjustment. All calculations under this paragraph 4
shall be made to the nearest cent or to the nearest 1/100th of a share, as the
case may be.
No adjustment in the Conversion Prices need be made under this paragraph
16
<PAGE>
4 for (i) rights to purchase Common Stock pursuant to a Corporation plan for
reinvestment of dividends or interest, or (ii) any change in the par value or no
par value of the Common Stock, and in no event shall any adjustment made under
this paragraph 4 reduce the Conversion Prices below the par value of the Common
Stock ($0.01). If an adjustment is made to the Conversion Price upon the
establishment of a record date for a distribution subject to subparagraphs 4(g)
or 4(h) above and if such distribution is subsequently canceled, the Conversion
Prices then in effect shall be readjusted, effective as of the date when the
Board of Directors determines to cancel such distribution, to the Conversion
Prices which would have been in effect if such record date had not been fixed.
No adjustment in the Conversion Prices need be made under subparagraphs 4(g) and
4(h) above if the Corporation issues or distributes to each holder of Class AA
Preferred Stock the shares of Common Stock, evidences of indebtedness, assets,
rights, options or warrants referred to in those subparagraphs which each holder
would have been entitled to receive had Class AA Preferred Stock been converted
into Common Stock prior to the happening of such event or the record date with
respect thereto.
Whenever the Conversion Prices are adjusted, the Corporation shall promptly
mail to holders of Class AA Preferred Stock, first class, postage prepaid, a
notice of the adjustment. The Corporation shall file with the transfer agent, if
any, for Class AA Preferred Stock a certificate from the Corporation's
independent public accountants briefly stating the facts requiring the
adjustment and the manner of computing it. Subject to subparagraph 4(s) below,
the certificate shall be conclusive evidence that the adjustment is correct.
The Corporation from time to time may reduce the Conversion Prices by any
amount for any period of time if the period is at least twenty (20) Business
Days and if the reduction is irrevocable during the period, but in no event may
the Conversion Prices be less than the par value of a share of Common Stock.
Whenever the Conversion Prices are reduced, the Corporation shall mail to
holders of Class AA Preferred Stock a notice of the reduction. The Corporation
shall mail, first class, postage prepaid, the notice at least 15 days before the
date the reduced conversion price takes effect. The notice shall state the
reduced conversion prices and the period they will be in effect. A reduction of
the Conversion Prices does not change or adjust the Conversion Prices otherwise
in effect for purposes of subparagraphs 4(f), 4(g), 4(h), 4(i) and 4(j) above.
If:
the Corporation takes any action which would require an adjustment in the
Conversion Prices pursuant to subparagraph 4(g) or 4(h) above, or clause (iv) of
subparagraph 4(f) above;
the Corporation consolidates or merges with, or transfers all or
substantially all of its assets to, another entity, and stockholders of the
Corporation must approve the transaction; or
there is a dissolution or liquidation of the Corporation;
a holder of Class AA Preferred Stock may want to convert such stock into shares
of Common Stock
17
<PAGE>
prior to the record date for or the effective date of the transaction so that he
may receive the rights, warrants, securities or assets which a holder of shares
of Common Stock on that date may receive. Therefore, the Corporation shall mail
to such holders, first class, postage prepaid, a notice stating the proposed
record or effective date, as the case may be. The Corporation shall mail the
notice at least ten (10) days before such date. Failure to mail the notice or
any defect in it shall not affect the validity of any transaction referred to in
clause (i), (ii) or (iii) of this subparagraph 4(p).
If the Corporation is party to a merger which reclassifies or changes its
Common Stock, upon consummation of such transaction Class AA Preferred Stock
shall automatically become convertible into the kind and amount of securities,
cash or other assets which the holder of Class AA Preferred Stock would have
owned immediately after the consolidation, merger, transfer or lease if such
holder had converted Class AA Preferred Stock immediately before the effective
date of the transaction. Appropriate adjustment (as determined by the Board of
Directors) shall be made in the application of the provisions herein set forth
with respect to the rights and interests thereafter of the holders of Class AA
Preferred Stock, to the end that the provisions set forth herein (including
provisions with respect to changes in and other adjustment of the Conversion
Prices) shall thereafter be applicable, as nearly as reasonably may be, in
relation to any shares of stock or other securities or property thereafter
deliverable upon the conversion of Class AA Preferred Stock. If this
subparagraph 4(q) applies, subparagraph 4(f) does not apply.
In any case in which this paragraph 4 shall require that an adjustment as a
result of any event become effective from and after a record date, the
Corporation may elect to defer until after the occurrence of such event (i) the
issuance to the holder of any shares of Class AA Preferred Stock converted after
such record date and before the occurrence of such event of the additional
shares of Common Stock issuable upon such conversion over and above the shares
issuable on the basis of the Conversion Prices in effect immediately prior to
adjustment and (ii) a check for any remaining fractional shares of Common Stock
as provided in subparagraph 4(c) above.
Except as provided in the immediately following sentence, any determination
that the Corporation or its Board of Directors must make pursuant to this
paragraph 4 shall be conclusive. Whenever the Corporation or its Board of
Directors shall be required to make a determination under this paragraph 4, such
determination shall be made in good faith and may be challenged in good faith by
a majority of the holders of Class AA Preferred Stock, and any dispute shall be
resolved, at the Corporation's expense, by an investment banking firm of
recognized national standing selected by the Corporation and acceptable to such
holders of Class AA Preferred Stock; provided, however, if the Conversion Prices
or Adjustment Prices as determined by the Board of Directors are more than 110%
of the price determined by such investment banking firm, then the costs incurred
by such investment banking firm shall be borne by the holders of Class AA
Preferred Stock who challenged such price.
All shares of Class AA Preferred Stock converted pursuant to this paragraph
4 shall be retired and shall be restored to the status of authorized and
unissued shares of preferred stock, without designation as to series and may
(subject to any restriction imposed on the Corporation by its Certificate of
Incorporation, any certificate of designations of Preferred Stock,
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its bylaws or the Stock Purchase Agreement or any documents entered into
pursuant thereto) thereafter be reissued as shares of any series of preferred
stock other than Class AA Preferred Stock.
Voting Rights.
The holders of record of shares of Class AA Preferred Stock shall not be
entitled to any voting rights except as hereinafter provided in this paragraph 5
or as otherwise provided by law.
So long as any shares of the Class AA Preferred Stock remain outstanding,
each share of Class AA Preferred Stock shall entitle the holder thereof to vote
on all matters voted on by holders of Common Stock, voting together with the
Common Stock as a single class (together with all other classes and series of
stock of the Corporation that are entitled to vote as a single class with the
Common Stock) at all meetings of the stockholders of the Corporation. In any
vote with respect to which the Class AA Preferred Stock shall vote with the
holders of Common Stock as a single class together with all other classes and
series of stock of the Corporation that are entitled to vote as a single class
with the Common Stock, each share of Class AA Preferred Stock shall entitle the
holder thereof to cast the number of votes equal to the number of votes which
could be cast in such vote by a holder of the number of shares of Common Stock
into which such share of Class AA Preferred Stock is convertible based on the
Mandatory Conversion Price of the Class AA Preferred Stock. Such voting right of
the holders of the Class AA Preferred Stock may be exercised at any annual
meeting of stockholders, any special meeting of stockholders, or by written
consent of the minimum number of shares required to take such action pursuant to
Section 228 of the Delaware General Corporation Law.
On any matter on which the holders of Class AA Preferred Stock are entitled
by law or under the Certificate of Incorporation to vote separately as a class,
each such holder shall be entitled to one vote for each share held, and such
matter shall be determined by a majority of the votes cast unless Delaware law
or this Certificate of Designations requires approval by a higher percentage.
(d) Until a Termination Event, the number of Directors comprising the Board
of Directors shall be equal to fifteen (15) and the holders of Preferred Stock,
voting separately as a single class, shall have the exclusive right to elect
three (3) Directors (each such Director, a "Preferred Stock Director") at any
special meeting of stockholders called for such purpose, at each annual meeting
of stockholders and in any written consent of stockholders pursuant to Section
228 of the Delaware General Corporation Law. Any increases in the size of the
Board of Directors will require a proportional increase in the number of
Preferred Stock Directors (rounded up to the next whole number) such that the
Preferred Stock Directors represent not less than twenty percent (20%) of the
votes of the Board of Directors. A proportionate number (rounded up to the next
whole number, but not less than one) of Preferred Stock Directors shall serve on
each committee of the Board of Directors (provided that with respect to the
Executive Committee, the Executive Committee shall consist of five members of
which two members shall be Preferred Stock Directors), and at least one
Preferred Stock Director shall serve on the board or other governing body of
each
19
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of the Corporation's subsidiaries and affiliates, other than operational home
building companies. In the event (an "Adverse Event") that on any date following
the Second Closing that is 60 days after the end of a fiscal quarter of the
Corporation (a "Test Date") both (i) the Average Trading Price of the Common
Stock is below $4.375 per share (adjusted in the same manner as the Mandatory
Conversion Price to take account of any of the occurrences that would require an
adjustment pursuant to subparagraphs 4(f) through 4(j) hereof) and (ii) (x) the
percentage change in the EBT per share of the Corporation (of the common stock
issued and outstanding) for the most recent two fiscal quarters as measured
against the same two fiscal quarters from the prior fiscal year is less than (y)
the percentage change in the EBT per share (of the common stock issued and
outstanding) of the Comparable Group for the same period as compared against the
EBT per share (calculated on the same basis) of the Comparable Group during the
same period in the prior fiscal year then the holders of Preferred Stock, voting
separately as a single class, shall be entitled to elect Preferred Stock
Directors sufficient to cause the Preferred Stock Directors to constitute a
majority of the Board of Directors and all committees of the Board of Directors,
including the Executive Committee ("Additional Preferred Stock Directors"). The
size of the Board of Directors and all committees shall be automatically
increased in order to effect any such additional Directors. The right of the
holders of Preferred Stock to elect Additional Preferred Stock Directors shall
continue until such time as neither (i) nor (ii) above is true for two
consecutive Test Dates. The "Average Trading Price" shall mean, on any date of
determination, the average of the closing prices of the Common Stock over the 90
day period prior to such date.
(e) The Preferred Stock Directors elected as provided herein shall serve
until the next annual meeting or until their respective successors shall be
elected and shall qualify. Upon the termination of the right of the holders of
Preferred Stock to elect Additional Preferred Stock Directors as set forth in
subparagraph 5(d) above, any Additional Preferred Stock Directors shall resign.
Any Preferred Stock Director may be removed with or without cause by, and shall
not be removed other than by, the vote of the holders of a majority of the
outstanding shares of Preferred Stock, voting separately as a single class, at a
meeting called for such purpose or by written consent in accordance with Section
228 of the Delaware General Corporate Law. If the office of any Preferred Stock
Director becomes vacant by reason of death, resignation, retirement,
disqualification or removal from office or otherwise, the remaining Preferred
Stock Directors, by majority vote, may elect a successor, or, alternatively, the
holders of a majority of the outstanding shares of Preferred Stock, voting
separately as a single class, at a meeting called for such purpose or by written
consent in accordance with Section 228 of the Delaware General Corporation Law
may elect a successor. Any such successor shall hold office for the unexpired
term in respect of which such vacancy occurred. Upon the occurrence of a
Termination Event, the Preferred Stock Directors then serving on the Board of
Directors may continue to hold their office for the remainder of their term.
(f) At any time when the right to elect Preferred Stock Directors or
Additional Preferred Stock Directors provided in subparagraph 5(d) shall have
vested in the holders of Class AA Preferred Stock and if such right shall not
already have been initially exercised, a proper officer of the Corporation
shall, upon the written request of any holder of record of Class AA Preferred
Stock then outstanding, addressed to the Secretary of the Corporation, call a
special meeting of holders of Preferred Stock. Such meeting shall be held at the
earliest practicable date upon the
20
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notice required for annual meetings of stockholders at the place for holding
annual meetings of stockholders of the Corporation or, if none, at a place
designated by the Secretary of the Corporation. If such meeting shall not be
called by the proper officers of the Corporation within thirty (30) days after
the personal service of such written request upon the Secretary of the
Corporation, or within thirty (30) days after mailing the same within the United
States, by registered mail, addressed to the Secretary of the Corporation at its
principal office (such mailing to be evidenced by the registry receipt issued by
the postal authorities), then the holders of record of ten percent (10%) of the
shares of Class AA Preferred Stock then outstanding may designate in writing a
holder of Class AA Preferred Stock to call such meeting at the expense of the
Corporation, and such meeting may be called by such person so designated upon
the notice required for annual meetings of stockholders and shall be held at the
place for holding annual meetings of the Corporation or, if none, at a place
designated by such holder. Any holder of Class AA Preferred Stock that would be
entitled to vote at such meeting shall have access to the stock books of the
Corporation for the purpose of causing a meeting of the holders of Preferred
Stock to be called pursuant to the provisions of this paragraph and to contact
the holders of Preferred Stock with respect to matters relating to such meeting.
Notwithstanding the provisions of this paragraph, however, no such special
meeting shall be called if any such request is received less than 90 days before
the date fixed for the next ensuing annual or special meeting of stockholders.
(g) If at any time when the holders of Class AA Preferred Stock are
entitled to elect directors pursuant to the foregoing provisions of this
paragraph 6, and the holders of Class ABI Preferred Stock and Class ABII
Preferred Stock are entitled to elect directors by reason of any provision of
the Certificate of Incorporation, as in effect at the time, or the respective
Certificate of Designation for such Classes, and if the terms of the Class ABI
Preferred Stock and Class ABII Preferred Stock so permit, the voting rights of
the Preferred Stock then entitled to vote shall be combined (with each series
having a number of votes proportional to the aggregate liquidation preference of
its outstanding shares). In such case, the holders of Preferred Stock, voting as
a class, shall elect such directors.
(h) In addition to any vote or consent of shareholders required by law or
the Certificate of Incorporation, the consent of the holders of at least
sixty-six and two-thirds percent (66-2/3%) of the shares of Class AA Preferred
Stock at the time outstanding, given in person or by proxy, either in writing
without a meeting or by vote at any meeting called for the purpose, shall be
necessary for effecting or validating:
Any amendment, alteration or repeal of any of the provisions of the
Certificate of Incorporation, or of the by-laws of the Corporation, which
affects adversely the voting powers, preferences and relative, participating,
optional and other special rights of the holders of shares of Class AA Preferred
Stock; provided, however, that the amendment of the provisions of the
Certificate of Incorporation so as to authorize or create, or to increase the
authorized amount of any class of any security convertible into any shares
ranking junior to the Class AA Preferred Stock in the distribution of assets on
any liquidation, dissolution, or winding up of the Corporation or in the payment
of dividends, shall not be deemed to affect adversely the voting powers,
preferences and relative, participating, optional and other special rights of
the holders of shares of Class AA
21
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Preferred Stock;
Any authorization or creation of, or increase in the authorized amount of,
any shares of any class or any security convertible into shares of any class
ranking senior to or on parity with shares of Class AA Preferred Stock (other
than the Class AB Preferred Stock) in the distribution of assets on any
liquidation, dissolution, or winding up of the Corporation or in the payment of
dividends or otherwise;
Any increase or decrease (other than by conversion) in the total number of
authorized shares of Class AA Preferred Stock;
Any sale, lease, assignment, transfer or other conveyance of all or
substantially all of the assets of the Corporation or any of its material
subsidiaries of which it owns fifty percent (50%) or more of the voting power
thereof, or any consolidation or merger involving the Corporation or any of such
subsidiaries (except mergers between the Corporation and any of its subsidiaries
or mergers among any of the Corporation's subsidiaries), or any reclassification
or other change of any stock, or any dissolution, liquidation, or winding up of
the Corporation or, unless the obligations of the Corporation under an agreement
are expressly conditioned upon the requisite approval of the holders of
sixty-six and two-thirds percent (66-2/3%) of the Class AA Preferred Stock then
outstanding as provided for herein, make any agreement or become obligated to do
so;
Any purchase, redemption or other acquisition for value (or payment into or
setting aside as a sinking fund for such purpose) of any shares of Common Stock
or other capital stock of the Corporation; or
Any declaration or payment of any dividends on or declaration or making of
any other distribution, direct or indirect, on account of the Common Stock or
setting apart any sum for any such purpose unless all accrued unpaid dividends
on Class AA Preferred Stock have been paid in cash.
