<PAGE>
-----------------------------
OMB APPROVAL
-----------------------------
OMB NUMBER: 3235-0145
EXPIRES: OCTOBER 31, 1997
ESTIMATED AVERAGE BURDEN
HOURS PER RESPONSE 14.90
-----------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 2
TO
SCHEDULE 13D
UNDER THE SECURITIES EXCHANGE ACT OF 1934
THE FORTRESS GROUP, INC.
- --------------------------------------------------------------------------------
(NAME OF ISSUER)
Common Stock, par value $0.01 per share
- --------------------------------------------------------------------------------
(TITLE OF CLASS OF SECURITIES)
34956K108
---------
(CUSIP NUMBER)
Murry N. Gunty
Prometheus Homebuilders LLC
LF Strategic Realty Investors II L.P.
30 Rockefeller Plaza, 63rd Floor
New York, NY 10020
(212) 632-6000
with a copy to:
R. Ronald Hopkinson, Esq.
Latham & Watkins
885 Third Avenue
New York, New York 10022 (212) 906-1200
- --------------------------------------------------------------------------------
(Name, Address and Telephone Number of Person Authorized to Receive Notices and
Communications)
February 19, 1998
-----------------------
(Date of Event which Requires Filing of this Statement)
If the filing person has previously filed a statement on Schedule 13G to report
the acquisition which is the subject of this Schedule 13D, and is filing this
schedule because of Rule 13d-1(b)(3) or (4), check the following box [ ].
Check the following box if a fee is being paid with the statement [ ]. (A fee is
not required only if the reporting person: (1) has a previous statement on file
reporting beneficial ownership of more than five percent of the class of
securities described in Item 1; and (2) has filed no amendment subsequent
thereto reporting beneficial ownership of five percent or less of such class.)
(See Rule 13d-7.)
Note: Six copies of this statement, including all exhibits, should be filed
with the Commission. See Rule 13d-1(a) for other parties to whom copies are to
be sent.
*The remainder of this cover page shall be filled out for a reporting person's
initial filing on this form with respect to the subject class of securities, and
for any subsequent amendment containing information which would alter
disclosures provided in a prior cover page.
The information required on the remainder of this cover page shall not be deemed
to be "filed" for the purpose of Section 18 of the Securities Exchange Act of
1934 ("Act") or otherwise subject to the liabilities of that section of the Act
but shall be subject to all other provisions of the Act (however, see the
Notes).
1
<PAGE>
SCHEDULE 13D
<TABLE>
<CAPTION>
CUSIP NO. 34956K108 PAGE 2 OF 13
- ------------------------------ -----------------------
<S> <C> <C>
1 NAME OF REPORTING PERSON
S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
Prometheus Homebuilders LLC
- --------------------------------------------------------------------------------
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a)[ ]
(b)[X]
- --------------------------------------------------------------------------------
3 SEC USE ONLY
- --------------------------------------------------------------------------------
4 SOURCE OF FUNDS
AF (See Item 3)
- --------------------------------------------------------------------------------
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS
IS REQUIRED PURSUANT TO ITEMS 2(d) or 2(e) [ ]
- --------------------------------------------------------------------------------
6 CITIZENSHIP OR PLACE OF ORGANIZATION
Delaware
- --------------------------------------------------------------------------------
NUMBER OF 7 SOLE VOTING POWER
SHARES
BENEFICIALLY 7,545,512/1/
OWNED BY -------------------------------------------------------------
EACH
REPORTING 8 SHARED VOTING POWER
PERSON
WITH None
-------------------------------------------------------------
9 SOLE DISPOSITIVE POWER
7,545,512
-------------------------------------------------------------
10 SHARED DISPOSITIVE POWER
None
- -------------------------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
7,545,512
- -------------------------------------------------------------------------------
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES* [x]
- -------------------------------------------------------------------------------
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
41.3%
- -------------------------------------------------------------------------------
14 TYPE OF REPORTING PERSON*
OO (limited liability company)
- -------------------------------------------------------------------------------
</TABLE>
*SEE INSTRUCTIONS BEFORE FILLING OUT!
INCLUDE BOTH SIDES OF THE COVER PAGE, RESPONSES TO ITEMS 1-7
(INCLUDING EXHIBITS) OF THE SCHEDULE, AND THE SIGNATURE ATTESTATION.
- -----------------------
1. Including 6,666,667 shares of Common Stock receivable upon conversion of
the Class AA Preferred Stock (as defined in the preamble) (See Item 5).
<PAGE>
<TABLE>
<CAPTION>
CUSIP NO. 34956K108 PAGE 3 OF 13
- ------------------------------- ------------------------
<S> <C> <C>
1 NAME OF REPORTING PERSON
S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
LF Strategic Realty Investors II L.P.
- -------------------------------------------------------------------------------
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a)[ ]
(b)[x]
- -------------------------------------------------------------------------------
3 SEC USE ONLY
- -------------------------------------------------------------------------------
4 SOURCE OF FUNDS
AF (See Item 3)
- -------------------------------------------------------------------------------
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS
IS REQUIRED PURSUANT TO ITEMS 2(d) or 2(e) [ ]
- -------------------------------------------------------------------------------
6 CITIZENSHIP OR PLACE OF ORGANIZATION
Delaware
- -------------------------------------------------------------------------------
NUMBER OF 7 SOLE VOTING POWER
SHARES
BENEFICIALLY 7,545,512/2/
OWNED BY
EACH ------------------------------------------------------------
REPORTING
PERSON 8 SHARED VOTING POWER
WITH
None
------------------------------------------------------------
9 SOLE DISPOSITIVE POWER
7,545,512
------------------------------------------------------------
10 SHARED DISPOSITIVE POWER
None
- -------------------------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
7,545,512
- -------------------------------------------------------------------------------
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES* [x]
- -------------------------------------------------------------------------------
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
41.3%
- -------------------------------------------------------------------------------
14 TYPE OF REPORTING PERSON*
PN (limited partnership)
- -------------------------------------------------------------------------------
</TABLE>
*SEE INSTRUCTIONS BEFORE FILLING OUT!
INCLUDE BOTH SIDES OF THE COVER PAGE, RESPONSES TO ITEMS 1-7
(INCLUDING EXHIBITS) OF THE SCHEDULE, AND THE SIGNATURE ATTESTATION.
- -------------------------
2. Including 6,666,667 shares of Common Stock receivable upon conversion of
the Class AA Preferred Stock (as defined in the preamble) (See Item 5).
<PAGE>
Page 4 of 13
This Amendment No. 2, dated March 3, 1998, which amends and restates
in its entirety the Schedule 13D, dated August 25, 1997, as amended by Amendment
No. 1, dated October 14, 1997 (the "Previous Statement"), of the Reporting
Persons (as defined below) is filed to reflect information required pursuant to
Rule 13d-2 of the General Rules and Regulations under the Securities Exchange
Act of 1934, as amended, relating to the purchase by Prometheus (as defined
below) of (i) an aggregate of 40,000 shares of Class AA Convertible Preferred
Stock, $0.01 par value per share (the "Class AA Preferred Stock"), (ii) an
aggregate of 35,000 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," and together
with the Class AA Preferred Stock and Class ABI Preferred Stock, the "Preferred
Stock"), (iii) an aggregate of 1,000,000 warrants (the "Warrants"), each to
purchase initially one share of common stock, $0.01 par value per share (the
"Common Stock") of The Fortress Group, Inc., a Delaware corporation (the
"Issuer" or the "Company"), (iv) an aggregate of up to 5,714,286 warrants
(the "Supplemental Warrants"), each to purchase initially one share of Common
Stock of the Issuer, and (v) 878,845 shares of Common Stock.
ITEM 1. SECURITY AND ISSUER.
This statement relates to the Reporting Persons deemed beneficial owners
of Common Stock existing by virtue of the execution of (a) the Stock Purchase
Agreement (as defined in Item 4), whereby Prometheus has agreed to purchase (i)
the Class AA Preferred Stock and the Class AB Preferred Stock, each convertible
into shares of Common Stock and each having voting rights with the Common Stock,
and (ii) the Warrants and Supplemental Warrants exercisable for Common Stock and
(b) the Builders Stock Purchase Agreements (as defined in Item 4), whereby
Prometheus has agreed to purchase an aggregate of 878,845 shares of Common Stock
from the Shareholders (as defined below). The Issuer's principal executive
offices are located at 1650 Tysons Boulevard, Suite 600, McLean, Virginia 22102.
ITEM 2. IDENTITY AND BACKGROUND.
(a) This statement is filed by Prometheus Homebuilders LLC, a Delaware
limited liability company ("Prometheus"), and LF Strategic Realty Investors II
L.P., a Delaware limited partnership ("LFSRI II") (together, the "Reporting
Persons").
(b) The principal business offices of the Reporting Persons are c/o Lazard
Freres Real Estate Investors LLC ("LFREI"), 30 Rockefeller Plaza, 63rd Floor,
New York, New York, 10020.
(c) Prometheus is a special purpose investment vehicle formed to acquire
the Common Stock of the Company and the Preferred Stock, Warrants and
Supplemental Warrants as contemplated by the Stock Purchase Agreement. LFSRI II
is an investment partnership formed to invest in companies active in the real
estate industry. The sole owner of Prometheus is LFSRI II, and the general
partner of LFSRI II is LFREI. LFREI's activities consist principally of acting
as general partner of several real estate investment partnerships that are
affiliated with Lazard Freres & Co. LLC. ("Lazard"). Lazard disclaims
beneficial ownership of any of the shares of Common Stock reported in this
Statement. The name, business address and principal occupation or employment of
the executive officers of LFREI are set forth on Schedule 1 hereto and
incorporated by reference herein.
<PAGE>
Page 5 of 13
(d) and (e) During the last five years, neither the Reporting Persons nor,
to the best knowledge of the Reporting Persons, any of the persons listed in
Schedule 1 hereto (i) has been convicted in a criminal proceeding (excluding
traffic violations or similar misdemeanors) nor (ii) has been a party to any
civil proceeding of a judicial or administrative body of competent jurisdiction,
and is or was, as a result of such proceeding, subject to a judgment, decree or
final order enjoining future violations of, or prohibiting or mandating
activities subject to, federal or state securities laws, or finding any
violation with respect to such laws.
(f) Each person listed on such Schedule 1 is a citizen of the United
States.
ITEM 3. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION.
The consummation of the transactions contemplated by the Stock Purchase
Agreement will require aggregate funds of approximately $75.0 million. The
purchase of the Common Stock pursuant to the Builders Stock Purchase Agreements
shall require approximately an additional $3,515,380. The funds for both
transactions are to be made available from capital commitments of the Limited
Partners of LFSRI II and/or from lines of credit made available to LFSRI II.
ITEM 4. PURPOSE OF TRANSACTION.
The beneficial ownership of the shares of Common Stock that are the
subject of this Amendment have been acquired from the Issuer for the purpose of
establishing an investment interest in the Issuer. Except as described herein
and in Item 6 below, the Reporting Persons have no present plan or proposal
which relates to or would result in any of the events referred to in paragraphs
(a) through (j), inclusive, of Item 4 of Schedule 13D. However, the Reporting
Persons intend to review their investment in the Company on a continuing basis
and, depending upon subsequent developments affecting the Company, the Company's
business and prospects, other investment and business opportunities available to
the Reporting Persons, general stock market and economic conditions, tax
considerations and other factors deemed relevant, may decide to take one or more
of such actions or to increase or decrease the size of their investment in the
Company.
The securities have been acquired pursuant to the Second Amended and
Restated Stock Purchase Agreement, dated February 19, 1998, between the Issuer
and Prometheus (the "Stock Purchase Agreement"). Subject to the terms and
conditions of the Stock Purchase Agreement, the Issuer shall sell to Prometheus
(i) an aggregate of 40,000 shares of Class AA Preferred Stock, (ii) an aggregate
of 35,000 shares of Class AB Preferred Stock apportioned between Class ABI
Preferred Stock and Class ABII Preferred Stock as described below and (iii) an
aggregate of 1,000,000 Warrants and up to 5,714,286 Supplemental Warrants. In
addition to the acquisition of securities described below, following the
approval of the holders of the requisite number of shares of outstanding Common
Stock of the Company (the "Stockholder Approval"), the structure of the Issuer's
board of directors shall be altered pursuant to the Stockholders Agreement
(defined below) as described in Item 6.
Upon completion of the transactions contemplated by the Stock Purchase
Agreement (the "Transaction"), Prometheus shall beneficially own 40,000 shares
of Class AA Preferred Stock with an aggregate liquidation value of $40,000,000.
Holders of the Class AA Preferred Stock are 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, and each share
<PAGE>
Page 6 of 13
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 (as
defined in the Class AA Certificate of Designations attached hereto as Exhibit 7
and incorporated herein by reference). Dividends shall accrue cumulatively at
12% per annum until the Second Closing (as defined below) and at 6% per annum
from and after the Second Closing, and shall compound quarterly on the aggregate
liquidation value of the Class AA Preferred Stock then outstanding, payable
quarterly in arrears. Class AA Preferred Stock is convertible at any time after
the date of its issuance, at the holder's option, into shares of Common Stock at
a conversion price of $6.00 per share, subject to certain adjustments, as set
forth in the Class AA Certificate of Designations. Notwithstanding the above,
all, but not less than all, of the Class AA Preferred Stock may be converted at
any time after the Second Closing, at the Company's option, into shares of
Common Stock at a conversion price of $6.00 per share, subject to certain
adjustments, when the average of the closing prices of the Common Stock, for the
90 days preceding conversion, is equal to or exceeds $12.00 per share.
Prometheus also shall beneficially own 35,000 shares of Class AB Preferred
Stock, consisting of Class ABI Preferred Stock and Class ABII Preferred Stock,
with an aggregate liquidation value of $35,000,000. Holders of the Class ABI
Preferred Stock are entitled to vote on all matters voted on by the 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, and 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 shares of Class ABI Preferred Stock would be
convertible if the conversion price was $5.25. Holders of Class ABII Preferred
Stock are entitled to vote on all matters voted on by the 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 (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 (as defined in the Class
ABII Certificate of Designations)) 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), and 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 was $5.25. Dividends shall accrue cumulatively at 12% per annum and
compound quarterly on the aggregate liquidation value of the Class AB Preferred
Stock then outstanding, payable quarterly in arrears. Class ABI Preferred Stock
and Class ABII Preferred Stock are convertible at any time on or after the
fourth anniversary of the issuance, at the option of the holder, into shares of
Common Stock at a price equal to 95% of the average of the closing prices of the
Company's Common Stock for the thirty consecutive trading days commencing forty-
five consecutive trading days before the applicable conversion date (the
"Conversion Price"), as set forth in the Class ABI and Class ABII Certificates
of Designations attached hereto as Exhibits 8 and 9, respectively, and
incorporated herein by reference. At the option of the Issuer on or after the
fifth anniversary of the issuance, the Issuer may convert all, but not less than
all, of the aggregate shares of Class ABI Preferred Stock and Class ABII
Preferred Stock into Common Stock at the Conversion Price. The Class AB
Preferred Stock may be redeemed, in whole, but not in part, at any time after
five years from the Initial Issue Date, at the option of the Company.
<PAGE>
Page 7 of 13
Prometheus shall receive Warrants exercisable for an aggregate of
1,000,000 shares of Common Stock at an exercise price per share equal to $7.00.
At any time after September 30, 2001 but prior to September 30, 2003, the holder
shall have the option to adjust the exercise price per share and the number of
shares for which the Warrants are exercisable as set forth in the Warrant
Agreement attached hereto as Exhibit 5 and incorporated herein by reference.
All Warrants are exercisable between September 30, 1999 and September 30, 2004.
At the option of the holder, the Warrants may be exercised by applying the value
of shares of Common Stock otherwise receivable by the holder upon exercise in
payment of the exercise price.
Prometheus also shall receive Supplemental Warrants exercisable for an
aggregate of 5,714,286 shares of Common Stock at an exercise price per share
equal to $0.01. Whenever the Conversion Price of the Class AA Preferred Stock is
adjusted (the "Adjustment Date"), the Company shall calculate the average of the
quoted prices of the Common Stock for the 60 days preceding such date (the
"Issue Price"). The aggregate number of Supplemental Warrants which are
exercisable as of such date shall be adjusted dependent upon the Issue Price as
set forth in the Supplemental Warrant Agreement attached hereto as Exhibit 6 and
incorporated herein by reference. The holder shall have the option to exercise
such Supplemental Warrants at any time after September 30, 2001 but prior to the
earliest of (i) March 31, 2004, (ii) the first Adjustment Date for which the
Issue Price is $5.00 or less and (iii) the Mandatory Conversion Date (as defined
in the Certificate of Designations of the Class AA Preferred Stock). At the
option of the holder, the Supplemental Warrants may be exercised by applying the
value of shares of Common Stock otherwise receivable by the holder upon exercise
in payment of the exercise price.
The Certificate of Incorporation and Bylaws of the Issuer, as well as the
bylaws of the Issuer's subsidiaries, shall be amended (respectively, the
"Certificate Amendments" and the "Bylaws Amendments") in connection with the
transactions contemplated under the Stock Purchase Agreement, in order to (i)
increase the authorized number of shares of Common Stock, (ii) incorporate the
Preferred Stock Certificates of Designations and (iii) adopt the terms and
conditions of the Stockholders Agreement.
The Transaction will be consummated in three or more stages. On September
30, 1997 (the "First Closing"), Prometheus purchased from the Issuer (i) 11,700
shares of Class AA Preferred Stock and (ii) 375,000 Warrants.
On February 27, 1998, or such other date as the parties shall agree (the
"Second Closing"), Prometheus shall purchase from the Issuer 28,300 shares of
Class AA Preferred Stock. In addition, contingent upon the Second Closing,
certain existing shareholders (the "Shareholders") of the Company have agreed to
sell to Prometheus pursuant to six separate stock purchase agreements, each
dated February 19, 1998 (collectively, the "Builders Stock Purchase
Agreements"), an aggregate of 878,845 shares of Common Stock at a purchase price
of $4 per share. A copy of each Builders Stock Purchase Agreement is attached
as Exhibit 10 through 15 hereto and incorporated by reference herein.
Following the Second Closing, the Issuer shall be obligated to sell to
Prometheus at one or more subsequent closings (the "Subsequent Purchases") an
aggregate of 35,000 shares of Class AB Preferred Stock, apportioned between the
Class ABI Preferred Stock and the Class ABII Preferred Stock such that
Prometheus has no more than 45% of the total voting power of the Issuer on the
date of issuance of such Class AB Preferred Stock with respect to the election
of directors to the Board of Directors generally (other than directors elected
exclusively by holders of Preferred Stock), but so that the Issuer shall issue
the maximum amount of Class ABI Preferred Stock it is permitted to issue before
issuing any Class ABII Preferred Stock. Concurrently with the earlier of (i)
the first sale of Class AB Preferred Stock (or
<PAGE>
Page 8 of 13
substituted debt instrument, as described below) or (ii) notification to the
Company by Prometheus that it has failed to purchase the amount of Class AB
Preferred Stock required by the Stock Purchase Agreement (which notice shall not
be delivered prior to December 31, 1998), the Company shall issue to Prometheus
625,000 Warrants and up to 5,714,286 Supplemental Warrants. The Issuer shall
give Prometheus notice of at least twenty business days of any Subsequent
Purchase and shall require Prometheus to purchase no fewer than 10,000 shares of
Class AB Preferred Stock unless such purchase is of the balance of the Class AB
Preferred Stock. The Issuer shall be obligated to require Prometheus to make
Subsequent Purchases of all of the Class AB Preferred Stock on or before
December 31, 1998.
If, following the Second Closing, Prometheus consents to a merger or
consolidation of the Company with a bona fide third party such that, following
the transaction, more than 51 percent of the Common Stock is beneficially owned
by such third party, the Company shall have the right to be released from its
obligations under the Stock Purchase Agreement to sell to Prometheus the then-
unissued balance of the Preferred Stock at one or more Subsequent Purchases.
As set forth in Item 6, in certain circumstances following the Second
Closing, the holders of Preferred Stock shall be entitled to appoint a majority
of the Board of Directors. As a result of the foregoing, upon consummation of
the Second Closing, the holders of Preferred Stock will have substantial
influence over, and could under certain circumstances exercise effective control
of, the direction and management of the Company and the conduct of its business.
As described in Item 5, upon conversion of the Preferred Stock and exercise of
the Warrants and Supplemental Warrants, the Reporting Persons could hold more
than 50% of the Common Stock of the Company.
The Second Closing and all Subsequent Purchases will be subject to the
following conditions: (1) stockholder approval of all items necessary to
effectuate the transactions as contemplated by the Stock Purchase Agreement and
the Ancillary Documents, (2) effectiveness of the Certificate Amendments and
Bylaws Amendments, (3) expiration of the waiting period under the Hart-Scott-
Rodino Antitrust Improvements Act of 1976, as amended, if applicable, (4) the
filing of the ABI Preferred Stock Certificate of Designations and ABII Preferred
Stock Certificate of Designations with the Secretary of State of the State of
Delaware, (5) the amendment of certain employment agreements of the Company and
(6) the satisfaction of various other customary closing conditions.
Further, the Issuer may agree to sell to Prometheus, on the same terms as
the previous sales, up to an additional (i) 13,333 shares of Class AA Preferred
Stock, (ii) 11,667 shares of Class AB Preferred Stock, apportioned between Class
ABI Preferred Stock and Class ABII Preferred Stock as set forth above, (iii)
333,250 Warrants and (iv) 1,904,762 Supplemental Warrants (collectively, the
"Additional Securities"). Prometheus also has the right of first refusal with
respect to any bona fide offer to purchase up to $25 million of equity capital
of the Issuer. Because neither the Issuer nor Prometheus are under any
obligation to engage in the purchase or sale of such additional securities, the
Reporting Persons disclaim beneficial ownership of such additional shares of
Common Stock subject to such future transactions. Moreover, the Warrants and
Supplemental Warrants to be issued pursuant to the Stock Purchase Agreement are
not exercisable until 1999 and 2001, respectively, and the Class AB Preferred
Stock is not convertible into Common Stock until 2001. Therefore, the Reporting
Persons disclaim beneficial ownership of any Common Stock into which the
Warrants and Supplemental Warrants are exercisable or the Class AB Preferred
Stock is convertible subject to future transactions.
The Company shall have the right to issue a debt instrument in lieu of all
or any portion of the Class AB Preferred Stock to be issued, provided that such
debt instrument contains terms and conditions
<PAGE>
Page 9 of 13
that are no less favorable to Prometheus than the terms and conditions of the
Class ABI Preferred Stock.
The foregoing discussion of the Stock Purchase Agreement is qualified in
its entirety by the full text of such agreement, a copy of which is attached
hereto as Exhibit 1 and is incorporated herein by reference.
ITEM 5. INTEREST IN SECURITIES OF THE ISSUER.
(a) Assuming (i) consummation of the sale by the Company of all shares
issuable pursuant to the Stock Purchase Agreement, (ii) the conversion of the
40,000 shares Class AA Preferred Stock into Common Stock at a conversion price
of $6.00 per share for approximately 6,666,667 shares of Common Stock and (iii)
the purchase of 878,845 shares of Common Stock from the Shareholders, such
7,545,512 shares would represent approximately 41.3% of the approximately
18,279,261 issued and outstanding shares of the Issuer, based on the number of
shares of Common Stock outstanding as of January 14, 1998, as disclosed in the
Company's most recent Proxy Statement, and the conversion of the Preferred Stock
into Common Stock.
Assuming further, based on a conversion price of $6.00 per share for the
Class AA Preferred Stock and an assumed conversion price of $5.25 per share for
the Class AB Preferred Stock, (i) the conversion of 35,000 shares of the Class
AB Preferred Stock into Common Stock at an assumed conversion price of $5.25 per
share for approximately 6,666,667 shares of Common Stock, (ii) the exercise of
the Warrants for 1,000,000 shares of Common Stock, (iii) the exercise of the
Supplemental Warrants for 5,714,286 shares of Common Stock and (iv) the
consummation of the sale to Prometheus of the Additional Securities for
6,682,464 shares of Common Stock/3/, each of which the Reporting Persons
disclaim beneficial ownership in Item 4, such 20,063,417 shares, in addition to
the 7,545,512 shares previously acquired for a total of 27,608,929 shares, would
represent approximately 72.0% of the approximately 38,342,678 shares of Common
Stock issued and outstanding as a result of such conversion of the Preferred
Stock and exercise of the Warrants and the Supplemental Warrants.
The calculations of the interest in securities are based on (i) assumed
conversion and exercise prices and do not take into consideration any
adjustments to such conversions and exercise prices and (ii) the Common Stock of
the Issuer issued and outstanding as of January 14, 1998 and does not take into
account any increase or decrease in the amount of Common Stock issued and
outstanding other than the conversion of the Preferred Stock and the exercise of
the Warrants and Supplemental Warrants.
Please see Item 4 and the terms set forth in the Class AA, Class ABI and
Class ABII Certificates of Designations attached hereto as Exhibits 7 through 9,
respectively, and incorporated herein by reference, the Warrant Agreement
attached hereto as Exhibit 5 and incorporated herein by reference and the
Supplemental Warrant Agreement attached hereto as Exhibit 6 and incorporated
herein by reference.
(b) Prometheus has the sole power to vote or to direct the vote of all
shares of Common Stock covered by this Statement, subject to the terms of the
Stockholders Agreement described in Item 6.
- ---------------------------
/3/ Calculated as the aggregate shares of Common Stock resulting from (i)
converting 13,333 shares of Class AA Preferred Stock into approximately
2,222,167 shares of Common Stock, (ii) converting 11,667 shares of Class AB
Preferred Stock into approximately 2,222,286 shares of Common Stock and (iii)
exercising the 333,250 Warrants and 1,904,762 Supplemental Warrants.
<PAGE>
Page 10 of 13
(c) Neither the Reporting Persons nor, to the knowledge of the Reporting
Persons, any of the parties listed on Schedule 1 hereto have acquired any shares
of Common Stock of the Company during the past sixty days, other than the
purchases reported herein.
(d) Prometheus has the sole right to receive or the power to direct the
receipt of dividends from, or the proceeds from the sale of, the shares of
Common Stock covered by this Statement.
(e) Not applicable.
ITEM 6. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS, OR RELATIONSHIPS WITH RESPECT
TO SECURITIES OF THE ISSUER.
On September 30, 1997, Prometheus and certain individuals (named below)
entered into a stockholders' voting agreement (the "Stockholders' Voting
Agreement"). At the Second Closing, (i) Prometheus, the Issuer and the
stockholders named therein shall enter into an amended and restated stockholders
agreement (the "Stockholders Agreement"), (ii) Prometheus and the Issuer shall
enter into an amended and restated registration rights agreement (the
"Registration Rights Agreement") and (iii) Prometheus and the Issuer shall enter
into an amended and restated warrant agreement (the "Warrant Agreement"). In
addition, the Company and Prometheus shall enter into a supplemental warrant
agreement (the "Supplemental Warrant Agreement" and, collectively with the
Stockholders' Voting Agreement, the Stockholders Agreement, the Registration
Rights Agreement and the Warrant Agreement, the "Ancillary Documents") at the
closing of the first Subsequent Purchase.
The Stockholders Agreement contemplates that the Issuer will take all
action following the Stockholder Approval necessary to cause (i) the Board to be
structured to consist of fifteen members (subject to increase in the case of an
Adverse Event (as defined in the Stockholders Agreement)), (ii) the holders of
Preferred Stock, voting separately as a single class, to have the exclusive
right to elect a minimum of three Directors (each such Director, a "Preferred
Stock Director"), (iii) any increases in the size of the Board to result in an
increase in the number of Preferred Stock Directors such that they represent at
least 20% of the votes exercisable by the Board and (iv) at least a
proportionate number of Preferred Stock Directors to serve on each committee of
the Board (provided that the Executive Committee shall consist of five members
of which two members shall be Preferred Stock Directors) and at least one
Preferred Stock Director to serve on the governing body of each of the Issuer's
subsidiaries and affiliates, other than operational home building companies.
Pursuant to the Stockholders Agreement, under certain circumstances Prometheus
will have the right to participate in the issuance or sale by the Company of any
shares of its capital stock so that Prometheus can maintain its proportionate
share of outstanding capital stock of the Company. In addition, Prometheus will
have certain tag-along rights if the Executive Shareholders (as defined in the
Stockholders Agreement) sell their beneficial interest in the Common Stock. In
the case of an Adverse Event, the holders of Class AA Preferred Stock and Class
AB Preferred Stock, voting separately as a single class, shall have the
exclusive right to elect sufficient Preferred Stock Directors to constitute a
majority of the Board of Directors and all committees of the Board of Directors.
The size of the Board of Directors and all committees of the Board of Directors
shall be automatically increased in order to effect any such additional
directors. This right shall continue until such time as the conditions giving
rise to the Adverse Effect are no longer in effect for two consecutive quarters,
as further described in the Certificates of Designations of the Preferred Stock.
After the Bylaws Amendments shall have become effective, neither the
Issuer nor its subsidiaries may take certain actions without the affirmative
vote of over eighty-one percent of either (i) the Directors
<PAGE>
Page 11 of 13
or (ii) the members of a five member executive committee established under the
Stockholders Agreement. The Certificate of Incorporation and Bylaws of the
Issuer and its subsidiaries shall be amended by the time of the Second Closing
to give effect to the terms of the Stockholders Agreement.
Pursuant to the Registration Rights Agreement, the Issuer shall grant
Prometheus demand registration rights to facilitate the resale of the Common
Stock owned by it and shall also grant Prometheus certain piggyback rights to
sell a portion of its shares in connection with offerings of securities by the
Issuer for its own account.
Pursuant to the Warrant Agreement, the Company will grant to Prometheus
warrants to purchase up to an aggregate of one million shares of Common Stock,
subject to adjustment. The warrants will be exercisable commencing on September
30, 1999 and ending on September 30, 2004, at the exercise prices set forth
therein.
Pursuant to the Supplemental Warrant Agreement, the Company will grant to
Prometheus warrants to purchase up to an aggregate of 5,714,286 shares of Common
Stock, subject to adjustment, at an exercise price per share equal to $0.01.
The warrants will be exercisable commencing on September 30, 2001 and ending on
the earliest of (i) March 31, 2004, (ii) the first Adjustment Date (as defined
above) for which the Issue Price (as defined above) is $5.00 or less and (iii)
the Mandatory Conversion Date (as defined in the Certificate of Designations of
the Class AA Preferred Stock).
Pursuant to the Stockholders' Voting Agreement, the following stockholders
of the Company have agreed to vote their voting shares of Common Stock for the
Transactions as contemplated by the Stock Purchase Agreement: J. Marshall
Coleman, James J. Martell, Jr., Robert R. Short, J. Christopher Stuhmer, Thomas
Buffington, Lawrence J. Witek, Lanold W. Caldwell, James M. Gidden, Edward A.
Kirkpatrick and Patricia A. Donnelly. This Agreement shall terminate at the
Second Closing. Each Stockholder agrees not to sell or otherwise transfer any
of its voting shares of capital stock of the Issuer until the Second Closing.
All references to the Ancillary Documents are qualified in their entirety
by the full text of such agreements and amendments, copies of which are attached
as Exhibits hereto and are incorporated by reference herein. See also Item 4.
ITEM 7. MATERIAL TO BE FILED AS EXHIBITS.