Financial Statements.
Until (i) the aggregate amount of Preferred Stock outstanding is less than
twenty percent (20%) of the maximum amount of the Preferred Stock issued to date
or (ii) the aggregate remaining investment or commitment to invest in the
Corporation by Investor (or any single transferee of Investor or related group
of transferees) is less than the greater of $10,000,000 or ten percent (10%) of
the Market Capitalization (a "Termination Event") (provided that a Termination
Event shall not occur prior to all closings being consummated under the Stock
Purchase Agreement), with the value of such investment to be based on the sum of
(x) the greater of the Liquidation Preference of the Preferred Stock and the
value of the Common Stock underlying such Preferred Stock (as measured by the
Conversion Price) then held by it, (y) the value of the Common Stock then held
by it and (z) the value of the warrants then held by it whether or not required
by the rules and regulations of the Commission, the Corporation shall furnish to
the holders of Class AA Preferred Stock (i) all quarterly and annual financial
information required to be filed with the Commission on Forms 10-Q and 10-K and,
with respect to the annual information only, a report
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thereon by the Corporation's certified independent accountants, (ii) all current
reports required to be filed with the Commission on Form 8-K.
The Corporation shall, so long as a Termination Event has not occurred,
deliver to the holders of Class AA Preferred Stock, forthwith upon any executive
officer of the Corporation becoming aware of any breach under this Certificate
of Designations, an Officers' Certificate specifying such breach and what action
the Corporation is taking or proposes to take with respect thereto.
Ranking.
With regard to rights to receive dividends, and distributions upon
liquidation, dissolution or winding up of the Corporation, the Class AA
Preferred Stock shall rank pari passu with any Parity Stock and senior to the
Common Stock and any other equity securities or other securities into which any
convertible indebtedness is convertible which are issued by the Corporation
after the date of this Certificate of Designation. The Class AA Preferred Stock
shall not be subject to the creation of capital stock senior with regards to the
right to receive dividends, and distribution upon liquidation, dissolution or
winding up of the Corporation.
Modification and Waiver.
The terms of this Certificate of Designation may be amended and the rights
hereunder may be waived with the consent of holders of at least sixty-six and
two-thirds percent (66-2/3%) of the shares of the Class AA Preferred Stock then
outstanding.
Exclusion of Other Rights.
Except as may otherwise be required by law, the shares of Class AA
Preferred Stock shall not have any voting powers, preferences and relative,
participating, optional or other special rights, other than those specifically
set forth in this resolution (as such resolution may be amended from time to
time) and in the Certificate of Incorporation.
Headings of Subdivisions.
The headings of the various subdivisions hereof are for convenience of
reference only and shall not affect the interpretation of any of the provisions
hereof.
Severability of Provisions.
If any voting powers, preferences and relative, participating, optional and
other special rights of the Class AA Preferred Stock and qualifications,
limitations and restrictions thereof set forth in this resolution (as such
resolution may be amended from time to time) is invalid, unlawful or incapable
of being enforced by reason of any rule of law or public policy, all other
voting powers, preferences and relative, participating, optional and other
special rights of Class AA Preferred Stock and qualifications, limitations and
restrictions thereof set forth in this resolution (as
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<PAGE>
so amended) which can be given effect without the invalid, unlawful or
unenforceable voting powers, preferences and relative, participating, optional
and other special rights of Class AA Preferred Stock and qualifications,
limitations and restrictions thereof shall, nevertheless, remain in full force
and effect, and no voting powers, preferences and relative, participating,
optional or other special rights of Class AA Preferred Stock and qualifications,
limitations and restrictions thereof herein set forth shall be deemed dependent
upon any other such voting powers, preferences and relative, participating,
optional or other special rights of Class AA Preferred Stock and qualifications,
limitations and restrictions thereof unless so expressed herein.
Record Holders.
The Corporation and the transfer agent for the Class AA Preferred Stock may
deem and treat the record holder of any shares of Preferred Stock as the true
and lawful owner thereof for all purposes, and neither the Corporation nor the
transfer agent shall be affected by any notice to the contrary.
Notice.
Except as may otherwise be provided for herein, all notices referred to herein
shall be in writing, and all notices hereunder shall be deemed to have been
given upon the earlier of receipt of such notice or three (3) Business Days
after the mailing of such notice if sent by registered mail (unless first-class
mail shall be specifically permitted for such notice under the terms of this
Certificate) with postage prepaid, addressed: if to the Corporation, to its
offices at 1921 Gallows Road, Suite 730, Vienna Virginia 22182 Attention:
Secretary or to an agent of the Corporation designated as permitted by this
Certificate, or, if to any holder of the Class AA Preferred Stock, to such
holder at the address of such holder of the Class AA Preferred Stock as listed
in the stock record books of the Corporation (which may include the records of
any transfer agent for the Class AA Preferred Stock); or to such other address
as the Corporation or holder, as the case may be, shall have designated by
notice similarly given.
[Signature Page Follows]
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IN WITNESS WHEREOF, the Corporation has caused this certificate to be duly
executed by Jeffrey Shirley its Vice President of Finance and attested by Jamie
M. Pirrello its Secretary, this 30th day of September, 1997.
THE FORTRESS GROUP, INC.
By:
----------------------------------
Name: Jeffrey Shirley
Title: Vice President of Finance
ATTEST:
By:
-------------------------------
Name: Jamie M. Pirrello
Title: Secretary
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ANNEX B
<PAGE>
CERTIFICATE OF DESIGNATIONS, PREFERENCES
AND RELATIVE, PARTICIPATING, OPTIONAL AND
OTHER SPECIAL RIGHTS OF PREFERRED
STOCK AND QUALIFICATIONS, LIMITATIONS
AND RESTRICTIONS THEREOF
OF
CLASS ABI CONVERTIBLE
REDEEMABLE 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 Article Fourth of its
Certificate of Incorporation (the "Certificate of Incorporation") and in
accordance with the provisions of Section 151 of the General Corporation Law of
the State of Delaware, the Board of Directors by unanimous vote at a meeting of
the Board of Directors at which a quorum was acting and present adopted the
following resolution which resolution remains in full force and effect on the
date hereof:
RESOLVED, that there is hereby established a series of authorized preferred
stock having a par value of $0.01 per share, which series shall be designated as
"Class ABI Convertible Redeemable Preferred Stock" (the "Class ABI Preferred
Stock"), shall consist of _______ shares and shall have the following voting
powers, preferences and relative, participating, optional and other special
rights, and qualifications, limitations and restrictions thereof as follows:
Certain Definitions; Number of Shares and Designation.
Definitions. Unless the context otherwise requires, the terms defined in
this paragraph 1 shall have, for all purposes of this resolution, the meanings
herein specified (with terms
<PAGE>
defined in the singular having comparable meanings when used in the plural).
Additional Preferred Stock Directors. The term "Additional Preferred Stock
Directors" shall have the meaning set forth in subparagraph 6(d).
Adverse Event. The term "Adverse Event" shall have the meaning set forth in
subparagraph 6(d)
Average Trading Price. The term "Average Trading Price" shall have the
meaning set forth in subparagraph 6(d).
Board of Directors. The term "Board of Directors" shall mean the Board of
Directors of the Corporation.
Business Day. The term "Business Day" shall mean a day other than a
Saturday or Sunday or a bank holiday in New York.
Class AA Preferred Stock. The term "Class AA Preferred Stock" shall mean
the 46,670 shares of Class AA Convertible Preferred Stock, $0.01 par value per
share, of the Corporation.
Class ABI Preferred Stock. The term "Class ABI Preferred Stock" shall have
the meaning set forth subparagraph 1(b).
Class ABII Preferred Stock. The term "Class ABII Preferred Stock" shall
mean the shares of Class ABII Convertible Redeemable Preferred Stock, $0.01 par
value per share, of the Corporation.
Commission. The term "Commission" shall mean the United States Securities
and Exchange Commission.
Common Equity. The term "Common Equity" shall mean all shares now or
hereafter authorized of any class of common stock of the Corporation, including
the Common Stock, and any other stock of the Corporation, howsoever designated,
authorized after the Initial Issue Date, which has the right (subject always to
prior rights of any class or series of preferred stock) to participate in the
distribution of the assets and earnings of the Corporation without limit as to
per share amount.
Common Stock. The term "Common Stock" shall mean the common stock, par
value $0.01 per share, of the Corporation.
Comparable Group. The term "Comparable Group" shall mean Pulte Corporation,
The Ryland Group, Inc., U.S. Home Corporation, NVR Inc., Hovnanian Enterprises,
Inc., Toll
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Brothers, Inc., Washington Homes, Inc., Zaring National Corporation, M/I
Schottenstein Homes, Inc., Continental Homes Holding Corp., Engle Homes, Inc.,
Crossman Communities, Beazer Homes USA, Inc. and D.R. Horton, Inc.
Conversion Date. The term "Conversion Date" shall mean the Optional
Conversion Date and the Mandatory Conversion Date, as applicable.
Conversion Price. The term "Conversion Price" shall be equal to 95% of the
Current Market Price on the applicable Conversion Date.
Current Market Price. The term "Current Market Price" means, for a share of
Common Stock on any date, the average of Quoted Prices for the thirty (30)
consecutive Trading Days commencing forty-five (45) Trading Days before the date
in question.
Director. The term "Director" means a member of the Board of Directors.
Dividend Payment Date. The term "Dividend Payment Date" shall have the
meaning set forth in subparagraph 2(b).
Dividend Period. The term "Dividend Period" shall mean the period from, and
including, the Initial Issue Date to, but not including, the first Dividend
Payment Date and thereafter, each quarterly period from, and including, the
Dividend Payment Date to, but not including the next Dividend Payment Date.
Dividend Rate. The term "Dividend Rate" shall mean twelve percent (12%).
EBT. The term "EBT" shall mean earnings before interest expense, income
taxes and extraordinary or non-recurring items, all calculated in accordance
with generally accepted accounting principles.
Executive Committee. The term "Executive Committee" shall mean the
five-member executive committee of the Board of Directors to which substantial
operational matters regarding the Corporation shall be delegated.
Initial Issue Date. The term "Initial Issue Date" shall mean the date that
shares of Class ABI Preferred Stock are first issued by the Corporation.
Investor. The term "Investor" shall mean, at any time, Prometheus
Homebuilders LLC and any of its affiliates, including, but not limited to,
Lazard Freres Real Estate Investors, LLC and its affiliates.
Junior Stock. The term "Junior Stock" shall mean, for purposes of paragraph
2 below,
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Common Equity and any class or series of stock of the Corporation authorized
after the Initial Issue Date which is not entitled to receive any dividends in
any Dividend Period unless all dividends required to have been paid or declared
and set apart for payment on the Class AB Preferred Stock and any Parity Stock
shall have been so paid or declared and set apart for payment, and for purposes
of paragraph 3 below, shall mean Common Equity and any class or series of stock
of the Corporation authorized after the Initial Issue Date which is not entitled
to receive any assets upon liquidation, dissolution or winding up of the affairs
of the Corporation until the Class AB Preferred Stock and any Parity Stock shall
have received the entire amount to which such stock is entitled upon such
liquidation, dissolution or winding up.
Liquidation Preference. The term "Liquidation Preference" shall mean
$1000.00 per share.
Mandatory Conversion Date. The term "Mandatory Conversion Date" shall mean
the Business Day, specified in a notice to holders of Class ABI Preferred Stock
given by the Corporation in accordance with the provisions of subparagraph
4(b)(ii), upon which the Corporation shall convert all outstanding shares of
Class ABI Preferred Stock into Common Stock as set forth in such subparagraph.
Market Capitalization. The term "Market Capitalization" shall mean the
market value of the Corporation's outstanding Common Stock as measured by the
thirty (30) Trading Days preceding any measurement date.
Officers' Certificate. The term "Officers' Certificate" means a certificate
signed on behalf of the Corporation by two officers of the Corporation, one of
whom must be the principal executive officer, the principal financial officer or
the principal accounting officer of the Corporation.
Optional Conversion Date. The term "Optional Conversion Date" shall have
the meaning set forth in subparagraph 4(b)(i) below.
Non-Preferred Stock Director. The term "Non-Preferred Stock Director" means
a Director other than a Preferred Stock Director.
Parity Stock. The term "Parity Stock" shall mean, for purposes of paragraph
2 below, (i) the Series A Preferred Stock, (ii) the Series B Preferred Stock,
(iii) the Series C Preferred Stock, (iv) the Series D Preferred Stock, (v) the
Class AA Preferred Stock, (vi) the Class ABII Preferred Stock and (vii) any
class or series of stock of the Corporation authorized after the Initial Issue
Date which is entitled to receive payment of dividends on a parity with the
Class ABI Preferred Stock, and for purposes of paragraph 3 below, shall mean (i)
the Series A Preferred Stock, (ii) the Series B Preferred Stock, (iii) the
Series C Convertible Preferred Stock, (iv) the Series D Preferred Stock, (v) the
Class AA Preferred Stock, (vi) the Class ABII Preferred Stock and (vii) any
class or series
4
<PAGE>
of stock of the Corporation authorized after the Initial Issue Date which is
entitled to receive assets upon liquidation, dissolution or winding up of the
affairs of the Corporation on a parity with the Class ABI Preferred Stock.
Preferred Stock. The term "Preferred Stock" shall mean the Class AA
Preferred Stock, the Class ABI Preferred Stock and the Class ABII Preferred
Stock.
Preferred Stock Director. The term "Preferred Stock Director" has the
meaning set forth in subparagraph 6(d).
Quoted Price. The term "Quoted Price", with respect to the Common Stock,
shall mean the last reported sales price for Common Stock as reported by the
National Association of Securities Dealers, Inc. Automatic Quotations System,
National Market System, or, if the applicable security is listed or admitted for
trading on a securities exchange, the last reported sales price of the
applicable security on the principal exchange on which the applicable security
is listed or admitted for trading (which shall be for consolidated trading if
applicable to such exchange), or if neither so reported or listed or admitted
for trading, the last reported bid price of the applicable security in the
over-the-counter market. In the event that the Quoted Price cannot be determined
as aforesaid, the Board of Directors shall determine the Quoted Price on the
basis of such quotations as it in good faith considers appropriate. Such
determination may be challenged in good faith by a majority of holders of shares
of Class ABI Preferred Stock, and any dispute shall be resolved at the
Corporation's cost, by an investment banking firm of recognized national
standing selected by the Corporation and reasonably acceptable to such holders
of Class ABI Preferred Stock and shall be made in good faith and be conclusive
absent manifest error; provided, however, if the Quoted Price as determined by
the Board of Directors is more than 110% of the price determined by the
investment banking firm, then the costs incurred by such investment banking firm
shall be borne by the holders of Class AB Preferred Stock who challenged such
price.
Record Date. The term "Record Date" shall mean the date designated by the
Board of Directors at the time a dividend is declared; provided, however, that
such Record Date shall not be more than thirty (30) days nor less than ten (10)
days prior to the respective Dividend Payment Date or such other date designated
by the Board of Directors for the payment of dividends.