Exhibit 1. Amended and Restated Stock Purchase Agreement dated as of
February 19, 1998 among the Issuer and Prometheus
Exhibit 2. Stockholders' Voting Agreement dated as of September 30,
1997 among the Issuer and certain stockholders listed
therein
Exhibit 3. Form of Amended and Restated Registration Rights Agreement
between the Company and Prometheus
Exhibit 4. Form of Amended and Restated Stockholders Agreement between
Prometheus, the Issuer and certain stockholders listed
therein
<PAGE>
Page 12 of 13
Exhibit 5. Form of Amended and Restated Warrant Agreement between
Prometheus and the Issuer
Exhibit 6. Form of Supplemental Warrant Agreement between Prometheus
and the Issuer
Exhibit 7. Class AA Certificate of Designations
Exhibit 8. Form of Class ABI Certificate of Designations
Exhibit 9. Form of Class ABII Certificate of Designations
Exhibit 10. Stock Purchase Agreement dated February 19, 1998 between
Prometheus and Edward A. Kirkpatrick
Exhibit 11. Stock Purchase Agreement dated February 19, 1998 between
Prometheus and James M. Giddens
Exhibit 12. Stock Purchase Agreement dated February 19, 1998 between
Prometheus and J. Christopher Stuhmer
Exhibit 13. Stock Purchase Agreement dated February 19, 1998 between
Prometheus and Lanold W. Caldwell
Exhibit 14. Stock Purchase Agreement dated February 19, 1998 between
Prometheus and Lawrence J. Witek
Exhibit 15. Stock Purchase Agreement dated February 19, 1998 between
Prometheus and Thomas B. Buffington
Exhibit 16. Joint Filing Agreement
<PAGE>
SIGNATURE
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete and
correct.
PROMETHEUS HOMEBUILDERS LLC
By: LF Strategic Realty Investors II L.P.,
as sole member
By: Lazard Freres Real Estate Investors L.L.C.,
as general partner
By: /s/ Murry N. Gunty
__________________________________________
Name: Murry N. Gunty
Title: Principal
LF STRATEGIC REALTY INVESTORS II L.P.
By: Lazard Freres Real Estate Investors L.L.C.,
as general partner
By: /s/ Murry N. Gunty
__________________________________________
Name: Murry N. Gunty
Title: Principal
Dated: March 2, 1998
13
<PAGE>
SCHEDULE I
EXECUTIVE OFFICERS OF PROMETHEUS AND LFREI
The business address for each of the following persons is 30
Rockefeller Plaza, 63rd Floor, New York, NY 10020.
<TABLE>
<CAPTION>
NAME OF OFFICER PRESENT AND PRINCIPAL OCCUPATION
- ---------------------------- -------------------------------------------------
<S> <C>
Arthur P. Solomon Principal of LFREI
Anthony E. Meyer Principal of LFREI
Robert P. Freeman Principal of LFREI
Klaus P. Kretschmann Principal of LFREI
Murry N. Gunty Principal of LFREI
Thomas M. Mulroy Senior Vice President of LFREI
Lorenzo L. Lorenzotti Secretary of LFREI
Henry C. Herms Comptroller of LFREI
</TABLE>
<PAGE>
EXHIBIT INDEX
Exhibit 1. Amended and Restated Stock Purchase Agreement dated as of
February 19, 1998 among The Fortress Group, Inc. (the
"Issuer") and Prometheus Homebuilders LLC ("Prometheus")
Exhibit 2. Stockholders' Voting Agreement dated as of September 30,
1997 among the Issuer and certain stockholders listed
therein
Exhibit 3. Form of Amended and Restated Registration Rights Agreement
between the Company and Prometheus
Exhibit 4. Form of Amended and Restated Stockholders Agreement between
Prometheus, the Issuer and certain stockholders listed
therein
Exhibit 5. Form of Amended and Restated Warrant Agreement between
Prometheus and the Issuer
Exhibit 6. Form of Supplemental Warrant Agreement between Prometheus
and the Issuer
Exhibit 7. Class AA Certificate of Designations
Exhibit 8. Form of Class ABI Certificate of Designations
Exhibit 9. Form of Class ABII Certificate of Designations
Exhibit 10. Stock Purchase Agreement dated February 19, 1998 between
Prometheus and Edward A. Kirkpatrick
Exhibit 11. Stock Purchase Agreement dated February 19, 1998 between
Prometheus and James M. Giddens
Exhibit 12. Stock Purchase Agreement dated February 19, 1998 between
Prometheus and J. Christopher Stuhmer
Exhibit 13. Stock Purchase Agreement dated February 19, 1998 between
Prometheus and Lanold W. Caldwell
Exhibit 14. Stock Purchase Agreement dated February 19, 1998 between
Prometheus and Lawrence J. Witek
Exhibit 15. Stock Purchase Agreement dated February 19, 1998 between
Prometheus and Thomas B. Buffington
Exhibit 16. Joint Filing Agreement
<PAGE>
EXHIBIT 1
SECOND AMENDED AND RESTATED STOCK PURCHASE AGREEMENT
by and between
THE FORTRESS GROUP, INC.
and
PROMETHEUS HOMEBUILDERS LLC
Dated as of February 19, 1998
<PAGE>
TABLE OF CONTENTS
PAGE
----
ARTICLE I. DEFINITIONS...................................................... 2
-----------
Section 1.1. Defined Terms.............................................. 2
ARTICLE II. PURCHASE AND SALE OF SECURITIES................................. 13
-------------------------------
Section 2.1. Purchase and Sale of Securities............................ 13
-------------------------------
Section 2.2. Consideration.............................................. 13
-------------
Section 2.3. Right to Assign............................................ 13
---------------
ARTICLE III. CLOSING........................................................ 14
-------
Section 3.1. Location of Closings....................................... 14
--------------------
Section 3.2. First and Second Closings.................................. 14
-------------------------
Section 3.3. Subsequent Purchases and Sales............................. 14
------------------------------
Section 3.4. Deliveries by the Company at Closing....................... 15
------------------------------------
Section 3.5. Deliveries by the Purchaser at Closing..................... 15
--------------------------------------
Section 3.6. Certificates; Opinions..................................... 15
----------------------
Section 3.7. Ancillary Agreements....................................... 15
--------------------
Section 3.8. Form of Documents and Instruments.......................... 16
---------------------------------
Section 3.9. Further Purchases.......................................... 16
-----------------
Section 3.10. Redelivery and Cancellation of Warrants................... 16
---------------------------------------
ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF THE COMPANY................... 16
---------------------------------------------
Section 4.1. Organization of the Company................................ 16
---------------------------
Section 4.2. Capitalization of the Company.............................. 17
-----------------------------
Section 4.3. Authorization of Issuance.................................. 18
-------------------------
Section 4.4. Authorization.............................................. 18
-------------
Section 4.5. Noncontravention........................................... 18
----------------
Section 4.6. Consents and Approvals..................................... 19
----------------------
Section 4.7. Subsidiaries............................................... 19
------------
Section 4.8. Employee Benefit Plans and Other Agreements................ 20
-------------------------------------------
Section 4.9. SEC Filings................................................ 25
-----------
Section 4.10. Absence of Undisclosed Liabilities; Guarantees........... 26
----------------------------------------------
Section 4.11. Absence of Certain Changes............................... 26
--------------------------
Section 4.12. Compliance With Laws..................................... 26
--------------------
Section 4.13. Litigation............................................... 26
----------
Section 4.14. True and Complete Disclosure............................. 27
----------------------------
Section 4.15. Taxes.................................................... 27
-----
Section 4.16. Properties............................................... 29
----------
Section 4.17. Environmental Matters.................................... 31
---------------------
Section 4.18. Insurance................................................ 33
---------
Section 4.19. Condition of Tangible Assets............................. 33
----------------------------
i
<PAGE>
Section 4.20. Contracts and Commitments................................ 33
-------------------------
Section 4.21. Books and Records........................................ 34
-----------------
Section 4.22. Labor Matters............................................ 34
-------------
Section 4.23. Payments................................................. 34
--------
Section 4.24. Information.............................................. 34
-----------
Section 4.25. Board Recommendations.................................... 35
---------------------
Section 4.26. Intellectual Property.................................... 35
---------------------
Section 4.27. Securities Offerings..................................... 35
--------------------
Section 4.28. No Agreements to Sell the Assets or the Company.......... 36
-----------------------------------------------
Section 4.29. No Brokers............................................... 36
----------
Section 4.30. Transactions with Certain Persons........................ 36
---------------------------------
ARTICLE V. REPRESENTATIONS AND WARRANTIES OF PURCHASER..................... 36
-------------------------------------------
Section 5.1. Organization of the Purchaser............................. 36
-----------------------------
Section 5.2. Authorization............................................. 36
-------------
Section 5.3. Noncontravention.......................................... 37
----------------
Section 5.4. Consents and Appeals...................................... 37
--------------------
Section 5.5. Purchase for Investment................................... 38
-----------------------
Section 5.6. Disclosure Documents...................................... 38
--------------------
Section 5.7. No Brokers................................................ 38
----------
ARTICLE VI. ACTIONS BY THE COMPANY AND THE PURCHASER PRIOR TO THE SECOND
------------------------------------------------------------
CLOSING..................................................................... 39
- -------
Section 6.1. Meeting of Stockholders; Proxy Statement; Certificate
-----------------------------------------------------
Amendments............................................................. 39
----------
Section 6.2. Stock Exchange Approval................................... 40
-----------------------
Section 6.3. Continuing Operations..................................... 40
---------------------
Section 6.4. Press Releases............................................ 42
--------------
Section 6.5. Additional Financial Statements........................... 42
-------------------------------
Section 6.6. Investigations and Access................................. 42
-------------------------
Section 6.7. Notification of Certain Matters........................... 43
-------------------------------
Section 6.8. No Solicitation........................................... 43
---------------
Section 6.9. Further Assurances........................................ 44
------------------
Section 6.10. HSR Act Notification..................................... 44
--------------------
Section 6.11. Employee Matters......................................... 45
----------------
Section 6.12. Action by the Company.................................... 45
---------------------
Section 6.13. Liability Insurance...................................... 45
-------------------
Section 6.14. Confidentiality.......................................... 45
---------------
Section 6.15. Action following Stockholder Approval.................... 46
-------------------------------------
ARTICLE VII. CONDITIONS TO ALL CLOSINGS.................................... 46
--------------------------
Section 7.1. Conditions to Each Party's Obligations.................... 46
--------------------------------------
Section 7.2. Conditions to the Company's Obligations................... 46
---------------------------------------
Section 7.3. Conditions to the Purchaser's Obligations................. 47
-----------------------------------------
ii
<PAGE>
ARTICLE VIII. SECOND AND SUBSEQUENT CLOSINGS............................... 48
------------------------------
Section 8.1. Conditions to Each Party's Obligations at the Second
----------------------------------------------------
Closing................................................................. 48
-------
Section 8.2. Conditions to the Purchaser's Obligations at the Second and
-----------------------------------------------------------
Subsequent Closings.................................................... 48
-------------------
ARTICLE IX. INDEMNIFICATION
---------------
Section 9.1. Survival of Representations, Etc.......................... 49
--------------------------------
Section 9.2. Indemnification by the Company............................ 49
------------------------------
Section 9.3. Indemnification by the Purchaser.......................... 49
--------------------------------
Section 9.4. Losses.................................................... 49
------
Section 9.5. Defense of Claims......................................... 50
-----------------
Section 9.6. Tax Treatment of Indemnity................................ 51
--------------------------
ARTICLE X. MISCELLANEOUS................................................... 51
-------------
Section 10.1. Termination.............................................. 51
-----------
Section 10.2. In the Event of Termination:............................. 52
---------------------------
Section 10.3. Fees and Expenses........................................ 52
-----------------
Section 10.4. Injunctive Relief........................................ 52
-----------------
Section 10.5. Independent Determination................................ 52
-------------------------
Section 10.6. Brokers, Etc............................................. 53
------------
Section 10.7. Assignment............................................... 53
----------
Section 10.8. Notices.................................................. 53
-------
Section 10.9. Choice of Law............................................ 54
-------------
Section 10.10. Entire Agreement; Amendments and Waivers.............. 54
----------------------------------------
Section 10.11. Counterparts.......................................... 55
------------
Section 10.12. Invalidity............................................ 55
----------
Section 10.13. Headings.............................................. 55
--------
Section 10.14. Limitation of Liability............................... 55
-----------------------
Section 10.15. Abstention from Voting................................ 55
----------------------
Section 10.16. Mutual Agreement...................................... 55
----------------
Section 10.17. Apportionment of Stock Between Class ABI Preferred Stock
--------------------------------------------------------
and Class ABII Preferred Stock......................................... 55
------------------------------
Section 10.18. Merger of Company..................................... 55
-----------------
iii
<PAGE>
SCHEDULES
Schedule 4.2
Schedule 4.5
Schedule 4.6
Schedule 4.7
Schedule 4.8
Schedule 4.9
Schedule 4.10
Schedule 4.11
Schedule 4.12
Schedule 4.13
Schedule 4.15
Schedule 4.16(a)
Schedule 4.16(b)
Schedule 4.16(c)
Schedule 4.16(d)
Schedule 4.16(e)
Schedule 4.16(f)
Schedule 4.16(j)
Schedule 4.16(k)
Schedule 4.16(s)
Schedule 4.17
Schedule 4.18
Schedule 4.20
Schedule 4.26
Schedule 4.27
Schedule 6.3
Schedule 6.3(e)
Schedule 6.3(i)
EXHIBITS
Exhibit A Form of Class ABI Certificate of Designations
Exhibit B Form of Class ABII Certificate of Designations
Exhibit C Form of Amended and Restated Registration Rights
Agreement
Exhibit D Form of Amended and Restated Warrant Agreement
Exhibit E Form of Amended and Restated Stockholders Agreement
Exhibit F Form of Bylaws Amendments
Exhibit G Form of Certificate Amendments
Exhibit H Form of Bylaws Amendments-Subsidiaries
Exhibit I Form of Supplemental Warrant Agreement
iv
<PAGE>
This SECOND AMENDED AND RESTATED STOCK PURCHASE AGREEMENT, dated as of
February 19, 1998, is made by and between (i) The Fortress Group, Inc., a
Delaware corporation (the "Company") and (ii) Prometheus Homebuilders LLC (the
-------
"Purchaser").
- ----------
RECITALS
--------
WHEREAS, the Company and the Purchaser entered into that certain stock
purchase agreement, dated as of August 14, 1997 (the "First Agreement").
---------------
WHEREAS, the Company and the Purchaser entered into that certain
Amended and Restated Stock Purchase Agreement, dated as of September 30, 1997
(the "Second Agreement"), amending and restating the First Agreement.
----------------
WHEREAS, the Company and the Purchaser desire to amend and restate in
its entirety the Second Agreement as set forth herein.
WHEREAS, the Second Agreement, as amended and restated as set forth
herein shall be referred to as the "Agreement".
---------
WHEREAS, Prometheus Homebuilders Funding Corp. has assigned all its
interest in the Purchaser to Lazard Freres Strategic Realty Investors II L.P.
WHEREAS, the Company has sold and desires to issue and sell to the
Purchaser, and the Purchaser desires to purchase from the Company, (i) an
aggregate of 40,000 shares of its newly issued Class AA Convertible Preferred
Stock, $0.01 par value per share, having the rights, designations and
preferences set forth in the Class AA Certificate of Designations and (ii) an
aggregate of 35,000 shares of its newly issued Class AB Preferred Stock
apportioned between Class ABI Convertible Redeemable Preferred Stock, $0.01 par
value per share, having the rights, designations and preferences set forth in
the Class ABI Certificate of Designations and Class ABII Convertible Redeemable
Preferred Stock, $0.01 par value per share, having the rights, designations and
preferences set forth in the Class ABII Certificate of Designations, together
with an aggregate of 1,000,000 warrants (the "Warrants") to purchase initially
--------
one share of Common Stock at an initial exercise price of $7.00 per share as
further described in the Warrant Agreement together with an aggregate of up to
5,714,286 warrants (the "Supplemental Warrants") to purchase initially one share
---------------------
of Common Stock at an exercise price of $0.01 per share as further described in
the Supplemental Warrant Agreement.
AGREEMENT
---------
NOW, THEREFORE, in consideration of the mutual covenants and premises
contained herein and for other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereto agree as follows:
<PAGE>
ARTICLE I.
DEFINITIONS
-----------
Section 1.1. Defined Terms. As used herein, the terms below shall
-------------
have the following meanings:
"Affiliate" shall mean any entity controlling, controlled by or under
---------
common control with the Company. For the purposes of this definition, "control"
shall have the meaning presently specified for that word in Rule 405 promulgated
by the Commission under the Securities Act.
"Agreement" shall mean this Stock Purchase Agreement as amended and
---------
restated, together with all schedules and exhibits referenced herein.
"Alternative Transaction" shall have the meaning set forth in Section
-----------------------
6.8.
"Ancillary Agreements" means the Warrant Agreement, the Supplemental
--------------------
Warrant Agreement, the Stockholders Agreement and the Registration Rights
Agreement.
"Applicable Law" means any statute, law, rule, or regulation or any
--------------
judgment, order, writ, injunction or decree of any Governmental Entity to which
a specified person or property is subject.
"Benefit Arrangement" means any employment, consulting, severance or
-------------------
other similar contract, arrangement or policy and each plan, arrangement
(written or oral), program, agreement or commitment providing for insurance
coverage (including without limitation any self-insured arrangements), workers'
compensation, disability benefits, supplemental unemployment benefits, vacation
benefits, retirement benefits, life, health or accident benefits (including
without limitation any "voluntary employees' beneficiary association" as defined
in Section 501(c)(9) of the Code providing for the same or other benefits) or
for deferred compensation, profit-sharing bonuses, stock options, stock
appreciation rights, stock purchases or other forms of incentive compensation or
post-retirement insurance, compensation or benefits which (A) is not a Welfare
Plan, Pension Plan or Multiemployer Plan, (B) is entered into, maintained,
contributed to or required to be contributed to, as the case may be, by the
Company or an ERISA Affiliate or under which the Company or any ERISA Affiliate
may incur any liability, and (C) covers any present or former employees,
directors or consultants of the Company (with respect to their relationship with
such entities).
"Board of Directors" means the Board of Directors of the Company.
------------------
"Business" means the business of the Company as described more fully
--------
in the "Business" section of the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996.
2
<PAGE>
"Business Day" shall mean any day other than a Saturday, a Sunday or a
------------
bank holiday in New York, New York.
"Bylaws" means the Bylaws of the Company as in effect on the date
------
hereof and as may be amended from time to time.
"Bylaws Amendments" means the amendments in substantially the form set
-----------------
forth in Exhibit F and Exhibit H attached hereto and any other amendments to the
bylaws of the Company and any of its Subsidiaries reasonably necessary in
connection with the transactions contemplated under this Agreement and the
Ancillary Agreements (including amendments required to give effect to the
Supermajority provisions of the Stockholders Agreement).
"Certificate Amendments" means the amendments in substantially the
----------------------
form set forth in Exhibit G attached hereto and any other amendments to the
Certificate of Incorporation or the certificates of incorporation of the
Company's Subsidiaries reasonably necessary in connection with the transactions
contemplated under this Agreement and the Ancillary Agreements, including,
without limitation, (a) an increase to the authorized number of shares of Common
Stock of the Company if necessary, (b) the terms and conditions of the
designations, rights and preference of the Preferred Stock set forth in the
Preferred Stock Certificates of Designations, (c) certain amendments to the
Class AA Certificate of Designations and (d) such other changes to the
Certificate of Incorporation as are reasonably necessary to give effect to the
rights, preferences and designations of the Preferred Stock contained in the
Preferred Stock Certificates of Designations and the provisions of this
Agreement and the Ancillary Agreements (including the voting provisions set
forth in the Stockholders Agreement, if requested by the Purchaser).
"Certificate of Incorporation" means the Certificate of Incorporation
----------------------------
of the Company as amended or restated and as in effect on the date hereof.
"Claim" shall have the meaning set forth in Section 9.5.
-----
"Claim Notice" shall have the meaning set forth in Section 9.5.
------------
"Class AA Certificate of Designations" means the Certificate of
------------------------------------
Designations, Preferences and Relative, Participating, Optional and Other
Special Rights and Qualifications, Limitations and Restrictions thereof of the
Class AA Convertible Preferred Stock, $0.01 par value per share, of the Company,
adopted on September 30, 1997, as the same shall be amended as set forth in the
Certificate Amendments.
"Class AA Per Share Purchase Price" shall mean the price of $1000 per
---------------------------------
share for the Class AA Preferred Stock.
"Class AA Preferred Stock" means the 6% - 12% Class AA Convertible
------------------------
Preferred Stock, $0.01 par value per share, of the Company.
3
<PAGE>
"Class ABI Certificate of Designations" means the Certificate of
-------------------------------------
Designations, Preferences and Relative, Participating, Optional and Other
Special Rights and Qualifications, Limitations and Restrictions thereof of the
Class AB Convertible Redeemable Preferred Stock, $0.01 par value per share, of
the Company, substantially in the form attached thereto as Exhibit A.
----------
"Class ABII Certificate of Designations" means the Certificate of
--------------------------------------
Designations, Preferences and Relative, Participating, Optional and Other
Special Rights and Qualifications, Limitations and Restrictions thereof of the
Class ABII Convertible Redeemable Preferred Stock, $0.01 par value per share, of
the Company, substantially in the form attached thereto as Exhibit B.
----------
"Class ABI Per Share Purchase Price" shall mean the price of $1000 per
----------------------------------
share for the Class ABI Preferred Stock.
"Class ABII Per Share Purchase Price" shall mean the price of $1000
-----------------------------------
per share for the Class ABII Preferred Stock.
"Class AB Preferred Stock" means the Class ABI Preferred Stock and the
------------------------
Class ABII Preferred Stock.
"Class ABI Preferred Stock" means the 12% Class ABI Convertible
-------------------------
Redeemable Preferred Stock, $0.01 par value per share, of the Company.
"Class ABII Preferred Stock" means the 12% Class ABII Convertible
--------------------------
Redeemable Preferred Stock, $0.01 par value per share, of the Company.
"Closing" shall mean the consummation of any purchase of Preferred
-------
Stock.
"Closing Date" means, with respect to the consummation of any purchase
------------
of Preferred Stock, the third Business Day following the date on which the
conditions set forth herein with respect thereto shall be satisfied or duly
waived, or if the Company and the Purchaser mutually agree on a different date
in this Agreement or otherwise, the date upon which they have mutually agreed.
"Code" means the Internal Revenue Code of 1986, as it may be amended
----
from time to time.
"Commission" means the United States Securities and Exchange
----------
Commission.
"Commitment" shall have the meaning set forth in Section 4.11.
----------
"Common Stock" means the common stock, par value $0.01 per share, of
------------
the Company.
"Company" shall have the meaning set forth in the first paragraph
-------
hereof.
"Company Employee Plan" shall have the meaning set forth in Section
---------------------
4.8(a).
4
<PAGE>
"Company Indemnified Parties" shall have the meaning set forth in
---------------------------
Section 9.3.
"Company Pension Plan" shall have the meaning set forth in Section
--------------------
4.8(a).
"Contract" shall mean 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.
"Conversion Shares" means the shares of Common Stock issuable upon the
-----------------
conversion of the Preferred Stock.
"Employee Plans" means all Benefit Arrangements, Multiemployer Plans,
--------------
Pension Plans and Welfare Plans.
"Encumbrance" means any claim, lien, mortgage, deed of trust, deed to
-----------
secure debt, pledge, option, charge, easement, security interest, right-of-way,
encumbrance or other rights of third parties of any nature, and, with respect to
any securities, any agreements, understandings or restrictions affecting the
voting rights or other incidents of record or beneficial ownership pertaining to
such securities.
"Environmental Conditions" means (1) the Release or threatened Release
------------------------
of any Hazardous Material (whether or not upon a Facility or any former Facility
or the Real Property or other property and whether or not such Release
constituted at the time thereof a violation of any Environmental Law), or (2)
the state of the environment, including natural resources (e.g., flora and
fauna) soil, surface water, ground water, wetlands or ambient air, as a result
of which the Company has or may become liable under any Environmental Laws or by
reason of which any Facility, any former Facility or any of the Real Property or
the other assets of the Company may suffer or be subjected to any Encumbrances.
"Environmental Laws" means any and all applicable Federal, state,
------------------
local or municipal laws, rules, orders, regulations, statutes, ordinances,
codes, legally binding decrees, or other requirement of any Governmental Entity
(including, without limitation, common law) regulating, relating to or imposing
liability or standards of conduct concerning protection of the environment or of
human health or relating to exposure of any kind to Hazardous Materials, as has
been, is now, or may at any time hereafter be, in effect.
"Environmental Permits" means any and all permits, licenses,
---------------------
registrations, notifications, exemptions and any other authorization required
under any Environmental Law.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
-----
amended.
"ERISA Affiliate" means any entity which is (or at any relevant time
---------------
was) a member of a "controlled group of corporations" with, under "common
control" with, a member
5
<PAGE>
of an "affiliated service group" with, or otherwise required to be aggregated
with the Company, as set forth in Section 414(b), (c), (m) or (o) of the Code or
Section 4001(b)(1) of ERISA.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
------------
"Executive Committee" shall have the meaning set forth in Section
-------------------
7.3(f).
"Existing Preferred Stock" means the Series A Preferred Stock, the
------------------------
Series B Preferred Stock, the Series C Preferred Stock, the Series D Preferred
Stock and the Series E Preferred Stock of the Company.
"Existing Preferred Stock Certificates of Designations" means the
-----------------------------------------------------
Company's (i) Certificate of Designations, Preferences and Relative,
Participating, Optional and Other Special Rights and Qualifications, Limitations
and Restrictions thereof of the Series A 11% Cumulative Convertible Preferred
Stock, $0.01 par value per share, (ii) Certificate of Designations, Preferences
and Relative, Participating, Optional and Other Special Rights and
Qualifications, Limitations and Restrictions thereof of the Series B Convertible
Preferred Stock, $0.01 par value per share, (iii) Certificate of Designations,
Preferences and Relative, Participating, Optional and Other Special Rights and
Qualifications, Limitations and Restrictions thereof of the Series C Convertible
Preferred Stock, $0.01 par value per share, (iv) Certificate of Designations,
Preferences and Relative, Participating, Optional and Other Special Rights and
Qualifications, Limitations and Restrictions thereof of the Series D 6%
Convertible Redeemable Preferred Stock, $0.01 par value per share and (v)
Certificate of Designations, Preferences and Relative, Participating, Optional
and Other Special Rights and Qualifications, Limitations and Restrictions
thereof of the Series E Preferred Stock.
"Existing Stockholders Agreement" shall mean that certain Stockholders
-------------------------------
Agreement, dated as of April 15, 1996, by and among Charles F. Smith, Jr., James
J. Martell, Jr., Patricia Donnelly, Michael P. Kahn and Pepi Kahn, Co-Trustees
of the Kahn Grantor Trust of 1993, James F. McEneany, Jr., James M. Pirrello,
Brian McGregor, Brian Buchanan, Thomas B. Buffington, Edward A. Kirkpatrick,
James M. Giddens, J. Christopher Stuhmer, Robert Short, Lanold W. Caldwell and
Lawrence J. Witek.
"Facilities" means the offices, buildings and other improvements and
----------
all other real property and related facilities, including the Real Property,
which are owned, leased or operated by the Company or any of its Subsidiaries.
"Financial Product Agreement" shall mean any (a) 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.
"First Closing" shall have the meaning set forth in Section 3.2(a).
-------------
6
<PAGE>
"Fixtures and Equipment" shall mean all of the furniture, fixtures,
----------------------
furnishings, machinery and equipment owned by the Company or any of its
Subsidiaries.
"Further Purchase" shall have the meaning set forth in Section 3.9.
----------------
"GAAP" shall have the meaning set forth in Section 4.9.
----
"Governmental Entity" means any court or tribunal in any jurisdiction
-------------------
(domestic or foreign) or any public, governmental, or regulatory body, agency,
department, commission, board, bureau, or other authority or instrumentality
(domestic or foreign).
"Hazardous Materials" means any hazardous substance, gasoline or
-------------------
petroleum (including crude oil or any fraction thereof) or petroleum products,
polychlorinated biphenyls, ureaformaldehyde insulation, asbestos or asbestos-
containing materials, pollutants, contaminants, radioactivity, and any other
materials or substances of any kind, whether solid, liquid or gas, that is
regulated pursuant to any Environmental Law or that gives rise to liability
under any Environmental Law.
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of
-------
1976, as amended.
"Indemnified Parties" shall have the meaning set forth in Section 9.3.
-------------------
"Indenture" shall mean that certain Indenture, dated as of May 21,
---------
1996, by and between The Fortress Group, Inc. and IBJ Schroder Bank & Trust
Company, as amended by that certain First Supplemental Indenture, dated as of
May 21, 1996, and that certain Second Supplemental Indenture, dated as of May
27, 1997, between the same parties.
"Liabilities" shall mean, as to any person, all debts, adverse claims,
-----------
liabilities and obligations, direct, indirect, absolute or contingent of such
person, whether known or unknown, accrued, vested or otherwise, whether in
contract, tort, strict liability or otherwise and whether or not actually
reflected, or required by GAAP to be reflected, in such person's or entity's
balance sheets or other books and records, including without limitation (i)
obligations arising from non-compliance with any law, rule or regulation of any
Government Entity or imposed by any court or any arbitrator of any kind, (ii)
all indebtedness or liability of such person for borrowed money, or for the
purchase price of property or services (including trade obligations), (iii) all
obligations of such person as lessee under leases, capital or other, (iv)
liabilities of such person in respect of plans covered by Title IV of ERISA, or
otherwise arising in respect of plans for the Company's employees or former
employees or their respective families or beneficiaries, (v) reimbursement
obligations of such person in respect of letters of credit, (vi) all obligations
of such person arising under acceptance facilities, (vii) all liabilities of
other persons or entities, directly or indirectly, guaranteed, endorsed (other
than for collection or deposit in the ordinary course of business) or discounted
with recourse by such person or with respect to which the person in question is
otherwise directly or indirectly liable, (viii) all obligations secured by any
Encumbrance on property of such person, whether or not the obligations have been
assumed, and (ix) all other
7
<PAGE>
items which have been, or in accordance with GAAP would be, included in
determining total liabilities on the liability side of the balance sheet.
"Losses" shall have the meaning set forth in Section 9.2.
------
"Material Adverse Effect" with respect to any person or entity shall
-----------------------
mean 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.
"Material Agreements" shall mean all of the following Contracts 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, or (ii) extend for a term of more than thirty (30) days
from the date hereof (unless the same is (y) cancelable on not more than thirty
(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, (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, or any agreement, Contract or
commitment with or 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, (m) any
construction, development, service, supply and maintenance agreement (unless the
same is (y) cancelable on not more than thirty (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;
"Multiemployer Plan" means any "multiemployer plan," as defined in
------------------
Section 4001(a)(3) or 3(37) of ERISA, which (A) the Company or any ERISA
Affiliate maintains, administers, contributes to or is required to contribute
to, or, after September 25, 1980,
8
<PAGE>
maintained, administered, contributed to or was required to contribute to, or
under which the Company or any ERISA Affiliate may incur any liability and (B)
covers any employee or former employee of the Company or any ERISA Affiliate
(with respect to their relationship with such entities).
"PBGC" means the Pension Benefit Guaranty Corporation.
----
"Pension Plan" means any "employee pension benefit plan" as defined in
------------
Section 3(2) of ERISA (other than a Multiemployer Plan) which (A) the Company or
any ERISA Affiliate maintains, administers, contributes to or is required to
contribute to, or, within the five years prior to the Closing Date, maintained,
administered, contributed to or was required to contribute to, or under which
the Company or any ERISA Affiliate may incur any liability and (B) covers any
employee or former employee of the Company or any ERISA Affiliate (with respect
to their relationship with such entities).
"Permits" shall mean all licenses, permits, orders, consents,
-------
approvals, registrations, authorizations, qualifications and filings required by
any federal, state, local or foreign laws or governmental or regulatory bodies
and all industry or other non-governmental self-regulatory organizations.
"Permitted Encumbrances" means (i) any mechanic's or materialmen's
----------------------
lien or similar Encumbrances arising in the ordinary course of business with
respect to amounts not yet due and payable or which are being contested in good
faith by appropriate proceedings and for which appropriate reserves have been
established, (ii) Encumbrances for Taxes not yet due and payable or which are
being contested in good faith by appropriate proceeding, for which appropriate
reserves have been established, (iii) easements, licenses, covenants, rights of
way and similar Encumbrances which, individually or in the aggregate, would not
materially and adversely affect the marketability or value of the property
encumbered thereby or materially interfere with the operations of the Company.
"Person" means any individual, co-partner, association, partnership,
------
joint venture, limited liability company, trust, estate or other entity or
organization.
"Preferred Stock" means the Class AA Preferred Stock, the Class ABI
---------------
Preferred Stock and the Class ABII Preferred Stock.
"Preferred Stock Certificates of Designations" shall mean the Class AA
--------------------------------------------
Certificate of Designations, the Class ABI Certificate of Designations and the
Class ABII Certificate of Designations.
"Preferred Stock Director" shall mean the three directors elected by
------------------------
the holders of the Preferred Stock in the manner set forth in the Preferred
Stock Certificates of Designations.
"Preferred Stock Liquidation Preference" shall mean $1,000 per share
--------------------------------------
of Preferred Stock, plus any accrued and unpaid dividends thereon.
9
<PAGE>
"Proceeding" means any action, suit or proceeding, whether civil,
----------
criminal, administrative, arbitrative or investigative, any appeal in such an
action, suit or proceeding, and any inquiry or investigation that could
reasonably be expected to lead to such an action, suit or proceeding.
"Proprietary Rights" shall have the meaning set forth in Section
------------------
4.26(a).
"Proxy Materials" means the proxy statement and other proxy materials
---------------
(as amended and supplemented) to be used to solicit proxies on behalf of the
board of directors of the Company in connection with the Stockholders Meeting.
"Purchase Price" shall mean the Class AA Per Share Purchase Price
--------------
multiplied by the number of shares of Class AA Preferred Stock to be purchased
and sold at a particular Closing plus the Class ABI Per Share Purchase Price
multiplied by the number of shares of Class ABI Preferred Stock to be purchased
and sold at a particular Closing plus the Class ABII Per Share Purchase Price
multiplied by the number of shares of Class ABII Preferred Stock to be purchased
and sold at a particular Closing.
"Purchaser" shall have the meaning set forth in the first paragraph
---------
hereof.
"Purchaser Indemnified Parties" shall have the meaning set forth in
-----------------------------
Section 9.2.
"Registration Rights Agreement" means the Amended and Restated
-----------------------------
Registration Rights Agreement substantially in the form of Exhibit C attached
hereto.
"Regulation D" shall have the meaning set forth in Section 4.27(b).
------------
"Regulations" means any laws, statutes, ordinances, regulations,
-----------
rules, notice requirements, court decisions and orders of any foreign, federal,
state or local government and any other governmental department or agency,
including without limitation Environmental Laws, energy, motor vehicle safety,
public utility, zoning, building and health codes, occupational safety and
health laws and laws respecting employment practices, employee documentation,
terms and conditions of employment and wages and hours.
"Release" means and includes any spilling, leaking, pumping, pouring,
-------
emitting, emptying, discharging, injecting, escaping, leaching, dumping or
disposing into the environment or the workplace of any Hazardous Materials, and
otherwise as defined in any Environmental Law.
"Schedules" shall have the meaning set forth in Section 10.10.
---------
"SEC Filings" shall have the meaning set forth in Section 4.9.
-----------
"Second Closing" shall have the meaning set forth in Section 3.2(b).
--------------
10
<PAGE>
"Securities" means the Preferred Stock, the Warrants and the
----------
Supplemental Warrants.
"Securities Act" means the Securities Act of 1933, as amended.
--------------
"Series A Preferred Stock" means the shares of Series A 11% Cumulative
------------------------
Convertible Preferred Stock, $0.01 par value per share, of the Company
outstanding on the date hereof.
"Series B Preferred Stock" means the shares of Series B Convertible
------------------------
Preferred Stock, $0.01 par value per share, of the Company outstanding on the
date hereof.
"Series C Preferred Stock" means the shares of Series C Convertible
------------------------
Preferred Stock, $0.01 par value per share, of the Company to be issued in
accordance with existing contractual provisions.
"Series D Preferred Stock" means the shares of Series D 6% Convertible
------------------------
Redeemable Preferred Stock, $0.01 par value per share, of the Company
outstanding on the date hereof or to be issued in accordance with existing
contractual provisions.
"Series E Preferred Stock" means the shares of Series E Preferred
------------------------
Stock, $0.01 par value per share, of the Company outstanding on the date hereof.
"Shareholder Undertakings" means the undertakings delivered by the
------------------------
Company to the Purchaser on the date of this Agreement pursuant to the
Stockholders Voting Agreement by all the stockholders party to the Stockholders
Voting Agreement including the proxy of each such person to vote in favor of the
Stockholder Approval.
"Stockholder Approval" shall have the meaning set forth in Section
--------------------
8.1(a).
"Stockholders Agreement" means the Amended and Restated Stockholders
----------------------
Agreement substantially in the form of Exhibit E attached hereto.
"Stockholders Meeting" shall have the meaning set forth in Section
--------------------
6.1(a).
"Stockholders Voting Agreement" shall mean that certain Stockholders
-----------------------------
Voting Agreement, dated as of September 30, 1997, by and among the Company, the
Purchaser and certain stockholders named therein.
"Subsequent Closing" shall mean each Closing of a Subsequent Purchase.
------------------
"Subsequent Purchase" shall have the meaning set forth in Section
-------------------
3.3(a).
"Subsidiary" means, with respect to any Person, (a) any corporation of
----------
which at least a majority in interest of the outstanding voting stock (having by
the terms thereof voting power under ordinary circumstances to elect a majority
of the directors of such corporation,
11
<PAGE>
irrespective of whether or not at the time stock of any other class or classes
of such corporation shall have or might have voting power by reason of the
happening of any contingency) is at the time, directly or indirectly, owned or
controlled by such Person, by one or more Subsidiaries of such Person, or by
such Person and one or more of its Subsidiaries, or (b) any corporate or non-
corporate entity in which such Person, one or more Subsidiaries of such Person,
or such person and one or more Subsidiaries of such Person, directly or
indirectly, at the date of determination thereof, has an ownership interest and
100% of the revenue of which is included in the consolidated financial reports
of such Person consistent with GAAP.
"Supplemental Warrant Agreement" means that certain Warrant Agreement
------------------------------
by and between the Company and the Purchaser substantially in the form attached
hereto as Exhibit I pursuant to which the Company shall at the first Subsequent
---------
Closing issue the Supplemental Warrants to the Purchaser or its designee.
"Supplemental Warrants" shall have the meaning set forth in the
---------------------
recitals hereto.
"Tax" or "Taxes" means any federal, state, local or foreign net or
--- -----
gross income, gross receipts, license, payroll, employment, excise, severance,
stamp, occupation, premium, (including taxes under Code Sec. 59A), customs
duties, capital stock, franchise, profits, withholding, social security (or
similar), unemployment, disability, real property, personal property, sales,
use, transfer, registration, value added, alternative or add-on minimum,
estimated, or other tax, governmental fee or like assessment or charge of any
kind whatsoever, including any interest, penalty or addition thereto, whether
disputed or not, imposed by any governmental authority or arising under any Tax
law or agreement, including, without limitation, any joint venture or
partnership agreement.
"Tax Return" means any return, declaration, report, claim for refund
----------
or information or return or statement relating to Taxes, including any schedule
or attachment thereto, and including any amendments thereof.
"Third Party Notice" shall have the meaning set forth in Section 9.5.
------------------
"Title Policies" shall have the meaning set forth in Section 4.16(a).
--------------
"Transaction" means, taken together, the transactions contemplated
-----------
under this Agreement.
"Transaction Expenses" means the reasonable fees and expenses incurred
--------------------
by the Purchaser, including, but not limited to, fees and expenses of legal
counsel, accountants and consultants and travel expenses in connection with the
preparation of the Agreement and the Purchaser's due diligence examination
relating to the Agreement and the transactions contemplated hereby, including,
without limitation, Hart-Scott-Rodino filing fees, if any.
"Warrant Agreement" means that certain Amended and Restated Warrant
-----------------
Agreement by and between the Company and the Purchaser substantially in the form
attached
12
<PAGE>
hereto as Exhibit D, pursuant to which the Company has at the First
Closing and shall at the first Subsequent Closing, issue the Warrants to the
Purchaser.
"Warrants" shall have the meaning set forth in the recitals hereto.
--------
"Warrant Shares" means the Common Stock issuable upon the exercise of
--------------
the Warrants and the Supplemental Warrants.
"Welfare Plan" means any "employee welfare benefit plan" as defined in
------------
Section 3(1) of ERISA, which (A) the Company or any ERISA Affiliate maintains,
administers, contributes to or is required to contribute to, or under which the
Company or any ERISA Affiliate may incur any liability and (B) covers any
employee or former employee of the Company or any ERISA Affiliate (with respect
to their relationship with such entities).
ARTICLE II.
PURCHASE AND SALE OF SECURITIES
-------------------------------
Section 2.1. Purchase and Sale of Securities. Subject to the terms
-------------------------------
and conditions hereof, from time to time, at the Closings, the Company has and
will sell, convey, assign, transfer, and deliver, and the Purchaser will
purchase and acquire from the Company (i) an aggregate of 40,000 shares of Class
AA Preferred Stock (including the 11,700 shares of Class AA Preferred Stock
issued to the Purchaser on September 30, 1997), (ii) an aggregate of 35,000
shares of Class AB Preferred Stock which shall be apportioned between the Class
ABI Preferred Stock and the Class ABII Preferred Stock as set forth in Section
10.17 and (iii) an aggregate of 1,000,000 Warrants (subject to adjustment in
accordance with the terms of the Warrant Agreement), including the 375,000
Warrants issued to the Purchaser on September 30, 1997 and an aggregate of up to
5,714,286 Supplemental Warrants (subject to adjustment as set forth in the
Supplemental Warrant Agreement).
Section 2.2. Consideration. Subject to the terms and conditions
-------------
hereof, at each Closing, the Purchaser shall deliver to the Company the Purchase
Price with respect to the number of shares of Preferred Stock to be purchased
and sold at such Closing by wire transfer of immediately available funds in U.S.
dollars to the account or accounts specified by the Company.
Section 2.3. Right to Assign. The Purchaser may assign its rights
---------------
and delegate its obligations created hereby to purchase Securities in accordance
with the provisions of Section 10.7.
13
<PAGE>
ARTICLE III.
CLOSING
-------
Section 3.1. Location of Closings. Each Closing shall be held at
--------------------
9:00 a.m. Eastern Time on the applicable Closing Date at the offices of Latham &
Watkins, 885 Third Avenue, New York, New York 10022.
Section 3.2. First and Second Closings.
-------------------------
(a) First Closing. On September 30, 1997, on terms substantially
-------------
similar to those set forth herein, the Purchaser purchased and acquired from the
Company, and the Company sold, conveyed, assigned, transferred and delivered to
the Purchaser, 11,700 shares of Class AA Preferred Stock and 375,000 Warrants,
and the Purchaser paid to the Company the Purchase Price for such shares of
Class AA Preferred Stock (the "First Closing").
-------------
(b) Second Closing. Subject to the terms and conditions hereof, on
--------------
February 27, 1998, the Purchaser will purchase and acquire from the Company and
the Company will sell, convey, assign, transfer and deliver to the Purchaser,
28,300 shares of Class AA Preferred Stock and the Purchaser will pay to the
Company the Purchase Price for such shares of Class AA Preferred Stock (the
"Second Closing").
- ---------------
Section 3.3. Subsequent Purchases and Sales.
------------------------------
(a) Subject to the terms and conditions hereof, following the Second
Closing, the Company shall be obligated to sell to the Purchaser, from time to
time at one or more Subsequent Closings, an aggregate of 35,000 shares of Class
AB Preferred Stock, apportioned between the Class ABI Preferred Stock and the
Class ABII Preferred Stock as set forth in Section 10.17 (each referred to as a
"Subsequent Purchase" and, together, the "Subsequent Purchases"), subject to
------------------- --------------------
satisfaction or waiver of the conditions set forth in Sections 7.1 and 7.3 and
Article VIII. Subject to the terms and conditions hereof, the Closing of any
Subsequent Purchase shall occur as soon as practicable following the date on
which the conditions set forth in Article VII and Article VIII shall have been
satisfied or duly waived and the applicable notice period referred to in Section
3.3(b) below shall have expired; provided, however, that no Subsequent Purchase
-------- -------
shall occur within six months following the date of the Second Closing unless
the Purchaser expressly consents in writing to any such Subsequent Purchase.
Concurrently with the earlier of (i) the first sale of Class AB Preferred Stock
(or debt instrument issued as described in Section 10.16) or (ii) the date on
which the Company receives a written notice from the Purchaser notifying the
Company that it has failed to purchase the amount of Class AB Preferred Stock
required by the terms of this Agreement (which notice shall not be delivered
prior to December 31, 1998), the Company shall issue 625,000 Warrants to the
Purchaser and shall execute and deliver the Supplemental Warrant Agreement to
the Purchaser and shall issue the Supplemental Warrants. The Company represents
and warrants that upon satisfaction of the conditions set forth herein, no
further action is required to permit the execution and delivery of
14
<PAGE>
the Supplemental Warrant Agreement and for the Warrants and the Supplemental
Warrants to be deemed issued and outstanding.
(b) At least 20 Business Days prior to any Subsequent Purchase, the
Company shall notify (which shall be in writing and irrevocable) the Purchaser
of the anticipated date of the Subsequent Closing (which shall be a Business
Day) and the number of shares of Class AB Preferred Stock the Company is
requiring the Purchaser to purchase, which shall not be fewer than 10,000 Shares
of Class AB Preferred Stock unless such purchase is of the balance of the Class
AB Preferred Stock. The Company shall be obligated to sell to the Purchaser all
of the Class AB Preferred Stock on or before December 31, 1998.
Section 3.4. Deliveries by the Company at Closing. At each Closing,
------------------------------------
the Company shall issue and deliver to the Purchaser:
(a) certificates evidencing the Preferred Stock to be issued and
delivered at such Closing in the name of the Purchaser (or its permitted
assignee(s)) in the respective amounts as set forth in a written notice provided
to the Company by the Purchaser, free and clear of all Encumbrances;
(b) at the First Closing, certificates evidencing 375,000 Warrants
and, at the first Subsequent Closing, certificates evidencing 625,000 Warrants
and up to 5,714,286 Supplemental Warrants, in each case in the name of the
Purchaser (or its permitted assignee(s)) in the respective amounts as set forth
in a written notice provided to the Company by the Purchaser, free and clear of
all Encumbrances; and
(c) all such other documents and instruments as the Purchaser or its
counsel shall reasonably request to consummate or evidence the Transaction.
Section 3.5. Deliveries by the Purchaser at Closing. At each
--------------------------------------
Closing, the Purchaser shall deliver to the Company:
(a) immediately available funds as provided in Section 2.2;
(b) all such other documents and instruments as the Company or its
counsel shall reasonably request to consummate or evidence the Transaction.
Section 3.6. Certificates; Opinions. At each Closing, the Purchaser
----------------------
and the Company shall deliver the certificates, opinions of counsel, and other
documents described in Article VII.
Section 3.7. Ancillary Agreements. (a) At the Second Closing, the
--------------------
Company and the Purchaser shall enter into the Ancillary Agreements other than
the Supplemental Warrant Agreement.
(b) At the first Subsequent Closing, the Company and the Purchaser
shall enter into the Supplemental Warrant Agreement.
15
<PAGE>
Section 3.8. Form of Documents and Instruments. All of the documents
---------------------------------
and instruments delivered at Closing shall be in form and substance, and shall
be executed and delivered in a manner, reasonably satisfactory to the parties'
respective counsel.
Section 3.9. Further Purchases. Provided that the Company has at
-----------------
such time sold all Subsequent Purchases to the Purchaser, the Company may, at
its option, request in writing on not less than thirty (30) Business Days'
notice that the Purchaser purchase in the aggregate from the Company, in
proportionate amounts and on terms otherwise identical to the terms of the
securities set forth in Section 2.1., in addition to the Securities set forth in
Section 2.1, up to an additional 13,333 shares of Class AA Preferred Stock, up
to an additional 11,667 shares of Class AB Preferred Stock apportioned between
Class ABI Preferred Stock and Class ABII Preferred Stock as set forth in Section
10.17, up to an additional 333,250 Warrants and up to an additional 1,904,762
Supplemental Warrants (a "Further Purchase"). The Purchaser may, in its sole
----------------
discretion accede to or refuse any such request for a Further Purchase. If the
Purchaser accepts any request for a Further Purchase, all Further Purchases
shall take place in accordance with Sections 3.3 through 3.8 as if the number of
Securities set forth in Section 3.3(a) were increased by the number of
additional Securities which the Purchaser has agreed to purchase as a Further
Purchase pursuant to this Section 3.9. Purchaser shall have a right of first
refusal with respect to any bona fide offer to purchase up to $25,000,000 of
equity capital (provided that Purchaser must respond to such offer within 30
days and if Purchaser does not accept such offer, the Company cannot raise such
capital on terms materially less favorable to the Company without first offering
the securities again to Purchaser).
Section 3.10. Redelivery and Cancellation of Warrants. From and
---------------------------------------
after the Second Closing, in the event the Purchaser defaults in any of its
obligations hereunder to fund Subsequent Purchases (otherwise than by reason of
a default of the Company), the Purchaser shall promptly redeliver to the Company
for cancellation all Warrants (but not Supplemental Warrants) received by it in
excess of one (1) Warrant for every seventy five dollars ($75) liquidation
preference of Preferred Stock issued pursuant to this Agreement.
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
---------------------------------------------
The Company represents and warrants to the Purchaser as follows:
Section 4.1. Organization of the Company. The Company is a
---------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and has all requisite corporate power and authority to
own, lease, and operate its properties and to carry on its business as presently
being conducted. No actions or proceedings to dissolve the Company are pending
or, to the knowledge of the Company, threatened. The copies of the Certificate
of Incorporation and Bylaws heretofore delivered by the Company to the Purchaser
are accurate and complete as of the date hereof. The Company is duly qualified
or licensed to do business as a foreign corporation and is in good standing in
each jurisdiction in which the property owned, leased, or operated by it or the
conduct of its business requires such
16
<PAGE>
qualification or licensing, except where the failure to do so taken in the
aggregate would not have a Material Adverse Effect on the Company.
Section 4.2. Capitalization of the Company. The authorized capital
-----------------------------
stock of the Company as of the date hereof, consists of 49,000,000 shares of
Common Stock, par value $0.01 per share and 1,000,000 shares of preferred stock.
As of the date hereof, 11,612,594 shares of Common Stock, 11,700 shares of Class
AA Preferred Stock, 10,000 shares of Series A Preferred Stock, 8,854 shares of
Series B Preferred Stock, no shares of Series C Preferred Stock, 60,000 shares
of Series D Preferred Stock and 2,500 shares of Series E Preferred Stock were
outstanding. As of the date hereof, 379,800 shares of Common Stock are reserved
for issuance upon exercise of outstanding employee stock options, 188,540 shares
of Common Stock are reserved for issuance upon conversion of the Existing
Preferred Stock and other outstanding securities, a maximum of 60,000 shares of
Series C Preferred Stock are reserved for issuance pursuant to existing
contractual agreements and a maximum of 600,000 shares of Common Stock are
reserved for issuance upon conversion of such Series C Preferred Stock. Schedule
--------
4.2 sets forth the beneficiaries of all such reserved shares. Schedule 4.2
- ---- ------------
contains the aggregate number of outstanding options to purchase shares of
Common Stock, the weighted average exercise price with respect to such options
and the plan or other arrangements pursuant to which such options were issued.
All outstanding shares of capital stock of the Company have been validly issued
and are fully paid and nonassessable, and no shares of capital stock of the
Company are subject to, nor have any been issued in violation of, any preemptive
or similar rights.
(b) Except as set forth above in paragraph (a) of this Section 4.2,
as contemplated by this Agreement and as set forth on Schedule 4.2 hereof, there
------------
are outstanding (i) no shares of capital stock or other voting securities of the
Company; (ii) no securities of the Company convertible into or exchangeable for
shares of capital stock or other voting securities of the Company; (iii) no
subscriptions, options, warrants, calls, commitments, preemptive rights or other
rights of any kind to acquire from the Company, and no obligation of the Company
to issue or sell, any shares of capital stock or other voting securities of the
Company or any securities of the Company convertible into or exchangeable for
such capital stock or voting securities; and (iv) no equity equivalents, stock
appreciation rights, interests in the ownership or earnings or other similar
rights of or with respect to the Company. Except as set forth on Schedule 4.2,
------------
there are no outstanding contractual obligations of the Company to repurchase,
redeem or otherwise acquire any shares of Common Stock or any other securities
of the type described in clauses (i)-(iv) of the preceding sentence. Except as
set forth on Schedule 4.2, there are no restrictions upon the voting or transfer
------------
of any share of the capital stock or other voting securities of the Company
pursuant to the Certificate of Incorporation, the Existing Preferred Stock
Certificates of Designations, the Bylaws or other governing documents or any
agreement or other instrument to which the Company is a party or by which the
Company is bound other than restricted stock held by certain employees. Schedule
--------
4.2 contains a true and correct list of all persons holding restricted stock (as
- ----
defined under any plan or arrangement pursuant to which it was issued), the
number of shares of restricted stock held by such persons and the document or
documents which describe such restrictions.
17
<PAGE>
Section 4.3. Authorization of Issuance. Upon consummation of the
-------------------------
transactions contemplated hereby, the Preferred Stock acquired by the Purchaser
from the Company will be duly authorized and validly issued, fully paid and not
subject to any preemptive or similar rights. Upon consummation of the
transactions contemplated hereunder, the Conversion Shares will be duly
authorized and reserved for issuance and upon conversion in accordance with the
terms of the Preferred Stock will be validly issued, fully paid and
nonassessable and not subject to any preemptive or similar rights. Upon the
First Closing, the Warrant Shares issuable upon exercise of the Warrants will be
duly authorized and reserved for issuance and, upon exercise of the Warrants in
accordance with the terms thereof, will be validly issued, fully paid and
nonassessable and not subject to any preemptive or similar rights. Upon the
Second Closing, the Warrant Shares issuable upon the exercise of the
Supplemental Warrants will be duly authorized and reserved for issuance and,
upon exercise of the Supplemental Warrants in accordance with the terms thereof,
will be validly issued, fully paid and nonassessable and not subject to any
preemptive or similar rights.
Section 4.4. Authorization. The Company has full corporate power and
-------------
authority to execute and deliver this Agreement and the Ancillary Agreements to
which it is a party and to consummate the transactions contemplated hereby and
thereby other than the Stockholder Approval. The execution and delivery by the
Company of this Agreement has been duly authorized by all necessary corporate
action of the Company. The execution and delivery by the Company of the
Ancillary Agreements to which it is a party, and the consummation by it of the
transactions contemplated hereby and thereby, have been duly authorized by all
necessary corporate action of the Company (other than the Stockholder Approval).
This Agreement has been duly executed and delivered by the Company and
constitutes, and each Ancillary Agreement executed or to be executed by the
Company has been, or when executed will be, duly executed and delivered by the
Company and constitutes, or when executed and delivered will constitute, a valid
and legally binding obligation of the Company, enforceable against the Company
in accordance with its terms.
Section 4.5. Noncontravention. Except as set forth on Schedule 4.5,
---------------- ------------
the execution and delivery by the Company of this Agreement and the Ancillary
Agreements and the performance by it of the transactions contemplated hereby and
thereby (including the conversion/exercise of all of the Securities acquired or
to be acquired by the Purchaser hereunder) do not and will not (i) conflict with
or result in a violation of any provision of the Certificate of Incorporation or
the Bylaws, or the charter, bylaws, or other governing instruments of any of its
Subsidiaries, (ii) conflict with or result in a violation of any provision of,
or constitute (with or without the giving of notice or the passage of time or
both) a default under, or give rise (with or without the giving of notice or the
passage of time or both) to any loss of a benefit which would have a Material
Adverse Effect, or of any event of default, right of termination, cancellation,
or acceleration under, any Material Agreement including, without limitation, the
Indenture, (iii) result in the creation or imposition of any Encumbrance (other
than a Permitted Encumbrance) upon the properties of the Company or any of its
Subsidiaries, or (iv) violate any Applicable Law binding upon the Company or any
of its Subsidiaries. Schedule 4.5 sets forth, in reasonable detail, the
------------
calculations of the Company demonstrating that the
18
<PAGE>
Company is currently in compliance with the Indenture and that the transactions
contemplated hereby do not and will not result in an event of default under or
breach of the terms of the Indenture, or give rise to a "Change of Control
Offer" as defined in the Indenture.
Section 4.6. Consents and Approvals. No consent, approval, order,
----------------------
authorization of, or declaration, filing, or registration with, any Governmental
Entity is required to be obtained or made by the Company or any of its
Subsidiaries in connection with the execution and delivery by the Company of
this Agreement and the Ancillary Agreements to which it is a party or the
consummation of the transactions contemplated hereby and thereby, other than (i)
filings under the HSR Act and expiration or termination of any applicable
waiting period required thereunder, (ii) the filing of the Certificate
Amendments with the Secretary of State of the State of Delaware, and (iii)
filings under the Exchange Act. Except as set forth on Schedule 4.6, no consent
------------
or approval of any person other than any Governmental Entity or The Nasdaq Stock
Market, Inc. is required to be obtained or made by the Company or any of its
Subsidiaries in connection with the execution and delivery by the Company of
this Agreement and the Ancillary Agreements to which it is a party or the
consummation of the transactions contemplated hereby and thereby.
Section 4.7. Subsidiaries. Except as otherwise set forth on Schedule
------------ --------
4.7, the Company does not own, directly or indirectly, any of the capital stock
- ---
or other securities of any corporation or partnership or have any direct or
indirect equity or ownership interest of more than five percent in any other
person, other than its Subsidiaries. Schedule 4.7 lists each such Subsidiary of
------------
the Company as of the date hereof and its respective jurisdiction of
incorporation or formation. As set forth on Schedule 4.7, each Subsidiary of the
------------
Company is a corporation, partnership or limited liability company duly
organized or formed, as the case may be, validly existing, and in good standing
under the laws of the jurisdiction of its incorporation or formation. Each such
Subsidiary has all requisite organizational authority to own, lease, and operate
its properties and to carry on its business as now being conducted. Except as
otherwise indicated on Schedule 4.7, no actions or proceedings to dissolve any
------------
Subsidiary of the Company are pending.
(b) Except as otherwise indicated on Schedule 4.7 or under the
------------
Securities Act or the rules and regulations promulgated thereunder, all the
outstanding capital stock or other equity interests of each Subsidiary of the
Company is owned directly or indirectly by the Company, free and clear of all
Encumbrances and restrictions on voting, sale, transfer or disposition. All
outstanding shares of capital stock of each Subsidiary of the Company have been
validly issued and are fully paid and nonassessable. No shares of capital stock
or other equity interests of any Subsidiary of the Company are subject to, nor
have any been issued in violation of, preemptive or similar rights.
(c) Except for shares of Common Stock owned by the Company or any
Subsidiary of the Company and as set forth above on Schedule 4.7, there are
------------
outstanding (i) no shares of capital stock or other voting securities of any
Subsidiary of the Company; (ii) no securities of any Subsidiary of the Company
convertible into or exchangeable for shares of
19
<PAGE>
capital stock or other voting securities of any of any Subsidiary of the
Company; (iii) no subscriptions, options, warrants, calls, commitments,
preemptive rights or other rights of any kind to acquire from any Subsidiary of
the Company, and no obligation of any Subsidiary of the Company to issue or
sell, any shares of capital stock or other voting securities of any Subsidiary
of the Company or any securities of any Subsidiary of the Company convertible
into or exchangeable for such capital stock or voting securities; and (iv) no
equity equivalents, stock appreciation rights, interests in the ownership or
earnings, or other similar rights of or with respect to any Subsidiary of the
Company. There are no outstanding contractual obligations of any Subsidiary of
the Company to repurchase, redeem or otherwise acquire any shares of capital
stock or any other securities of the type described in clauses (i)-(iv) of the
preceding sentence.
Section 4.8. Employee Benefit Plans and Other Agreements. (a)
-------------------------------------------
Disclosure; Delivery of Copies of Relevant Documents and Other Information.
- --------------------------------------------------------------------------
Schedule 4.8 contains a complete list of Employee Plans which cover or have
- ------------
covered present or former employees, directors or consultants of the Company or
any of its Subsidiaries (with respect to their relationship with such entities)
(each, a "Company Employee Plan"). True and complete copies of each of the
---------------------
following Company Employee Plan documents have been delivered or made available
by the Company to the Purchaser: (i) each Company Employee Plan document (and,
if applicable, related trust agreements and all annuity contracts or other
funding instruments) and all amendments thereto, all reasonably available
written descriptions thereof which have been distributed to the Company's
employees and those of its ERISA Affiliates and a complete description of any
Company Employee Plan, which is not in writing (including a description of the
number and level of employees covered thereby), (ii) the most recent
determination or opinion letter issued by the Internal Revenue Service with
respect to each Pension Plan and each Welfare Plan (other than a Multiemployer
Plan), which covers or has covered employees of the Company or any of its ERISA
Affiliates (with respect to their relationship with such entities), (iii) for
the three most recent plan years, any Annual Reports on Form 5500 Series
required to be filed with any governmental agency for each Pension Plan which
covers or has covered employees or former employees of the Company or any of its
ERISA Affiliates (with respect to their relationship with such entities) (each,
a "Company Pension Plan"), (iv) any actuarial reports prepared for the last
--------------------
three plan years for each Pension Plan which covers or has covered present or
former employees, directors or consultants of the Company or any of its
Subsidiaries (with respect to their relationship with such entities), (v) a
tabulation of age, salary, service and related data as of the last day of the
last plan year for employees of the Company or any of its Subsidiaries and (vi)
a description setting forth the amount of any liability of the Company or any of
its Subsidiaries as of the Closing Date for payments more than thirty (30)
calendar days past due with respect to each Welfare Plan which covers or has
covered employees or former employees of the Company or any of its Subsidiaries.
20
<PAGE>
(b) Employee Plans.
--------------
(i) Pension Plans.
-------------
(A) The funding method used in connection with any
Pension Plan which is subject to the minimum funding requirements of ERISA is
acceptable and the actuarial assumptions used in connection with funding each
such plan are reasonable. As of the last day of the last plan year of each
Pension Plan and as of the Closing Date, the "amount of unfunded benefit
liabilities" as defined in Section 4001(a)(18) of ERISA (but excluding from the
definition of "current value" of "assets" of such Pension Plan, accrued but
unpaid contributions) did not and will not exceed zero. No "accumulated funding
deficiency" (for which an excise tax is due or would be due in the absence of a
waiver) as defined in Section 412 of the Code or as defined in Section 302(a)(2)
of ERISA, whichever may apply, has been incurred with respect to any Pension
Plan with respect to any plan year, whether or not waived. Neither the Company
nor any ERISA Affiliate has failed to pay when due any "required installment",
within the meaning of Section 412(m) of the Code and Section 302(e) of ERISA,
whichever may apply, with respect to any Pension Plan. Neither the Company nor
any ERISA Affiliate is subject to any lien imposed under Section 412(n) of the
Code or Section 302(f) of ERISA, whichever may apply, with respect to any
Pension Plan. Neither the Company nor any ERISA Affiliate has any liability for
unpaid contributions with respect to any Pension Plan.
(B) Neither the Company nor any ERISA Affiliate is
required to provide security to any Company Pension Plan under Section
401(a)(29) of the Code.
(C) Any Company Pension Plan and each related trust
agreement, annuity contract or other funding instrument is qualified and tax-
exempt under the provisions of Code Sections 401(a) (or 403(a), as appropriate)
and 501(a) and has been so qualified during the period from its adoption to
date.