Redemption Date. The term "Redemption Date" shall have the meaning set
forth in subparagraph 5(b) below.
Redemption Price. The term "Redemption Price" shall mean a price per share
equal to the Liquidation Preference, plus an amount equal to all cumulative
dividends accrued and unpaid on such share to the Redemption Date.
Series A Preferred Stock. The term "Series A Preferred Stock" shall mean
the Series A 11% Cumulative Convertible Preferred Stock, $0.01 par value per
share, of the Corporation.
5
<PAGE>
Series B Preferred Stock. The term "Series B Preferred Stock" shall mean
the Series B Convertible Preferred Stock, $0.01 par value per share, of the
Corporation.
Series C Preferred Stock. The term "Series C Preferred Stock" shall mean
the Series C Convertible Preferred Stock, $0.01 par value per share, of the
Corporation.
Series D Preferred Stock. The term "Series D Preferred Stock" shall mean
the Series D 6% Convertible Redeemable Preferred Stock, $0.01 par value per
share, of the Corporation.
Stock Purchase Agreement. The term "Stock Purchase Agreement" shall mean
that certain Amended and Restated Stock Purchase Agreement, dated as of
September 30, 1997, by and between the Corporation and Prometheus Homebuilders
LLC.
Termination Event. The term "Termination Event" shall have the meaning set
forth in subparagraph 7(a) below.
Test Date. The term "Test Date" shall have the meaning set forth in
subparagraph 6(d).
Trading Day. The term "Trading Day" with respect to any security shall mean
any day on which any market in which the applicable security is then traded and
in which a Quoted Price may be ascertained is open for business.
Number of Shares and Designation. _______ shares of the preferred stock,
$0.01 par value per share, of the Corporation are hereby constituted as a series
of the preferred stock designated as "Class ABI Convertible Redeemable Preferred
Stock" (the "Class ABI Preferred Stock").
Dividends.
The record holders of Class ABI Preferred Stock shall be entitled to
receive dividends, when and as declared by the Board of Directors, out of funds
legally available for payment of dividends. Such dividends shall be payable by
the Corporation in cash at the rate of twelve percent (12%) per annum of the
Liquidation Preference.
Dividends on shares of Class ABI Preferred Stock shall accrue and be
cumulative from the date of issuance of such shares. Dividends shall be payable
quarterly in arrears when and as declared by the Board of Directors on March 31,
June 30, September 30 and December 31 of each year (a "Dividend Payment Date"),
[commencing on _______________________ , 1997]. If any Dividend Payment Date
occurs on a day that is not a Business Day, any accrued dividends otherwise
payable on such Dividend Payment Date shall be paid on the next succeeding
Business Day. The amount of dividends payable on Class ABI Preferred Stock for
each full Dividend Period shall be
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computed by dividing by four (4) the annual rate per share set forth in
subparagraph 2(a) above. Dividends shall be paid to the holders of record of the
Class ABI Preferred Stock as their names shall appear on the share register of
the Corporation on the Record Date for such dividend. Dividends payable in any
Dividend Period which is less than a full Dividend Period in length will be
computed on the basis of a ninety (90) day quarterly period and actual days
elapsed in such Dividend Period. Dividends on account of arrears for any past
Dividend Periods may be declared and paid at any time to holders of record on
the Record Date therefor. For any Dividend Period in which dividends are not
paid in full on the Dividend Payment Date first succeeding the end of such
Dividend Period, then on such Dividend Payment Date such accrued and unpaid
dividends shall be added (solely for the purpose of calculating dividends
payable on the Class ABI Preferred Stock) to the Liquidation Preference of the
Class ABI Preferred Stock effective at the beginning of the Dividend Period
succeeding the Dividend Period as to which such dividends were not paid and
shall thereafter accrue additional dividends in respect thereof at the Dividend
Rate until such accrued and unpaid dividends have been paid in full.
So long as any shares of Class ABI Preferred Stock shall be outstanding,
the Corporation shall not declare, pay or set apart for payment on any Junior
Stock any dividends whatsoever, whether in cash, property or otherwise (other
than dividends payable in shares of the class or series upon which such
dividends are declared or paid, or payable in shares of Common Stock with
respect to Junior Stock other than Common Stock, together with cash in lieu of
fractional shares), nor shall the Corporation make any distribution on any
Junior Stock, nor shall any Junior Stock be purchased, redeemed or otherwise
acquired by the Corporation or any of its subsidiaries of which it owns not less
than a majority of the outstanding voting power, nor shall any monies be paid or
made available for a sinking fund for the purchase or redemption of any Junior
Stock, unless all dividends to which the holders of Class ABI Preferred Stock
shall have been entitled for all previous Dividend Periods shall have been paid
or declared and a sum of money sufficient for the payment thereof has been set
apart.
The Corporation shall be obligated to declare and pay dividends in an
amount equal to the Dividend Rate on each Dividend Payment Date to the extent
that funds are legally available for declaration of such dividends. In the event
that full dividends are not paid or made available to the holders of all
outstanding shares of Class ABI Preferred Stock and of any Parity Stock with
respect to any Dividend Period and funds available for payment of dividends
shall be insufficient to permit payment in full to holders of all such stock of
the full preferential amounts to which they are then entitled, then the entire
amount legally available for payment of dividends shall be distributed each
Dividend Period ratably among all such holders of Class ABI Preferred Stock and
of any Parity Stock in proportion to the full amount to which they would
otherwise be respectively entitled. The dividends payable in respect of the
Class ABI Preferred Stock shall be a mandatory obligation of the Corporation,
subject only to the limitations set forth in Section 170 of the Delaware General
Corporation Law with respect to funds legally permitted to be used for the
payment of dividends (the "Legal Funds Requirement"). In stating that the
dividends payable in
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respect of the Class ABI Preferred Stock are a mandatory obligation, it is the
explicit intent of the Corporation to eliminate any and all discretion of the
Board of Directors with respect to the declaration and payment of such dividends
and to require the Board of Directors to declare and pay such dividends as and
when provided herein, subject only to compliance with the Legal Funds
Requirement.
Distributions Upon Liquidation, Dissolution or Winding Up.
In the event of any voluntary or involuntary liquidation, dissolution or
other winding up of the affairs of the Corporation before any payment or
distribution shall be made to the holders of Junior Stock, the holders of Class
ABI Preferred Stock shall be entitled to be paid out of the assets of the
Corporation in cash or property at its fair market value as determined by the
Board of Directors the Liquidation Preference per share plus an amount equal to
all dividends accrued and unpaid thereon to the date of such liquidation,
dissolution or such other winding up. Except as provided in this paragraph,
holders of Class ABI Preferred Stock shall not be entitled to any distribution
in the event of liquidation, dissolution or winding up of the affairs of the
Corporation.
If, upon any such liquidation, dissolution or other winding up of the
affairs of the Corporation the assets of the Corporation shall be insufficient
to permit the payment in full of the Liquidation Preference per share plus an
amount equal to all dividends accrued and unpaid on the Class ABI Preferred
Stock and the full liquidating payments on all Parity Stock, then the assets of
the Corporation shall be ratably distributed among the holders of Class ABI
Preferred Stock and of any Parity Stock in proportion to the full amounts to
which they would otherwise be respectively entitled if all amounts thereon were
paid in full. Neither the consolidation or merger of the Corporation into or
with another entity or entities, nor the sale, lease, transfer or conveyance of
all or substantially all of the assets of the Corporation to another corporation
or any other entity shall be deemed a liquidation, dissolution or winding up of
the affairs of the Corporation within the meaning of this paragraph 3.
Conversion Rights.
At any time, on or after [Fourth Anniversary], a holder of shares of Class
ABI Preferred Stock may convert such shares into Common Stock at any time before
the close of business on the Redemption Date (unless the Corporation shall
default in payment of the Redemption Price).
At any time, on or after [Fifth Anniversary], the Corporation, at its
option, may convert all, but not less than all of the aggregate shares of Class
ABI Preferred Stock and Class ABII Preferred Stock outstanding at such time into
Common Stock at any time before the close of business on the Redemption Date;
provided that, on the Mandatory Conversion Date, the
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Corporation shall have paid all accrued dividends on all shares of Class ABI
Preferred Stock then outstanding, up to and including the most recent Dividend
Payment Date (unless the Corporation shall default in payment of the Conversion
Price).
For the purposes of conversion, each share of Class ABI Preferred Stock
shall be valued at the Liquidation Preference plus all accrued but unpaid
dividends thereon through the relevant Conversion Date, which shall be divided
by the Conversion Price in effect on the Conversion Date to determine the number
of shares issuable upon conversion. Immediately following such conversion, the
rights of the holders of converted Class ABI Preferred Stock shall cease (in
respect of such converted stock) and the persons entitled to receive the Common
Stock upon the conversion of Class ABI Preferred Stock shall be treated for all
purposes as having become the owners of such Common Stock.
To convert Class ABI Preferred Stock pursuant to subparagraph 4(a)(i), a
holder must (i) surrender the certificate or certificates evidencing the shares
of Class ABI Preferred Stock to be converted, duly endorsed in a form
satisfactory to the Corporation, at the office of the Corporation or transfer
agent for the Class ABI Preferred Stock, (ii) notify the Corporation at such
office that he elects to convert Class ABI Preferred Stock, and the number of
shares he wishes to convert, (iii) state in writing the name or names in which
he wishes the certificate or certificates for shares of Common Stock to be
issued, and (iv) pay any transfer or similar tax if required (provided, however,
that no such payment shall be required if the Common Stock issuable upon
conversion is to be issued in the name of the converting holder of Class ABI
Preferred Stock). In the case of lost or destroyed certificates evidencing
ownership of shares of Class ABI Preferred Stock to be surrendered for
conversion, the holder shall submit proof of loss or destruction, and such
indemnity as shall be reasonably required by the Corporation. In the event that
a holder fails to notify the Corporation of the number of shares of Class ABI
Preferred Stock which he wishes to convert, he shall be deemed to have elected
to convert all shares represented by the certificate or certificates surrendered
for conversion. The date on which the holder satisfies all those requirements is
the "Optional Conversion Date." As soon as practical and in any event within
five (5) Business Days of the Optional Conversation Date, the Corporation shall
deliver through the transfer agent a certificate for the number of full shares
of Common Stock issuable upon the conversion, a check for any fractional share
and a new certificate representing the unconverted portion, if any, of the
shares of Class ABI Preferred Stock represented by the certificate or
certificates surrendered for conversion. The person in whose name the Common
Stock certificate is registered shall be treated as the stockholder of record on
and after the Optional Conversion Date. All shares of Common Stock issuable upon
conversion of the Class ABI Preferred Stock shall be fully paid and
nonassessable and shall rank pari passu with the other shares of Common Stock
outstanding from time to time. In the case of Class ABI Preferred Stock that has
been converted after any Record Date but before the next succeeding Dividend
Payment Date, dividends that are payable on such Dividend Payment Date
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shall be payable on such Dividend Payment Date notwithstanding such conversion,
and such dividends shall be paid to the holder of such Class ABI Preferred Stock
on such Record Date (and shall not constitute "accrued and unpaid dividends" for
purposes of subparagraph 4(a)). Holders of Common Stock issued upon conversion
shall not be entitled to receive any dividend payable to holders of Common Stock
as of any record time before the close of business on the Optional Conversion
Date. If a holder of Class ABI Preferred Stock converts more than one share at a
time the number of full shares of Common Stock issuable upon conversion shall be
based on the total value of all shares of Class ABI Preferred Stock converted.
To convert Class ABI Preferred Stock and Class ABII Preferred Stock
pursuant to subparagraph 4(a)(ii), notice of any conversion shall be sent by or
on behalf of the Corporation not more than sixty (60) days nor less than thirty
(30) days prior to the Mandatory Conversion Date, by first class mail, postage
prepaid, to all holders of record of the Class ABI Preferred Stock and Class
ABII Preferred Stock at their respective last addresses as they shall appear on
the books of the Corporation; provided, however, that no failure to give such
notice or any defect therein or in the mailing thereof shall affect the validity
of the proceedings for the conversion of any shares of Class ABI Preferred Stock
and Class ABII Preferred Stock except as to the holder to whom the Corporation
has failed to give notice or except as to the holder to whom notice was
defective. In addition to any information required by law or by the applicable
rules of any exchange upon which Class ABI Preferred Stock and Class ABII
Preferred Stock may be listed or admitted to trading, such notice shall state:
(i) the Mandatory Conversion Date; (ii) the date on which the Conversion Price
shall be calculated; (iii) the number of shares of Class ABI Preferred Stock and
Class ABII Preferred Stock to be converted being all the Class ABI Preferred
Stock and Class ABII Preferred Stock held of record by all holders; (iv) the
place or places where certificates for such shares are to be surrendered for
receipt of such Common Stock issuable upon such conversion; and (v) that
dividends on the shares to be converted will cease to accrue on the Mandatory
Conversion Date. Upon the mailing of any such notices of conversion, the
Corporation shall become obligated to convert on the Mandatory Conversion Date
all of the Class ABI Preferred Stock and Class ABII Preferred Stock.
The person in whose name the Common Stock certificate is registered shall
be treated as the stockholder of record on and after the Mandatory Conversion
Date. All shares of Common Stock issuable upon conversion of the Class ABI
Preferred Stock and Class ABII Preferred Stock shall be fully paid and
nonassessable and shall rank pari passu with the other shares of Common Stock
outstanding from time to time. In the case of Class ABI Preferred Stock and
Class ABII Preferred Stock that has been converted after any Record Date but
before the next succeeding Dividend Payment Date, dividends that are payable on
such Dividend Payment Date shall be payable on such Dividend Payment Date
notwithstanding such conversion, and such dividends shall be paid to the holder
of such Class ABI Preferred Stock and Class ABII Preferred Stock on such Record
Date (and shall not constitute "accrued and unpaid dividends" for purposes of
subparagraph 4(a)). Holders of Common Stock issued upon conversion shall not be
entitled to receive any dividend payable to
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holders of Common Stock as of any record time before the close of business on
the Mandatory Conversion Date.
The Corporation will not issue a fractional share of Common Stock upon
conversion of Class ABI Preferred Stock. Instead the Corporation will deliver
its check for the current market value of the fractional share. The current
market value of a fraction of a share is determined as follows: Multiply the
closing market price of a full share by the fraction. Round the result to the
nearest cent. The closing market price of a share of Common Stock is the Quoted
Price of the Common Stock on the last Trading Day prior to the Conversion Date.
If a holder converts shares of Class ABI Preferred Stock, the Corporation
shall pay any documentary, stamp or similar issue or transfer tax due on the
issue of shares of Common Stock upon the conversion. However, the holder shall
pay any such tax which is due because the shares are issued in a name other than
the holder's name.
The Corporation has reserved and shall continue to reserve out of its
authorized but unissued Common Stock or its Common Stock held in treasury enough
shares of Common Stock to permit the conversion of the Class ABI Preferred Stock
in full as deterimined in good faith by the Board of Directors from time to
time. All shares of Common Stock which may be issued upon conversion of Class
ABI Preferred Stock shall be fully paid and nonassessable. The Corporation will
endeavor to comply with all securities laws regulating the offer and delivery of
shares of Common Stock upon conversion of Class ABI Preferred Stock and will
endeavor to list such shares on each national securities exchange on which the
Common Stock is listed.
The Corporation from time to time may reduce the Conversion Price by any
amount for any period of time if the period is at least twenty (20) Business
Days and if the reduction is irrevocable during the period, but in no event may
the Conversion Price be less than the par value of a share of Common Stock.
Whenever the Conversion Price is reduced, the Corporation shall mail to holders
of Class ABI Preferred Stock a notice of the reduction. The Corporation shall
mail, first class, postage prepaid, the notice at least 15 days before the date
the reduced conversion price takes effect. The notice shall state the reduced
conversion price and the period it will be in effect.
If the Corporation consolidates or merges with or into, as transfers or
leases all or substantially all its assets to any person, upon consummation of
such transaction Class ABI Preferred Stock shall automatically become
convertible into the kind and amount of securities, cash or other assets which
the holder of Class ABI Preferred Stock would have owned immediately after the
consolidation, merger, transfer or lease if such holder had converted Class ABI
Preferred Stock immediately before the effective date of the transaction.
Appropriate adjustment (as determined by the Board of Directors) shall be made
in the application of the provisions herein set forth with respect to the rights
and interests thereafter of the holders of Class ABI Preferred Stock, to the end
that the provisions set forth herein (including provisions with respect to
changes in and other
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adjustment of the Conversion Price) shall thereafter be applicable, as nearly as
reasonably may be, in relation to any shares of stock or other securities or
property thereafter deliverable upon the conversion of Class ABI Preferred
Stock.
In any case in which this paragraph 4 shall require that an adjustment as a
result of any event become effective from and after a record date, the
Corporation may elect to defer until after the occurrence of such event (i) the
issuance to the holder of any shares of Class ABI Preferred Stock converted
after such record date and before the occurrence of such event of the additional
shares of Common Stock issuable upon such conversion over and above the shares
issuable on the basis of the Conversion Price in effect immediately prior to
adjustment and (ii) a check for any remaining fractional shares of Common Stock
as provided in subparagraph 4(c) above.
Except as provided in the immediately following sentence, any determination
that the Corporation or its Board of Directors must make pursuant to this
paragraph 4 shall be conclusive. Whenever the Corporation or its Board of
Directors shall be required to make a determination under this paragraph 4, such
determination shall be made in good faith and may be challenged in good faith by
a majority of the holders of Class ABI Preferred Stock, and any dispute shall be
resolved, at the Corporation's expense, by an investment banking firm of
recognized national standing selected by the Corporation and acceptable to such
holders of Class ABI Preferred Stock; provided, however, if the Conversion Price
as determined by the Board of Directors is more than 110% of the price
determined by the investment banking firm, then the costs incurred by such
investment banking firm shall be borne by the holders of Class ABI Preferred
Stock who challenged such price.
All shares of Class ABI Preferred Stock converted pursuant to this
paragraph 4 shall be retired and shall be restored to the status of authorized
and unissued shares of preferred stock, without designation as to series and may
(subject to any restriction imposed on the Corporation by its Certificate of
Incorporation, any certificate of designations of Preferred Stock, its bylaws or
the Stock Purchase Agreement or any documents entered into pursuant thereto)
thereafter be reissued as shares of any series of preferred stock other than
Class ABI Preferred Stock.
Redemption by the Corporation.
The Class ABI Preferred Stock and the Class ABII Preferred Stock, together,
may be redeemed, in whole, but not in part, at any time on or after ___________,
2002 at the option of the Corporation at the Redemption Price. If the Redemption
Date is on or after a Record Date and on or before the related Dividend Payment
Date, the dividend payable shall be paid to the holder in whose name the Class
ABI Preferred Stock is registered at the close of business on such record date.
Notice of any redemption shall be sent by or on behalf of the Corporation
not more than sixty (60) days nor less than thirty (30) days prior to the
Redemption Date, by first class mail, postage prepaid, to all holders of record
of the Class ABI Preferred Stock and the Class ABII
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Preferred Stock at their respective last addresses as they shall appear on the
books of the Corporation; provided, however, that no failure to give such notice
or any defect therein or in the mailing thereof shall affect the validity of the
proceedings for the redemption of any shares of Class ABI Preferred Stock or
Class ABII Preferred Stock except as to the holder to whom the Corporation has
failed to give notice or except as to the holder to whom notice was defective.
In addition to any information required by law or by the applicable rules of any
exchange upon which Class ABI Preferred Stock and Class ABII Preferred Stock may
be listed or admitted to trading, such notice shall state: (i) the Redemption
Date; (ii) the Redemption Price; (iii) the number of shares of Class ABI
Preferred Stock and Class ABII Preferred Stock to be redeemed; (iv) the place or
places where certificates for such shares are to be surrendered for payment of
the Redemption Price; and (v) that dividends on the shares to be redeemed will
cease to accrue on the Redemption Date (vi) the Conversion Price; (vii) that
Class ABI Preferred Stock and Class ABII Preferred Stock called for redemption
may be converted at any time before the close of business on the Redemption
Date; and (viii) that holders of Class ABI Preferred Stock and Class ABII
Preferred Stock must satisfy the requirements of subparagraph 4(b) above if such
holders desire to convert such shares. Upon the mailing of any such notices of
redemption, the Corporation shall become obligated to redeem at the time of
redemption specified thereon all the Class ABI Preferred Stock and the Class
ABII Preferred Stock.
If notice has been mailed in accordance with subparagraph 5(b) above and
provided that on or before the Redemption Date specified in such notice, all
funds necessary for such redemption shall have been set aside by the
Corporation, separate and apart from its other funds in trust for the pro rata
benefit of the holders of the shares so called for redemption, so as to be, and
to continue to be available therefor, then, from and after the Redemption Date,
dividends on the shares of the Class ABI Preferred Stock so called for
redemption shall cease to accrue, and said shares shall no longer be deemed to
be outstanding and shall not have the status of shares of Class ABI Preferred
Stock, and all rights of the holders thereof as shareholders of the Corporation
(except the right to receive from the Corporation the Redemption Price) shall
cease. Upon surrender, in accordance with said notice, of the certificates for
any shares so redeemed (properly endorsed or assigned for transfer, if the
Corporation shall so require and the notice shall so state), such shares shall
be redeemed by the Corporation at the Redemption Price.
Any funds deposited with a bank or trust company for the purpose of
redeeming Class ABI Preferred Stock shall be irrevocable except that:
the Corporation shall be entitled to receive from such bank or trust
company the interest or other earnings, if any, earned on any money so
deposited in trust, and the holders of any shares redeemed shall have no
claim to such interest or other earnings; and
any balance of monies so deposited by the Corporation and unclaimed by
the holders of the Class ABI Preferred Stock entitled thereto at the
expiration of two (2) years
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from the applicable Redemption Date shall be repaid, together with any
interest or other earnings earned thereon, to the Corporation, and after
any such repayment, the holders of the shares entitled to the funds so
repaid to the Corporation shall look only to the Corporation for payment
without interest or other earnings.
No Class ABI Preferred Stock may be redeemed except with funds legally
available for the payment of the Redemption Price.
All shares of Class ABI Preferred Stock redeemed pursuant to this paragraph
5 shall be retired and shall be restored to the status of authorized and
unissued shares of preferred stock, without designation as to series and may
(subject to any restriction imposed on the Corporation by its Certificate of
Incorporation, any certificate of designations of Preferred Stock, its bylaws or
the Stock Purchase Agreement or any documents entered into pursuant thereto)
thereafter be reissued as shares of any series of preferred stock other than
shares of Class ABI Preferred Stock.
Voting Rights.
The holders of record of shares of Class ABI Preferred Stock shall not be
entitled to any voting rights except as hereinafter provided in this paragraph 6
or as otherwise provided by law.
So long as any shares of the Class ABI Preferred Stock remain outstanding,
each share of Class ABI Preferred Stock shall entitle the holder thereof to vote
on all matters voted on by holders of Common Stock, voting together with the
Common Stock as a single class (together with all other classes and series of
stock of the Corporation that are entitled to vote as a single class with the
Common Stock) at all meetings of the stockholders of the Corporation. In any
vote with respect to which the Class ABI Preferred Stock shall vote with the
holders of Common Stock as a single class together with all other classes and
series of stock of the Corporation that are entitled to vote as a single class
with the Common Stock, each share of Class ABI Preferred Stock shall entitle the
holder thereof to cast the number of votes equal to the number of votes which
could be cast in such vote by a holder of the number of shares of Common Stock
into which such share of Class ABI Preferred Stock would be convertible if the
Conversion Price were 100% of the closing trading price of the Common Stock on
the date immediately preceding the Initial Issue Date of the Class AA Preferred
Stock. Such voting right of the holders of the Class ABI Preferred Stock may be
exercised at any annual meeting of stockholders, any special meeting of
stockholders, or by written consent of the minimum number of shares required to
take such action pursuant to Section 228 of the Delaware General Corporation
Law.
On any matter on which the holders of Class ABI Preferred Stock are
entitled by law or under the Certificate of Incorporation to vote separately as
a class, each such holder shall be entitled to one vote for each share held, and
such matter shall be determined by a majority of the
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votes cast unless Delaware law or this Certificate of Designations requires
approval by a higher percentage.
Until a Termination Event, the number of Directors comprising the Board of
Directors shall be equal to fifteen (15) and the holders of Preferred Stock,
voting separately as a single class, shall have the exclusive right to elect
three (3) Directors (each such Director, a "Preferred Stock Director") at any
special meeting of stockholders called for such purpose, at each annual meeting
of stockholders and in any written consent of stockholders pursuant to Section
228 of the Delaware General Corporation Law. Any increases in the size of the
Board of Directors will require a proportional increase in the number of
Preferred Stock Directors (rounded up to the next whole number such that the
Preferred Stock Directors represent not less than twenty percent (20%) of the
votes of the Board of Directors). A proportionate number (rounded up to the next
whole number, but not less than one) of Preferred Stock Directors shall serve on
each committee of the Board of Directors (provided that with respect to the
Executive Committee, the Executive Committee shall consist of five members of
which two members shall be Preferred Stock Directors), and at least one
Preferred Stock Director shall serve on the board or other governing body of
each of the Corporation's subsidiaries and affiliates, other than operational
home building companies. In the event (an "Adverse Event") that on any date
following the Initial Issue Date that is 60 days after the end of a fiscal
quarter of the Corporation (a "Test Date") both (i) the Average Trading Price of
the Common Stock is below $4.375 per share (provided that such amount shall be
adjusted for reverse stock splits, recapitalizations and other similar events)
and (ii) (x) the percentage change in the EBT per share of the Corporation (of
the Common Stock issued and outstanding) for the most recent two fiscal quarters
as measured against the same two fiscal quarters from the prior fiscal year is
less than (y) the percentage change in the EBT per share (of the common stock
issued and outstanding) of the Comparable Group for the same period as compared
against the EBT per share (calculated on the same basis) of the Comparable Group
during the same period in the prior fiscal year then the holders of Preferred
Stock, voting separately as a single class, shall be entitled to elect Preferred
Stock Directors sufficient to cause the Preferred Stock Directors to constitute
a majority of the Board of Directors and all committees of the Board of
Directors, including the Executive Committee ("Additional Preferred Stock
Directors"). The size of the Board of Directors and all committees shall be
automatically increased in order to effect any such additional Directors. The
right of the holders of Preferred Stock to elect Additional Preferred Stock
Directors shall continue until such time as neither (i) nor (ii) above is true
for two consecutive Test Dates. The "Average Trading Price" shall mean, on any
date of determination, the average of the closing prices of the Common Stock
over the 90 day period prior to such date.
The Preferred Stock Directors elected as provided herein shall serve until
the next annual meeting or until their respective successors shall be elected
and shall qualify. Upon the termination of the right of the holders of Preferred
Stock to elect Additional Preferred Stock Directors as set forth in subparagraph
6(d) above, any Additional Preferred Stock Directors shall resign. Any Preferred
Stock Director may be removed with or without cause by, and shall not be
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removed other than by, the vote of the holders of a majority of the outstanding
shares of Preferred Stock, voting separately as a single class, at a meeting
called for such purpose or by written consent in accordance with Section 228 of
the Delaware General Corporate Law. If the office of any Preferred Stock
Director becomes vacant by reason of death, resignation, retirement,
disqualification or removal from office or otherwise, the remaining Preferred
Stock Directors, by majority vote, may elect a successor, or, alternatively, the
holders of a majority of the outstanding shares of Preferred Stock, voting
separately as a single class, at a meeting called for such purpose or by written
consent in accordance with Section 228 of the Delaware General Corporation Law
may elect a successor. Any such successor shall hold office for the unexpired
term in respect of which such vacancy occurred. Upon the occurrence of a
Termination Event, the Preferred Stock Directors then serving on the Board of
Directors may continue to hold their office for the remainder of their term.
At any time when the right to elect Preferred Stock Directors or Additional
Preferred Stock Directors provided in subparagraph 6(d) shall have vested in the
holders of Class ABI Preferred Stock and if such right shall not already have
been initially exercised, a proper officer of the Corporation shall, upon the
written request of any holder of record of Class ABI Preferred Stock then
outstanding, addressed to the Secretary of the Corporation, call a special
meeting of holders of Preferred Stock. Such meeting shall be held at the
earliest practicable date upon the notice required for annual meetings of
stockholders at the place for holding annual meetings of stockholders of the
Corporation or, if none, at a place designated by the Secretary of the
Corporation. If such meeting shall not be called by the proper officers of the
Corporation within thirty (30) days after the personal service of such written
request upon the Secretary of the Corporation, or within thirty (30) days after
mailing the same within the United States, by registered mail, addressed to the
Secretary of the Corporation at its principal office (such mailing to be
evidenced by the registry receipt issued by the postal authorities), then the
holders of record of ten percent (10%) of the shares of Class ABI Preferred
Stock then outstanding may designate in writing a holder of Class ABI Preferred
Stock to call such meeting at the expense of the Corporation, and such meeting
may be called by such person so designated upon the notice required for annual
meetings of stockholders and shall be held at the place for holding annual
meetings of the Corporation or, if none, at a place designated by such holder.
Any holder of Class ABI Preferred Stock that would be entitled to vote at such
meeting shall have access to the stock books of the Corporation for the purpose
of causing a meeting of the holders of Preferred Stock to be called pursuant to
the provisions of this paragraph and to contact the holders of Preferred Stock
with respect to matters relating to such meeting. Notwithstanding the provisions
of this paragraph, however, no such special meeting shall be called if any such
request is received less than 90 days before the date fixed for the next ensuing
annual or special meeting of stockholders.
If at any time when the holders of Class ABI Preferred Stock are entitled
to elect directors pursuant to the foregoing provisions of this paragraph 6, and
the holders of Class AA Preferred Stock and Class ABII Preferred Stock are
entitled to elect directors by reason of any provision of the Certificate of
Incorporation, as in effect at the time, or the respective Certificate of
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Designation for such Classes, and if the terms of the Class AA Preferred Stock
and Class ABII Preferred Stock so permit, the voting rights of the Preferred
Stock then entitled to vote shall be combined (with each series having a number
of votes proportional to the aggregate liquidation preference of its outstanding
shares). In such case, the holders of Preferred Stock, voting as a class, shall
elect such directors.