(D) Any Company Pension Plan and each related trust
agreement, annuity contract or other funding instrument presently complies and
has been maintained in compliance, in all material respects, with its terms and,
both as to form and in operation, with the requirements prescribed by any and
all statutes, orders, rules and regulations which are applicable to such plans,
including without limitation ERISA and the Code.
(E) The Company has paid all premiums (and interest
charges and penalties for late payment, if applicable) due the PBGC with respect
to each Company Pension Plan for each plan year thereof for which such premiums
are required. Neither the Company nor any ERISA Affiliate has engaged in, or is
a successor or parent corporation to an entity that has engaged in, a
transaction described in Section 4069 of ERISA. There has been no "reportable
event" (as defined in Section 4043(b) of ERISA and the PBGC regulations under
such Section) with respect to any Pension Plan. No filing has been made by the
Company or any ERISA Affiliate with the PBGC, and no proceeding has been
commenced by the PBGC, to terminate any Pension Plan. No condition exists and no
event has occurred that could constitute grounds for the termination of any
Pension Plan by the PBGC. Neither the Company nor any
21
<PAGE>
ERISA Affiliate has, at any time, (1) ceased operations at a facility so as to
become subject to the provisions of Section 4062(e) of ERISA, (2) withdrawn as a
substantial employer so as to become subject to the provisions of Section 4063
of ERISA, or (3) ceased making contributions on or before the Closing Date to
any Pension Plan subject to Section 4064(a) of ERISA to which the Company or any
ERISA Affiliate made contributions during the six years prior to the Closing
Date.
(ii) Multiemployer Plans.
-------------------
(A) Neither the Company nor any ERISA Affiliate has, at
any time, withdrawn from a Multiemployer Plan in a "complete withdrawal" or a
"partial withdrawal" as defined in Sections 4203 and 4205 of ERISA,
respectively, so as to result in a liability, contingent or otherwise (including
without limitation the obligations pursuant to an agreement entered into in
accordance with Section 4204 of ERISA), of the Company or any ERISA Affiliate.
Neither the Company nor any ERISA Affiliate has engaged in, or is a successor or
parent corporation to an entity that has engaged in, a transaction described in
Section 4212(c) of ERISA.
(B) All contributions required to be made by the
Company or any ERISA Affiliate to any Multiemployer Plan have been made when
due.
(C) If, as of the Closing Date, the Company (and all
ERISA Affiliates) were to withdraw from any Multiemployer Plans to which it (or
any of them) has contributed or been obligated to contribute, it (and they)
would incur no liabilities to such plans under Title IV of ERISA.
(D) To the best of the Company's knowledge, with
respect to any Multiemployer Plan: (1) no such Multiemployer Plan has been
terminated or has been in reorganization under ERISA so as to result, directly
or indirectly, in any liability, contingent or otherwise, of the Company or any
ERISA Affiliate under Title IV of ERISA; (2) no proceeding has been initiated by
any person (including the PBGC) to terminate such Multiemployer Plan; (3) a
"mass withdrawal", as defined in PBGC Reg. Section 2640.7, with respect to such
Multiemployer Plan has not occurred; (4) the Company and the ERISA Affiliates
have no reason to believe that such Multiemployer Plan will be terminated or
will be reorganized under ERISA or that a "mass withdrawal", as defined in PBGC
Reg. Section 2640.7, will occur with respect to such Multiemployer Plan; and (5)
the Company and the ERISA Affiliates do not expect to withdraw in a "complete
withdrawal" or "partial withdrawal" from such Multiemployer Plan.
(iii) Welfare Plans
-------------
(A) Each Welfare Plan presently complies and has been
maintained in compliance, in all material respects, with its terms and, both as
to form and operation, with the requirements prescribed by any and all statutes,
orders, rules and regulations which are applicable to such Welfare Plan,
including without limitation ERISA and the Code.
22
<PAGE>
(B) None of the Company, any ERISA Affiliate or any
Welfare Plan has any present or future obligation to make any payment to, or
with respect to any present or former employee of the Company or any ERISA
Affiliate pursuant to, any retiree medical benefit plan, or other retiree
Welfare Plan, and no condition exists which would prevent the Company from
amending or terminating any such benefit plan or Welfare Plan.
(C) Each Welfare Plan which is a "group health plan,"
as defined in Section 607(1) of ERISA, has been operated in material compliance
with provisions of Part 6 of Title I, Subtitle B of ERISA and 4980B of the Code
at all times.
(D) Neither the Company nor any ERISA Affiliate has
incurred any liability with respect to any Welfare Plan that is a "multiemployer
plan", as defined in Section 3(37) of ERISA, under the terms of such Welfare
Plan, any collective bargaining agreement or otherwise resulting from any
cessation of contributions, cessation of obligation to make contributions or
other form of withdrawal from such Welfare Plan.
(E) If, as of the Closing Date, the Company (and all
ERISA Affiliates) were to have a cessation of contribution, cessation of
obligations to make contribution or other form of withdrawal from all Welfare
Plans that are "multiemployer plans", as defined in Section 3(37) of ERISA, it
(and they) would incur no material liabilities with respect to any such Welfare
Plans under the terms of such Welfare Plans, any collective bargaining agreement
or otherwise.
(iv) Benefit Arrangements. Each Benefit Arrangement has been
--------------------
maintained in all material respects in compliance with its terms and with the
requirements prescribed by any and all statutes, orders, rules and regulations
which are applicable to such Benefit Arrangement, including without limitation,
the Code. Except as set forth in Schedule 4.8 and except as provided by law, the
------------
employment of all persons presently employed or retained by the Company is
terminable at will.
(v) Unrelated Business Taxable Income. No Employee Plan (or
---------------------------------
trust or other funding vehicle pursuant thereto) is subject to any tax under
Code Section 511.
(vi) Deductibility of Payments. There is no contract,
-------------------------
agreement, plan or arrangement covering any present or former employee, director
or consultant of the Company or any of its Subsidiaries (with respect to his or
her relationship with such entities) that, individually or collectively,
provides for the payment by the Company of any amount (i) that is not deductible
under Section 162(a)(1), 162(m) or 404 of the Code or (ii) that is an "excess
parachute payment" pursuant to Section 280G of the Code.
(vii) Fiduciary Duties and Prohibited Transactions. Neither
--------------------------------------------
the Company nor any plan fiduciary of any Welfare Plan or Pension Plan, has
engaged in any transaction in violation of Sections 404 or 406 of ERISA or any
"prohibited transaction," as defined in Section 4975(c)(1) of the Code, for
which no exemption exists under Section 408 of ERISA or Section 4975(c)(2) or
(d) of the Code, or has otherwise violated the provisions of Part
23
<PAGE>
4 of Title I, Subtitle B of ERISA. The Company has not knowingly participated in
a violation of Part 4 of Title I, Subtitle B of ERISA by any plan fiduciary of
any Welfare Plan or Pension Plan and has not been assessed any civil penalty
under Section 502(l) of ERISA.
(viii) Validity and Enforceability. Each Welfare Plan, Pension
---------------------------
Plan, related trust agreement, annuity contract or other funding instrument is
legally valid and binding and in full force and effect.
(ix) Litigation. There is no action, order, writ,
----------
injunction, judgment or decree outstanding or claim, suit, litigation,
proceeding, arbitral action, governmental audit or investigation relating to or
seeking benefits under any Employee Plan that is pending, threatened or
anticipated against the Company, any ERISA Affiliate or any Employee Plan.
(x) No Amendments. Neither the Company nor any ERISA
-------------
Affiliate has any announced plan or legally binding commitment to create any
additional Employee Plans which are intended to cover present or former
employees, directors or consultants of the Company or any of its Subsidiaries
(with respect to their relationship with such entities) or to amend or modify
any existing Company Employee Plan.
(xi) No Other Material Liability. No event has occurred in
---------------------------
connection with which the Company or any ERISA Affiliate or any Employee Plan,
directly or indirectly, could be subject to any material liability (A) under any
statute, regulation or governmental order relating to any Employee Plan or (B)
pursuant to any obligation of the Company to indemnify any person against
liability incurred under any such statute, regulation or order as they relate to
the Employee Plans.
(xii) Unpaid Contributions. Neither the Company nor any ERISA
--------------------
Affiliate has any liability for unpaid contributions under Section 515 of ERISA
with respect to any Pension Plan, Multiemployer Plan or Welfare Plan.
(xiii) Insurance Contracts. Neither the Company nor any
-------------------
Employee Plan (other than a Multiemployer Plan) holds as an asset of any
Employee Plan any interest in any annuity contract, guaranteed investment
contract or any other investment or insurance contract issued by an insurance
company that is the subject of bankruptcy, conservatorship or rehabilitation
proceedings.
(xiv) No Acceleration or Creation of Rights. Except as
-------------------------------------
disclosed on Schedule 4.8, neither the execution and delivery of this Agreement
------------
by the Company nor the consummation of the transactions contemplated hereby
(including the conversion/exercise of all of the Securities acquired or to be
acquired by the Purchaser hereunder) will result in the acceleration or creation
of any rights of any person to benefits under any Employee Plan (including,
without limitation, the acceleration of the vesting or exercisability of any
stock options, the acceleration of the vesting of any restricted stock, the
acceleration of the accrual or
24
<PAGE>
vesting of any benefits under any Pension Plan or the acceleration or creation
of any rights under any severance, parachute or change in control agreement).
(xv) No Severance Payments. There are no agreements,
---------------------
including, without limitation, any employment or consulting agreements to which
the Company or any of its Subsidiaries is a party that will require the Company
or any of its Subsidiaries to make a severance payment or incur or assume any
other liability as a result of the transactions contemplated by this Agreement
and the Ancillary Agreements, including, without limitation, any obligation to
make any payments upon the occurrence of a change of control.
Section 4.9. SEC Filings. The Company has filed with the Commission
-----------
all forms, reports, schedules, statements, and other documents required to be
filed by it under the Securities Act, the Exchange Act, and all other Federal
securities laws and the rules and regulations promulgated thereunder, during the
period from June 1996 to the date of this Agreement (the "SEC Filings"). A copy
-----------
of the unaudited consolidated balance sheet and statement of operations of the
Company as at and for the period ended on November 28, 1997 (the "November
--------
Financial Statements") is annexed to Schedule 4.9. Each SEC Filing and the
- --------------------- ------------
November Financial Statements was prepared in accordance with, and at the time
of filing complied (or will comply) in all material respects with, the
requirements of the Securities Act, the Exchange Act or other applicable Federal
securities law and the rules and regulations promulgated thereunder, as the case
may be, except as the same was corrected or superseded in a subsequent SEC
Filing filed with the Commission. Neither the SEC Filings nor the November
Financial Statements, including, without limitation, any financial statements or
schedules included therein, at the time filed, contained any untrue statement of
a material fact or omitted to state any material fact required to be stated
therein or necessary in order to make the statements contained therein, in light
of the circumstances under which they were made, not misleading, except as the
same was corrected or superseded in a subsequent SEC Filing filed with the
Commission. The consolidated historical financial statements (including, in each
case, any related notes thereto) contained in the SEC Filings and the November
Financial Statements have been prepared in conformity with generally accepted
accounting principles ("GAAP") applied on a consistent basis (except as
----
described therein) and each presents fairly the consolidated financial position
of the Company and its consolidated Subsidiaries at the respective dates thereof
and the consolidated results of its operations and changes in cash flows for the
period indicated (subject to normal year-end audit adjustments in the case of
any unaudited interim financial statements).
Section 4.10. Absence of Undisclosed Liabilities; Guarantees. (a)
----------------------------------------------
Except as set forth on Schedule 4.10, neither the Company nor any of its
-------------
Subsidiaries has any Liabilities which are reasonably expected to have,
individually or in the aggregate, a Material Adverse Effect on the Company
(including any liabilities, tax or otherwise, related to the "roll-up" of the
homebuilding operations into the Company).
(b) Except as set forth on Schedule 4.10, neither the Company nor any
-------------
of its Subsidiaries is a party to: (i) any Material Agreement relating to the
making of any advance to, or investment in, any Person other than advances or
investments made by the Company to or in
25
<PAGE>
its Subsidiaries; or (ii) any Material Agreement, other than from the Company
with respect to its Subsidiaries providing for a guaranty or other contingent
liability with respect to any indebtedness for money borrowed or similar
obligation of any Person.
Section 4.11. Absence of Certain Changes. Except as set forth on
--------------------------
Schedule 4.11 or disclosed in any SEC Filings or the November Financial
- -------------
Statements, since December 31, 1996: (i) there has not been any event or
occurrences, or series of events or occurrences, which have had, or may have, a
Material Adverse Effect on the Company, (ii) neither the Company nor any of its
Subsidiaries has incurred any liability or engaged in any transaction that is
material to the Company and its Subsidiaries taken as a whole, or entered into
any Material Agreement, except in the ordinary course of business consistent
with past practice, or as contemplated by this Agreement, (iii) neither the
Company nor any of its Subsidiaries is in default under (and no event has
occurred which with the lapse of time or action by a third party could result in
a default under) any Material Agreement, (iv) except for the dividends on the
Common Stock and the dividends paid on the Class AA Preferred Stock, there has
not been any declaration, setting aside or payment of any dividend or other
distribution with respect to the Preferred Stock or the Existing Preferred
Stock, (v) there has not been any commitment, contractual obligation, borrowing,
capital expenditure or transaction (each, a "Commitment") entered into by the
----------
Company or any of its Subsidiaries, other than Commitments which would not,
individually or in the aggregate, reasonably be expected to result in a Material
Adverse Effect on the Company, or (vi) there has not been any change in the
Company's accounting principles, practices or methods which would, individually
or in the aggregate, reasonably be expected to result in a Material Adverse
Effect on the Company.
Section 4.12. Compliance With Laws. Except as set forth on Schedule
-------------------- --------
4.12, (i) the Company and its Subsidiaries are in compliance with all Applicable
- ----
Laws other than violations which do not and will not, individually or in the
aggregate, have a Material Adverse Effect on the Company; (ii) each of the
Company and its Subsidiaries has obtained and holds all material permits,
licenses, variances, exemptions, orders, franchises, approvals and
authorizations of all Governmental Entities necessary for the lawful conduct of
its business as currently conducted or the lawful ownership, use and operation
of its assets; (iii) neither the Company nor any of its Subsidiaries has
received any written notice of violation of any Applicable Law, which has not
been dismissed or otherwise disposed of, that the Company or such Subsidiary has
not so complied other than with respect to violations of Applicable Law which do
not and will not, individually or in the aggregate, have a Material Adverse
Effect on the Company; and (iv) neither the Company nor any of its Subsidiaries
is charged or, to the best knowledge of the Company, threatened with, or, to the
best knowledge of the Company, under investigation with respect to, any
violation of any Applicable Law, including Environmental Laws, relating to any
aspect of the business of the Company or any of its Subsidiaries other than
violations which do not and will not, individually or in the aggregate, have a
Material Adverse Effect on the Company.
Section 4.13. Litigation. Schedule 4.13 sets forth all Proceedings
---------- -------------
pending or, to the best knowledge of the Company, threatened against or
involving the Company or any of its
26
<PAGE>
Subsidiaries (or any of their respective directors or officers in connection
with the business or affairs of the Company or such Subsidiary) or any
properties or rights of the Company or any of its Subsidiaries as of the date
hereof. Except as set forth on Schedule 4.13, any and all liabilities of the
-------------
Company and its Subsidiaries under such Proceedings that are probable and
subject to reasonable estimation within the meaning of GAAP are adequately
covered (except for standard deductible amounts) by the existing insurance
maintained by the Company or estimates in accordance with GAAP for the uninsured
costs thereof are reflected in the financial statements of the Company. Except
as set forth on Schedule 4.13, the Company has no knowledge of any facts that
-------------
are likely to give rise to any additional Proceedings that would reasonably be
expected to have a Material Adverse Effect on the Company. As of the date
hereof, there are no Proceedings (including with respect to Environmental Laws)
pending or, to the best knowledge of the Company, threatened seeking to
restrain, prohibit, or obtain damages or other relief in connection with this
Agreement, the Ancillary Agreements to which the Company is a party or the
transactions contemplated hereby or thereby.
Section 4.15. True and Complete Disclosure. The representations and
----------------------------
warranties of the Company set forth with this Agreement, the information
included in the Schedules, and in any certificates delivered pursuant to Section
7.3 of this Agreement, when taken together, are true and accurate in all
material respects on the date as of which such information is dated and not
incomplete by omitting to state any material fact necessary to make the
statements of fact contained therein, in the light of the circumstances under
which they were made, not misleading at such date. All financial projections
prepared and furnished by the Company to the Purchaser were prepared in good
faith on the basis of assumptions believed to be reasonable at the time such
projections were prepared.
Section 4.15. Taxes. (a) Except as set forth on Schedule 4.15:
----- -------------
(i) The Company and all of its Subsidiaries have filed all
Tax Returns required to be filed by them on or before the Closing Date (taking
into account all extensions for filing such Tax Returns) and all such Tax
Returns are correct and complete in all material respects. Each affiliated group
with which any of the Company and its Subsidiaries files a consolidated or
combined Tax Return has filed all such Tax Returns that it was required to file
for each taxable period during which any of the Company and its Subsidiaries was
a member of the group. All such consolidated and combined Tax Returns were
correct and complete in all materials respects;
(ii) All Taxes due and payable by the Company and/or its
Subsidiaries (whether or not shown on any Tax Return) have been timely paid in
full. All income Taxes owed by any affiliated group with which any of the
Company and its Subsidiaries files a consolidated or combined Tax Return
(whether or not shown on any Tax Return) have been paid for each taxable period
during which any of the Company and its Subsidiaries was a member of the group;
27
<PAGE>
(iii) There are no liens or encumbrances related to Taxes on
any of the assets of the Company or its Subsidiaries (other than for current
Taxes not yet due and payable);
(iv) The Company and its Subsidiaries have withheld all Taxes
required to have been withheld and paid by them or on their behalf in connection
with amounts paid or owing to any employee, independent contractor, creditor,
stockholder, or other third party, and such withheld Taxes have either been duly
paid to the proper governmental authority or set aside in accounts for such
purpose;
(v) None of the Company or any of its Subsidiaries (A) has
been a member of any affiliated group filing a consolidated federal income Tax
Return (other than (i) a group the common parent of which is the Company or (ii)
a former group of members of which are owned by the Company) and (B) has any
liability for the Taxes of any person as defined in Section 7701(a)(1) of the
Code (other than the Company and its Subsidiaries) under Treas. Reg. (S) 1.1502-
6 (or any similar provision of state, local, or foreign tax), as a transferee or
successor, by contract, or otherwise;
(vi) The charges, accruals and reserves for Taxes (including
deferred Taxes) currently reflected on the Financial Statements in accordance
with GAAP are adequate in the reasonable estimation of the Company to cover all
unpaid Taxes accruing or payable by the Company and its Subsidiaries in respect
of taxable periods that end on or before the Closing Date and for any taxable
periods that begin before the Closing Date and end thereafter to the extent such
Taxes are attributable to the portion of such period ending on the Closing Date
(determined under the closing of the books method of allocation);
(vii) The Company and its Subsidiaries have no Tax deficiency
or claim assessed or, to the best of the Company's knowledge, proposed or
threatened (whether orally or in writing) against any of them, except to the
extent that adequate liabilities or reserves with respect thereto are accrued on
the Financial Statements in accordance with GAAP or (i) such deficiency or claim
is being contested in good faith by appropriate proceedings, (ii) no such
accrual is required by GAAP and (iii) the nature and amount of the disputed Tax
is set forth on Schedule 4.15.
-------------
(viii) None of the Company or any of its Subsidiaries has made
any payments, nor is any of them obligated to make any payments, and is not a
party to any agreements that could obligate it to make any payments, that will
not be deductible under Code Section 280G.
(ix) None of the assets of the Company (a) is property that
is required to be treated as being owned by any other person pursuant to the so-
called safe harbor lease provisions of former Section 168(f)(8) of the Code, or
(b) directly or indirectly secures any debt the interest on which is tax-exempt
under Section 103(a) of the Code, or (c) is "tax-exempt use property" within the
meaning of Section 168(h) of the Code.
28
<PAGE>
(x) Except as set forth on Schedule 4.7, none of the Company
------------
or any of its Subsidiaries is subject to any joint venture, partnership or other
arrangement or contract which is treated as a partnership for federal income tax
purposes.
(b) Schedule 4.15 lists (a) elections or material consents with
-------------
respect to Taxes affecting the Company or any of its Subsidiaries as of the date
hereof, and (b) all federal, state, local, and foreign Tax Returns that have
been audited, and indicates those Tax Returns that currently are the subject of
audit. Correct and complete copies of all federal Tax Returns, examination
reports, and statements of deficiencies assessed against or agreed to by the
Company or any of its Subsidiaries since January 1, 1994 have been delivered to
Purchaser.
Section 4.16 Properties. (a) Permits. The Company possesses all
---------- -------
material Permits and waivers necessary for the lawful conduct of its Business as
currently conducted, the absence of which would materially adversely affect the
Real Property or the Business of the Company. Each of the material Permits is
listed on Schedule 4.16(a) hereto. All material Permits are in full force and
----------------
effect, no material violations have occurred with respect thereto, and to the
Company's knowledge no basis exists for any limitation, revocation, or
withdrawal thereof or any denial of any extension or renewal with respect
thereto.
(b) Real Property. Schedule 4.16(b) hereto sets forth each parcel of
------------- ----------------
real property that the Company owns as of the date hereof (collectively, the
"Real Property"). The Real Property has all necessary access to and from public
-------------
highways, streets, and roads and no pending or to the best knowledge of the
Company, threatened proceeding or other fact or condition exists that could
limit or result in the termination of such access. The Real Property is
connected to and serviced by electric, gas, sewage, telephone, and water
facilities in all areas where such connections and services are available, which
facilities are in compliance, in all material respects, with all Applicable Laws
and installation and connection charges with respect thereto have been paid in
full.
(c) Under the heading "Real Property Leases", Schedule 4.16(c) hereto
----------------
describes each agreement, arrangement, contract, commitment, or lease (the "Real
----
Property Leases") pursuant to which the Company is the lessor or the lessee with
- ---------------
respect to any real property (the "Leased Real Property") as of the date hereof.
--------------------
As to each Real Property Lease (a) the Company has neither delivered nor
received notice that any material breach or material event of default exists,
and (b) no condition or event of default by the Company or any other Person.
(d) Land Contracts. Under the heading "Land Contracts", Schedule
-------------- --------
4.16(d) hereto lists all written and oral agreements, arrangements, contracts,
- --------
and commitments to which the Company is a party or entered into on behalf
thereof pursuant to which the Company has any material obligation or right to
purchase any developed or undeveloped real property (the "Land Contract
-------------
Property") as of the date hereof. Each such parcel of developed real property
- ---------
included in the Land Contract Property satisfies all of the representations and
----------------------
warranties set forth herein concerning the Real Property.
29
<PAGE>
(e) Good and Marketable Title. The Company has good and marketable
-------------------------
title in fee simple to its Real Property, subject to the Permitted Encumbrances
and upon acquisition of the Land Contract Property, the Land Contract Property
will likewise be owned in fee and the Company shall have good and marketable
title thereto subject only to Permitted Encumbrances and the Encumbrances listed
on Schedule 4.16(e).
-------------
(f) No Breach or Default. Except as set forth in Schedule 4.16(f)
-------------------- ----------------
hereto, with respect to any agreements, arrangements, contracts, covenants,
conditions, deeds, deeds of trust, rights-of-way, easements, mortgages,
restrictions, surveys, title insurance policies, and other documents granting to
the Company title to or an interest in or otherwise affecting its Real Property,
no material breach or event of default has occurred nor has any event occurred
that with the giving of notice, the lapse of time, or both would constitute a
material breach or event of default, by the Company or, to the best knowledge of
the Company, any other Person.
(g) No Condemnation. No condemnation, eminent domain, or similar
---------------
proceeding exists, is pending or, to the best knowledge of the Company is
threatened with respect to, or that could affect, in any material respect any
Real Property or Leased Real Property.
(h) Compliance with Laws. The buildings and improvements on the Real
--------------------
Property and the Leased Real Property and the subdivision and improvements of
the Real Property do not violate, in any material respect (i) any Applicable
Law, including any building, set-back, or zoning law, ordinance, regulation, or
statute, or other governmental restriction in the nature thereof, or (ii) any
restrictive covenant affecting any such property.
(i) Parties in Possession. There are no parties in possession (other
---------------------
than in the ordinary course of the Company's business) of any material portion
of the Real Property as lessees, tenants at sufferance, or trespassers.
(j) Unpaid Obligations. Except as set forth on Schedule 4.16(j),
------------------ ----------------
there are not material unpaid charges, debts, liabilities, claims or obligations
arising from the construction, occupancy, ownership, use, or operation of the
Real Property. No such Real Property is subject to any condition or obligation
to any material Governmental Entity or other person requiring the owner or any
transferee thereof to donate land, money or other property or to make off-site
public improvements.
(k) Assessments. Except as set forth on Schedule 4.16(k), no
----------- ----------------
developer-related material charges or assessments for public improvements or
otherwise made against the Real Property or any lots included therein are
unpaid, including without limitation those for construction of sewer lines,
water lines, storm drainage systems, electric lines, natural gas lines, streets
(including perimeter streets), roads and curbs.
(l) Subdivision Standards. The Real Property and all lots included
---------------------
therein conform in all material respects to the appropriate governmental
authority's subdivision standards.
30
<PAGE>
(m) Moratoria. There is no moratorium applicable to any of the Real
---------
Property on (i) the issuance of building permits for the construction of houses,
or certificates of occupancy therefor or (ii) the purchase of sewer or water
taps.
(n) Construction Conditions. The lots included in the Real Property
-----------------------
are stable and otherwise suitable in all material respects for the construction
of a residential structure by customary means and without extraordinary site
preparation measures.
(o) Environmental Matters. The Real Property does not contain
---------------------
wetlands or a level of radon above action levels of the U.S. Environmental
Protection Agency and is not located within a "critical", "preservation",
"conservation", or similar type of area except where such conditions are not
reasonably expected to have a Material Adverse Effect on the Company. No
material portion of the Real Property is situated within a "noise cone" such
that the Federal Housing Administration will not approve mortgages due to the
noise level classification of such Real Property.
(p) Claims. No material Proceeding is pending or, to the best
------
knowledge of the Company, threatened which involves any of the Real Property or
against the Company with respect to any of the Real Property; all of the Real
Property and the lots included therein are in compliance, in all material
respects, with all applicable zoning and subdivision ordinances; none of the
development-site preparation and construction work performed on the Real
Property has concentrated or diverted surface water or percolating water
improperly onto or from the Real Property in any material respect.
(q) Third Party Rights. The Company has not granted to any Person
------------------
any contract or other right to the use of any portion of the Real Property or to
the furnishing or use of any facility or amenity on or relating to the Real
Property other than rights granted to individual homebuyers to purchase lots in
the ordinary course of business.
(r) Zoning. All of the Real Property is zoned to permit single-
------
family home construction and occupancy thereon, except as set forth on Schedule
--------
4.16(s).
- -------
(s) No Foreign Sellers. The Company is not a "foreign person" within
------------------
the meaning of Sections 1445 and 7701 of the Code.
Section 4.17. Environmental Matters. For purposes of this Section,
---------------------
the term "Company" shall include (i) the Company, (ii) any Subsidiaries of the
-------
Company, (iii) all partnerships, joint ventures and other entities or
organizations in which Company was at any time or is a partner, joint venturer,
member or participant, and (iv) all predecessor or former corporations,
partnerships, joint ventures, organizations, businesses or other entities,
whether in existence as of the date hereof or at any time prior to the date
hereof, the assets or obligations of which have been acquired or assumed by
Company or the Business or to which Company or the Business has succeeded.
31
<PAGE>
(b) Except as disclosed in Schedule 4.17, the Company and its
-------------
Subsidiaries: (i) are, and within the period of all applicable statutes of
limitation have been, in compliance with all applicable Environmental Laws; (ii)
hold all Environmental Permits (each of which is in full force and effect)
required for any of their current operations or for any property owned, leased
or otherwise operated by any of them; (iii) are, and within the period of all
applicable statutes of limitation have been, in compliance with all of their
Environmental Permits; and (iv) reasonably believe that each of their
Environmental Permits will be renewed before the expiration of such
Environmental Permit currently in effect, except where the failure to so comply
with such Environmental Laws, hold or comply with such Environmental Permits or
timely renew such Environmental Permits is not reasonably expected to have a
Material Adverse Effect on the Company. With respect to the Company's
reasonably foreseeable future operations, it does not anticipate any issues
arising under Environmental Laws that would prevent the Company from receiving
Permits that are necessary to allow it to conduct its Business.
(c) Except as set forth on Schedule 4.17, the Company and its
-------------
Subsidiaries have not received any notice of alleged, actual or potential
responsibility for, or any inquiry or investigation regarding, any Environmental
Condition except where such Environmental Condition is not reasonably expected
to have a Material Adverse Effect on the Company. The Company has not received
any notice of any other claim, demand or action by any individual or entity
alleging any actual or threatened injury or damage to any person, property,
natural resource or the environment arising from or relating to any Release or
threatened Release of any Hazardous Materials at, on, under, in or from any
Facility or any former Facilities, or in connection with any operations or
activities of the Company or any of its Subsidiaries except with respect to any
claim, demand or action which is not reasonably expected to have a Material
Adverse Effect on the Company.
(d) Except as disclosed in Schedule 4.17 or with respect to such
-------------
matters as have been fully and finally resolved and as to which there are no
remaining obligations known or reasonably anticipated, neither the Company nor
any of its Subsidiaries has entered into or agreed to any consent decree, order,
or settlement or other agreement, nor is subject to any judgment, decree, or
order or other agreement, in any judicial, administrative, arbitral, or other
forum, relating to compliance with or liability under any Environmental Law,
except where such obligations, consent decrees, orders, settlement or other
agreements is not reasonably expected to have a Material Adverse Effect on the
Company.
(e) Except as disclosed in Schedule 4.17 or for actions of third
-------------
parties occurring after the Company's or any of its Subsidiaries disposition of
any real property formerly owned or leased by the Company or any of its
Subsidiaries, Hazardous Materials have not been disposed of, emitted,
discharged, transported or otherwise Released or threatened to be Released, to
or at any real property presently or formerly owned or leased by the Company or
any of its Subsidiaries, or, to the knowledge of the Company, any other
location, which Hazardous Materials are reasonably expected to (i) give rise to
liability of the Company or any of its Subsidiaries under any applicable
Environmental Law, except where such liability is not reasonably expected to
have a Material Adverse Effect on the Company, or (ii) interfere with the
32
<PAGE>
Company's or any of its Subsidiaries' continued operations, except where such
interference is not reasonably expected to have a Material Adverse Effect on the
Company or (iii) impair the fair saleable value of any real property owned or
leased by the Company or any of its Subsidiaries, except for such impairment as
is not reasonably expected to have a Material Adverse Effect on the Company.
(f) Except as disclosed in Schedule 4.17, neither the Company nor any
-------------
of its Subsidiaries has assumed or retained, whether by contract or by operation
of law in connection with the sale or transfer of any assets or business,
liabilities under any applicable Environmental Law arising from or associated
with or otherwise in connection with such assets or business of any kind, fixed
or contingent, known or not known, except where such liabilities are not
reasonably expected to have a Material Adverse Effect on the Company.
(g) True, complete and correct copies of the written reports, and all
parts thereof, of all environmental audits or assessments which have been
conducted in respect of any Facility or any former Facility within the past five
years, either by the Company or any attorney, environmental consultant or
engineer engaged for such purpose, have been delivered to the Purchaser and a
list of all such reports, audits and assessments and any other similar report,
audit or assessment of which the Company has knowledge is included on Schedule
--------
4.17.
- ----
Section 4.18. Insurance. Schedule 4.18 sets forth a list of the
--------- -------------
insurance policies held by, or for the benefit of, the Company and its
Subsidiaries. Each of the Company and its Subsidiaries carry, and will continue
to carry, insurance with reputable insurers with respect to such of their
respective properties and business, in such amounts and against such risks as is
customarily maintained by other entities of similar size engaged in similar
businesses. None of such insurance was obtained through the use of materially
false or misleading information or the failure to provide the insurer with all
material information requested in order to evaluate the liabilities and risks
insured. Neither the Company nor any of its Subsidiaries has received any notice
of cancellation or non-renewal of any current insurance policies or binders.
Section 4.19. Condition of Tangible Assets. The Facilities of the
----------------------------
Company and its Subsidiaries and the Fixtures and Equipment are in good
operating condition and repair (except for ordinary wear and tear) are
reasonably sufficient for the operation of the business of the Company and its
Subsidiaries as presently conducted and are in conformity, in all material
respects, with all Applicable Laws, ordinances, orders, regulations and other
requirements (including applicable zoning, environmental, motor vehicle safety
or standards, occupational safety and health laws and regulations) relating
thereto currently in effect, except where the failure to conform would not have
a Material Adverse Effect on the Company.
Section 4.20. Contracts and Commitments. Except for documents set
-------------------------
forth on Schedule 4.20 or listed as exhibits to the Company's Annual Report on
-------------
Form 10-K for the fiscal year ended December 31, 1996, neither the Company nor
any of its Subsidiaries is a party to any Material Agreement except for
contracts between the Company or any of its Subsidiaries and individual home
buyers for purchases of homes or lots in the ordinary course of business. Except
as set forth on Schedule 4.20, neither the Company nor any of its Subsidiaries
-------------
is (and, to the
33
<PAGE>
knowledge of the Company, no other party is) in material breach or violation of,
or default under any Material Agreement to which it is a party, the breach or
violation of which will or may have a Material Adverse Effect on the Company.
Section 4.21. Books and Records. The Company has made and kept (and
-----------------
given the Purchaser access to) books and records and accounts, which, in
reasonable detail, accurately and fairly reflect the activities of the Company
and each of its Subsidiaries. The minute books of the Company and each of its
Subsidiaries previously provided to the Purchaser accurately and adequately
reflect all action previously taken by the stockholders, the board of directors
and committees of the board of directors of the Company and each of its
Subsidiaries.
Section 4.22. Labor Matters. Since January 1, 1994, neither the
-------------
Company nor any of its Subsidiaries has experienced any attempt by organized
labor or its representatives to make the Company or such Subsidiary conform to
demands of organized labor relating to its employees or to enter into a binding
agreement with organized labor that would cover the employees of the Company or
any of its Subsidiaries. The Company and its Subsidiaries are in compliance with
all Applicable Laws respecting employment practices, terms and conditions of
employment and wages and hours except where noncompliance would not have a
Material Adverse Effect on the Company and, to the Company's knowledge, are not
engaged in any unfair labor practice. There is no unfair labor practice charge
or complaint against the Company or any of its Subsidiaries pending before the
National Labor Relations Board or any other governmental agency arising out of
the activities of the Company or any of its Subsidiaries, and the Company has no
knowledge of any facts or information which would give rise thereto. There is no
labor strike or labor disturbance pending or, to the Company's knowledge,
threatened against the Company or any of its Subsidiaries. There is no grievance
currently being asserted and neither the Company nor any of its Subsidiaries has
experienced since January 1, 1994, a work stoppage or other labor difficulty
which grievance, work stoppage or other labor difficulty is reasonably likely to
have a Material Adverse Effect on the Company.
Section 4.23. Payments. Neither the Company nor any of its
--------
Subsidiaries has, directly or indirectly, paid or delivered any fee, commission
or other sum of money or item of property, however characterized, to any finder,
agent, government official or other party, in the United States or any other
country, which is in any manner related to the business or operations of the
Company or its Subsidiaries and which the Company knows or has reason to believe
to have been illegal under any federal, state or local laws of the United States
(including, without limitation the U.S. Foreign Corrupt Practices Act) or any
other country having jurisdiction; and neither the Company nor any of its
Subsidiaries has participated, directly or indirectly, in any boycotts or other
similar practices affecting any of its actual or potential customers.
Section 4.24. Information. The information contained in the Proxy
-----------
Materials (other than information with respect to the Purchaser, or any of their
Affiliates which shall have been supplied in writing by them or any of their
authorized representatives for use in or in preparing the Proxy Materials) will
not, at the date of mailing to the Company's stockholders or at the date of the
Stockholders Meeting, contain any statement which, at the time and in light of
34
<PAGE>
the circumstances under which it is made, is false or misleading with respect to
any material fact required to be stated therein or necessary to correct any
statement in any earlier communication with respect to the solicitation of
proxies for the Stockholders Meeting. The Proxy Materials will comply as to form
in all material respects with the Exchange Act and the rules and regulations of
the SEC thereunder.
Section 4.25. Board Recommendations. By a vote of the directors
---------------------
present at a meeting of the board of directors of the Company (which meeting was
duly called and held and at which a quorum was present at all times), the board
of directors has (i) approved and adopted (A) this Agreement, including the
issuance of the Securities, (B) the Company's entering into the Ancillary
Agreements to which it is or will be a party, and (C) the Certificate
Amendments, and (ii) resolved to recommend to the Company's stockholders
approval of the transactions contemplated hereunder and under the Ancillary
Agreements to which it is or will be a party, including issuance of the
Securities to the Purchaser pursuant to this Agreement.
Section 4.26. Intellectual Property. (a) The Company and its
---------------------
Subsidiaries either own or have valid licenses or other rights to use all
patents, copyrights, trademarks, software, databases, data, other technical
information used in their businesses as presently conducted ("Proprietary
Rights"), subject to the limitations contained in the agreements governing the
use of the same, with such exceptions as would not result in a Material Adverse
Effect on the Company. There are no limitations contained in the agreements of
the type described in the immediately preceding sentence which, upon
consummation of the transactions contemplated hereunder, will alter or impair
any such rights, breach any such agreement with any third party vendor, or
require payments of additional sums thereunder, except any such limitations that
would not have a Material Adverse Effect on the Company. The Company and its
Subsidiaries are in compliance with such licenses and agreements and, except as
set forth on Schedule 4.26, there are no pending or, to the best knowledge of
-------------
the Company or any of its Subsidiaries, threatened Proceedings challenging or
questioning the validity or effectiveness of any license or agreement relating
to such property or the right of the Company or any of its Subsidiaries to use,
copy, modify or distribute the same.
(b) No person has a right, other than those set forth on Schedule
--------
4.26 to receive a royalty or similar payment in respect of any material
- ----
Proprietary Rights whether or not pursuant to any contractual arrangements
entered into by the Company or its Subsidiaries.
Section 4.27. Securities Offerings. (a) Except as set forth on
--------------------
Schedule 4.27, since the date of its initial public offering, the Company has
- -------------
not sold any securities other than securities registered pursuant to the
Securities Act. The sale of the Securities to the Purchaser hereunder and the
issuance of the Conversion Shares and the Supplemental Warrant Shares complies
with all federal and state securities laws.
(b) Neither the Company nor any affiliate (as defined in Rule 501(b)
of Regulation D under the Securities Act ("Regulation D")) of the Company has,
------------
directly or through any agent (provided that no representation is made as to the
Purchaser or any person acting on their behalf), (i) sold, offered for sale,
solicited offers to buy or otherwise negotiated in respect of
35
<PAGE>
any security (as defined in the Securities Act) that is or will be
integrated with the offering and sale of the Securities in a manner that would
require the registration of the Securities under the Securities Act or (ii)
engaged in any form of general solicitation or general advertising (within the
meaning of Regulation D) in connection with the offering of the Securities.
(c) Except as set forth on Schedule 4.27, neither the Company nor any
-------------
of its Subsidiaries is a party to or bound by any contract or other agreement,
or otherwise obligated, to register any of the securities of the Company or any
of its Subsidiaries under the Act.
Section 4.28. No Agreements to Sell the Assets or the Company. Except
-----------------------------------------------
as contemplated by this Agreement, none of the Company or any of its
Subsidiaries have any legal obligation, absolute or contingent, to any person or
firm to sell the capital stock, material assets or business of the Company or
any of its Subsidiaries or to effect any merger, consolidation, liquidation,
dissolution, recapitalization or other reorganization of the Company or any of
its Subsidiaries or to enter into any agreement with respect thereto.
Section 4.29. No Brokers. The Company has not employed, and is not
----------
subject to the valid claim of, any broker, finder, consultant or other
intermediary in connection with the transactions contemplated hereby who might
be entitled to a fee or commission from the Company in connection with such
transactions.
Section 4.30. Transactions with Certain Persons. Except as disclosed
---------------------------------
in SEC Filings or as would not be required to be so disclosed, no officer,
director or employee of the Company or any of its Subsidiaries nor any member of
any such person's immediately family is or has been, since the Company's
formation, a party to any transaction with the Company or any of its
Subsidiaries, including without limitation, any contract, agreement or other
arrangement (a) providing for the furnishing of services by, (b) providing for
the rental of real or personal property from, or (c) otherwise requiring
payments to (other than for services as officers, directors or employees of the
Company or its Subsidiaries) any such person or corporation, partnership, trust
or other entity in which any such person has an interest as a shareholder,
officer, director, trustee or partner.
ARTICLE V.
REPRESENTATIONS AND WARRANTIES OF PURCHASER
-------------------------------------------
The Purchaser hereby represents and warrants to the Company as
follows:
Section 5.1. Organization of the Purchaser. The Purchaser is a limited
-----------------------------
liability company duly formed and validly existing and in good standing as a
limited liability company under the laws of its jurisdiction of formation and
has full limited liability company power and authority to carry on its business
as currently being conducted.
Section 5.2. Authorization. The Purchaser has full limited liability
-------------
company power and authority to execute and deliver this Agreement and the
Ancillary Agreements and to
36
<PAGE>
consummate the transactions contemplated hereby and thereby. The execution and
delivery by the Purchaser of this Agreement and the Ancillary Agreements, and
the consummation by it of the transactions contemplated hereby and thereby, have
been duly authorized by all necessary limited liability company action of the
Purchaser. This Agreement has been duly executed and delivered by the Purchaser
and constitutes, and each Ancillary Agreement executed or to be executed by the
Purchaser has been, or when executed will be, duly executed and delivered by the
Purchaser and constitutes, or when executed and delivered will constitute, a
valid and legally binding obligation of the Purchaser, enforceable against the
Purchaser in accordance with its terms.
Section 5.3. Noncontravention. The execution and delivery by the
----------------
Purchaser of this Agreement and the Ancillary Agreements and the consummation by
it of the transactions contemplated hereby and thereby do not and will not (i)
conflict with or result in a violation of any provision of the limited liability
company agreement or other governing agreement of the Purchaser, (ii) conflict
with or result in a violation of any provision of, or constitute (with or
without the giving of notice or the passage of time or both) a default under, or
give rise (with or without the giving of notice or the passage of time or both)
to any right of termination, cancellation, or acceleration under, any bond,
debenture, note, mortgage, indenture, lease, agreement, or other instrument or
obligation to which the Purchaser is a party or by which the Purchaser or any of
its properties may be bound, (iii) result in the creation or imposition of any
Encumbrance upon the properties of the Purchaser, or (iv) violate any Applicable
Law binding upon the Purchaser, except, in the case of clauses (ii), (iii), and
(iv) above, for any such conflicts, violations, defaults, termination,
cancellations, accelerations, or Encumbrances which would not, individually or
in the aggregate, materially and adversely affect the ability of the Purchaser
to consummate the transactions contemplated hereby.
Section 5.4. Consents and Appeals. No consent, approval, order or
--------------------
authorization of, or declaration, filing or registration with, any Government
Entity is required to be obtained or made by the Purchaser in connection with
the execution and delivery by the Purchaser of this Agreement and the Ancillary
Agreements or the consummation of the transaction contemplated hereby and
thereby other than (i) filings under the HSR Act and expiration or termination
of any applicable waiting period required thereunder and (ii) any filings
required under Section 13 and Section 16 of the Exchange Act and Rule 13d-1
under the Exchange Act and (iii) such consents, approvals, orders or
authorization which, if not made, would not, individually or in the aggregate,
materially and adversely affect the ability of the Purchaser to consummate the
transactions contemplated hereby.
37
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Section 5.5. Purchase for Investment. (a) The Purchaser is acquiring
-----------------------
the Securities solely by and for its own account, for investment purposes only
and not for the purpose of resale or distribution; and the Purchaser has no
contract, undertaking, agreement or arrangement with any person or entity to
sell, transfer or pledge to such person or anyone else any Securities; and the
Purchaser has no present plans or intentions to enter into any such contract,
undertaking or arrangement.
(b) The Purchaser acknowledges and understands that: (i) the
Securities, the Conversion Shares and the Warrant Shares cannot be sold or
transferred without compliance with the registration provisions of the
Securities Act or compliance with exemptions, if any, available thereunder; (ii)
the certificates representing the respective Securities will include a legend
thereon that refers to the foregoing; and (iii) the Company has no obligation or
intention to register the Securities, Conversion Shares or the Warrant Shares
under any federal or state securities act or law; except to the extent, in each
case, that the terms of the Registration Rights Agreement shall otherwise
provide.
(c) The Purchaser (i) is an "accredited investor" as defined in
Rule 501 of Regulation D; (ii) has such knowledge and experience in financial
and business matters in general that it has the capacity to evaluate the merits
and risks of an investment in the Securities and to protect its own interest in
connection with an investment in the Securities; (iii) has such a financial
condition that it has no need for liquidity with respect to its investment in
the Securities to satisfy any existing or contemplated undertaking, obligation
or indebtedness; and (iv) is able to bear the economic risk of its investment in
the Securities for an indefinite period of time.
Section 5.6. Disclosure Documents. None of the information with
--------------------
respect to the Purchaser or any of its Affiliates which shall have been supplied
in writing by the Purchaser for inclusion in the Proxy Material will at the date
of mailing of the Proxy Material to the Company's stockholders contain any
statement which, at the time and in light of the circumstances under which it is
made, is false or misleading with respect to any material fact required to be
stated therein or necessary to correct any statement in any earlier
communication with respect to the solicitation of proxies for the Stockholders
Meeting.
Section 5.7. No Brokers. The Purchaser has not employed, and is not
----------
subject to the valid claim of, any broker, finder, consultant or other
intermediary in connection with the transactions contemplated by this Agreement
who might be entitled to a fee or commission in connection with such
transactions.
38
<PAGE>
ARTICLE VI.
ACTIONS BY THE COMPANY AND
--------------------------
THE PURCHASER PRIOR TO THE SECOND CLOSING
-----------------------------------------
The Company and the Purchaser covenant as follows for the period from
the date hereof through the Second Closing (unless otherwise specified herein):
Section 6.1. Meeting of Stockholders; Proxy Statement; Certificate
-----------------------------------------------------
Amendments.
- ----------
(a) The Company shall take all action necessary in accordance with
Applicable Law and the Certificate of Incorporation and Bylaws to duly call,
give notice of, convene and hold a meeting of its stockholders, which meeting
may be the Company's annual meeting of stockholders (the "Stockholders
------------
Meeting"), as promptly as practicable after the date hereof to consider and vote
- -------
upon the adoption and approval of the transaction as contemplated hereunder,
including, without limitation, the Certificate Amendments. The stockholder vote
required for the adoption and approval of the transactions contemplated
hereunder shall be the vote or votes required by Applicable Law, the Certificate
of Incorporation, the Existing Preferred Stock Certificates of Designations and
the rules of The Nasdaq Stock Market, Inc. Except as provided in Section 6.1(b)
below, the board of directors of the Company shall (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 contemplated hereunder,
(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 other action
reasonably necessary to secure a vote of the Company's stockholders in favor of
such adoption and approval. The Company has delivered the Shareholder
Undertakings committing all of its executive officers and directors who own
shares of Common Stock to vote all such shares of Common Stock in favor of the
transactions contemplated hereunder at the Stockholders Meeting.
(b) As promptly as practicable after the date hereof, the Company
shall take or cause to be taken, all actions, and do, or cause to be done, all
things reasonably necessary, proper or advisable to (i) prepare and file with
the Commission any documents or materials, including, but not limited to, the
Proxy Materials, pertaining to the issuance of the Securities and the
Stockholders Meeting, (ii) have the Proxy Materials cleared by the Commission
(including with respect to clauses (i) and (ii) by consulting with the Purchaser
and responding promptly to any comments from the Commission) and (iii) take such
action as may be required to be taken under applicable state securities or blue
sky laws in connection with the issuance of the Securities, the Conversion
Shares or the Warrant Shares except that the Company shall have no registration
obligations other than as set forth in the Registration Rights Agreement. Except
to the extent otherwise determined in good faith by the Company's board of
directors in the exercise of its fiduciary duties, taking into account the
advice of outside counsel, the Proxy Materials shall contain the recommendation
of the Board of Directors that stockholders of the Company vote in favor of the
adoption and approval of all matters necessary to effectuate the transactions
contemplated hereunder. The Company shall notify the Purchaser promptly of the
receipt of any
39
<PAGE>
comments on, or any requests for amendments or supplements to, the Proxy
Materials by the Commission, and the Company shall supply the Purchaser with
copies of all correspondence between it and its representatives, on the one
hand, and the Commission or members of its staff, on the other, with respect to
the Proxy Materials. The Company, after consultation with the Purchaser, shall
use its reasonable best efforts to respond promptly to any comments made by the
Commission with respect to the Proxy Materials. The Company and the Purchaser
shall cooperate with each other in preparing the Proxy Materials, and the
Company and the Purchaser shall each use its reasonable best efforts to obtain
and furnish the information required to be included in the Proxy Materials. The
Company and the Purchaser each agrees promptly to correct any information
provided by it for use in the Proxy Statement if and to the extent that such
information shall have become false or misleading in any material respect, and
the Company further agrees to take all steps necessary to cause the Proxy
Statement as so corrected to be filed with the Commission and to be disseminated
promptly to holders of shares of the Common Stock, in each case as and to the
extent required by Applicable Law.
Section 6.2. Stock Exchange Approval. The Company shall use its
-----------------------
reasonable best efforts and take all action reasonably necessary to obtain the
confirmation of The Nasdaq Stock Market, Inc. that the transactions contemplated
hereby (including the Certificate Amendments) will not violate Rule 4310 or Rule
4460 of the National Association of Securities Dealers, Inc. Manual.
Section 6.3. Continuing Operations. From the date of this Agreement
---------------------
to the earlier of (i) the Second Closing or (ii) the termination of this
Agreement in accordance with its terms, the Company and its Subsidiaries shall
conduct their business in the ordinary and usual course, and, except as set
forth on Schedule 6.3, neither the Company nor any of its Subsidiaries shall,
------------
without the prior consent of the Purchaser except as expressly contemplated
hereby:
(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 twelve
(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 after the date hereof or materially
amend any transaction in effect on the date hereof, with any Affiliate of the
Company (other than between the Company and its Subsidiaries or between
Subsidiaries);
(d) split (including any reverse split), combine, or reclassify any
shares of its capital stock; adopt resolutions authorizing a liquidation,
dissolution, merger, consolidation,
40
<PAGE>
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;
(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;
(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 ;
(h) enter into any new line of business other than the business
engaged in by the Company and its Subsidiaries on the date hereof, cease to be
engaged in any material line of business engaged in by the Company 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;
(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 (A) involving payments for damages
and penalties in excess of $50,000 or (B) otherwise material to the Company and
its subsidiaries taken as a whole;
(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
one hundred thousand dollars ($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;
41
<PAGE>
(p) enter into or amend any joint venture, partnership or profit
sharing agreement or arrangement;
(q) amend to the Company's or any Subsidiary's certificate of
incorporation or bylaws; or
(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 Preferred Stock and the Existing Preferred Stock as required
pursuant to the terms of the Preferred Stock and the Preferred Stock
Certificates of Designations;
(s) issue, 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 Preferred Stock or
the Existing Preferred Stock or upon exercise of the Warrants or the
Supplemental Warrants) or deliver or other securities other than as contemplated
herein or pursuant to stock options issued and outstanding as of the date hereof
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.
Section 6.4. Press Releases. Except as may be required by applicable
--------------
law or by the rules of any national securities exchange, neither the Purchaser
nor the Company shall issue any press release with respect to this Agreement or
the transactions contemplated hereunder without the prior consent of the Company
in the case of the Purchaser, and of the Purchaser in the case of the Company
(which consent shall not be unreasonably withheld under the circumstances). Any
such press release required by applicable law or by the rules of any national
securities exchange shall only be made after reasonable notice to the other
party.
Section 6.5. Additional Financial Statements. During the period from
-------------------------------
the date hereof through the Second Closing, as soon as reasonably practicable
after they become publicly available, the Company shall furnish to the Purchaser
(i) the quarterly consolidated financial statements of the Company and its
consolidated Subsidiaries, which shall have been prepared in accordance with
GAAP and on a basis consistent with past practice and (ii) all monthly financial
statements or reports of the Company and its consolidated Subsidiaries, which
shall have been prepared in a manner consistent with past practice.
Section 6.6. Investigations and Access. The Company agrees to permit
-------------------------
the Purchaser and its agents and representatives reasonable access during normal
business hours to (i) the premises of the Company and its Subsidiaries and (ii)
all the books, computer software application systems, files and records of the
Company and its Subsidiaries, including, but not limited to, lease, loan, real
estate, financial, tax and personnel files and records, and to furnish the
Purchaser such financial and operating data and other information with respect
to the business, assets and properties of the Company as the Purchaser shall
reasonably request. The Company
42
<PAGE>
will authorize its accountants to provide the Purchaser, in accordance with such
accountant's internal policies, with their working papers for the Company's
financial statements. The Company shall deliver true, correct and complete
copies of all resolutions, and minutes of all meetings, reflecting any action
taken by the Company stockholders, board of directors or committees of the board
of directors and by each Subsidiary during the period from the date hereof
through the First Closing.
Section 6.7. Notification of Certain Matters. The Company shall give
-------------------------------
prompt notice to the Purchaser, and the Purchaser shall give prompt notice to
the Company, of (i) the occurrence, or failure to occur, of any event which
occurrence or failure would be likely to cause any representation or warranty
contained in this Agreement to be untrue or inaccurate in any material respect
any time from the date hereof to the Closing Date and (ii) any material failure
of the Company or the Purchaser, as the case may be, to comply with or satisfy
any covenant, condition or agreement to be complied with or satisfied by it
hereunder, and each party shall use all reasonable efforts to remedy such
failure. In addition, the Company shall give prompt notice to the Purchaser of
any material developments involving the operations or activities of the Company
or its Subsidiaries.
Section 6.8. No Solicitation. Until the Second Closing shall have
---------------
occurred, neither the Company nor any of its Affiliates nor any of their
respective directors, officers, employees, representatives or agents, shall
directly or indirectly solicit or initiate any discussions, submissions of
proposals or offers or negotiations with, participate in any negotiations or
discussions with, or provide any information or data of any nature whatsoever
to, or otherwise cooperate in any other way with, or assist or participate in,
facilitate or encourage any effort or attempt by, any corporation, partnership,
person or other entity or group, other than the Purchaser and its respective
partners, employees, representatives, agents and Affiliates, concerning any
Alternative Transaction, provided, however, that nothing contained in this
-----------------
Section 6.8 shall prohibit the Board of Directors from (i) 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 entity to enter into any
Alternative Transaction or entering into an Alternative Transaction if, and only
to the extent that, (A) the Company receives the written advice of outside legal
counsel that such action is advisable to enable the Board of Directors to comply
with its fiduciary duties imposed by Applicable Law and (B) prior to furnishing
such information to, or entering into discussions or negotiations with, such
person or entity, the Company (A) provides written notice to the Purchaser 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 (B) receives from such person or entity an executed
confidentiality agreement on terms and in form customary for similar
transactions or (ii) complying with Rule 14e-2 promulgated under the Exchange
Act, with regard to an Alternative Transaction. For purposes of this Agreement,
"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
43
<PAGE>
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
except, in each case, as disclosed in the Schedules to this Agreement. As part
of the written notice provided to the Purchaser pursuant to clause (i)(B) above,
the Company shall 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 shall use reasonable efforts to keep the Purchaser
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 shall
not release any third party from, or waive any provision of, any confidentiality
or standstill agreement to which the Company is a party.
Section 6.9. Further Assurances. Upon the terms and subject to the
------------------
conditions contained herein, the Company agrees, both before and after each
Closing, (i) to use all reasonable efforts to take, or cause to be taken, all
actions and to do, or cause to be done, all things necessary, proper or
advisable to consummate and make effective the transactions contemplated by this
Agreement, (ii) to execute any documents, instruments or conveyances of any kind
which may be reasonably necessary or advisable to carry out any of the
transactions contemplated hereunder, and (iii) to cooperate with the Purchaser
in connection with the foregoing. Without limiting the foregoing, the Company
agrees to use its reasonable best efforts (A) to obtain all necessary waivers,
consents and approvals, (B) to defend all actions challenging this Agreement or
the consummation of the transactions contemplated hereby, (C) to lift or rescind
any injunction or restraining order or other court order adversely affecting the
ability of the Company to consummate the transactions contemplated hereby, (D)
to give all notices to and make all registrations and filings with third
parties, including without limitation, submissions of information requested by
Governmental Entities and The Nasdaq National Market, Inc., and (E) to fulfill
all conditions to this Agreement. In addition, the Company will commence all
action required under this Section 6.9 by a date which is early enough to allow
the transactions contemplated hereunder to be consummated by each Closing Date.
Section 6.10. HSR Act Notification. To the extent it is determined
--------------------
that the HSR Act will be applicable to the transactions as contemplated
hereunder, each of the affected parties hereto shall (i) file or cause to be
filed, as promptly as practicable after the execution and delivery of this
Agreement, with the Federal Trade Commission and the United States Department of
Justice, all reports and other documents required to be filed by such party
under the HSR Act concerning the transactions contemplated hereby and (ii)
promptly comply with or cause to be complied with any requests by the Federal
Trade Commission or the United States Department of Justice for additional
information concerning the Transaction, in each case so that the waiting period
applicable to this Agreement and the transaction contemplated hereby under the
HSR Act shall expire as soon as practicable after the execution and delivery),
of this Agreement. Each party hereto agrees to request, and to cooperate with
the other party or parties in requesting, early termination of any applicable
waiting period under the HSR Act.
44
<PAGE>
Section 6.11. Employee Matters. On or prior to the Second Closing,
----------------
the Board of Directors shall take all actions necessary to ensure that the
acquisition of the Securities by the Purchaser (including the
conversion/exercise of all of the Securities acquired or to be acquired by the
Purchaser hereunder) and the transactions contemplated herein shall not result
in the acceleration or creation of any rights of any person to benefits under
any Employee Plan (including, without limitation, the acceleration of the
vesting or exercisability of any stock options, the acceleration of the vesting
of any restricted stock, the acceleration of the accrual or vesting of any
benefits under any Pension Plan or the acceleration or creation of any rights
under any severance, parachute or change in control agreement).
Section 6.12. Action by the Company. On the date of Stockholder
---------------------
Approval, the Board of Directors shall take, or cause to be taken, all actions
necessary or desirable to (i) cause the Board of Directors to consist of fifteen
(15) directors, three of whom shall be elected by the Purchaser by delivery of a
written consent immediately following the date of Stockholder Approval and (ii)
effect the Bylaws Amendments. Prior to the Second Closing, the Board of
Directors shall take, or cause to be taken, all actions necessary or desirable
to file with the Secretary of State of the State of Delaware the Certificate
Amendments.
Section 6.13. Liability Insurance. On or prior to the appointment of
-------------------
the Preferred Stock Directors to the Board of Directors, the Company shall
ensure that each person serving on the Board of Directors on and after date of
such appointment shall receive substantially the same liability insurance
coverage as a member of the Board of Directors as the Company's directors
receive as of the date hereof (including coverage for liabilities arising before
the date of taking office to the extent arising from such person's status as a
prospective member of the Board of Directors) and that such policies shall be in
full force and effect in accordance with their terms as of the date of such
appointment and in no event shall such coverage be for an amount less than
$25,000,000.
Section 6.14. Confidentiality. The Company and the Purchaser agree
---------------
that all information provided to any of them or any of their representatives
pursuant to this Agreement shall be kept confidential, and such parties shall
not (x) disclose such information to any persons other than the directors,
officers, employees, financial advisors, legal advisors, accountants,
consultants and affiliates of such parties who reasonably need to have access to
the confidential information and who are advised of the confidential nature of
such information or (y) use such information in a manner which would be
detrimental to the Company or the Purchaser; provided, however, the foregoing
-----------------
obligation of such parties shall not (a) relate to any information that (i) is
or becomes generally available other than as a result of unauthorized disclosure
by such parties or by persons to whom such parties have made such information
available, (ii) is or becomes available to such parties on a non-confidential
basis from a third party that is not, to such parties' knowledge, bound by any
other confidentiality agreement with the Company, or (b) prohibit disclosure of
any information if required by law, rule, regulation, court order or other legal
or governmental process.
45
<PAGE>
Section 6.15. Action following Stockholder Approval. Immediately
-------------------------------------
following the Stockholder Approval, (i) the Board of Directors shall adopt the
Bylaws Amendments, (ii) the Certificate Amendments shall be duly filed with the
Secretary of State of the State of Delaware and (iii) the Preferred Stock
Directors shall be appointed to the Board of Directors; provided, however, that
with respect to clauses (i) and (iii) the Company shall take such actions
earlier, upon the written request of the Purchaser.
ARTICLE VII.
CONDITIONS TO ALL CLOSINGS
--------------------------
Section 7.1. Conditions to Each Party's Obligations. The respective
--------------------------------------
obligations of each party to consummate the transactions contemplated hereby in
respect of each Closing are subject to the satisfaction or waiver, on or prior
to the relevant Closing Date, of each of the following conditions:
(a) No Governmental or Other Proceedings or Litigation. There shall
--------------------------------------------------
be no injunction or court order restraining consummation of the transactions
contemplated hereunder and there shall be 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 contemplated hereunder, and there shall not have been adopted
any law or regulation making all or any portion of the transactions contemplated
hereunder illegal.
(b) HSR Act. To the extent that the HSR Act is applicable to the
-------
transactions contemplated hereunder, all waiting periods (and any extensions
thereof) applicable to any such transactions under the HSR Act shall have
expired or been terminated.
Section 7.2 Conditions to the Company's Obligations. The obligation
---------------------------------------
of the Company to consummate the transactions contemplated hereby on the
applicable Closing Date is subject to the satisfaction or waiver on or prior to
the applicable Closing Date of each of the following conditions:
(a) Representations, Warranties and Covenants. All representations
-----------------------------------------
and warranties of the Purchaser contained in this Agreement shall be true and
correct in all material respects at and as of the applicable Closing Date as if
such representations and warranties were made at and as of the applicable
Closing Date, and the Purchaser shall have performed in all material respects
all agreements and covenants required hereby to be performed by it prior to or
at the applicable Closing Date. There shall be delivered to the Company a
certificate (signed by the sole member of the Purchaser) to the foregoing
effect.
(b) Opinion of Counsel. The Purchaser shall have delivered to the
------------------
Company the opinions of Latham & Watkins, counsel to the Purchaser, in form and
substance reasonably acceptable to the Company.
46
<PAGE>
(c) Certificates. The Purchaser will furnish the Company with such
------------
certificates of its general partner and others to evidence compliance with the
conditions set forth in this Article VII as may be reasonably requested by the
Company.