In addition to any vote or consent of shareholders required by law or the
Certificate of Incorporation, the consent of the holders of at least sixty-six
and two-thirds percent (66-2/3%) of the shares of Class ABI Preferred Stock at
the time outstanding, given in person or by proxy, either in writing without a
meeting or by vote at any meeting called for the purpose, shall be necessary for
effecting or validating:
Any amendment, alteration or repeal of any of the provisions of the
Certificate of Incorporation, or of the by-laws of the Corporation, which
affects adversely the voting powers, preferences and relative,
participating, optional and other special rights of the holders of shares
of Class ABI Preferred Stock; provided, however, that the amendment of the
provisions of the Certificate of Incorporation so as to authorize or
create, or to increase the authorized amount of any class of any security
convertible into any shares ranking junior to the Class ABI Preferred Stock
in the distribution of assets on any liquidation, dissolution, or winding
up of the Corporation or in the payment of dividends, shall not be deemed
to affect adversely the voting powers, preferences and relative,
participating, optional and other special rights of the holders of shares
of Class ABI Preferred Stock;
Any authorization or creation of, or increase in the authorized amount
of, any shares of any class or any security convertible into shares of any
class ranking senior to or on parity with shares of Class ABI Preferred
Stock (other than the Class AA Preferred Stock) in the distribution of
assets on any liquidation, dissolution, or winding up of the Corporation or
in the payment of dividends or otherwise;
Any increase or decrease (other than by redemption or conversion) in
the total number of authorized shares of Class ABI Preferred Stock;
Any sale, lease, assignment, transfer or other conveyance of all or
substantially all of the assets of the Corporation or any of its material
subsidiaries of which it owns fifty percent (50%) or more of the voting
power thereof, or any consolidation or merger involving the Corporation or
any of such subsidiaries (except mergers between the Corporation and any of
its subsidiaries or mergers among any of the Corporation's subsidiaries),
or any reclassification or other change of any stock, or any dissolution,
liquidation, or winding up of the Corporation or, unless the obligations of
the Corporation under an agreement are expressly conditioned upon the
requisite approval of the holders of sixty-six and two-thirds percent
(66-2/3%) of the Class ABI Preferred Stock then outstanding as provided for
herein, make any agreement or become obligated to do so;
17
<PAGE>
Except as permitted by paragraph 5 above, any purchase, redemption or
other acquisition for value (or payment into or setting aside as a sinking
fund for such purpose) of any shares of Common Stock or other capital stock
of the Corporation;
Any declaration or payment of any dividends on or declaration or
making of any other distribution, direct or indirect, on account of the
Common Stock or setting apart any sum for any such purpose unless all
accrued unpaid dividends on Class ABI Preferred Stock have been paid in
cash.
Financial Statements.
Until (i) the aggregate amount of Preferred Stock outstanding is less than
twenty percent (20%) of the maximum amount of the Preferred Stock issued to date
or (ii) the aggregate remaining investment or commitment to invest in the
Corporation by Investor (or any single transferee of Investor or related group
of transferees) is less than the greater of $10,000,000 or ten percent (10%) of
the Market Capitalization (a "Termination Event") (provided that a Termination
Event shall not occur prior to all closings being consummated under the Stock
Purchase Agreement), with the value of such investment to be based on the sum of
(x) the greater of the Liquidation Preference of the Preferred Stock and the
value of the Common Stock underlying such Preferred Stock (as measured by the
Conversion Price) then held by it, (y) the value of the Common Stock then held
by it, and (z) the value of the warrants then held by it, whether or not
required by the rules and regulations of the Commission, the Corporation shall
furnish to the holders of Class ABI Preferred Stock (i) all quarterly and annual
financial information required to be filed with the Commission on Forms 10-Q and
10-K and, with respect to the annual information only, a report thereon by the
Corporation's certified independent accountants, (ii) all current reports
required to be filed with the Commission on Form 8-K.
The Corporation shall, so long as a Termination Event has not occurred,
deliver to the holders of Class ABI Preferred Stock, forthwith upon any
executive officer of the Corporation becoming aware of any breach under this
Certificate of Designations, an Officers' Certificate specifying such breach and
what action the Corporation is taking or proposes to take with respect thereto.
Ranking.
With regard to rights to receive dividends, redemption payments and
distributions upon liquidation, dissolution or winding up of the Corporation,
the Class ABI Preferred Stock shall rank pari passu with any Parity Stock and
senior to the Common Stock and any other equity securities or other securities
into which any convertible indebtedness is convertible which are issued by the
Corporation after the date of this Certificate of Designation. The Class ABI
Preferred Stock shall not be subject to the creation of capital stock senior
with regards to the right to receive dividends, redemption payments and
distribution upon liquidation, dissolution or winding up of the
18
<PAGE>
Corporation.
Modification and Waiver.
The terms of this Certificate of Designation may be amended and the rights
hereunder may be waived with the consent of holders of at least sixty-six and
two-thirds percent (66-2/3%) of the shares of the Class ABI Preferred Stock then
outstanding.
Exclusion of Other Rights.
Except as may otherwise be required by law, the shares of
Class ABI Preferred stock shall not have any voting powers, preferences and
relative, participating, optional or other special rights, other than those
specifically set forth in this resolution (as such resolution may be amended
from time to time) and in the Certificate of Incorporation.
Headings of Subdivisions.
The headings of the various subdivisions hereof are for convenience of
reference only and shall not affect the interpretation of any of the provisions
hereof.
Severability of Provisions.
If any voting powers, preferences and relative, participating, optional and
other special rights of the Class ABI Preferred Stock and qualifications,
limitations and restrictions thereof set forth in this resolution (as such
resolution may be amended from time to time) is invalid, unlawful or incapable
of being enforced by reason of any rule of law or public policy, all other
voting powers, preferences and relative, participating, optional and other
special rights of Class ABI Preferred Stock and qualifications, limitations and
restrictions thereof set forth in this resolution (as so amended) which can be
given effect without the invalid, unlawful or unenforceable voting powers,
preferences and relative, participating, optional and other special rights of
Class ABI Preferred Stock and qualifications, limitations and restrictions
thereof shall, nevertheless, remain in full force and effect, and no voting
powers, preferences and relative, participating, optional or other special
rights of Class ABI Preferred Stock and qualifications, limitations and
restrictions thereof herein set forth shall be deemed dependent upon any other
such voting powers, preferences and relative, participating, optional or other
special rights of Class ABI Preferred Stock and qualifications, limitations and
restrictions thereof unless so expressed herein.
Record Holders.
The Corporation and the transfer agent for the Class ABI Preferred Stock
may deem and treat the record holder of any shares of Preferred Stock as the
true and lawful owner thereof for all purposes, and neither the Corporation nor
the transfer agent shall be affected by any notice to the
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<PAGE>
contrary.
Notice.
Except as may otherwise be provided for herein, all notices referred to
herein shall be in writing, and all notices hereunder shall be deemed to have
been given upon the earlier of receipt of such notice or three (3) Business Days
after the mailing of such notice if sent by registered mail (unless first-class
mail shall be specifically permitted for such notice under the terms of this
Certificate) with postage prepaid, addressed: if to the Corporation, to its
offices at 1921 Gallows Road, Suite 730, Vienna Virginia 22182 Attention:
Secretary or to an agent of the Corporation designated as permitted by this
Certificate, or, if to any holder of the Class ABI Preferred Stock, to such
holder at the address of such holder of the Class ABI Preferred Stock as listed
in the stock record books of the Corporation (which may include the records of
any transfer agent for the Class ABI Preferred Stock); or to such other address
as the Corporation or holder, as the case may be, shall have designated by
notice similarly given.
[Signature Page Follows]
20
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IN WITNESS WHEREOF, the Corporation has caused this certificate to be duly
executed by [NAME AND TITLE OF OFFICER] and attested by [NAME OF SECRETARY] its
secretary, this _____ day of ____________________, 1997.
THE FORTRESS GROUP, INC.
By: _____________________________________
Name:
Title:
ATTEST:
By: ____________________________________
Name:
Secretary:
21
<PAGE>
ANNEX C
<PAGE>
CERTIFICATE OF DESIGNATIONS, PREFERENCES
AND RELATIVE, PARTICIPATING, OPTIONAL AND
OTHER SPECIAL RIGHTS OF PREFERRED
STOCK AND QUALIFICATIONS, LIMITATIONS
AND RESTRICTIONS THEREOF
OF
CLASS ABII CONVERTIBLE
REDEEMABLE 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 Article Fourth of its
Certificate of Incorporation (the "Certificate of Incorporation") and in
accordance with the provisions of Section 151 of the General Corporation Law of
the State of Delaware, the Board of Directors by unanimous vote at a meeting of
the Board of Directors at which a quorum was acting and present adopted the
following resolution which resolution remains in full force and effect on the
date hereof:
RESOLVED, that there is hereby established a series of authorized preferred
stock having a par value of $0.01 per share, which series shall be designated as
"Class ABII Convertible Redeemable Preferred Stock" (the "Class ABII Preferred
Stock"), shall consist of _______ shares and shall have the following voting
powers, preferences and relative, participating, optional and other special
rights, and qualifications, limitations and restrictions thereof as follows:
Certain Definitions; Number of Shares and Designation.
Definitions. Unless the context otherwise requires, the terms defined in
this paragraph 1 shall have, for all purposes of this resolution, the meanings
herein specified (with terms
<PAGE>
defined in the singular having comparable meanings when used in the plural).
Additional Preferred Stock Directors. The term "Additional Preferred Stock
Directors" shall have the meaning set forth in subparagraph 6(d).
Adverse Event. The term "Adverse Event" shall have the meaning set forth in
subparagraph 6(d)
Average Trading Price. The term "Average Trading Price" shall have the
meaning set forth in subparagraph 6(d).
Board of Directors. The term "Board of Directors" shall mean the Board of
Directors of the Corporation.
Business Day. The term "Business Day" shall mean a day other than a
Saturday or Sunday or a bank holiday in New York.
Class AA Preferred Stock. The term "Class AA Preferred Stock" shall mean
the 46,670 shares of Class AA Convertible Preferred Stock, $0.01 par value per
share, of the Corporation.
Class ABI Preferred Stock. The term "Class ABI Preferred Stock" shall mean
the shares of Class ABI Convertible Redeemable Preferred Stock, $0.01 par value
per share, of the Corporation.
Class ABII Preferred Stock. The term "Class ABII Preferred Stock" shall
have the meaning set forth subparagraph 1(b).
Commission. The term "Commission" shall mean the United States Securities
and Exchange Commission.
Common Equity. The term "Common Equity" shall mean all shares now or
hereafter authorized of any class of common stock of the Corporation, including
the Common Stock, and any other stock of the Corporation, howsoever designated,
authorized after the Initial Issue Date, which has the right (subject always to
prior rights of any class or series of preferred stock) to participate in the
distribution of the assets and earnings of the Corporation without limit as to
per share amount.
Common Stock. The term "Common Stock" shall mean the common stock, par
value $0.01 per share, of the Corporation.
Comparable Group. The term "Comparable Group" shall mean Pulte Corporation,
The Ryland Group, Inc., U.S. Home Corporation, NVR Inc., Hovnanian Enterprises,
Inc., Toll
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Brothers, Inc., Washington Homes, Inc., Zaring National Corporation, M/I
Schottenstein Homes, Inc., Continental Homes Holding Corp., Engle Homes, Inc.,
Crossman Communities, Beazer Homes USA, Inc. and D.R. Horton, Inc.
Conversion Date. The term "Conversion Date" shall mean the Optional
Conversion Date and the Mandatory Conversion Date, as applicable.
Conversion Price. The term "Conversion Price" shall be equal to 95% of the
Current Market Price on the applicable Conversion Date.
Current Market Price. The term "Current Market Price" means, for a share of
Common Stock on any date, the average of Quoted Prices for the thirty (30)
consecutive Trading Days commencing forty-five (45) Trading Days before the date
in question.
Director. The term "Director" means a member of the Board of Directors.
Dividend Payment Date. The term "Dividend Payment Date" shall have the
meaning set forth in subparagraph 2(b).
Dividend Period. The term "Dividend Period" shall mean the period from, and
including, the Initial Issue Date to, but not including, the first Dividend
Payment Date and thereafter, each quarterly period from, and including, the
Dividend Payment Date to, but not including the next Dividend Payment Date.
Dividend Rate. The term "Dividend Rate" shall mean twelve percent (12%).
EBT. The term "EBT" shall mean earnings before interest expense, income
taxes and extraordinary or non-recurring items, all calculated in accordance
with generally accepted accounting principles.
Executive Committee. The term "Executive Committee" shall mean the
five-member executive committee of the Board of Directors to which substantial
operational matters regarding the Corporation shall be delegated.
Initial Issue Date. The term "Initial Issue Date" shall mean the date that
shares of Class ABII Preferred Stock are first issued by the Corporation.
Investor. The term "Investor" shall mean, at any time, Prometheus
Homebuilders LLC and any of its affiliates, including, but not limited to,
Lazard Freres Real Estate Investors, LLC and its affiliates.
Junior Stock. The term "Junior Stock" shall mean, for purposes of paragraph
2 below,
3
<PAGE>
Common Equity and any class or series of stock of the Corporation authorized
after the Initial Issue Date which is not entitled to receive any dividends in
any Dividend Period unless all dividends required to have been paid or declared
and set apart for payment on the Class AB Preferred Stock and any Parity Stock
shall have been so paid or declared and set apart for payment, and for purposes
of paragraph 3 below, shall mean Common Equity and any class or series of stock
of the Corporation authorized after the Initial Issue Date which is not entitled
to receive any assets upon liquidation, dissolution or winding up of the affairs
of the Corporation until the Class AB Preferred Stock and any Parity Stock shall
have received the entire amount to which such stock is entitled upon such
liquidation, dissolution or winding up.
Liquidation Preference. The term "Liquidation Preference" shall mean
$1000.00 per share.
Mandatory Conversion Date. The term "Mandatory Conversion Date" shall mean
the Business Day, specified in a notice to holders of Class ABII Preferred Stock
given by the Corporation in accordance with the provisions of subparagraph
4(b)(ii), upon which the Corporation shall convert all outstanding shares of
Class ABII Preferred Stock into Common Stock as set forth in such subparagraph.
Market Capitalization. The term "Market Capitalization" shall mean the
market value of the Corporation's outstanding Common Stock as measured by the
thirty (30) Trading Days preceding any measurement date.
Officers' Certificate. The term "Officers' Certificate" means a certificate
signed on behalf of the Corporation by two officers of the Corporation, one of
whom must be the principal executive officer, the principal financial officer or
the principal accounting officer of the Corporation.
Optional Conversion Date. The term "Optional Conversion Date" shall have
the meaning set forth in subparagraph 4(b)(i) below.
Non-Preferred Stock Directors. The term "Non-Preferred Stock Director"
means a Director other than a Preferred Stock Director.
Parity Stock. The term "Parity Stock" shall mean, for purposes of paragraph
2 below, (i) the Series A Preferred Stock, (ii) the Series B Preferred Stock,
(iii) the Series C Preferred Stock, (iv) the Series D Preferred Stock, (v) the
Class AA Preferred Stock, (vi) the Class ABI Preferred Stock and (vii) any class
or series of stock of the Corporation authorized after the Initial Issue Date
which is entitled to receive payment of dividends on a parity with the Class AB
II Preferred Stock, and for purposes of paragraph 3 below, shall mean (i) the
Series A Preferred Stock, (ii) the Series B Preferred Stock, (iii) the Series C
Convertible Preferred Stock, (iv) the Series D Preferred Stock, (v) the Class AA
Preferred Stock, (vi) the Class ABI Preferred Stock and (vii) any class or
series of stock of the Corporation authorized after the Initial Issue Date which
is entitled to receive assets
4
<PAGE>
upon liquidation, dissolution or winding up of the affairs of the Corporation on
a parity with the Class AB II Preferred Stock.
Preferred Stock. The term "Preferred Stock" shall mean the Class AA
Preferred Stock, the Class ABI Preferred Stock and the Class ABII Preferred
Stock.
Preferred Stock Director. The Term "Preferred Stock Director" has the
meaning set forth in subparagraph 6(d).