Section 7.3. Conditions to the Purchaser's Obligations. The
-----------------------------------------
obligation of the Purchaser to consummate the transactions contemplated hereby
on the applicable Closing Date is subject to the satisfaction or waiver on or
prior to the applicable Closing Date of each of the following conditions:
(a) Representations, Warranties and Covenants. All representations
-----------------------------------------
and warranties of the Company contained in this Agreement shall be true and
correct in all material respects at and as of the applicable Closing Date as if
such representations and warranties were made at and as of the applicable
Closing Date (provided that no representation or warranty shall be deemed
breached if the action causing such representation or warranty to be untrue as
of the relevant Closing Date permitted by Section 6.3 or was consented to by the
Purchaser under Section 6.3), and the Company shall have performed in all
material respects all agreements and covenants required hereby to be performed
prior to or at the applicable Closing Date. There shall be delivered to the
Purchaser a certificate (signed by the President and Chief Executive Officer and
the Secretary of the Company) to the foregoing effect.
(b) Consents. All consents, approvals, Permits and waivers from
--------
Governmental Entities and other parties necessary to permit the Purchaser and
the Company to consummate the transactions contemplated hereby shall have been
obtained, unless the failure to obtain any such consent, approval, Permit or
waiver would not have a Material Adverse Effect upon the Company or the
Purchaser.
(c) Opinion of Counsel. The Company shall have delivered to the
------------------
Purchaser the opinions of Arent Fox Kintner Plotkin & Kahn, counsel for the
Company, in form and substance reasonably acceptable to the Purchaser.
(d) Certificates. The Company shall furnish the Purchaser with such
------------
certificates of the Chief Executive Officer and the Secretary of the Company and
others to evidence compliance with the conditions set forth in this Article VII
as may be reasonably requested by the Purchaser.
(e) No Adverse Changes. Since the date of this Agreement, there
------------------
shall not have been any Material Adverse Effect on the Company.
(f) Elections of Directors. All actions shall have been taken by the
----------------------
Company, its stockholders and Board of Directors so that, immediately upon the
Stockholder Approval, the Board of Directors shall consist of fifteen (15)
directors and the Purchaser may, by execution and delivery of a written consent,
elect three (3) members of the Board of Directors effective as of the
Stockholder Approval as set forth in Section 6.15. As of the date of the
Stockholder Approval the Company shall have established a five-member executive
committee (the "Executive Committee") of the Board of Directors to which
-------------------
substantial authority for operational matters
47
<PAGE>
shall be delegated, as further described in the Stockholders Agreement. The
Company shall appoint two members of the Executive Committee nominated by the
Purchaser.
(g) Ancillary Agreements. The Company shall enter into and deliver
--------------------
to the Purchaser the Ancillary Agreements to which it is a party.
(h) Amendment to Existing Stockholders Agreement. If necessary, the
--------------------------------------------
Existing Stockholders Agreement shall be amended to be consistent with the terms
of this Agreement and the Ancillary Agreements (including the Stockholders
Agreement).
ARTICLE VIII.
SECOND AND SUBSEQUENT CLOSINGS
------------------------------
Section 8.1. Conditions to Each Party's Obligations at the Second
----------------------------------------------------
Closing. In addition to the conditions set forth in Article VII, the respective
- -------
obligations of each party to consummate the transactions contemplated hereby on
the Second Closing and on Subsequent Closings are subject to the satisfaction or
waiver, on or prior to the date of the Second Closing or the date of any
Subsequent Closing (as the case may be), of each of the following conditions:
(a) Stockholder Approval. The holders of the requisite number of
--------------------
shares of outstanding Common Stock of the Company shall have duly and validly
approved all items necessary to effectuate the transactions contemplated hereby
and under the Ancillary Agreements, including without limitation, the
Certificate Amendments (the "Stockholder Approval").
--------------------
Section 8.2. Conditions to the Purchaser's Obligations at the Second
-------------------------------------------------------
and Subsequent Closings. In addition to the conditions set forth in Article VII,
- -----------------------
the obligations of the Purchaser to consummate the transactions on the Second
Closing and on Subsequent Closings are subject to the satisfaction or waiver, on
or prior to the date of the Second Closing and the date of any Subsequent
Closing (as the case may be), of each of the following conditions :
(a) Certificate Amendments; Bylaws Amendments. The Certificate
-----------------------------------------
Amendments and Bylaws Amendments in a form satisfactory to Purchaser necessary
to give effect to the transactions contemplated hereby and the provisions of the
Ancillary Documents shall have become effective in accordance with Section 6.15.
(b) Liability Insurance. The Company shall have provided to the
-------------------
Purchaser a copy of the insurance policies together with the riders and
schedules thereto which evidence compliance with the provisions set forth in
Section 6.13.
(c) Employment Agreements. The Company shall amend the employment
---------------------
agreement of James J. Martell, Jr. in a form and substance satisfactory to the
Purchaser, in the Purchaser's sole discretion, to require that he devote not
less than 95% of his working time to conducting the business affairs of the
Company and to include customary non-compete
48
<PAGE>
provisions and, if the Purchaser in its sole discretion so requires, enter into
an employment agreement on similar terms with J. Marshall Coleman.
ARTICLE IX.
INDEMNIFICATION
---------------
Section 9.1. Survival of Representations, Etc. The representations,
--------------------------------
warranties, covenants and agreements of the parties hereto contained herein
shall survive all of the Closings and shall remain in full force and effect
until December 31, 2000; provided, however, that (i) the representations and
-----------------
warranties set forth in Section 4.17 shall survive until December 31, 2004; (ii)
the representations and warranties in Sections 4.1 through 4.4 and Section 4.7
shall survive indefinitely and the covenants and agreements set forth in
Articles IX and X shall remain in full force and effect indefinitely and (iii)
the representations and warranties set forth in Section 4.15 shall survive and
shall remain in full force and effect for a period equal to the applicable
statute of limitations for any Taxes imposed payable in breach of such
representations and warranties; and provided, further, that there shall be no
-----------------
termination with respect to any representation or warranty as to which either
(a) a bona fide claim has been asserted prior to such date or (b) the Purchaser
had actual knowledge of any breach thereof prior to any Closing Date.
Section 9.2. Indemnification by the Company. The Company shall
------------------------------
indemnify and hold harmless the Purchaser and its members, Affiliates,
directors, officers, advisors, agents and employees (the "Purchaser 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
------
this Agreement, the transactions contemplated hereby, and/or the delivery,
enforcement and performance of this Agreement or the Ancillary Agreements except
to the extent that Losses with respect thereto are the result of the Purchaser'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 this Agreement, the Ancillary Agreements or in any certificate delivered
pursuant thereto.
Section 9.3. Indemnification by the Purchaser. The Purchaser shall
--------------------------------
indemnify and hold harmless the Company and its Affiliates, directors, officers,
advisors, agents and employees (the "Company Indemnified Parties" and, together
---------------------------
with the Purchaser Indemnified Parties, the "Indemnified Parties") to the
-------------------
fullest extent lawful, from and against any and all Losses (i) arising from this
Agreement or the Ancillary Agreements, to the extent of Losses from the
Purchaser's actions or omissions or (ii) arising by reason of or resulting from
any breach of any warranty, representation, covenant or agreement of the
Purchaser contained in this Agreement or in any certificate delivered pursuant
thereto.
Section 9.4. Losses. The term "Losses" as used in this Section 9 is
------
not limited to matters asserted by third parties, but includes Losses incurred
or sustained by an Indemnified Party in the absence of third party claims.
Payments by an Indemnified Party of amounts for
49
<PAGE>
which such Indemnified Party is indemnified hereunder shall not necessarily be a
condition precedent to recovery.
Section 9.5. Defense of Claims. If a claim for Losses (a "Claim") is
----------------- -----
to be made by an Indemnified Party, such Indemnified Party shall give written
notice (a "Claim Notice") to the indemnifying party as soon as practicable after
------------
such Indemnified Party becomes aware of any fact, condition or event which may
give rise to Losses for which indemnification may be sought under this Section
9. If any lawsuit or enforcement action is filed against any Indemnified Party
hereunder, notice thereof (a "Third Party Notice") shall be given to the
------------------
indemnifying party as promptly as practicable (and in any event within five (5)
calendar days after the service of the citation or summons). The failure of any
indemnified party to give timely notice hereunder shall not affect rights to
indemnification hereunder, except to the extent that the indemnifying party
demonstrates actual damage caused by such failure. After receipt of a Third
Party Notice, if the indemnifying party shall acknowledge in writing to the
indemnified party that the indemnifying party shall be obligated under the terms
of its indemnity hereunder in connection with such lawsuit or action, then the
indemnifying party shall be entitled, if it so elects, (i) to take control of
the defense and investigation of such lawsuit or action, (ii) to employ and
engage attorneys approved by the Indemnified Party (such approval not to be
unreasonably withheld) to handle and defend the same, at the indemnifying
party's cost, risk and expense unless the named parties to such action or
proceeding include both the indemnifying party and the Indemnified Party and the
Indemnified Party has been advised in writing by counsel that there may be one
or more legal defenses available to such Indemnified Party that are different
from or additional to those available to the indemnifying party, and (iii) to
compromise or settle such claim, which compromise or settlement shall be made
only with the written consent of the Indemnified Party, such consent not to be
unreasonably withheld. The Indemnified Party shall cooperate in all reasonable
respects with the indemnifying party and such attorneys in the investigation,
trial and defense of such lawsuit or action and any appeal arising therefrom;
and the Indemnified Party may, at its own cost, participate in the
investigation, trial and defense of such lawsuit or action and any appeal
arising therefrom and appoint its own counsel therefor, at its own cost. The
parties shall also cooperate with each other in any notifications to insurers.
If the indemnifying party fails to assume the defense of such claim within
fifteen (15) calendar days after receipt of the Third Party Notice, the
Indemnified Party against which such claim has been asserted will (upon
delivering notice to such effect to the indemnifying party) have the right to
undertake the defense, compromise or settlement of such claim and the
indemnifying party shall have the right to participate therein at its own cost;
provided, however, that such claim shall not be compromised or settled without
- -----------------
the written consent of the Indemnifying Party, which consent shall not be
unreasonably withheld. In the event the Indemnified Party assumes the defense of
the claim, the Indemnified Party will keep the indemnifying party reasonably
informed of the progress of any such defense, compromise or settlement.
Notwithstanding the foregoing, the indemnifying party shall not be liable for
the reasonable fees and expenses of more than one separate firm of attorneys at
any time for any and all Indemnified Parties (which firm shall be designated in
writing by such Indemnified Party or Parties) in connection with any one such
action or proceeding arising out of the same general allegations or
circumstances.
50
<PAGE>
Section 9.6. Tax Treatment of Indemnity. The parties agree that any
--------------------------
indemnification payments made pursuant to this Agreement shall be treated for
Tax purposes as an adjustment to the consideration for the purchase of the
Securities, unless otherwise required by applicable law, in which event
indemnification payments shall be made in an amount sufficient to indemnify the
party on a net after-Tax basis.
ARTICLE X.
MISCELLANEOUS
-------------
Section 10.1. Termination. (a) Prior to the First Closing
-----------
Agreement may be terminated:
(i) by the Purchaser, if there is a breach of any
representation warranty set forth in Article IV hereof or any covenant or
agreement to be complied with or performed by the Company pursuant to the terms
of this Agreement except for any breach which would not have a Material Adverse
Effect on the Company or the Purchaser; or
(ii) by the Company, if there is a material breach of
any representation or warranty set forth in Article V hereof or of any covenant
or agreement to be complied with or performed by the Purchaser pursuant to the
terms of this Agreement except for any breach which would not have a Material
Adverse Effect on the Company.
(b) Prior to the Second Closing, this Agreement may be terminated:
(i) by the Company or the Purchaser if the Stockholder
Approval shall not have been obtained on or before March 6, 1998, provided that
the Company shall not have the right to elect this termination if the Company
has not complied with all of its obligations under this Agreement;
(ii) by the Purchaser if the Second Closing shall not
have occurred by March 6, 1998.
(iii) by the Purchaser, if there is a breach of any
representation or warranty set forth in Article IV hereof or any covenant or
agreement to be complied with or performed by the Company pursuant to the terms
of this Agreement except for any breach which would not have a Material Adverse
Effect on the Company or the Purchaser; or
(iv) by the Company, if there is a material breach of
any representation or warranty set forth in Article V hereof or of any covenant
or agreement to be complied with or performed by the Purchaser pursuant to the
terms of this Agreement except for any breach which would not have a Material
Adverse Effect on the Company.
51
<PAGE>
Section 10.2. In the Event of Termination: In the event of
---------------------------
termination of this Agreement:
(a) Each party will redeliver all documents, work papers and other
material of any other party relating to the transactions contemplated hereby,
whether so obtained before or after the execution hereof to the party furnishing
the same;
(b) The provisions of Sections 9 and 10.3 shall continue in full
force and effect; and
(c) Other than pursuant to Sections 9 and 10.3, no party hereto shall
have any liability or further obligation to any other party relating to the
transactions contemplated hereby, provided that no such termination shall
relieve any party from liability or a prior breach of this Agreement.
Section 10.3. Fees and Expenses. The Company shall be responsible for
-----------------
the payment of all costs and expenses incurred by the Company in connection with
the transactions contemplated hereunder, regardless of whether such transactions
close, including, without limitation, all fees and expenses incurred in
connection with the Proxy Materials 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. On each Closing Date, the Company shall reimburse the
Purchaser for the Transaction Expenses (by wire transfer of same day funds). In
the event that the Agreement is terminated, other than pursuant to Section
10.1(a)(ii) or Section 10.1(b)(iv) hereof, in addition to any other rights of
the Purchaser hereunder, the Company shall promptly pay the Purchaser, 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).
Section 10.4. Injunctive Relief. The parties hereto acknowledge and
-----------------
agree that irreparable damage would occur in the event any of the provisions of
this Agreement were not performed in accordance with their specific terms or
were otherwise breached. It is accordingly agreed that the parties shall be
entitled to an injunction or injunctions to prevent breaches of the provisions
of this Agreement, and shall be entitled to enforce specifically the provisions
of this Agreement, in any court of the United States or any state thereof having
jurisdiction, in addition to any other remedy to which the parties may be
entitled under the Agreement or at law or in equity.
Section 10.5. Independent Determination. From and after the date of
-------------------------
the Second Closing, all decisions on behalf of the Company as to payment of
indemnification pursuant hereto and otherwise regarding the Company's rights and
obligations pursuant to this Agreement and the Ancillary Agreements shall be
made by a committee of the board of directors consisting of all directors not
elected by the holders of the Preferred Stock voting as a separate class and a
decision of a majority of such directors shall be the decision of the committee.
Nothing contained in this Section 10.5 shall 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
52
<PAGE>
seeks indemnification due to circumstances that do not pertain to an alleged
breach of this Agreement), and the determination as to whether indemnification
pursuant to such other source is available shall be made in accordance with the
procedures applicable thereto.
Section 10.6. Brokers, etc. No brokerage fees shall be payable to any
------------
Person in connection with the transactions contemplated hereunder, other than a
fee to be payable to Furman Selz, LLC by the Company (in an amount to be
negotiated).
Section 10.7. Assignment. Neither this Agreement nor any of the
----------
rights or obligations hereunder may be assigned by the Company without the prior
written consent of the Purchaser, or by the Purchaser without the prior written
consent of the Company, except that the Purchaser may, without such consent,
assign its rights hereunder, in whole or in part, including, the right to
acquire the Preferred Stock, the Warrants and the Supplemental Warrants
hereunder, to one or more affiliates of the Purchaser. Subject to the foregoing,
this Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and assigns, and no other person shall
have any right, benefit or obligation hereunder.
Section 10.8. Notices. Unless otherwise provided herein, any notice,
-------
request, instruction or other document to be given hereunder by any party to the
other shall be in writing and delivered by hand-delivery, registered first-class
mail, telex, confirmed telecopy, or air courier guaranteeing overnight delivery,
as follows:
If to the Company:
The Fortress Group, Inc.
1650 Tysons Boulevard, Suite 600
McLean, Virginia 22102
Telephone: (703) 442-4545
Facsimile: (703) 442-7730
Attn: J. Marshall Coleman
with a copy to: Secretary
With an additional copy to:
Arent Fox Kintner Plotkin & Kahn
1050 Connecticut Avenue, NW
Washington, DC 20036
Telephone: (202) 857-6473
Facsimile: (202) 857-6395
Attn: Jeffrey E. Jordan
53
<PAGE>
If to the Purchaser:
Prometheus Homebuilders LLC
c/o Lazard Freres Real Estate Investors, LLC
Thirty Rockefeller Plaza, 63rd Floor
New York, NY 10020
Telephone: (212) 632-6060
Facsimile: (212) 632-6052
Attn: Robert P. Freeman
Murry N. Gunty
With a copy to:
Latham & Watkins
885 Third Avenue
New York, NY 10022
Telephone: (212) 906-1200
Facsimile: (212) 751-4864
Attn: R. Ronald Hopkinson
or to such other place and with such other copies as either party may designate
as to itself by written notice to the other.
All such notices, requests, instructions or other documents shall be
deemed to have been duly given; at the time delivered by hand, if personally
delivered; four Business Days after being deposited in the mail, postage
prepaid, if mailed; when answered back, if telexed; when receipt acknowledged by
addressee, if by telecopier transmission; and on the next Business Day if timely
delivered to an air courier guaranteeing overnight delivery.
Section 10.9. Choice of Law. This Agreement shall be construed,
-------------
interpreted and the rights of the parties determined in accordance with the
internal laws of the State of New York, without regard to the conflict of law
principles thereof, except with respect to matters of law concerning the
internal corporate affairs of any corporate entity which is a party to or the
subject of this Agreement, and as to those matters the law of the jurisdiction
under which the respective entity derives its powers shall govern.
Section 10.10. Entire Agreement; Amendments and Waivers. This
----------------------------------------
Agreement, including all schedules attached hereto (each, a "Schedule" and,
--------
collectively, the "Schedules") constitutes the entire agreement among the
---------
parties pertaining to the subject matter hereof and supersedes all prior
agreements, understandings, negotiations and discussions, whether oral or
written, of the parties, including the written summary of proposed terms between
the Company and the Purchaser. Capitalized terms used in the Schedules but not
defined therein shall have the respective meanings ascribed to such terms in
this Agreement. Any item disclosed in one Schedule shall be deemed to have been
disclosed in all other Schedules.
54
<PAGE>
Section 10.11. Counterparts. This Agreement may be executed in one or
------------
more counterparts, each of which shall be deemed an original, but all
of which together shall constitute one and the same instrument.
Section 10.12. Invalidity. In the event that any one or more of the
----------
provisions contained in this Agreement or in any other instrument referred to
herein, shall, for any reason, be held to be invalid, illegal or unenforceable
in any respect, such invalidity, illegality or unenforceability shall not affect
any other provision of this Agreement or any other such instrument.
Section 10.13. Headings. The headings of the Articles and Sections
--------
herein are inserted for convenience of reference only and are not intended to be
a part of or to affect the meaning or interpretation of this Agreement.
Section 10.14. Limitation of Liability. In no event shall any member,
-----------------------
partner or representative of the Purchaser or of any partnership which is a
partner of the Purchaser or any partner of any such partnership, or any direct
or indirect stockholder, officer, director, partner, employee or any other such
person, be personally liable for any obligation of the Purchaser under this
Agreement. In no event shall any officer, director, employee or shareholder of
the Company be personally liable for any obligation of the Company under this
Agreement.
Section 10.15. Abstention from Voting. Neither the Purchaser nor any
----------------------
assignee of the Purchaser shall vote on the resolution to be proposed to
stockholders of the Company to authorize the issuance of the Securities .
Section 10.16. Mutual Agreement. The Company shall have the right to
----------------
issue a debt instrument in lieu of all or any portion of the Class AB Preferred
Stock to be issued hereunder, provided that such debt instrument contains terms
and conditions that are no less favorable to the Purchaser than the terms and
conditions of the Class ABI Preferred Stock (such debt to have a maturity date
of December 31, 2004).
Section 10.17. Apportionment of Stock Between Class ABI Preferred
--------------------------------------------------
Stock and Class ABII Preferred Stock. 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 the Purchaser 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 of
Directors generally (other than directors elected exclusively by holders of
Preferred Stock), but so that the Company shall issue the maximum amount of
Class ABI Preferred Stock it is permitted to issue before issuing any Class ABII
Preferred Stock.
Section 10.18. Merger of Company. Following the Second Closing, the
-----------------
parties hereby acknowledge and agree that, in the event that the Purchaser, in
its discretion pursuant to the terms of the Preferred Stock and the Stockholders
Agreement, gives its consent to a merger or consolidation of the Company with a
bona fide third party in an arms length transaction ("Merger") such that,
following such Merger, more than 51 percent of the Common Stock of the
55
<PAGE>
Company (or the surviving corporation in the Merger) is beneficially owned by
such third party, following the consummation of such Merger the Company shall
have the right to be released from its obligations under this Agreement to sell
to the Purchaser the then-unissued balance of the Preferred Stock (and any debt
instrument issuable in lieu thereof as set forth in Section 10.16) at one or
more Subsequent Closings.
[Signature Page Follows]
56
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed, as of the day and year first above written.
THE FORTRESS GROUP, INC.
By: /s/ J. Marshall Coleman
---------------------------------------
Name: J. Marshall Coleman
__________________________________
Title: Chairman of the Board
_________________________________
PROMETHEUS HOMEBUILDERS LLC
By: LF Strategic Realty Investors II L.P.,
its member
By: Lazard Freres Real Estate Investors
L.L.C., its general partner
By: /s/ Murry N. Gunty
----------------------------------------
Name:
Title:
<PAGE>
EXHIBIT A
FORM OF
CERTIFICATE OF DESIGNATIONS,
PREFERENCES AND RELATIVE, PARTICIPATING,
OPTIONAL AND OTHER SPECIAL
RIGHTS AND QUALIFICATIONS, LIMITATIONS
AND RESTRICTIONS THEREOF
OF
CLASS ABI PREFERRED STOCK
OF
THE FORTRESS GROUP, INC.
<PAGE>
EXHIBIT B
FORM OF
CERTIFICATE OF DESIGNATIONS,
PREFERENCES AND RELATIVE, PARTICIPATING,
OPTIONAL AND OTHER SPECIAL
RIGHTS AND QUALIFICATIONS, LIMITATIONS
AND RESTRICTIONS THEREOF
OF
CLASS ABII PREFERRED STOCK
OF
THE FORTRESS GROUP, INC.
<PAGE>
EXHIBIT C
FORM OF
AMENDED AND RESTATED
REGISTRATION RIGHTS AGREEMENT
<PAGE>
EXHIBIT D
FORM OF
AMENDED AND RESTATED
WARRANT AGREEMENT
<PAGE>
EXHIBIT E
FORM OF
AMENDED AND RESTATED
STOCKHOLDER AGREEMENT
<PAGE>
EXHIBIT F
FORM OF
BYLAWS AMENDMENTS
<PAGE>
EXHIBIT G
FORM OF
CERTIFICATE AMENDMENTS
<PAGE>
EXHIBIT H
FORM OF
BYLAWS AMENDMENTS-SUBSIDIARIES
<PAGE>
EXHIBIT I
FORM OF
SUPPLEMENTAL WARRANT AGREEMENT
<PAGE>
EXHIBIT 2
This STOCKHOLDERS VOTING AGREEMENT, dated as of September 30, 1997, between
certain holders of the shares of outstanding voting Common Stock, $0.01 par
value per share ("Common Stock"), of the Company (as defined below) set forth on
the signature page hereof (each, a "Stockholder" and, collectively, the
"Stockholders") and Prometheus Homebuilders LLC, a Delaware limited liability
company (the "Purchaser"). Capitalized terms not otherwise defined herein have
the meaning ascribed to them in the Stock Purchase Agreement (as hereinafter
defined).
RECITALS
A. Concurrently with the execution of this Agreement, pursuant to that
certain Amended and Restated Stock Purchase Agreement, as amended from time to
time (the "Stock Purchase Agreement"), dated as of September 30, 1997, by and
between The Fortress Group, Inc., a Delaware corporation (the "Company") and the
Purchaser, the parties thereto agreed to a series of transactions, including the
sale to the Purchaser of certain shares of the Company's Class AA Preferred
Stock and Class AB Preferred Stock (all such transactions between the Company
and the Purchaser are hereinafter collectively referred to as the
"Transactions").
B. As an additional inducement to the Purchaser to enter into the
Transactions, each of the Stockholders have agreed to vote in favor of the
Transactions on the terms set forth below.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties agree as follows:
1. Voting of Shares. During the term of this Agreement for so long as
----------------
such Stockholder shall be the owner of any Shares (as hereinafter defined), each
of the Stockholders covenants and agrees with each other Stockholder and the
Purchaser, to vote (which term shall include taking action without a meeting by
written consent) such number of Shares that may be voted by such Stockholder in
favor of the Transactions.
2. Shares. The term "Shares" as used herein shall mean any and all shares
------
of the capital stock of the Company (including Common Stock) which carry voting
rights (including any voting rights which arise by reason of default) now owned
or subsequently acquired by a Stockholder through purchase, gift, stock splits,
stock dividends and exercise of stock options.
3. Termination. This Agreement shall terminate at the Second Closing (as
-----------
defined in the Stock Purchase Agreement). Each Stockholder hereby agrees not to
sell, transfer or otherwise dispose of any of its Shares until the Second
Closing (other than Shares pledged by Charles F. Smith, Jr. as of the date
hereof pursuant to an existing loan agreement).
4. No Revocation. The voting agreements contained herein are coupled with
-------------
an interest and may not be revoked prior to termination in accordance with
Section 3, except by
<PAGE>
written consent of the Purchaser, the Company and the
Stockholders owning a majority of the Shares.
5. Irrevocable Proxy. Each Stockholder hereby constitutes and appoints
-----------------
the Purchaser, with full power of substitution, as the proxy of the Stockholder
and hereby authorizes the Purchaser to represent and to vote all of the Shares
in favor of the approval of the Transactions at the Stockholders Meeting and at
every adjournment or postponement thereof, to the same extent and with the same
effect as the Stockholder might or could do under applicable law, rules and
regulations. The proxy granted pursuant to the immediately preceding sentence
is given in consideration of the agreements and covenants of the Company
pursuant to this Agreement and as such is coupled with an interest and shall be
irrevocable unless and until this Agreement terminates pursuant to Section 3
hereof. The Stockholder hereby revokes any and all previous proxies granted
with respect to any of the Shares and shall not hereafter, unless and until this
Agreement terminates pursuant to Section 3 hereof, purport to grant any other
proxy or power of attorney with respect to any of the Shares, deposit any of the
Shares into a voting trust or enter into any agreement (other than this
Agreement), arrangement or understanding with any Person, directly or
indirectly, to vote or grant any proxy or give instructions with respect to the
voting of any of the Shares.
6. General.
-------
(a) Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of Delaware, without regard to any
principles of conflicts of law.
(b) Notices. All notices, requests, demands and other communications under
-------
this Agreement shall be in writing and shall be deemed given if delivered
personally or by facsimile transmission (with subsequent letter confirmation by
mail) or three days after being mailed by certified or registered mail, postage
prepaid, return receipt requested, to the parties, their successors in interest
or their assigns at the following addresses, or at such other addresses as the
parties may designate by written notice in the manner aforesaid:
If to the Stockholders: ATTN: [Stockholder Name]
c/o The Fortress Group, Inc.
1921 Gallows Road, Suite 730
Vienna, Virginia 22182
Telephone: (703) 442-4545
Facsimile: (703) 442-7730
Attn: J. Marshall Coleman
with a copy to: Arent Fox Kintner Plotkin & Kahn
1050 Connecticut Avenue, NW
Washington, D.C. 20036
Telephone: (202) 857-6235
Facsimile: (202) 857-6120
Attn: Jeffrey E. Jordan
2
<PAGE>
If to the Purchaser: Prometheus Homebuilders LLC
c/o Lazard Freres Real Estate Investors, LLC
Thirty Rockefeller Plaza, 63rd Floor
New York, NY 10020
Telephone: (212) 632-6060
Facsimile: (212) 632-6052
Attn: Robert Freeman
Murry N. Gunty
with a copy to: Latham & Watkins
885 Third Avenue
New York, NY 10022
Telephone: (212) 906-1200
Facsimile: (212) 751-4864
Attn: R. Ronald Hopkinson
(c) Entire Agreement. This Agreement contains the entire understanding
----------------
among the parties hereto and supersedes any prior understandings and agreements,
either oral or written, between or among the parties hereto relating to the
subject matter hereof.
(d) Equitable Remedies. In addition to legal remedies, in recognition of
------------------
the fact that remedies at law may not be sufficient, the parties (and their
permitted successors and assigns) shall be entitled to equitable remedies for
breaches or defaults hereunder, including, without limitation, specific
performance and injunction.
(e) Amendment. No amendment, modification or termination of any provision
---------
of this Agreement shall be valid unless in writing and signed by the Purchaser,
the Company and Stockholders owning a majority of the Shares.
(f) Binding Agreement: Successors and Assigns. This Agreement shall be
------------------------------------------
binding upon the parties hereto and their respective successors and legal
representatives; provided, however, that the rights and obligations of the
Purchaser under this Agreement shall not be assigned to any party other than:
(i) to an affiliate of the Purchaser or to any entity with which the Purchaser
merges or combines; or (ii) with the consent of the Stockholders owning a
majority of the Shares.
(g) Counterparts. This Agreement may be executed in several counterparts,
------------
and as so executed shall constitute one agreement, binding on all of the parties
hereto, notwithstanding that all the parties are not a signatory to the original
or the same counterparts.
(h) No Waiver; Cumulative Remedies. No failure or delay on the part of any
------------------------------
party in exercising any right, power or remedy hereunder shall, except to the
extent expressly provided herein, operate as a waiver hereof, nor shall any
single or partial exercise of any right, power or remedy preclude any other
future exercise thereof or the exercise of any other right,
3
<PAGE>
power or remedy hereunder. The remedies provided herein are cumulative and not
exclusive of any remedies provided by law.
(i) Severability. The provisions of this Agreement are severable, and if
------------
any clause or provision of this Agreement shall be held invalid or unenforceable
in whole or in part in any jurisdiction, then such clause or provision shall, as
to such jurisdiction, be ineffective to the extent of such invalidity or
unenforceability without in any manner affecting the validity or enforceability
of such clause or provision in any other jurisdiction or the remaining
provisions hereof in any jurisdiction.
(j) By its execution and delivery of this Agreement, each Stockholder
represents and warrants to the Purchaser that it owns 100% of the Shares set
forth opposite its name on the signature page hereof.
[Signature Page Follows]
4
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed by the parties hereto
as of the day and year first above written.
494,423
- ------------------------
By: /s/ James J. Martell
------------------------
Name: James J. Martell
Title:
651,585
- ------------------------
By: /s/ J. Marshall Coleman
------------------------
Name: J. Marshall Coleman
Title:
0
- ------------------------
By: /s/ Patricia Donnelley
--------------------------
Name: Patricia Donnelley
Title:
948,948.5
- -------------------------
By: /s/ Thomas B. Buffington
-------------------------------
Name: Thomas B. Buffington
Title:
474,474.25
- ------------------------
By: /s/ James Giddens
-----------------------------
Name: James Giddens
Title:
457,628
- -------------------------
By: /s/ Lawrence J. Witek
--------------------------
Name: Lawrence J. Witek
Title:
5
<PAGE>
457,628
- -------------------------
By: /s/ Lanold W. Caldwell
----------------------
Name: Lanold W. Caldwell
Title:
1,691,227
- -------------------------
By: /s/ J. Christopher Stuhmer
--------------------------
Name: J. Christopher Stuhmer
Title:
1,569,517
- -------------------------
By: /s/ Robert Short
--------------------
Name:
Title:
125,000
- -------------------------
By: /s/ Mary Ann Martell
---------------------
Name: Marry Ann Martell
Title:
PROMETHEUS HOMEBUILDERS LLC
By: LF Strategic Realty Investors II L.P.,
its member
By: Lazard Freres Real Estate Investors L.L.C.,
its general partner
By: /s/ Anthony E. Meyer
-----------------------
Name: Anthony E. Meyer
Title: Chief Investment Officer
6
<PAGE>
EXHIBIT 3
AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT
by and between
THE FORTRESS GROUP, INC.
and
PROMETHEUS HOMEBUILDERS LLC
Dated as of
February __, 1998
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
1. DEFINITIONS ....................................................... 1
2. DEMAND REGISTRATIONS .............................................. 4
(a) Timing Of Demand Registrations ................................ 4
(b) Number of Demand Registrations ................................ 4
(c) Required Thresholds ........................................... 4
(d) Participation ................................................. 4
(e) Underwriter's Cutback ......................................... 5
(f) Managing Underwriter .......................................... 5
(g) Black-Out Periods of Investor ................................. 5
3. PIGGYBACK REGISTRATIONS ........................................... 5
(a) Participation ................................................. 5
(b) Underwriter's Cutback ......................................... 6
(c) Company Control ............................................... 6
4. HOLD-BACK AGREEMENTS .............................................. 6
(a) By Holders of Registrable Securities .......................... 6
(b) By the Company and Others ..................................... 7
5. REGISTRATION PROCEDURES ........................................... 7
6. REGISTRATION EXPENSES ............................................. 11
(a) Demand Registrations .......................................... 11
(b) Piggyback Registrations ....................................... 11
(c) Company Expenses .............................................. 11
7. INDEMNIFICATION ................................................... 12
(a) Indemnification by Company .................................... 12
(b) Indemnification Procedures .................................... 12
(c) Indemnification by Holder of Registrable Securities ........... 13
(d) Contribution .................................................. 14
8. EXCHANGE ACT REPORTING REQUIREMENTS ............................... 14
9. REQUIREMENTS FOR PARTICIPATION IN UNDERWRITTEN OFFERINGS .......... 15
10. SUSPENSION OF SALES ............................................... 15
11. FUTURE REGISTRATION RIGHTS AGREEMENTS ............................. 15
12. MISCELLANEOUS ..................................................... 16
(a) Remedies ...................................................... 16
(b) No Inconsistent Agreements .................................... 16
(c) Amendments and Waivers ........................................ 17
i
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
(d) Notices ....................................................... 17
(e) Successors and Assigns ........................................ 17
(f) Counterparts .................................................. 18
(g) Table of Contents and Headings ................................ 18
(h) Governing Law ................................................. 18
(i) Severability .................................................. 18
(j) Forms ......................................................... 18
(k) Entire Agreement .............................................. 18
ii
<PAGE>
This AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT (this
"Agreement") is made and entered into as of September 30, 1997, by and between
The Fortress Group, Inc., a Delaware corporation (the "Company") and Prometheus
Homebuilders LLC (the "Investor").
WHEREAS, on September 30, 1997, the Company and the Investor entered
into that certain registration rights agreement (the "Original Registration
Rights Agreement")
WHEREAS, In order to induce the Investor to enter into the that
certain Second Amended and Restated Stock Purchase Agreement, dated as of
February __, 1998 hereof (the "Stock Purchase Agreement"), the Company has
agreed to amend and restate the Original Registration Rights Agreement as set
forth in this Agreement. The execution of this Agreement is a condition to the
Second Closing under the Stock Purchase Agreement.
NOW, THEREFORE The parties hereby agree as follows:
1. Definitions.
-----------
As used in this Agreement, the following capitalized terms shall have
the following meanings:
Board: The Board of Directors of the Company.
-----
Claim: Any loss, claim, damages, liability or expense (including the
-----
reasonable costs of investigation and legal fees and expenses).
Common Stock: The common stock, par value $0.01 per share, of the
------------
Company.
Demand Registration: A registration pursuant to Section 2 hereof.
-------------------
Equity Security: Any capital stock of the Company or any security
---------------
convertible, with or without consideration, into any such stock, or any security
carrying any warrant or right to subscribe to or purchase any such stock, or any
such warrant or right.
Exchange Act: The Securities Exchange Act of 1934, as amended.
------------
Firm Commitment Underwritten Offering: An offering in which the
-------------------------------------
underwriters agree to purchase securities for distribution pursuant to a
registration statement under the Securities Act and in which the obligation of
the underwriters is to purchase all the securities being offered if any are
purchased.
Holder: The beneficial owner of a security. For all purposes of this
------
Agreement, the Company shall be entitled to treat the record owner of a security
as the beneficial owner of such security unless the Company has been given
written notice of the existence and identity of a different beneficial owner. A
Holder of Preferred Stock shall be deemed to be the Holder of the Common Stock
into which such Preferred Stock could be converted. A Holder of a Warrant shall
be deemed to be the Holder of the Common Stock for which such Warrant could be
exercised.
<PAGE>
Indemnified Holder: Any Holder of Registrable Securities, any
------------------
officer, director, employee or agent of any such Holder and any Person who
controls any such Holder within the meaning of either Section 15 of the
Securities Act or Section 20 of the Exchange Act.
Misstatement: An untrue statement of a material fact or an omission
------------
to state a material fact required to be stated in a Registration Statement or
Prospectus or necessary to make the statements in a Registration Statement,
Prospectus or preliminary prospectus not misleading.
Person: A natural person, partnership, corporation, business trust,
------
association, joint venture or other entity or a government or agency or
political subdivision thereof.
Piggyback Registration: A registration pursuant to Section 3 hereof.
----------------------
Preferred Stock: The Class AA Convertible Preferred Stock and the
---------------
Class AB Convertible Redeemable Preferred Stock of the Company being issued and
sold pursuant to the Stock Purchase Agreement.
Prospectus: The prospectus included in any Registration Statement, as
----------
supplemented by any and all prospectus supplements and as amended by any and all
post-effective amendments and including all material incorporated by reference
in such prospectus.
Registration: A Demand Registration or a Piggyback Registration.
------------
Registration Expenses: The out-of-pocket expenses of a Registration,
---------------------
including:
(1) all registration and filing fees (including fees with respect
to filings required to be made with the National Association of Securities
Dealers);
(2) fees and expenses of compliance with securities or blue sky
laws (including fees and disbursements of counsel for the underwriters or
selling holders in connection with blue sky qualifications of the
Registrable Securities and determinations of their eligibility for
investment under the laws of such jurisdictions as the managing
underwriters or holders of a majority of the Registrable Securities being
sold may designate);
(3) printing, messenger, telephone and delivery expenses;
(4) fees and disbursements of counsel for the Company and of not
more than one firm of attorneys for the sellers of the Registrable
Securities;
(5) fees and disbursements of all independent certified public
accountants of the Company incurred in connection with such Registration
(including the expenses of any special audit and "cold comfort" letters
incident to such registration);
(6) fees and disbursements of underwriters (excluding discounts,
commissions, fees or expenses of underwriters, selling brokers, dealer
managers or similar securities industry professionals relating to the
distribution of the Registrable Securities);
2
<PAGE>
(7) premiums and other costs of securities acts liability
insurance if the Company so desires or if the underwriters or selling
holders of Registrable Securities so require; and
(8) fees and expenses of any other Persons retained by the
Company.
Registration Statement: Any registration statement under the
----------------------
Securities Act on an appropriate form (which form shall be available for the
sale of the Registrable Securities in accordance with the intended method or
methods of distribution thereof and shall include all financial statements
required by the SEC to be filed therewith) which covers Registrable
Securities pursuant to the provisions of this Agreement, including the
Prospectus included in such registration statement, amendments (including post-
effective amendments) and supplements to such registration statement, and all
exhibits to and all material incorporated by reference in such registration
statement.
Registrable Securities: (a) The shares of the Preferred Stock,
----------------------
whether or not owned by the Investor, (b) any debt instruments ("Debt") issued
pursuant to Section 10.16 of the Stock Purchase Agreement, whether or not owned
by the Investor, (c) the shares of Common Stock issued or issuable upon
conversion of the Preferred Stock or Debt, whether or not owned by the Investor,
(d) the shares of Common Stock issued or issuable upon exercise of any Warrants,
whether or not owned by the Investor, the _____ shares of Common Stock to be
acquired by Investor pursuant to that certain stock purchase agreement dated as
of ______, 1998 by and among the Investor and certain Stockholders of the
Company, and (f) 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 the Investor; 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.
Securities Act: The Securities Act of 1933, amended.
--------------
SEC: The Securities and Exchange Commission.
---
Transfer Restricted Security: 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 shall 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 Company 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).
Underwritten registration or underwritten offering: A registration in
-------------------------- ---------------------
which securities of the Company are sold to an underwriter for distribution to
the public.
3
<PAGE>
Warrants: The warrants to purchase Common Stock issued pursuant to
--------
that certain Amended and Restated Warrant Agreement dated of even date herewith
by and among the Company and the Investor and that certain Supplemental Warrant
Agreement to be entered into as of the first Subsequent Closing (as defined in
the Stock Purchase Agreement) by and among the Company and the Investor.
2. Demand Registrations.
--------------------
(a) Timing Of Demand Registrations.
------------------------------
Holders of Registrable Securities constituting at least twenty percent
(20%) of the Registrable Securities then outstanding may request at any time
that the Company file a registration statement under the Securities Act on an
appropriate form (which form shall be available for the sale of the Registrable
Securities in accordance with the intended method or methods of distribution
thereof and shall include all financial statements required by the SEC to be
filed therewith) covering the shares of Registrable Securities that are the
subject of such request.
(b) Number of Demand Registrations.
------------------------------
The Company shall be obligated to prepare, file and cause to become
effective pursuant to this Section 2: (i) no more than two Registration
Statements in any two-year period and (ii) no more than three Registration
Statements in total; provided, however, that a Registration Statement shall not
be counted as one of the three Demand Registrations hereunder unless it becomes
effective and is maintained effective in accordance with the requirements
specified in Section 5(a).
(c) Required Thresholds.
-------------------
The Company shall not be obligated to prepare, file and cause to
become effective pursuant to this Section 2 a Registration Statement on Form S-1
unless the proposed aggregate public offering price of the securities to be
included in such Demand Registration is at least $5 million. Nor shall the
Company be obligated to prepare, file and cause to become effective such
Registration Statement upon a demand made by less than 50% of the Holders of the
Registrable Securities then outstanding if such demand is made 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).
(d) Participation.
-------------
The Company shall promptly give written notice to all Holders of
Registrable Securities upon receipt of a request for a Demand Registration
pursuant to Section 2(a) above. The Company shall include in such Demand
Registration such shares of Registrable Securities for which it has received
written requests to register such shares within 30 days after such written
notice has been given.
4
<PAGE>
(e) Underwriter's Cutback.
---------------------
If the public offering of Registrable Securities 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 hereunder 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 shall 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.
Any shares that are thereby excluded from the offering shall 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.
The Company and, subject to the requirements of Section 11 hereof,
other Holders of securities of the Company may include such securities in such
Registration if, but only if, the managing underwriter concludes that such
inclusion will not interfere with the successful marketing of all the
Registrable Securities requested to be included in such registration.
(f) Managing Underwriter.
--------------------
The managing underwriter or underwriters of any underwritten public
offering covered by a Demand Registration shall be selected by the Holders of a
majority of the shares of Registrable Securities to be included in such
registration.
(g) Black-Out Periods of Investor.
-----------------------------
Notwithstanding anything herein to the contrary, (i) the Company shall
have the right, exercisable once per Demand Registration to require the Investor
not to sell under a Demand Registration or to suspend the effectiveness thereof
(but not for a period exceeding 90 days in any calendar year) 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 public disclosure thereof would be
required prior to the time such disclosure might otherwise be required, or when
the Company is in possession of material information that it deems advisable not
to disclose in a registration statement.
3. Piggyback Registrations.
-----------------------
(a) Participation.
-------------
Each time the Company decides to file a registration statement under
the Securities Act (other than registrations on Forms S-4 or S-8 or any
successor form thereto, and other than a Demand Registration) covering the offer
and sale by it or any of its security holders of any of its securities for
money, the Company shall give written notice thereof to all Holders of
Registrable Securities. The Company shall include in such registration
statement such shares of Registrable
5
<PAGE>
Securities for which it has received written requests to register such shares
within 30 days after such written notice has been given. If the registration
statement is to cover an underwritten offering, such Registrable Securities
shall be included in the underwriting on the same terms and conditions as the
securities otherwise being sold through the underwriters.
(b) Underwriter's Cutback.
---------------------
Subject to the requirements of Section 11 hereof, if in the good faith
judgment of the managing underwriter of such offering 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
Common Stock to be included in the offering (except for shares of Registrable
Securities to be included in a Demand Registration in accordance with Section 2
hereof) shall be reduced to such smaller number with the participation in such
offering to be in the following order of priority: (1) first, the shares of
Registrable Securities requested to be included, and (2) 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 shall 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 shall 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.
(c) Company Control.
---------------
The Company may decline to file a Registration Statement after giving
notice to any Holder pursuant to Section 3(a) above, or withdraw a Registration
Statement after filing and after such notice, but prior to the effectiveness
thereof, provided that the Company shall promptly notify each Holder in writing
of any such action and provided further that the Company shall bear all expenses
incurred by such Holder or otherwise in connection with such withdrawn
Registration Statement.
4. Hold-Back Agreements.
--------------------
(a) By Holders of Registrable Securities.
------------------------------------
Upon the written request of the managing underwriter of any
underwritten offering of the Company's securities, a Holder of Registrable
Securities shall not 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 shall have
entered into substantially similar holdback agreements with such managing
underwriter covering at least the same period.
6
<PAGE>
(b) By the Company and Others.
-------------------------
The Company agrees:
(i) not to effect any public or private sale or distribution of
its Equity Securities 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).
5. Registration Procedures.
-----------------------
If and whenever the Company is required to register Registrable
Securities in a Demand Registration or a Piggyback Registration, the Company
will use its best efforts to effect such registration to permit the sale of such
Registrable Securities in accordance with the intended plan of distribution
thereof, and pursuant thereto the Company will as expeditiously as possible:
(a) prepare and file with the SEC as soon as practicable a
Registration Statement with respect to such Registrable Securities and use its
best efforts to cause such Registration Statement to become effective and remain
effective until the Registrable Securities covered by such Registration
Statement have been sold, provided that before filing a Registration Statement
or Prospectus or any amendments or supplements thereto, the Company shall
furnish to the Holders of the Registrable Securities covered by such
Registration Statement and the underwriters, if any, draft copies of all such
documents proposed to be filed, which documents will be subject to the review of
such Holders and underwriters, and the Company shall not file any Registration
Statement or amendment thereto or any Prospectus or any supplement thereto to
which the Holders of a majority of the Registrable Securities covered by such
Registration Statement or the underwriters, if any, shall reasonably object;
(b) prepare and file with the SEC such amendments and post-effective
amendments to the Registration Statement, and such supplements to the
Prospectus, as may be requested by any Holder of Registrable Securities or any
underwriter of Registrable Securities or as may be required by the rules,
regulations or instructions applicable to the registration form used by the
Company or by the Securities Act or rules and regulations thereunder to keep the
Registration Statement effective until all Registrable Securities covered by
such Registration Statement are sold in accordance with the intended plan of
distribution set forth in such Registration Statement or supplement to the
Prospectus;
7
<PAGE>
(c) promptly notify the selling Holders of Registrable Securities and
the managing underwriter, if any, and (if requested by any such Person) confirm
such advice in writing:
(i) when the Prospectus or any supplement or post-effective
amendment has been filed, and, with respect to the Registration Statement
or any post-effective amendment, when the same has become effective,
(ii) of any request by the SEC for amendments or supplements to
the Registration Statement or the Prospectus or for additional information,
(iii) of the issuance by the SEC of any stop order suspending the
effectiveness of the Registration Statement or the initiation of any
proceedings for that purpose,
(iv) if at any time the representations and warranties of the
Company contemplated by clause (i) of paragraph (o) below cease to be
accurate in all material respects,
(v) of the receipt by the Company of any notification with
respect to the suspension of the qualification of the Registrable
Securities for sale in any jurisdiction or the initiation or threatening of
any proceeding for such purpose, and
(vi) of the existence of any fact which results in the
Registration Statement, the Prospectus or any document incorporated therein
by reference containing a Misstatement;
(d) make every reasonable effort to obtain the withdrawal of any order
suspending the effectiveness of the Registration Statement at the earliest
possible time;
(e) if requested by the managing underwriter or a Holder of
Registrable Securities being sold in connection with an underwritten offering,
immediately incorporate in a supplement or post-effective amendment such
information as the managing underwriter and the Holders of a majority of the
Registrable Securities being sold agree should be included therein relating to
the sale of the Registrable Securities, including, without limitation,
information with respect to the number of shares of Registrable Securities being
sold to underwriters, the purchase price being paid therefor by such
underwriters and with respect to any other terms of the underwritten offering of
the Registrable Securities to be sold in such offering; and make all required
filings of such supplement or post-effective amendment as soon as notified of
the matters to be incorporated in such supplement or post-effective amendment;
(f) promptly prior to the filing of any document which is to be
incorporated by reference into the Registration Statement or the Prospectus
(after initial filing of the Registration Statement) provide copies of such
document to counsel to the selling Holders of Registrable Securities and to the
managing underwriter, if any, and make the Company's representatives available
for discussion of such document and make such changes in such document prior to
the filing thereof as counsel for such selling Holders or underwriters may
reasonably request;
8
<PAGE>
(g) furnish to each selling Holder of Registrable Securities and the
managing underwriter, without charge, at least one signed copy of the
Registration Statement and any post-effective amendments thereto, including
financial statements and schedules, all documents incorporated therein by
reference and all exhibits (including those incorporated by reference);
(h) deliver to each selling Holder of Registrable Securities and the
underwriters, if any, without charge, as many copies of each Prospectus (and
each preliminary prospectus) as such Persons may reasonably request (the Company
hereby consenting to the use of each such Prospectus (or preliminary prospectus)
by each of the selling Holders of Registrable Securities and the underwriters,
if any, in connection with the offering and sale of the Registrable Securities
covered by such Prospectus (or preliminary prospectus);
(i) prior to any public offering of Registrable Securities, register
or qualify or cooperate with the selling Holders of Registrable Securities, the
underwriters, if any, and their respective counsel in connection with the
registration or qualification of such Registrable Securities for offer and sale
under the securities or blue sky laws of such jurisdictions in the United States
as such selling Holders or underwriters may designate in writing and do anything
else necessary or advisable to enable the disposition in such jurisdictions of
the Registrable Securities covered by the Registration Statement; provided that
the Company shall not be required to qualify generally to do business in any
jurisdiction where it is not then so qualified or to take any action which would
subject it to general service of process in any such jurisdiction where it is
not then so subject;
(j) cooperate with the selling Holders of Registrable Securities and
the managing underwriter, if any, to facilitate the timely preparation and
delivery of certificates not bearing any restrictive legends representing the
Registrable Securities to be sold and cause such Registrable Securities to be in
such denominations and registered in such names as the managing underwriter may
request at least three business days prior to any sale of Registrable Securities
to the underwriters;
(k) use its best efforts to cause the Registrable Securities covered
by the Registration Statement to be registered with or approved by such other
governmental agencies or authorities in the United States as may be necessary to
enable the seller or sellers thereof or the underwriters, if any, to consummate
the disposition of such Registrable Securities;
(l) if the Registration Statement or the Prospectus contains a
Misstatement, prepare a supplement or post-effective amendment to the
Registration Statement or the related Prospectus or any document incorporated
therein by reference or file any other required document so that, as thereafter
delivered to the purchasers of the Registrable Securities, the Prospectus will
not contain a Misstatement;
(m) use its best efforts to cause all Registrable Securities covered
by the Registration Statement to be listed on any national securities exchange
or authorized for quotation on NASDAQ or in the National Market System, if
requested by the Holders of a majority of such Registrable Securities or the
managing underwriter, if any;
9
<PAGE>
(n) provide a CUSIP number for all Registrable Securities not later
than the effective date of the Registration Statement;
(o) enter into such agreements (including an underwriting agreement)
and do anything else necessary or advisable in order to expedite or facilitate
the disposition of such Registrable Securities, and in such connection:
(i) make such representations and warranties to the Holders of
such Registrable Securities and the underwriters, if any, in form,
substance and scope as are customarily made by issuers to underwriters in
primary underwritten offerings;
(ii) obtain opinions of counsel to the Company and updates
thereof (which counsel and opinions (in form, scope and substance) shall be
reasonably satisfactory to the managing underwriter, if any, and the
Holders of a majority of the Registrable Securities being sold) addressed
to each selling Holder and the underwriter, if any, covering the matters
customarily covered in opinions delivered to underwriters in primary
underwritten offerings and such other matters as may be reasonably
requested by such Holders or underwriters;
(iii) obtain "cold comfort" letters and updates thereof from the
Company's independent certified public accountants addressed to the selling
Holders of Registrable Securities and the underwriters, if any, such
letters to be in customary form and covering matters of the type
customarily covered in "cold comfort" letters by underwriters in connection
with primary underwritten offerings;
(iv) if an underwriting agreement is entered into, cause the same
to include the indemnification and contribution provisions and procedures
of Section 7 hereof with respect to all parties to be indemnified pursuant
to said Section (or, with respect to the indemnification of such
underwriters, such similar indemnification and contribution provisions as
such underwriters shall customarily require); and
(v) deliver such documents and certificates as may be requested
by the Holders of a majority of the Registrable Securities being sold and
the managing underwriter, if any, to evidence compliance with clause (i)
above and with any customary conditions contained in the underwriting
agreement or other agreement entered into by the Company.
The above shall be done at each closing under such underwriting or similar
agreement or as and to the extent otherwise reasonably requested by the Holders
of a majority of the Registrable Securities being sold;
(p) make available for inspection by representatives of the Holders of
a majority of the Registrable Securities being sold, any underwriter
participating in any disposition pursuant to such Registration Statement, and
any attorney or accountant retained by the sellers or any such underwriter, all
financial and other records and pertinent corporate documents and properties of
the Company, and cause the Company's officers, directors and employees to supply
all information reasonably requested by any such representative, underwriter,
attorney or accountant in connection
10
<PAGE>
with the Registration; provided that any records, information or documents that
are designated by the Company in writing as confidential shall be kept
confidential by such Persons unless disclosure of such records, information or
documents is required by court or administrative order; and
(q) otherwise use its best efforts to comply with all applicable rules
and regulations of the SEC, and make generally available to its security holders
earnings statements satisfying the provisions of Section 11(a) of the Securities
Act, no later than 45 days after the end of any 12-month period (or 90 days, if
such period is a fiscal year) (x) commencing at the end of any fiscal quarter in
which Registrable Securities are sold to underwriters in an underwritten
offering, or, if not sold to underwriters in such an offering, (y) beginning
with the first month of the Company's first fiscal quarter commencing after the
effective date of the Registration Statement, which statements shall cover said
12-month periods.
6. Registration Expenses.
---------------------
(a) Demand Registrations.
--------------------
The Company shall bear all Registration Expenses incurred in
connection with the first two of the three Demand Registrations and of any
Registrations which do not become or are not maintained effective in accordance
with the requirements specified in Section 5(a) other than any Registration
terminated prior to effectiveness at the request of, or solely as a result of
the actions of holders whose Registrable Securities are included in such
registration. The Registration Expenses of the third Demand Registration
incurred by the Investor or any other holder whose Registrable Securities are
included in such Demand Registration shall be split proportionally between the
Investor, any such holder and the Company.
(b) Piggyback Registrations.
-----------------------
The Company shall bear all Registration Expenses incurred in
connection with all Piggyback Registrations.
(c) Company Expenses.
----------------
The Company also will, in any event, pay its internal expenses
(including, without limitation, all salaries and expenses of its officers and
employees performing legal or accounting duties), the expense of any annual
audit, the fees and expenses incurred in connection with any listing of the
securities to be registered on a securities exchange, and the fees and expenses
of any Person, including special experts, retained by the Company.
7. Indemnification.
---------------
(a) Indemnification by Company.
--------------------------
The Company agrees to indemnify and hold harmless each Indemnified
Holder from and against all Claims arising out of or based upon any Misstatement
or alleged Misstatement, except insofar as such Misstatement or alleged
Misstatement was based upon information furnished in writing to the Company by
such Indemnified Holder expressly for use in the document
11
<PAGE>
containing such Misstatement or alleged Misstatement. This indemnity shall not
be exclusive and shall be in addition to any liability which the Company may
otherwise have.
The foregoing notwithstanding, the Company shall not be liable to the
extent that any such Claim arises out of or is based upon a Misstatement or
alleged Misstatement made in any preliminary prospectus if (i) such Indemnified
Holder failed to send or deliver a copy of the Prospectus with or prior to the
delivery of written confirmation of the sale of Registrable Securities giving
rise to such Claim and (ii) the Prospectus would have corrected such untrue
statement or omission.
In addition, the Company shall not be liable to the extent that any
such Claim arises out of or is based upon a Misstatement or alleged Misstatement
in a Prospectus, (x) if such Misstatement or alleged Misstatement is corrected
in an amendment or supplement to such Prospectus and (y) having previously been
furnished by or on behalf of the Company with copies of the Prospectus as so
amended or supplemented, such Indemnified Holder thereafter fails to deliver
such Prospectus as so amended or supplemented prior to or concurrently with the
sale to the person who purchased a Registrable Security from such Indemnified
Holder and who is asserting such Claim.
The Company shall also indemnify underwriters, selling brokers, dealer
managers and similar securities industry professionals participating in a
distribution covered by a Registration Statement, their officers and directors
and each Person who controls such Persons (within the meaning of Section 15 of
the Securities Act or Section 20 of the Exchange Act) to the same extent as
provided above with respect to the indemnification of the Indemnified Holders of
Registrable Securities.
(b) Indemnification Procedures.
--------------------------
If any action or proceeding (including any governmental investigation
or inquiry) shall be brought or asserted against an Indemnified Holder in
respect of which indemnity may be sought from the Company, such Indemnified
Holder shall promptly notify the Company in writing, and the Company shall
assume the defense thereof, including the employment of counsel reasonably
satisfactory to such Indemnified Holder and the payment of all expenses.
Such Indemnified Holder shall have the right to employ separate
counsel in any such action and to participate in the defense thereof, but the
fees and expenses of such separate counsel shall be the expense of such
Indemnified Holder unless (i) the Company has agreed to pay such fees and
expenses, (ii) the Company shall have failed to assume the defense of such
action or proceeding or has failed to employ counsel satisfactory to such
Indemnified Holder in any such action or proceeding or (iii) the named parties
to any such action or proceeding (including any impleaded parties) include both
such Indemnified Holder and the Company, and such Indemnified Holder shall have
been advised by counsel that there may be one or more legal defenses available
to such Indemnified Holder that are different from or additional to those
available to the Company.
If such Indemnified Holder notifies the Company in writing that it
elects to employ separate counsel at the expense of the Company as permitted by
the provisions of the preceding
12
<PAGE>
paragraph, the Company shall not have the right to assume the defense of such
action or proceeding on behalf of such Indemnified Holder. The foregoing
notwithstanding, the Company shall not be liable for the reasonable fees and
expenses of more than one separate firm of attorneys at any time for such
Indemnified Holder and any other Indemnified Holders (which firm shall be
designated in writing by such Indemnified Holders) in connection with any one
such action or proceeding or separate but substantially similar or related
actions or proceedings in the same jurisdiction arising out of the same general
allegations or circumstances.
The Company shall not be liable for any settlement of any such action
or proceeding effected without its written consent, but if settled with its
written consent, or if there be a final judgment for the plaintiff in any such
action or proceeding, the Company agrees to indemnify and hold harmless such
Indemnified Holders from and against any loss or liability by reason of such
settlement or judgment.
(c) Indemnification by Holder of Registrable Securities.
---------------------------------------------------
Each Holder of Registrable Securities agrees to indemnify and hold
harmless the Company, its directors and officers and each Person, if any, who
controls the Company within the meaning of either Section 15 of the Securities
Act or Section 20 of the Exchange Act to the same extent as the foregoing
indemnity from the Company to such Holder, but only with respect to information
relating to such Holder furnished in writing by such Holder expressly for use in
any Registration Statement, Prospectus or preliminary prospectus. In no event,
however, shall the liability hereunder of any selling Holder of Registrable
Securities be greater than the dollar amount of the proceeds received by such
Holder upon the sale of the Registrable Securities giving rise to such
indemnification obligation.
In case any action or proceeding shall be brought against the Company
or its directors or officers or any such controlling person, in respect of which
indemnity may be sought against a Holder of Registrable Securities, such Holder
shall have the rights and duties given the Company and the Company or its
directors or officers or such controlling person shall have the rights and
duties given to each Holder by Sections 7(a) and 7(b) above.
The Company shall be entitled to receive indemnities from
underwriters, selling brokers, dealer managers and similar securities industry
professionals participating in the distribution, to the same extent as provided
above with respect to information so furnished in writing by such Persons
specifically for inclusion in any Prospectus or Registration Statement.
(d) Contribution.
------------
If the indemnification provided for in this Section 7 is unavailable
to an indemnified party under Section 7(a) or Section 7(c) above (other than by
reason of exceptions provided in those Sections) in respect of any Claims
referred to in such Sections, then each applicable indemnifying party, in lieu
of indemnifying such indemnified party, shall contribute to the amount paid or
payable by such indemnified party as a result of such Claims in such proportion
as is appropriate to reflect the relative fault of the Company on the one hand
and of the Indemnified Holder on the other in connection with the statements or
omissions which resulted in such Claims as well as any
13
<PAGE>
other relevant equitable considerations. The amount paid or payable by a party
as a result of the Claims referred to above shall be deemed to include, subject
to the limitations set forth in Section 7(b), any legal or other fees or
expenses reasonably incurred by such party in connection with investigating or
defending any action or claim.
The relative fault of the Company on the one hand and of the
Indemnified Holder on the other shall be determined by reference to, among other
things, whether the Misstatement or alleged Misstatement relates to information
supplied by the Company or by the Indemnified Holder and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such Misstatement or alleged Misstatement.
The Company and each Holder of Registrable Securities agree that it
would not be just and equitable if contribution pursuant to this Section 7(d)
were determined by pro rata allocation or by any other method of allocation
which does not take account of the equitable considerations referred to above.
Notwithstanding the provisions of this Section 7(d), an Indemnified
Holder shall not be required to contribute any amount in excess of the amount by
which (i) the total price at which the securities that were sold by such
Indemnified Holder and distributed to the public were offered to the public
exceeds (ii) the amount of any damages which such Indemnified Holder has
otherwise been required to pay by reason of such Misstatement.
No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation.
8. Exchange Act Reporting Requirements.
-----------------------------------
From and after the date hereof, the Company shall (whether or not it
shall then be required to do so) timely file such information, documents and
reports as the Commission may require or prescribe under Section 13 or 15(d)
(whichever is applicable) of the Exchange Act. In addition, the Company shall
take such other measures and file such other information, documents and reports,
as shall hereafter be required by the Commission as a condition to the
availability of Rule 144 under the Securities Act (or any successor provision)
and the use of Form S-3.
From and after the date hereof, the Company shall forthwith upon
request furnish any Holder of Registrable Securities (i) a written statement by
the Company that it has complied with such reporting requirements, (ii) a copy
of the most recent annual or quarterly report of the Company, and (iii) such
other reports and documents filed by the Company with the Commission as such
Holder may reasonably request in availing itself of an exemption for the sale of
Registrable Securities without registration under the Securities Act.
The purpose of the foregoing requirements are (x) to enable any such
Holder to comply with the current public information requirements contained in
paragraph (c) of Rule 144 under the Securities Act (or any successor provision)
and (y) to qualify the Company for the use of registration statements on Form S-
3.
14
<PAGE>
9. Requirements for Participation in Underwritten Offerings.
--------------------------------------------------------
No Person may participate in any underwritten offering pursuant to a
Registration hereunder unless such Person (a) agrees to sell such Person's
securities on the basis provided in any underwriting arrangements approved by
the Persons entitled hereunder to approve such arrangements and (b) completes
and executes all questionnaires, powers of attorney, indemnities, underwriting
agreements and other documents required under the terms of such underwriting
arrangements.