Quoted Price. The term "Quoted Price", with respect to the Common Stock,
shall mean the last reported sales price for Common Stock as reported by the
National Association of Securities Dealers, Inc. Automatic Quotations System,
National Market System, or, if the applicable security is listed or admitted for
trading on a securities exchange, the last reported sales price of the
applicable security on the principal exchange on which the applicable security
is listed or admitted for trading (which shall be for consolidated trading if
applicable to such exchange), or if neither so reported or listed or admitted
for trading, the last reported bid price of the applicable security in the
over-the-counter market. In the event that the Quoted Price cannot be determined
as aforesaid, the Board of Directors shall determine the Quoted Price on the
basis of such quotations as it in good faith considers appropriate. Such
determination may be challenged in good faith by a majority of holders of shares
of Class ABI Preferred Stock, and any dispute shall be resolved at the
Corporation's cost, by an investment banking firm of recognized national
standing selected by the Corporation and reasonably acceptable to such holders
of Class ABI Preferred Stock and shall be made in good faith and be conclusive
absent manifest error; provided, however, if the Quoted Price as determined by
the Board of Directors is more than 110% of the price determined by the
investment banking firm, then the costs incurred by such investment banking firm
shall be borne by the holders of Class ABI Preferred Stock who challenged such
price.
Record Date. The term "Record Date" shall mean the date designated by the
Board of Directors at the time a dividend is declared; provided, however, that
such Record Date shall not be more than thirty (30) days nor less than ten (10)
days prior to the respective Dividend Payment Date or such other date designated
by the Board of Directors for the payment of dividends.
Redemption Date. The term "Redemption Date" shall have the meaning set
forth in subparagraph 5(b) below.
Redemption Price. The term "Redemption Price" shall mean a price per share
equal to the Liquidation Preference, plus an amount equal to all cumulative
dividends accrued and unpaid on such share to the Redemption Date.
Series A Preferred Stock. The term "Series A Preferred Stock" shall mean
the Series A 11% Cumulative Convertible Preferred Stock, $0.01 par value per
share, of the Corporation.
Series B Preferred Stock. The term "Series B Preferred Stock" shall mean
the Series B Convertible Preferred Stock, $0.01 par value per share, of the
Corporation.
5
<PAGE>
Series C Preferred Stock. The term "Series C Preferred Stock" shall mean
the Series C Convertible Preferred Stock, $0.01 par value per share, of the
Corporation.
Series D Preferred Stock. The term "Series D Preferred Stock" shall mean
the Series D 6% Convertible Redeemable Preferred Stock, $0.01 par value per
share, of the Corporation.
Stock Purchase Agreement. The term "Stock Purchase Agreement" shall mean
that certain Amended and Restated Stock Purchase Agreement, dated as of
September 30, 1997, by and between the Corporation and Prometheus Homebuilders
LLC.
Termination Event. The term "Termination Event" shall have the meaning set
forth in subparagraph 7(a) below.
Test Date. The term "Test Date" shall have the meaning set forth in
subparagraph 6(d).
Trading Day. The term "Trading Day" with respect to any security shall mean
any day on which any market in which the applicable security is then traded and
in which a Quoted Price may be ascertained is open for business.
Number of Shares and Designation. _______ shares of the preferred stock,
$0.01 par value per share, of the Corporation are hereby constituted as a series
of the preferred stock designated as "Class ABII Convertible Redeemable
Preferred Stock" (the "Class ABII Preferred Stock").
Dividends.
The record holders of Class ABII Preferred Stock shall be entitled to
receive dividends, when and as declared by the Board of Directors, out of funds
legally available for payment of dividends. Such dividends shall be payable by
the Corporation in cash at the rate of twelve percent (12%) per annum of the
Liquidation Preference.
Dividends on shares of Class ABII Preferred Stock shall accrue and be
cumulative from the date of issuance of such shares. Dividends shall be payable
quarterly in arrears when and as declared by the Board of Directors on March 31,
June 30, September 30 and December 31 of each year (a "Dividend Payment Date"),
[commencing on __________________________________ , 1997]. If any Dividend
Payment Date occurs on a day that is not a Business Day, any accrued dividends
otherwise payable on such Dividend Payment Date shall be paid on the next
succeeding Business Day. The amount of dividends payable on Class ABII Preferred
Stock for each full Dividend Period shall be computed by dividing by four (4)
the annual rate per share set forth in subparagraph 2(a) above. Dividends shall
be paid to the holders of record of the Class ABII Preferred Stock as their
names shall appear on the share register of the Corporation on the Record Date
for such dividend.
6
<PAGE>
Dividends payable in any Dividend Period which is less than a full Dividend
Period in length will be computed on the basis of a ninety (90) day quarterly
period and actual days elapsed in such Dividend Period. Dividends on account of
arrears for any past Dividend Periods may be declared and paid at any time to
holders of record on the Record Date therefor. For any Dividend Period in which
dividends are not paid in full on the Dividend Payment Date first succeeding the
end of such Dividend Period, then on such Dividend Payment Date such accrued and
unpaid dividends shall be added (solely for the purpose of calculating dividends
payable on the Class ABII Preferred Stock) to the Liquidation Preference of the
Class ABII Preferred Stock effective at the beginning of the Dividend Period
succeeding the Dividend Period as to which such dividends were not paid and
shall thereafter accrue additional dividends in respect thereof at the Dividend
Rate until such accrued and unpaid dividends have been paid in full.
So long as any shares of Class ABII Preferred Stock shall be outstanding,
the Corporation shall not declare, pay or set apart for payment on any Junior
Stock any dividends whatsoever, whether in cash, property or otherwise (other
than dividends payable in shares of the class or series upon which such
dividends are declared or paid, or payable in shares of Common Stock with
respect to Junior Stock other than Common Stock, together with cash in lieu of
fractional shares), nor shall the Corporation make any distribution on any
Junior Stock, nor shall any Junior Stock be purchased, redeemed or otherwise
acquired by the Corporation or any of its subsidiaries of which it owns not less
than a majority of the outstanding voting power, nor shall any monies be paid or
made available for a sinking fund for the purchase or redemption of any Junior
Stock, unless all dividends to which the holders of Class ABII Preferred Stock
shall have been entitled for all previous Dividend Periods shall have been paid
or declared and a sum of money sufficient for the payment thereof has been set
apart.
The Corporation shall be obligated to declare and pay dividends in an
amount equal to the Dividend Rate on each Dividend Payment Date to the extent
that funds are legally available for declaration of such dividends. In the event
that full dividends are not paid or made available to the holders of all
outstanding shares of Class ABII Preferred Stock and of any Parity Stock with
respect to any Dividend Period and funds available for payment of dividends
shall be insufficient to permit payment in full to holders of all such stock of
the full preferential amounts to which they are then entitled, then the entire
amount legally available for payment of dividends shall be distributed each
Dividend Period ratably among all such holders of Class ABII Preferred Stock and
of any Parity Stock in proportion to the full amount to which they would
otherwise be respectively entitled. The dividends payable in respect of the
Class ABII Preferred Stock shall be a mandatory obligation of the Corporation,
subject only to the limitations set forth in Section 170 of the Delaware General
Corporation Law with respect to funds legally permitted to be used for the
payment of dividends (the "Legal Funds Requirement"). In stating that the
dividends payable in respect of the Class ABII Preferred Stock are a mandatory
obligation, it is the explicit intent of the Corporation to eliminate any and
all discretion of the Board of Directors with respect to the declaration and
payment of such dividends and to require the Board of Directors to declare and
pay
7
<PAGE>
such dividends as and when provided herein, subject only to compliance with the
Legal Funds Requirement.
Distributions Upon Liquidation, Dissolution or Winding Up.
In the event of any voluntary or involuntary liquidation, dissolution or
other winding up of the affairs of the Corporation before any payment or
distribution shall be made to the holders of Junior Stock, the holders of Class
ABII Preferred Stock shall be entitled to be paid out of the assets of the
Corporation in cash or property at its fair market value as determined by the
Board of Directors the Liquidation Preference per share plus an amount equal to
all dividends accrued and unpaid thereon to the date of such liquidation,
dissolution or such other winding up. Except as provided in this paragraph,
holders of Class ABII Preferred Stock shall not be entitled to any distribution
in the event of liquidation, dissolution or winding up of the affairs of the
Corporation.
If, upon any such liquidation, dissolution or other winding up of the
affairs of the Corporation the assets of the Corporation shall be insufficient
to permit the payment in full of the Liquidation Preference per share plus an
amount equal to all dividends accrued and unpaid on the Class ABII Preferred
Stock and the full liquidating payments on all Parity Stock, then the assets of
the Corporation shall be ratably distributed among the holders of Class ABII
Preferred Stock and of any Parity Stock in proportion to the full amounts to
which they would otherwise be respectively entitled if all amounts thereon were
paid in full. Neither the consolidation or merger of the Corporation into or
with another entity or entities, nor the sale, lease, transfer or conveyance of
all or substantially all of the assets of the Corporation to another corporation
or any other entity shall be deemed a liquidation, dissolution or winding up of
the affairs of the Corporation within the meaning of this paragraph 3.
Conversion Rights.
At any time, on or after [Fourth Anniversary], a holder of shares of Class
ABII Preferred Stock may convert such shares into Common Stock at any time
before the close of business on the Redemption Date (unless the Corporation
shall default in payment of the Redemption Price).
At any time, on or after [Fifth Anniversary], the Corporation, at its
option, may convert all, but not less than all of the aggregate shares of Class
ABI Preferred Stock and Class ABII Preferred Stock outstanding at such time into
Common Stock at any time before the close of business on the Redemption Date;
provided that, on the Mandatory Conversion Date, the Corporation shall have paid
all accrued dividends on all shares of Class ABII Preferred Stock then
outstanding, up to and including the most recent Dividend Payment Date (unless
the Corporation
8
<PAGE>
shall default in payment of the Conversion Price)
For the purposes of conversion, each share of Class ABII Preferred Stock
shall be valued at the Liquidation Preference plus all accrued but unpaid
dividends thereon through the relevant Conversion Date, which shall be divided
by the Conversion Price in effect on the Conversion Date to determine the number
of shares issuable upon conversion. Immediately following such conversion, the
rights of the holders of converted Class ABII Preferred Stock shall cease (in
respect of such converted stock) and the persons entitled to receive the Common
Stock upon the conversion of Class ABII Preferred Stock shall be treated for all
purposes as having become the owners of such Common Stock.
To convert Class ABII Preferred Stock pursuant to subparagraph 4(a)(i), a
holder must (i) surrender the certificate or certificates evidencing the shares
of Class ABII Preferred Stock to be converted, duly endorsed in a form
satisfactory to the Corporation, at the office of the Corporation or transfer
agent for the Class ABII Preferred Stock, (ii) notify the Corporation at such
office that he elects to convert Class ABII Preferred Stock, and the number of
shares he wishes to convert, (iii) state in writing the name or names in which
he wishes the certificate or certificates for shares of Common Stock to be
issued, and (iv) pay any transfer or similar tax if required (provided, however,
that no such payment shall be required if the Common Stock issuable upon
conversion is to be issued in the name of the converting holder of Class ABII
Preferred Stock). In the case of lost or destroyed certificates evidencing
ownership of shares of Class ABII Preferred Stock to be surrendered for
conversion, the holder shall submit proof of loss or destruction, and such
indemnity as shall be reasonably required by the Corporation. In the event that
a holder fails to notify the Corporation of the number of shares of Class ABII
Preferred Stock which he wishes to convert, he shall be deemed to have elected
to convert all shares represented by the certificate or certificates surrendered
for conversion. The date on which the holder satisfies all those requirements is
the "Optional Conversion Date." As soon as practical and in any event within
five (5) Business Days of the Optional Conversation Date, the Corporation shall
deliver through the transfer agent a certificate for the number of full shares
of Common Stock issuable upon the conversion, a check for any fractional share
and a new certificate representing the unconverted portion, if any, of the
shares of Class ABII Preferred Stock represented by the certificate or
certificates surrendered for conversion. The person in whose name the Common
Stock certificate is registered shall be treated as the stockholder of record on
and after the Optional Conversion Date. All shares of Common Stock issuable upon
conversion of the Class ABII Preferred Stock shall be fully paid and
nonassessable and shall rank pari passu with the other shares of Common Stock
outstanding from time to time. In the case of Class ABII Preferred Stock that
has been converted after any Record Date but before the next succeeding Dividend
Payment Date, dividends that are payable on such Dividend Payment Date shall be
payable on such Dividend Payment Date notwithstanding such conversion, and such
dividends shall be paid to the holder of such Class ABII Preferred Stock on
9
<PAGE>
such Record Date (and shall not constitute "accrued and unpaid dividends" for
purposes of subparagraph 4(a)). Holders of Common Stock issued upon conversion
shall not be entitled to receive any dividend payable to holders of Common Stock
as of any record time before the close of business on the Optional Conversion
Date. If a holder of Class ABII Preferred Stock converts more than one share at
a time the number of full shares of Common Stock issuable upon conversion shall
be based on the total value of all shares of Class ABII Preferred Stock
converted.
To convert Class ABI Preferred Stock and Class ABII Preferred Stock
pursuant to subparagraph 4(a)(ii), notice of any conversion shall be sent by or
on behalf of the Corporation not more than sixty (60) days nor less than thirty
(30) days prior to the Mandatory Conversion Date, by first class mail, postage
prepaid, to all holders of record of the Class ABI Preferred Stock and Class
ABII Preferred Stock at their respective last addresses as they shall appear on
the books of the Corporation; provided, however, that no failure to give such
notice or any defect therein or in the mailing thereof shall affect the validity
of the proceedings for the conversion of any shares of Class ABI Preferred Stock
and Class ABII Preferred Stock except as to the holder to whom the Corporation
has failed to give notice or except as to the holder to whom notice was
defective. In addition to any information required by law or by the applicable
rules of any exchange upon which Class ABI Preferred Stock and Class ABII
Preferred Stock may be listed or admitted to trading, such notice shall state:
(i) the Mandatory Conversion Date; (ii) the date on which the Conversion Price
shall be calculated; (iii) the number of shares of Class ABI Preferred Stock and
Class ABII Preferred Stock to be converted being all the Class ABI Preferred
Stock and Class ABII Preferred Stock held of record by all holders; (iv) the
place or places where certificates for such shares are to be surrendered for
receipt of such Common Stock issuable upon such conversion; and (v) that
dividends on the shares to be converted will cease to accrue on the Mandatory
Conversion Date. Upon the mailing of any such notices of conversion, the
Corporation shall become obligated to convert on the Mandatory Conversion Date
all of the Class ABI Preferred Stock and Class ABII Preferred Stock.
The person in whose name the Common Stock certificate is registered shall
be treated as the stockholder of record on and after the Mandatory Conversion
Date. All shares of Common Stock issuable upon conversion of the Class ABI
Preferred Stock and Class ABII Preferred Stock shall be fully paid and
nonassessable and shall rank pari passu with the other shares of Common Stock
outstanding from time to time. In the case of Class ABI Preferred Stock and
Class ABII Preferred Stock that has been converted after any Record Date but
before the next succeeding Dividend Payment Date, dividends that are payable on
such Dividend Payment Date shall be payable on such Dividend Payment Date
notwithstanding such conversion, and such dividends shall be paid to the holder
of such Class ABI Preferred Stock and Class ABII Preferred Stock on such Record
Date (and shall not constitute "accrued and unpaid dividends" for purposes of
subparagraph 4(a)). Holders of Common Stock issued upon conversion shall not be
entitled to receive any dividend payable to holders of Common Stock as of any
record time before the close of business on the Mandatory Conversion Date.
The Corporation will not issue a fractional share of Common Stock upon
conversion of Class ABII Preferred Stock. Instead the Corporation will deliver
its check for the
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<PAGE>
current market value of the fractional share. The current market value of a
fraction of a share is determined as follows: Multiply the closing market price
of a full share by the fraction. Round the result to the nearest cent. The
closing market price of a share of Common Stock is the Quoted Price of the
Common Stock on the last Trading Day prior to the Conversion Date.
If a holder converts shares of Class ABII Preferred Stock, the Corporation
shall pay any documentary, stamp or similar issue or transfer tax due on the
issue of shares of Common Stock upon the conversion. However, the holder shall
pay any such tax which is due because the shares are issued in a name other than
the holder's name.
The Corporation has reserved and shall continue to reserve out of its
authorized but unissued Common Stock or its Common Stock held in treasury enough
shares of Common Stock to permit the conversion of the Class ABII Preferred
Stock in full as determined in good faith by the Board of Directors from time to
time. All shares of Common Stock which may be issued upon conversion of Class
ABII Preferred Stock shall be fully paid and nonassessable. The Corporation will
endeavor to comply with all securities laws regulating the offer and delivery of
shares of Common Stock upon conversion of Class ABII Preferred Stock and will
endeavor to list such shares on each national securities exchange on which the
Common Stock is listed.
The Corporation from time to time may reduce the Conversion Price by any
amount for any period of time if the period is at least twenty (20) Business
Days and if the reduction is irrevocable during the period, but in no event may
the Conversion Price be less than the par value of a share of Common Stock.
Whenever the Conversion Price is reduced, the Corporation shall mail to holders
of Class ABII Preferred Stock a notice of the reduction. The Corporation shall
mail, first class, postage prepaid, the notice at least 15 days before the date
the reduced conversion price takes effect. The notice shall state the reduced
conversion price and the period it will be in effect.
If the Corporation consolidates or merges with or into, transfers or leases
all or substantially all its assets to any person, upon consummation of such
transaction Class ABII Preferred Stock shall automatically become convertible
into the kind and amount of securities, cash or other assets which the holder of
Class ABII Preferred Stock would have owned immediately after the consolidation,
merger, transfer or lease if such holder had converted Class ABII Preferred
Stock immediately before the effective date of the transaction. Appropriate
adjustment (as determined by the Board of Directors) shall be made in the
application of the provisions herein set forth with respect to the rights and
interests thereafter of the holders of Class ABII Preferred Stock, to the end
that the provisions set forth herein (including provisions with respect to
changes in and other adjustment of the Conversion Price) shall thereafter be
applicable, as nearly as reasonably may be, in relation to any shares of stock
or other securities or property thereafter deliverable upon the conversion of
Class ABII Preferred Stock.
In any case in which this paragraph 4 shall require that an adjustment as a
result of any event become effective from and after a record date, the
Corporation may elect to defer until after the occurrence of such event (i) the
issuance to the holder of any shares of Class ABII Preferred Stock converted
after such record date and before the occurrence of such event of the additional
shares of Common Stock issuable upon such conversion over and above the shares
issuable on the basis of the Conversion Price in effect immediately prior to
adjustment and (ii) a
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<PAGE>
check for any remaining fractional shares of Common Stock as provided in
subparagraph 4(c) above.
Except as provided in the immediately following sentence, any determination
that the Corporation or its Board of Directors must make pursuant to this
paragraph 4 shall be conclusive. Whenever the Corporation or its Board of
Directors shall be required to make a determination under this paragraph 4, such
determination shall be made in good faith and may be challenged in good faith by
a majority of the holders of Class ABII Preferred Stock, and any dispute shall
be resolved, at the Corporation's expense, by an investment banking firm of
recognized national standing selected by the Corporation and acceptable to such
holders of Class ABII Preferred Stock; provided, however, if the Conversion
Price as determined by the Board of Directors is more than 110% of the price
determined by the investment banking firm, then the costs incurred by such
investment banking firm shall be borne by the holders of Class ABII Preferred
Stock who challenged such price.
All shares of Class ABII Preferred Stock converted pursuant to this
paragraph 4 shall be retired and shall be restored to the status of authorized
and unissued shares of preferred stock, without designation as to series and may
(subject to any restriction imposed on the Company by its Certificate of
Incorporation,any certificate of designations of Preferred Stock, its bylaws or
the Stock Purchase Agreement or any documents entered into pursuant thereto)
thereafter be reissued as shares of any series of preferred stock other than
Class ABII Preferred Stock.
Redemption by the Corporation.
The Class ABI Preferred Stock and the Class ABII Preferred Stock, together
may be redeemed, in whole, but not in part, at any time on or after [Fifth
Anniversary] at the option of the Corporation at the Redemption Price. If the
Redemption Date is on or after a Record Date and on or before the related
Dividend Payment Date, the dividend payable shall be paid to the holder in whose
name the Class ABI Preferred Stock is registered at the close of business on
such record date.
Notice of any redemption shall be sent by or on behalf of the Corporation
not more than sixty (60) days nor less than thirty (30) days prior to the
Redemption Date, by first class mail, postage prepaid, to all holders of record
of the Class ABI Preferred Stock and the Class ABII Preferred Stock at their
respective last addresses as they shall appear on the books of the Corporation;
provided, however, that no failure to give such notice or any defect therein or
in the mailing thereof shall affect the validity of the proceedings for the
redemption of any shares of Class ABI Preferred Stock or Class ABII Preferred
Stock except as to the holder to whom the Corporation has failed to give notice
or except as to the holder to whom notice was defective. In addition to any
information required by law or by the applicable rules of any exchange upon
which Class ABI Preferred Stock and Class ABII Preferred Stock may be listed or
admitted to trading, such notice shall state: (i) the Redemption Date; (ii) the
Redemption Price; (iii) the number of shares of Class ABI Preferred Stock and
Class ABII Preferred Stock to be redeemed; (iv) the place or places where
certificates for such shares are to be surrendered for payment of the Redemption
Price; and (v) that
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<PAGE>
dividends on the shares to be redeemed will cease to accrue on the Redemption
Date (vi) the Conversion Price; (vii) that Class ABI Preferred Stock and Class
ABII Preferred Stock called for redemption may be converted at any time before
the close of business on the Redemption Date; and (viii) that holders of Class
ABI Preferred Stock and Class ABII Preferred Stock must satisfy the requirements
of subparagraph 4(b) above if such holders desire to convert such shares. Upon
the mailing of any such notices of redemption, the Corporation shall become
obligated to redeem at the time of redemption specified thereon all the Class
ABI Preferred Stock and the Class ABII Preferred Stock.
If notice has been mailed in accordance with subparagraph 5(b) above and
provided that on or before the Redemption Date specified in such notice, all
funds necessary for such redemption shall have been set aside by the
Corporation, separate and apart from its other funds in trust for the pro rata
benefit of the holders of the shares so called for redemption, so as to be, and
to continue to be available therefor, then, from and after the Redemption Date,
dividends on the shares of the Class ABII Preferred Stock so called for
redemption shall cease to accrue, and said shares shall no longer be deemed to
be outstanding and shall not have the status of shares of Class ABII Preferred
Stock, and all rights of the holders thereof as shareholders of the Corporation
(except the right to receive from the Corporation the Redemption Price) shall
cease. Upon surrender, in accordance with said notice, of the certificates for
any shares so redeemed (properly endorsed or assigned for transfer, if the
Corporation shall so require and the notice shall so state), such shares shall
be redeemed by the Corporation at the Redemption Price.
Any funds deposited with a bank or trust company for the purpose of
redeeming Class ABII Preferred Stock shall be irrevocable except that:
the Corporation shall be entitled to receive from such bank or trust
company the interest or other earnings, if any, earned on any money so deposited
in trust, and the holders of any shares redeemed shall have no claim to such
interest or other earnings; and
any balance of monies so deposited by the Corporation and unclaimed by the
holders of the Class ABII Preferred Stock entitled thereto at the expiration of
two (2) years from the applicable Redemption Date shall be repaid, together with
any interest or other earnings earned thereon, to the Corporation, and after any
such repayment, the holders of the shares entitled to the funds so repaid to the
Corporation shall look only to the Corporation for payment without interest or
other earnings.
No Class ABII Preferred Stock may be redeemed except with funds legally
available for the payment of the Redemption Price.
All shares of Class ABII Preferred Stock redeemed pursuant to this
paragraph 5 shall be retired and shall be restored to the status of authorized
and unissued shares of preferred stock, without designation as to series and may
(subject to any restriction imposed on the
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<PAGE>
Corporation by its Certificate of Incorporation, any certificate of designations
of Prefered Stock, its bylaws or the Stock Purchase Agreement or any document
entered tinot pursuant thereto) thereafter be reissued as shares of any series
of preferred stock other than shares of Class ABII Preferred Stock.
Voting Rights.
The holders of record of shares of Class ABII Preferred Stock shall not be
entitled to any voting rights except as hereinafter provided in this paragraph 6
or as otherwise provided by law.
So long as any shares of the Class ABII Preferred Stock remain outstanding,
each share of Class ABII Preferred Stock shall entitle the holder thereof to
vote on all matters voted on by holders of Common Stock, voting together with
the Common Stock as a single class (together with all other classes and series
of stock of the Corporation that are entitled to vote as a single class with the
Common Stock) at all meetings of the stockholders of the Corporation other than
in respect of the election of Directors (provided that the Class ABII shall vote
in the election of Directors if (i) the price of the Common Stock (as measured
by the Current Market Price) is less than $3.00 per share (such amount to be
adjusted for stock splits and recombinations as appropriate) and (ii) the holder
provides notice to the Company that it elects to obtain such voting right). In
any vote with respect to which the Class ABII Preferred Stock shall vote with
the holders of Common Stock as a single class together with all other classes
and series of stock of the Corporation that are entitled to vote as a single
class with the Common Stock, each share of Class ABII Preferred Stock shall
entitle the holder thereof to cast the number of votes equal to the number of
votes which could be cast in such vote by a holder of the number of shares of
Common Stock into which such share of Class ABII Preferred Stock would be
convertible if the Conversion Price were 100% of the closing trading price of
the Common Stock on the date immediately preceding the Initial Issue Date of the
Class AA Preferred Stock. Such voting right of the holders of the Class ABII
Preferred Stock may be exercised at any annual meeting of stockholders, any
special meeting of stockholders, or by written consent of the minimum number of
shares required to take such action pursuant to Section 228 of the Delaware
General Corporation Law.
On any matter on which the holders of Class ABII Preferred Stock are
entitled by law or under the Certificate of Incorporation to vote separately as
a class, each such holder shall be entitled to one vote for each share held, and
such matter shall be determined by a majority of the votes cast unless Delaware
law or this Certificate of Designations requires approval by a higher
percentage.
Until a Termination Event, the number of Directors comprising the Board of
Directors shall be equal to fifteen (15) and the holders of Preferred Stock,
voting separately as a single class, shall have the exclusive right to elect
three (3) Directors (each such Director, a "Preferred Stock Director") at any
special meeting of stockholders called for such purpose, at each annual meeting
of stockholders and in any written consent of stockholders pursuant to Section
228
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of the Delaware General Corporation Law. Any increases in the size of the Board
of Directors will require a proportional increase in the number of Preferred
Stock Directors (rounded up to the next whole number such that the Preferred
Stock Directors represent not less than twenty percent (20%) of the votes of the
Board of Directors). A proportionate number (rounded up to the next whole
number, but not less than one) of Preferred Stock Directors shall serve on each
committee of the Board of Directors (provided that with respect to the Executive
Committee, the Executive Committee shall consist of five members of which two
members shall be Preferred Stock Directors), and at least one Preferred Stock
Director shall serve on the board or other governing body of each of the
Corporation's subsidiaries and affiliates, other than operational home building
companies. In the event (an "Adverse Event") that on any date following the
Initial Issue Date that is 60 days after the end of a fiscal quarter of the
Corporation (a "Test Date") both (i) the Average Trading Price of the Common
Stock is below $4.375 per share (provided that such amount shall be adjusted for
reverse stock splits, recapitalizations and other similar events) and (ii) (x)
the percentage change in the EBT per share of the Corporation (of the Common
Stock issued and outstanding) for the most recent two fiscal quarters as
measured against the same two fiscal quarters from the prior fiscal year is less
than (y) the percentage change in the EBT per share (of the common stock issued
and outstanding) of the Comparable Group for the same period as compared against
the EBT per share (calculated on the same basis) of the Comparable Group during
the same period in the prior fiscal year then the holders of Preferred Stock,
voting separately as a single class, shall be entitled to elect Preferred Stock
Directors sufficient to cause the Preferred Stock Directors to constitute a
majority of the Board of Directors and all committees of the Board of Directors,
including the Executive Committee ("Additional Preferred Stock Directors"). The
size of the Board of Directors and all committees shall be automatically
increased in order to effect any such additional Directors. The right of the
holders of Preferred Stock to elect Additional Preferred Stock Directors shall
continue until such time as neither (i) nor (ii) above is true for two
consecutive Test Dates. The "Average Trading Price" shall mean, on any date of
determination, the average of the closing prices of the Common Stock over the 90
day period prior to such date.
The Preferred Stock Directors elected as provided herein shall serve until
the next annual meeting or until their respective successors shall be elected
and shall qualify. Upon the termination of the right of the holders of Preferred
Stock to elect Additional Preferred Stock Directors as set forth in subparagraph
6(d) above, any Additional Preferred Stock Directors shall resign. Any Preferred
Stock Director may be removed with or without cause by, and shall not be removed
other than by, the vote of the holders of a majority of the outstanding shares
of Preferred Stock, voting separately as a single class, at a meeting called for
such purpose or by written consent in accordance with Section 228 of the
Delaware General Corporate Law. If the office of any Preferred Stock Director
becomes vacant by reason of death, resignation, retirement, disqualification or
removal from office or otherwise, the remaining Preferred Stock Directors, by
majority vote, may elect a successor, or, alternatively, the holders of a
majority of the outstanding shares of Preferred Stock, voting separately as a
single class, at a meeting called for such purpose or by written consent in
accordance with Section 228 of the Delaware General Corporation Law may elect a
successor.
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<PAGE>
Any such successor shall hold office for the unexpired term in respect of which
such vacancy occurred. Upon the occurrence of a Termination Event, the Preferred
Stock Directors then serving on the Board of Directors may continue to hold
their office for the remainder of their term.
At any time when the right to elect Preferred Stock Directors or Additional
Preferred Stock Directors provided in subparagraph 6(d) shall have vested in the
holders of Class ABII Preferred Stock and if such right shall not already have
been initially exercised, a proper officer of the Corporation shall, upon the
written request of any holder of record of Class ABII Preferred Stock then
outstanding, addressed to the Secretary of the Corporation, call a special
meeting of holders of Preferred Stock. Such meeting shall be held at the
earliest practicable date upon the notice required for annual meetings of
stockholders at the place for holding annual meetings of stockholders of the
Corporation or, if none, at a place designated by the Secretary of the
Corporation. If such meeting shall not be called by the proper officers of the
Corporation within thirty (30) days after the personal service of such written
request upon the Secretary of the Corporation, or within thirty (30) days after
mailing the same within the United States, by registered mail, addressed to the
Secretary of the Corporation at its principal office (such mailing to be
evidenced by the registry receipt issued by the postal authorities), then the
holders of record of ten percent (10%) of the shares of Class ABII Preferred
Stock then outstanding may designate in writing a holder of Class ABII Preferred
Stock to call such meeting at the expense of the Corporation, and such meeting
may be called by such person so designated upon the notice required for annual
meetings of stockholders and shall be held at the place for holding annual
meetings of the Corporation or, if none, at a place designated by such holder.
Any holder of Class ABII Preferred Stock that would be entitled to vote at such
meeting shall have access to the stock books of the Corporation for the purpose
of causing a meeting of the holders of Preferred Stock to be called pursuant to
the provisions of this paragraph and to contact the holders of Preferred Stock
with respect to matters relating to such meeting. Notwithstanding the provisions
of this paragraph, however, no such special meeting shall be called if any such
request is received less than 90 days before the date fixed for the next ensuing
annual or special meeting of stockholders.
If at any time when the holders of Class ABII Preferred Stock are entitled
to elect directors pursuant to the foregoing provisions of this paragraph 6, and
the holders of Class AA Preferred Stock and Class ABI Preferred Stock are
entitled to elect directors by reason of any provision of the Certificate of
Incorporation, as in effect at the time, or the respective Certificate of
Designation for such Classes, and if the terms of the Class AA Preferred Stock
and Class ABI Preferred Stock so permit, the voting rights of the Preferred
Stock then entitled to vote shall be combined (with each series having a number
of votes proportional to the aggregate liquidation preference of its outstanding
shares). In such case, the holders of Preferred Stock, voting as a class, shall
elect such directors.
In addition to any vote or consent of shareholders required by law or the
Certificate of Incorporation, the consent of the holders of at least sixty-six
and two-thirds percent
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<PAGE>
(66-2/3%) of the shares of Class ABII Preferred Stock at the time outstanding,
given in person or by proxy, either in writing without a meeting or by vote at
any meeting called for the purpose, shall be necessary for effecting or
validating:
Any amendment, alteration or repeal of any of the provisions of the
Certificate of Incorporation, or of the by-laws of the Corporation, which
affects adversely the voting powers, preferences and relative, participating,
optional and other special rights of the holders of shares of Class ABII
Preferred Stock; provided, however, that the amendment of the provisions of the
Certificate of Incorporation so as to authorize or create, or to increase the
authorized amount of any class of any security convertible into any shares
ranking junior to the Class ABII Preferred Stock in the distribution of assets
on any liquidation, dissolution, or winding up of the Corporation or in the
payment of dividends, shall not be deemed to affect adversely the voting powers,
preferences and relative, participating, optional and other special rights of
the holders of shares of Class ABII Preferred Stock;
Any authorization or creation of, or increase in the authorized amount of,
any shares of any class or any security convertible into shares of any class
ranking senior to or on parity with shares of Class ABII Preferred Stock (other
than the Class AA Preferred Stock) in the distribution of assets on any
liquidation, dissolution, or winding up of the Corporation or in the payment of
dividends or otherwise;
Any increase or decrease (other than by redemption or conversion) in the
total number of authorized shares of Class ABII Preferred Stock;
Any sale, lease, assignment, transfer or other conveyance of all or
substantially all of the assets of the Corporation or any of its material
subsidiaries of which it owns fifty percent (50%) or more of the voting power
thereof, or any consolidation or merger involving the Corporation or any of such
subsidiaries (except mergers between the Corporation and any of its subsidiaries
or mergers among any of the Corporation's subsidiaries), or any reclassification
or other change of any stock, or any dissolution, liquidation, or winding up of
the Corporation or, unless the obligations of the Corporation under an agreement
are expressly conditioned upon the requisite approval of the holders of
sixty-six and two-thirds percent (66-2/3%) of the Class ABII Preferred Stock
then outstanding as provided for herein, make any agreement or become obligated
to do so;
Except as permitted by paragraph 5 above, any purchase, redemption or other
acquisition for value (or payment into or setting aside as a sinking fund for
such purpose) of any shares of Common Stock or other capital stock of the
Corporation;
Any declaration or payment of any dividends on or declaration or making of
any other distribution, direct or indirect, on account of the Common Stock or
setting apart any sum for any such purpose unless all accrued unpaid dividends
on Class ABII Preferred Stock have been paid in cash.
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<PAGE>
Financial Statements.
Until (i) the aggregate amount of Preferred Stock outstanding is less than
twenty percent (20%) of the maximum amount of the Preferred Stock issued to date
or (ii) the aggregate remaining investment or commitment to invest in the
Corporation by Investor (or any single transferee of Investor or related group
of transferees) is less than the greater of $10,000,000 or ten percent (10%) of
the Market Capitalization (a "Termination Event") (provided that a Termination
Event shall not occur prior to all closings being consummated under the Stock
Purchase Agreement), with the value of such investment to be based on the sum of
(x) the greater of the Liquidation Preference of the Preferred Stock and the
value of the Common Stock underlying such Preferred Stock (as measured by the
Conversion Price) then held by it, (y) the value of the Common Stock then held
by it, and (z) the value of the warrants then held by it, whether or not
required by the rules and regulations of the Commission, the Corporation shall
furnish to the holders of Class ABII Preferred Stock (i) all quarterly and
annual financial information required to be filed with the Commission on Forms
10-Q and 10-K and, with respect to the annual information only, a report thereon
by the Corporation's certified independent accountants, (ii) all current reports
required to be filed with the Commission on Form 8-K.
The Corporation shall, so long as a Termination Event has not occurred,
deliver to the holders of Class ABII Preferred Stock, forthwith upon any
executive officer of the Corporation becoming aware of any breach under this
Certificate of Designations, an Officers' Certificate specifying such breach and
what action the Corporation is taking or proposes to take with respect thereto.
Ranking.
With regard to rights to receive dividends, redemption payments and
distributions upon liquidation, dissolution or winding up of the Corporation,
the Class ABII Preferred Stock shall rank pari passu with any Parity Stock and
senior to the Common Stock and any other equity securities or other securities
into which any convertible indebtedness is convertible which are issued by the
Corporation after the date of this Certificate of Designation. The Class ABII
Preferred Stock shall not be subject to the creation of capital stock senior
with regards to the right to receive dividends, redemption payments and
distribution upon liquidation, dissolution or winding up of the Corporation.
Modification and Waiver.
The terms of this Certificate of Designation may be amended and the rights
hereunder may be waived with the consent of holders of at least sixty-six and
two-thirds percent (66 2/3%) of
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the shares of the Class ABII Preferred Stock then outstanding.
Exclusion of Other Rights.
Except as may otherwise be required by law, the shares of Class ABII
Preferred Stock shall not have any voting powers, preferences and relative,
participating, optional or other special rights, other than those specifically
set forth in this resolution (as such resolution may be amended from time to
time) and in the Certificate of Incorporation.
Headings of Subdivisions.
The headings of the various subdivisions hereof are for convenience of
reference only and shall not affect the interpretation of any of the provisions
hereof.
Severability of Provisions.
If any voting powers, preferences and relative, participating, optional and
other special rights of the Class ABII Preferred Stock and qualifications,
limitations and restrictions thereof set forth in this resolution (as such
resolution may be amended from time to time) is invalid, unlawful or incapable
of being enforced by reason of any rule of law or public policy, all other
voting powers, preferences and relative, participating, optional and other
special rights of Class ABII Preferred Stock and qualifications, limitations and
restrictions thereof set forth in this resolution (as so amended) which can be
given effect without the invalid, unlawful or unenforceable voting powers,
preferences and relative, participating, optional and other special rights of
Class ABII Preferred Stock and qualifications, limitations and restrictions
thereof shall, nevertheless, remain in full force and effect, and no voting
powers, preferences and relative, participating, optional or other special
rights of Class ABII Preferred Stock and qualifications, limitations and
restrictions thereof herein set forth shall be deemed dependent upon any other
such voting powers, preferences and relative, participating, optional or other
special rights of Class ABII Preferred Stock and qualifications, limitations and
restrictions thereof unless so expressed herein.
Record Holders.
The Corporation and the transfer agent for the Class ABII Preferred Stock
may deem and treat the record holder of any shares of Preferred Stock as the
true and lawful owner thereof for all purposes, and neither the Corporation nor
the transfer agent shall be affected by any notice to the contrary.
Notice.
Except as may otherwise be provided for herein, all notices referred to
herein shall be in writing, and all notices hereunder shall be deemed to have
been given upon the earlier of receipt of such notice or three (3) Business Days
after the mailing of such notice if sent by registered
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mail (unless first-class mail shall be specifically permitted for such notice
under the terms of this Certificate) with postage prepaid, addressed: if to the
Corporation, to its offices at 1921 Gallows Road, Suite 730, Vienna Virginia
22182 Attention: Secretary or to an agent of the Corporation designated as
permitted by this Certificate, or, if to any holder of the Class ABII Preferred
Stock, to such holder at the address of such holder of the Class ABII Preferred
Stock as listed in the stock record books of the Corporation (which may include
the records of any transfer agent for the Class ABII Preferred Stock); or to
such other address as the Corporation or holder, as the case may be, shall have
designated by notice similarly given.
[Signature Page Follows]
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IN WITNESS WHEREOF, the Corporation has caused this certificate to be duly
executed by [NAME AND TITLE OF OFFICER] and attested by [NAME OF SECRETARY] its
secretary, this _____ day of ____________________, 1997.
THE FORTRESS GROUP, INC.
By:
----------------------------------
Name:
Title:
ATTEST:
By: ------------------------------
Name:
Secretary:
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ANNEX D
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
THE FORTRESS GROUP, INC.
THE FORTRESS GROUP, INC., a corporation duly organized and existing under
the General Corporation Law of the State of Delaware (the "Corporation"), does
hereby certify that:
1. The Certificate of Incorporation of the Corporation is hereby amended by
adding a new Article, Article ELEVENTH, which reads in its entirety as follows:
ELEVENTH: (A) In addition to any other vote required by applicable law and
notwithstanding the fact that a lesser or no vote of the Board of Directors
of the Corporation or the Executive Committee of the Board of Directors of
the Corporation is required under applicable law and notwithstanding
Article SIXTH hereof, the Corporation shall not, and shall not permit any
of its subsidiaries to, without either (A) the affirmative vote of over
eighty-one percent (81%) of the members of the entire Board of Directors of
the Corporation or (B) the affirmative vote of over eighty-one percent
(81%) of the members of the entire Executive Committee:
(i) purchase, sell, license, assign, transfer, convey or otherwise acquire
or dispose of any assets, securities, or businesses, unless such
transaction is provided for in the annual budget or is in the ordinary
course of business and does not involve the acquisition or disposition
of homebuilding operations or any homebuilding company or entity.
<PAGE>
(ii) split (including any reverse split), combine or reclassify any shares
of its capital stock; adopt resolutions authorizing a liquidation,
dissolution, merger, consolidation, restructuring, recapitalization,
or other reorganization of the capital structure of the Corporation or
any of its subsidiaries; or make any other material changes in its
capital structure;
(iii) enter into any new line of business other than the business engaged
in by the Corporation and its subsidiaries on the date hereof, cease
to be engaged in any material line of business engaged in by the
Corporation and its subsidiaries on the date hereof or materially
change the nature of the business engaged in by any of them on the
date hereof;
(iv) file any petition seeking relief, or consent to the institution of any
proceeding against itself seeking to adjudicate it a bankrupt or
insolvent, under any law relating to bankruptcy, insolvency or
reorganization or relief of debtors;
(v) amend or otherwise alter the Corporation's or any subsidiary's
certificate of incorporation or adopt, alter, amend or repeal any
bylaw of the Corporation (other than the adoption, alteration,
amendment or repeal of any bylaw of the Corporation by the
stockholders of the Corporation) or any subsidiary of the Corporation;
(vi) declare or pay any dividend or make any other distribution with
respect to its capital stock, other than dividends paid by any
subsidiary to the Corporation or another subsidiary in the ordinary
and usual course of business or to the holders of the Investor
Preferred Stock (as hereinafter defined) or in respect of other
outstanding preferred stock of the Corporation on the date hereof;
(vii) issue or sell (whether through the issuance or granting of options,
warrants, commitments, subscriptions, rights to purchase, or
otherwise) any of its capital stock (other than upon conversion of the
Investor Preferred Stock or other outstanding convertible securities
of the Corporation, or upon exercise of outstanding warrants or stock
options to purchase the Corporation's common stock) or deliver other
securities other than as contemplated in that certain Amended and
2
<PAGE>
Restated Stockholders Agreement (the "Stockholders Agreement"),
dated as of September 30, 1997, by and among Prometheus Homebuilders
LLC (the "Purchaser"), the Corporation and certain stockholders
named therein, or purchase or otherwise acquire any of its capital
stock, employee or director stock options or debt securities; or
(viii) agree to do any of the foregoing.
(B) Notwithstanding any provision of law which might otherwise permit a
lesser vote or no vote, but in addition to any affirmative vote of the
holders of any particular class or series of the stock required by law or
this Certificate of Incorporation, the affirmative vote of the holders of
at least a majority in voting power of the then outstanding shares of Class
AA Convertible Preferred Stock of the Corporation, Class ABI Convertible
Preferred Stock of the Corporation and Class ABII Convertible Redeemable
Preferred Stock of the Corporation (collectively, the "Investor Preferred
Stock"), voting together as a single class, shall be required in order for
the stockholders of the Corporation to adopt, alter, amend or repeal any
bylaw of the Corporation.
(C) Notwithstanding anything in this Article ELEVENTH to the contrary, the
terms and provisions of Sections (A) and (B) of this Article ELEVENTH shall
only be in effect until such time as the Purchaser provides written notice
to the Secretary of the Corporation that it elects to have said Sections
(A) and (B) of this Article ELEVENTH to be of no further force and effect
pursuant to Section 3.2(d) of the Stockholders Agreement, at which time
Sections (A) and (B) of this Article ELEVENTH shall be of no further force
and effect.
2. The foregoing amendment was duly adopted in accordance with the
provisions of Sections 242 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, THE FORTRESS GROUP, INC. has caused this Certificate to
be executed by its duly authorized officer on this __ day of _______, 1997.
3
<PAGE>
THE FORTRESS GROUP, INC.
By:____________________________________
Name:
Office:
4
<PAGE>
THE FORTRESS GROUP, INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS OF THE FORTRESS GROUP
SPECIAL MEETING OF STOCKHOLDERS
_________, 1997
James J. Martell, Jr. and J. Marshall Coleman, and each of them, are hereby
authorized to represent and vote the stock of the undersigned at the Special
Meeting of Stockholders to be held ___________, 1997 at _______________, and at
any adjournments thereof.
The shares represented by this proxy will be voted in accordance with
specifications made herein. If no specifications are made, this proxy will be
voted FOR proposals 1 and 2 on the reverse side hereof.
PLEASE VOTE, DATE AND SIGN ON REVERSE
AND RETURN PROMPTLY IN THE ENCLOSED
ENVELOPE
Please sign exactly as your name appears
on this proxy. When signing as attorney,
executor, administrator, trustee, or
guardian, please give your full title.
If shares are held jointly, each holder
should sign.
<PAGE>
<TABLE>
<S> <C> <C> <C>
1. Proposal to approve certain investment transactions For Against Withhold
involving the purchase by an affiliate of Lazard Freres |_| |_| |_|
Real Estate Investors, LLC of up to $100,000,000 of the
Company's newly issued convertible preferred stock and
debt instruments convertible into common stock (which
debt, if any, would be in lieu of a portion of the
preferred stock), and amendments to the Company's
certificate of incorporation which, among other things,
would increase the Company's authorized common stock
and would require the affirmative vote of more than 81%
of the Company's board of directors or executive
committee for the Company to engage in certain
significant acts or transactions
2. Proposal to authorize an increase in the common stock For Against Withhold
subject to the Company's 1996 Stock Incentive Plan |_| |_| |_|
3. In their discretion, the proxies are authorized to vote For Against Withhold
upon any other business that may properly come before |_| |_| |_|
the meeting.
</TABLE>
The undersigned hereby acknowledges receipt of the notice of said Special
Meeting of Shareholders and the proxy statement relating thereto.
The undersigned hereby revokes any proxy or proxies heretofore given to vote
such stock, and hereby ratifies and confirms all that said attorneys and
proxies, or other substitutes, may do by virtue hereof. If only one attorney and
proxy shall be present and acting, then that one shall have and may exercise all
the powers of said attorneys and proxies.
The signature of shareholder should correspond exactly with the name stenciled
hereon. Joint owners should sign individually. When signing as attorney,
executor, administrator, trustee or guardian, please give your full title as
such.
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Shareholder Sign Here Date Co-Owner Sign here Date