10. Suspension of Sales.
-------------------
Upon receipt of written notice from the Company that a Registration
Statement or Prospectus contains a Misstatement, each Holder of Registrable
Securities shall forthwith discontinue disposition of Registrable Securities
until such Holder has received copies of the supplemented or amended Prospectus
required by Section 5(1) hereof, or until such Holder is advised in writing by
the Company that the use of the Prospectus may be resumed, and, if so directed
by the Company, such Holder shall deliver to the Company (at the Company's
expense) all copies, other than permanent file copies then in such Holder's
possession, of the Prospectus covering such Registrable Securities current at
the time of receipt of such notice.
11. Future Registration Rights Agreements.
-------------------------------------
Except for an underwriting agreement between the Company and one or
more professional underwriters of securities, the Company shall not agree after
the date hereof to register any Equity Securities under the Securities Act
unless such agreement specifically provides that:
(a) the Holder of such Equity Securities may not participate in any
Demand Registration without the consent of the Holders of a majority of the
shares of the Registrable Securities included in such registration unless:
(i) the offering of the Registrable Securities is to be a Firm
Commitment Underwritten Offering and the managing underwriter concludes
that the public offering or sale of such Equity Securities would not
interfere with the successful marketing of all Registrable Securities
requested to be sold and
(ii) the Holders of Registrable Securities shall have the right
to participate, to the extent they may request, in any registration
statement initiated under a demand registration right exercised by the
Holder of such Equity Securities, except that if the managing underwriter
of a public offering made pursuant to such a demand registration limits the
number of shares of Common Stock to be sold, the participation of the
Holders of the Registrable Securities and the Holders of all other Common
Stock (other than the Equity Securities held by such Holder of Equity
Securities) shall be determined as set forth in Section 3 hereof.
(b) the Holder of such Equity Securities may not participate in any
Piggyback Registration if the sale of Registrable Securities is to be
underwritten unless, if the managing underwriter limits the total number of
shares to be sold, the Holders of such Equity Securities and
15
<PAGE>
the Holders of Registrable Securities are entitled to participate in such
underwritten distribution based on the order of priority set forth in Section 3
hereof, and
(c) all Equity Securities excluded from any Registration as a result
of the foregoing limitations may not be publicly offered or sold for a period
(not to exceed at least 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 this Agreement.
12. Miscellaneous.
-------------
(a) Remedies.
--------
Each Holder of Registrable Securities, in addition to being entitled
to exercise all rights provided herein, in the Stock Purchase Agreement and
granted by law, including recovery of damages, shall be entitled to specific
performance of its rights under this Agreement. The Company agrees that
monetary damages would not be adequate compensation for any loss incurred by
reason of a breach by it of the provisions of this Agreement and hereby agrees
to waive the defense in any action for specific performance that a remedy at law
would be adequate.
(b) No Inconsistent Agreements.
--------------------------
The Company shall not on or after the date of this Agreement enter
into any agreement with respect to its securities that is inconsistent with the
rights granted to the Holders of Registrable Securities in this Agreement or
otherwise conflicts with the provisions hereof.
Other than as disclosed on Schedule I attached hereto, the Company has
not previously entered into any agreement with respect to its securities
granting any registration rights to any Person. The rights granted to the
Holders of Registrable Securities hereunder do not in any way conflict with and
are not inconsistent with the rights granted to the holders of the Company's
securities under any such agreements, except as noted on Schedule I.
(c) Amendments and Waivers.
----------------------
The provisions of this Agreement, including the provisions of this
sentence, may not be amended, modified or supplemented, and waivers or consents
to departures from the provisions hereof may not be given unless the Company has
obtained the written consent of the Holders of at least a majority of the
outstanding shares of Registrable Securities. The foregoing notwithstanding, a
waiver or consent to departure from the provisions hereof that relates
exclusively to the rights of Holders of shares of Registrable Securities whose
shares are being sold pursuant to a Registration Statement and that does not
directly or indirectly affect the rights of other Holders of shares of
Registrable Securities may be given by the Holders of a majority of the shares
of Registrable Securities being sold.
16
<PAGE>
(d) Notices.
-------
All notices and other communications provided for or permitted
hereunder shall be made in writing by hand-delivery, registered first-class
mail, telex, telecopier, or air courier guaranteeing overnight delivery:
(i) if to a Holder of Registrable Securities, at the most current
address given by such Holder to the Company in accordance with the
provisions hereof, which address initially is, with respect to the
Investor, the address set forth on the Investor's signature page of the
Stock Purchase Agreement, with a copy to Latham & Watkins, 885 Third
Avenue, Suite 1000, New York, New York 10022, Attention: R. Ronald
Hopkinson, Esq.; and
(ii) if to the Company, initially at its address set forth in the
Stock Purchase Agreement and thereafter at such other address, notice of
which is given in accordance with the provisions hereof, with a copy to
Arent Fox Kintner Plotkin & Kahn, 1050 Connecticut Avenue, N.W.,
Washington, D.C. 20036, Attention: Jeffrey E. Jordan, Esq.
All such notices and communications shall be deemed to have been duly
given: at the time delivered by hand, if personally delivered; five business
days after being deposited in the mail, postage prepaid, if mailed; when
answered back, if telexed; when receipt acknowledged, if telecopied; and on the
next business day, if timely delivered to an air courier guaranteeing overnight
delivery. The Company shall promptly provide a list of the most current
addresses of the Holders of Registrable Securities given to it in accordance
with the provisions hereof to any such Holder for the purpose of enabling such
Holder to communicate with other Holders in connection with this Agreement.
(e) Successors and Assigns.
----------------------
This Agreement shall inure to the benefit of and be binding upon the
successors and assigns of each of the parties.
(f) Counterparts.
------------
This Agreement may be executed in one or more of counterparts, each of
which shall be deemed an original, but all of which taken together shall
constitute one and the same agreement.
(g) Table of Contents and Headings.
------------------------------
The table of contents and headings in this Agreement are inserted for
convenience of reference only and are not intended to be a part of or to affect
the meaning or interpretation of this Agreement.
17
<PAGE>
(h) Governing Law.
-------------
This Agreement shall be governed by and construed in accordance with
the laws of the State of New York.
(i) Severability.
------------
In the event that any one or more of the provisions contained herein,
or the application thereof in any circumstance, is held invalid, illegal or
unenforceable, the validity, legality and enforceability of any such provision
in every other respect and of the remaining provisions contained herein shall
not be affected or impaired thereby.
(j) Forms.
-----
All references in this Agreement to particular forms of registration
statements are intended to include all successor forms which are intended to
replace, or to apply to similar transactions as, the forms herein referenced.
(k) Entire Agreement.
----------------
This Agreement and the Stock Purchase Agreement are intended by the
parties as the final expression of their agreement and intended to be a complete
and exclusive statement of the agreement and understanding of the parties hereto
in respect of the subject matter contained herein. There are no restrictions,
promises, warranties or undertakings, other than those set forth or referred to
herein or therein with respect to the registration rights granted by the Company
with respect to the securities sold pursuant to the Stock Purchase Agreement.
This Agreement and the Stock Purchase Agreement supersede all prior agreements
and understandings between the parties with respect to such subject matter.
[Signature Page Follows]
18
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
THE FORTRESS GROUP, INC.
By: _______________________________________
Name: _________________________________
Title: ________________________________
PROMETHEUS HOMEBUILDERS LLC
by: LF Strategic Realty Investors II L.P.,
its member
by: Lazard Freres Real Estate Investors
L.L.C., its general partner
By: ______________________________________
Name: ________________________________
Title: _______________________________
19
<PAGE>
SCHEDULE 1
TO REGISTRATION RIGHTS AGREEMENT
1. Agreement and Plan of Reorganization dated as of March 11, 1996, as amended,
by an among the Company, Buffington Acquisition, Inc., Buffington Holdings, Inc.
and the Stockholders named therein.
2. Amended and Restated Agreement and Plan of Reorganization dated as of March
11, 1996, as amended, by and among the Company, Christopher Acquisition, Inc.,
Christopher Homes, Custom Homes Division, Inc. and the Stockholders named
therein.
3. Amended and Restated Agreement and Plan of Reorganization dated as of March
11, 1996, as amended, by and among the Company, Genesee Acquisition, Inc., The
Genesee Company, The Genesee Company/ Castle Pines, Ltd., The Genesee Company of
Michigan, Ltd., Genesee Development Company and the Stockholders named therein.
4. Amended and Restated Agreement and Plan of Reorganization dated as March 11,
1996, as amended, by and among the Company, Sunstar Acquisition, Inc., Solaris
Development Corporation and the Stockholders named therein.
5. Asset Purchase Agreement dated August 31, 1996 by and among the Company,
Fortress Acquisition, Inc., Landmark Homes, Inc., B. Rex Stephens, and Bobby W.
Harrelson.
6. Asset Purchase Agreement dated February 28, 1997 by and among the Company,
Fortress-Florida, Inc., DW Hutson Construction, Inc. and David Hutson.
7. Purchase Agreement dated as of August 18, 1997 by and among the Company,
Fortress Galloway, Inc., Don Galloway Homes, Inc., Don Galloway Land, LLC,
Galloway Limited Partnership, Thornblade, LLC and Don A. Galloway.
Certain provision in agreements 1 through 4 above pertaining to priority on
registration and Section 3(b) of this Agreement are inconsistent in certain
respects. The Company agrees that it shall use its best efforts to obtain,
prior to the Second Closing under the Stock Purchase Agreement, the consent of
the parties to such agreements to modification of such provisions reasonably
sufficient to make such provision consistent with Section 3(b).
<PAGE>
EXHIBIT 4
AMENDED AND RESTATED STOCKHOLDERS AGREEMENT
by and among
THE FORTRESS GROUP, INC.,
PROMETHEUS HOMEBUILDERS LLC
and
THE STOCKHOLDERS NAMED HEREIN
dated as of
February ___, 1998
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I. DEFINITIONS..................................................... 2
-----------
Section 1.1. Defined Terms.............................................. 2
-------------
ARTICLE II. BOARD.......................................................... 5
-----
Section 2.1. Members of the Board....................................... 5
--------------------
ARTICLE III. COVENANTS..................................................... 7
---------
Section 3.1. Operating Statements; Public Company Status................ 7
-------------------------------------------
Section 3.2. Conduct of Business........................................ 7
-------------------
ARTICLE IV. PARTICIPATION RIGHTS........................................... 11
--------------------
Section 4.1.............................................................. 11
ARTICLE V. TAG-ALONG RIGHTS................................................ 13
----------------
Section 5.1. Tag-Along Rights........................................... 13
----------------
ARTICLE VI. MISCELLANEOUS.................................................. 15
-------------
Section 6.1. Counterparts............................................... 15
------------
Section 6.2. Governing Law.............................................. 15
-------------
Section 6.3. Expenses................................................... 15
--------
Section 6.4. Notices.................................................... 15
-------
Section 6.5. Successors and Assigns..................................... 17
----------------------
Section 6.6. Headings................................................... 17
--------
Section 6.7. Amendments and Waivers..................................... 17
----------------------
Section 6.8. Interpretation, Absence of Presumption..................... 17
--------------------------------------
Section 6.9. Severability............................................... 18
------------
Section 6.10. Further Assurances......................................... 18
------------------
Section 6.11. Specific Performance....................................... 18
--------------------
Section 6.12. Confidentiality............................................ 18
---------------
</TABLE>
i
<PAGE>
THIS AMENDED AND RESTATED STOCKHOLDERS AGREEMENT (the "Agreement"),
dated as of March __, 1998, is made by and among Prometheus Homebuilders LLC
(the "Purchaser"), The Fortress Group, Inc., a Delaware corporation (the
"Company") and the stockholders named herein (the "Stockholders"). Capitalized
terms not otherwise defined herein have the meaning ascribed to them in the
Stock Purchase Agreement (as hereinafter defined).
RECITAL
-------
WHEREAS, on September 30, 1997, the Purchaser, the Company and the
Stockholders entered into that certain stockholders agreement (the "Original
Stockholders Agreement").
WHEREAS, the Company, and the Purchaser have entered into that certain
Second Amended and Restated Stock Purchase Agreement, dated as of February ___,
1998 (the "Stock Purchase Agreement"), pursuant to which the Company has agreed
to sell, and the Purchaser has agreed to purchase (i) up to an aggregate of
40,000 shares of the Class AA Convertible Preferred Stock of the Company, $0.01
par value per share, (ii) up to an aggregate of 35,000 shares of Convertible
Redeemable Preferred Stock of the Company $0.01 par value per share divided into
Class ABI Convertible Redeemable Preferred Stock and Class ABII Convertible
Redeemable Preferred Stock, together with up to an aggregate of, initially,
1,000,000 Warrants, and up to, initially, 5,714,286 Supplemental Warrants upon
the terms and subject to the conditions set forth therein;
WHEREAS, it is a condition to the transactions contemplated by the
Stock Purchase Agreement and the parties believe it to be in their best
interests that they amend and restate the Original Stockholders Agreement as set
forth herein and provide for certain rights and restrictions with respect to the
investment by the Purchaser in the Company and the corporate governance of the
Company; and
WHEREAS, the Company and the Purchaser believe that the combination in
a strategic partnership of the leadership, expertise and experience in the
operations of the Company and the investment and capital markets expertise and
access to capital of the Purchaser and its Affiliates will significantly enhance
the Company's ability to pursue its growth and operating strategies.
AGREEMENT
---------
NOW, THEREFORE, in consideration of the premises and the covenants and
agreements contained herein and for good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, and intending to be legally
bound hereby, the parties hereto hereby agree as follows:
<PAGE>
ARTICLE I.
DEFINITIONS
-----------
Section 1.1. Defined Terms. As used in this Agreement, the following
-------------
terms shall have the following respective meanings:
"Additional Preferred Stock Directors" shall have the meaning set
forth in Section 2.1(a).
"Adverse Event" shall have the meaning set forth in Section 2.1(a).
"Affiliate" shall mean any entity controlling, controlled by or under
common control with the Company. For the purposes of this definition, "control"
shall have the meaning presently specified for that word in Rule 405 promulgated
by the Commission under the Securities Act.
"Agreement" shall have the meaning set forth in the first paragraph
hereof.
"Average Trading Price" shall have the meaning set forth in Section
2.1(a).
"Beneficially Own" shall mean, with respect to any security, having
direct or indirect (including through any Subsidiary or Affiliate) "beneficial
ownership" of such security, as determined pursuant to Rule 13d-3 under the
Exchange Act, including pursuant to any agreement, arrangement or understanding,
whether or not in writing; provided, however, that all of the shares of the
-------- -------
Preferred Stock and the Warrants which the Purchaser has agreed to purchase
under the Stock Purchase Agreement but which have not yet been purchased shall
be deemed to be Beneficially Owned by the Purchaser until the Termination Event,
if any, and provided, further, that for the purposes of Section 5.1 the
-------- -------
Purchaser shall be deemed to own that number of shares of Common Stock that it
actually Beneficially Owns at any given date plus the number of shares of Common
----
Stock into which the Preferred Stock is convertible, based on the Conversion
Price (as defined in the Preferred Stock Certificates of Designations) of such
Preferred Stock in effect on the relevant date.
"Board" shall mean the board of directors of the Company.
"Business Day" shall mean any day other than a Saturday, a Sunday or a
bank holiday in New York, New York.
"Class AA Preferred Stock" shall mean the Class AA Convertible
Preferred Stock of the Company, $0.01 par value per share.
"Class AB Preferred Stock" shall mean the Class ABI Preferred Stock
and the Class ABII Preferred Stock.
"Class ABI Preferred Stock" shall mean the Class ABI Convertible
Redeemable Preferred Stock of the Company, $0.01 par value per share.
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"Class ABII Preferred Stock" shall mean the Class ABII Convertible
Redeemable Preferred Stock of the Company, $0.01 par value per share.
"Common Stock" shall mean the common stock, par value $0.01 per share,
of the Company.
"Company" shall have the meaning set forth in the first paragraph
hereof.
"Comparable Group" shall mean 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.
"Conversion Event" shall have the meaning set forth in Section 2.1(d).
"Director" shall mean a member of the Board.
"EBT" shall mean earnings of the Company before interest, expenses,
income, taxes, and extraordinary or non-recurring items, all calculated in
accordance with generally accepted accounting principles.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Executive Committee" shall mean the five-member executive committee
of the Board which shall have the powers set forth in Section 3.2(b).
"Executive Equity Plan" shall have the meaning set forth in Section
3.2(e).
"Executive Shareholders" shall mean J. Marshall Coleman and James J.
Martell, Jr..
"Exercise Notice" shall have the meaning set forth in Section 4.1(b).
"Governmental Entity" shall mean any court or tribunal in any
jurisdiction (domestic or foreign) or any public, governmental, or regulatory
body, agency, department, commission, board, bureau, or other authority or
instrumentality (domestic or foreign).
"Homebuilder Shareholders" shall mean all the Stockholders other than
the Executive Shareholders.
"Liquidation Preference" shall mean $1000.00 per share.
"Market Capitalization" shall mean the market value of the Company's
outstanding Common Stock as measured by the thirty (30) Trading Days (as defined
in the Stock Purchase Agreement) preceding any measurement date.
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"Participation Notice" shall have the meaning set forth in Section
4.1(b).
"Person" shall mean any individual, corporation, partnership, limited
liability company, joint venture, trust, unincorporated organization, other form
of business or legal entity or Governmental Entity.
"Preferred Stock" shall mean the Class AA Preferred Stock and the
Class AB Preferred Stock.
"Preferred Stock Certificate of Designations" shall mean the
Certificate of Designations of the Class AA Preferred Stock, the Certificate of
Designations of the Class ABI Preferred Stock and the Certificate of
Designations of the Class ABII Preferred Stock.
"Preferred Stock Director" shall have the meaning set forth in Section
2.1(a).
"Purchaser" shall have the meaning set forth in the first paragraph
hereof.
"Purchaser Nominees" shall mean the designees to the Board by
Purchaser (or its assignee), with the number, committee representation and
subsidiary and affiliate representation of such Purchaser Nominees being equal
to the number of Preferred Stock Directors (as if such Preferred Stock remained
outstanding) that would be entitled to sit on the Board or on the board of any
subsidiary or affiliate of the Company and any committee of the Board pursuant
to Section 2.1(a).
"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 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 Preferred
Stock, and any dispute shall be resolved at the Company's cost, by an investment
banking firm of recognized national standing selected by the Company and
acceptable to such holders of Preferred Stock and shall be made in good faith
and be conclusive absent manifest error.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Securities Filings" shall have the meaning set forth in Section
3.1(a)(iii).
"Selling Shareholder" shall mean the Executive Shareholders and the
Homebuilder Shareholders.
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"Stockholders" shall have the meaning set forth in the first paragraph
hereof.
"Stock Purchase Agreement" shall have the meaning set forth in the
second paragraph hereof.
"Supplemental Warrants" shall mean warrants to purchase Common Stock
issued pursuant to that certain Supplemental Warrant Agreement to be entered
into pursuant to the Stock Purchase Agreement between the Company and the
Purchaser as the same may be amended from time to time.
"Tag-Along Notice" shall have the meaning set forth in Section 5.1(a).
"Tag-Along Rights" shall have the meaning set forth in Section 5.1(a).
"Termination Event" shall mean on and after all Closings under the
Stock Purchase Agreement have occurred, the date on which the aggregate
remaining investment or commitment to invest in the Company by Purchaser (or any
transferee or assignee of the Purchaser or group of transferees or assignees) is
less than the greater of $10,000,000 or ten percent (10%) of the Market
Capitalization, 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.
"Test Date" shall have the meaning set forth in Section 2.1(a).
"Third Party" shall have the meaning set forth in Section 5.1(a).
"Third Party Terms" shall have the meaning set forth in Section
5.1(a).
"Transfer" shall mean sell, transfer, assign, pledge, hypothecate or
in any way alienate.
"Warrants" shall mean warrants to purchase Common Stock issued
pursuant to that certain amended and restated Warrant Agreement dated as of the
date hereof between the Company and the Purchaser as the same may be amended
from time to time.
ARTICLE II.
BOARD
-----
Section 2.1. Members of the Board. (a) Until a Termination Event,
--------------------
the Company and the Stockholders shall take all action necessary to cause: (i)
the number of Directors comprising the Board to be equal to fifteen (15)
(subject to increase in the case of an Adverse Event, as provided below), (ii)
the holders of Preferred Stock, voting separately as a single class, as set
forth in the Preferred Stock Certificates of Designations, to have the exclusive
right to elect a minimum of three (3) Directors (each such Director, a
"Preferred Stock Director"), (iii) 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
percent (20%) of the votes exercisable by the Board, and (iv) 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,
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the Executive Committee shall consist of five members, of which two members
shall be Preferred Stock Directors), and at least one Preferred Stock Director
to serve on the board or other governing body of each of the Company'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 Company (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 Company (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 Company and the Stockholders shall take all action
necessary to cause: (i) the holders of Preferred Stock voting separately as a
single class, to elect 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 ("Additional
Preferred Stock Directors") and (ii) 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 ABI 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.
(b) In the event that all the shares of the Preferred Stock shall
have been converted into Common Stock prior to the occurrence of a Termination
Event (a "Conversion Event"), the Company will support the nomination of and the
election of Purchaser Nominees, and each Stockholder shall vote all of its
shares to elect such Purchaser Nominees, such that Purchaser shall have the same
right to elect Directors as set forth in paragraph (a) above, including rights
to appoint Directors to committees and subsidiaries as set forth in paragraph
(a) above, as if Purchaser still owned all of the Preferred Stock, and the
Company and the Stockholders will exercise all authority under applicable law to
cause such Purchaser Nominees to be elected to the Board. Without limiting the
generality of the foregoing, with respect to each meeting of stockholders of the
Company at which Directors are to be elected, the Company shall use its best
efforts to solicit from the stockholders of the Company (other than the
Purchaser) eligible to vote in the election of Directors provided in favor of
each Purchaser Nominee.
(c) If a Director has been designated by Purchaser and Purchaser
requests that such Director be removed (with or without cause) then such
Director shall be removed with or without cause, and each Stockholder hereby
agrees to vote all shares of Common Stock owned or held of record to effect such
removal.
(d) Nothing in this Agreement shall prevent Purchaser or any of its
transferees or assignees from voting securities owned by them in their sole and
absolute discretion, including
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voting securities to elect additional directors to the Board in excess of the
Directors which Purchaser is entitled to elect pursuant to the terms of this
Agreement.
ARTICLE III.
COVENANTS
---------
Section 3.1. Operating Statements; Public Company Status.
-------------------------------------------
(a) From and after the date of this Agreement until the Termination
Event, if any, the Company will:
(i) deliver to the Purchaser, as soon as practicable after the end
of each month or other reporting period, operating and financial statements and
management reports (x) of the Company, and (y) of each Subsidiary not
consolidated with the Company, each as, at and for the end of such month or
other reporting period, and such other statements or reports as are reasonably
requested by Purchaser, all in such form as shall reasonably be required by
Purchaser;
(ii) deliver to Purchaser copies of all other information distributed
by the Company to the Board;
(iii) deliver to the Purchaser, as promptly as practicable following
filing, a copy of each report, schedule or other document filed by the Company
pursuant to the requirements of any federal or state securities laws
(collectively, the "Securities Filings"); and
(iv) continue to comply in all material respects with the reporting
requirements of Section 13 or 15(d) of the Exchange Act.
(b) Until a Termination Event, the Company will afford the Purchaser
a reasonable opportunity to review any Securities Filing, any other filing with
a Governmental Entity and any press release or similar public announcement to be
issued, released or made by the Company or any of its Affiliates (including,
without limitation, any oral announcement) which refers to, describes or
mentions the Purchaser or any of its Affiliates at least three (3) Business Days
prior to the time that such filing is filed with or sent to the applicable
Governmental Entity or such release or announcement is disseminated.
Section 3.2. Conduct of Business. (a) From and after the Bylaws
-------------------
Amendments (as defined in the Stock Purchase Agreement) shall 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 shall not, and
shall not permit any of its subsidiaries without either (A) the affirmative vote
of over eighty-one percent (81%) of the entire Directors ("Supermajority
Director Approval") or (B) the affirmative vote of over eighty-one percent (81%)
of the members of the entire Executive Committee ("Supermajority Executive
Committee Approval") to:
(i) purchase, sell, license, assign, transfer, convey or
otherwise acquire or dispose of any assets, securities, or businesses,
unless such
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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 twelve (12) month
period;
(ii) 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;
(iii) enter into any transaction after the date hereof or
materially amend any transaction in effect on the date hereof, with
any Affiliate of the Company (other than between the Company and its
Subsidiaries or between its Subsidiaries);
(iv) 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;
(v) 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 the Company's
acquisitions committee on guidelines approved by the Executive
Committee);
(vi) 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;
(vii) 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;
(viii) enter into any new line of business other than the
business engaged in by the Company and its Subsidiaries on the date
hereof, cease
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<PAGE>
to be engaged in any material line of business engaged in by the
Company 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;
(ix) approve the annual operating budget of the Company for
any year after 1997;
(x) amend or take actions materially inconsistent with the
approved annual operating budget for 1997 or any subsequent year;
(xi) make any general assignment for the benefit of
creditors;
(xii) 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;
(xiii) institute, voluntarily dismiss, terminate or settle any
litigation or arbitration against any Person (A) involving payments
for damages and penalties in excess of $50,000 or (B) otherwise
material to the Company and its subsidiaries taken as a whole;
(xiv) 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 one hundred thousand dollars ($100,000) in
the aggregate;
(xv) 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;
(xvi) enter into or amend any joint venture, partnership or
profit sharing agreement or arrangement;
(xvii) amend to the Company's or any Subsidiary's certificate
of incorporation or bylaws; or
(xviii) 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
Preferred Stock and the Existing Preferred Stock as required pursuant
to the terms of the Preferred Stock and the Preferred Stock
Certificates of Designations;
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(xix) issue, 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 Preferred Stock or the Existing Preferred Stock or upon exercise
of the Warrants or the Supplemental Warrants) or deliver or other
securities other than as contemplated herein or pursuant to stock
options issued and outstanding as of the date hereof or purchase or
otherwise acquire any of its capital stock, employee or director stock
options or debt securities; or
(xx) agree to do any of the foregoing.
(b) From and after the Bylaws Amendments shall have become effective
the Board will promptly establish an Executive Committee, which shall 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 set forth in Section 3.2(a).
(c) The bylaws of the Company shall provide that the number of
directors required to constitute a Supermajority Director Approval and a
Supermajority Executive Committee Approval shall constitute a quorum for the
Board and Executive Committee, respectively, and the Company and the
Stockholders shall take all action necessary to amend its Certificate of
Incorporation, and bylaws (and the bylaws, certificates of incorporation of its
subsidiaries) to give effect to terms and conditions of this Agreement, the
forms of such amendments to be reasonably satisfactory to Purchaser.
(d) Prior to a Termination Event, Purchaser may elect to terminate
all or a portion of the voting provisions of this 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 Stockholder agree to take all such action as may be
necessary to give effect to such termination, including amending this Agreement
and the bylaws and certificates of incorporation of the Company and its
subsidiaries. Upon the occurrence of a Termination Event, Purchaser shall
deliver a notice to the Company electing to have Sections (A) and (B) of Article
II of the Certificate of Incorporation of the Company to be of no further force
and effect in accordance with Section (C) thereof.
(e) Purchaser agrees to vote the 11,700 shares of Class AA Preferred
Stock it acquired at the First Closing under the Stock Purchase Agreement, in
favor of the Company's proposal to authorize an increase in the shares of Common
Stock available for grant under the 1996 Stock Incentive Plan as amended, from
1,125,000 shares to 1,550,000 shares.
(f) Each of the Stockholders agree to take all such action as may be
necessary to effect a Certificate Amendment to increase the number of authorized
shares of Common Stock if required to satisfy the conversion/exercise rights of
the Securities purchased by Purchaser under the Stock Purchase Agreement.
(g) Each of the Stockholders hereby constitutes and appoints the
Purchaser, with full power of substitution, as the proxy of the Stockholders and
hereby authorizes the
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<PAGE>
Purchaser to represent and to vote all of the shares of capital stock of the
Company held by them in favor of the approval of all transactions that are
necessary to give effect to the terms of this Agreement to the same extent and
with the same effect as the Stockholder might or could do under applicable law,
rules and regulations. The proxy granted pursuant to the immediately preceding
sentence is given in consideration of the agreements and covenants of the
Company pursuant to this Agreement and as such is coupled with an interest and
shall be irrevocable unless and until a Termination Event occurs. Each
Stockholder hereby revokes any and all previous proxies granted with respect to
any of the Shares and shall not hereafter, unless and until a Termination Event
occurs, purport to grant any other proxy or power of attorney with respect to
any of the Shares, deposit any of the Shares into a voting trust or enter into
any agreement (other than this Agreement), arrangement or understanding with any
Person, directly or indirectly, to vote or grant any proxy or give instructions
with respect to the voting of any of the Shares.
ARTICLE IV.
PARTICIPATION RIGHTS
--------------------
Section 4.1. (a) Right to Participate. From and after the date
--------------------
hereof until a Termination Event, if any, the Purchaser shall be entitled to a
participation right to purchase or subscribe for up to that number of additional
shares of capital stock (including as "capital stock" for purposes of this
Section 4.1, any security, option, warrant, call, commitment, subscription,
right to purchase or other agreement of any character that is convertible into
or exchangeable or redeemable for shares of capital stock of the Company or any
Subsidiary (and all references in this Section 4.1 to capital stock shall, as
appropriate, be deemed to be references to any such securities), and also
including additional shares of capital stock to be issued pursuant to the
conversion, exchange or redemption of any security, option, warrant, call,
commitment, subscription, right to purchase or other agreement of any character
that is convertible into or exchangeable or redeemable for shares of capital
stock, as if the price at which such additional shares of capital stock is
issued pursuant to any such conversion, exchange or redemption were the market
price on the date of such issuance) 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 (including the shares of capital stock to be
issued to the Purchaser upon exercise of its participation rights hereunder; it
being understood and agreed that the Company will accordingly be required to
either increase the number of shares of capital stock to be issued or sold so
that the Purchaser may purchase additional shares to maintain its proportionate
interest, or to reduce the number of shares of capital stock to be issued or
sold to Persons other than the Purchaser) as is represented by the number of
shares of Common Stock owned by the Purchaser or for which the Purchaser may
exercise the Supplemental Warrants or into which the Purchaser has the right to
convert prior to such sale or issuance, in each case at the respective exercise
rates or conversion prices in effect at the relevant time (and including for
this purpose any shares of Common Stock and Supplemental Warrants to be acquired
pursuant to the Stock Purchase Agreement, but not yet issued), relative to the
number of shares of Common Stock outstanding prior to such sale or issuance (and
including for this purpose any shares of Common Stock and Supplemental Warrants
to be acquired pursuant to the Stock Purchase Agreement, but not yet issued);
provided, however, that the provisions of this Section 4.1 shall not apply to
- -------- -------
(i) the conversion of the Existing Preferred Stock, the 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
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adjustment pursuant to the Preferred Stock Certificates of Designations and (ii)
Common Stock issued to the Corporation's employees under to the Executive Equity
Plan and other bona fide employee benefit plans adopted by the Board and
approved by the holders of Common Stock when required by law (but only to the
extent that the aggregate number of shares excluded thereby and issued after the
date hereof pursuant to such other benefit plans shall not exceed 5% of the
Common Stock outstanding at the time of any such issuance).
(b) Notice. In the event the Company proposes to issue or sell any
------
shares of capital stock in a transaction giving rise to the participation rights
provided for in this Section, the Company shall send a written notice (the
"Participation Notice") to the Purchaser setting forth the number of shares of
such capital stock of the Company that the Company proposes to sell or issue,
the price (before any commission or discount) at which such shares are proposed
to be issued (or, in the case of an underwritten or privately placed offering in
which the price is not known at the time the Participation Notice is given, the
method of determining such price and an estimate thereof), and all other
relevant information as to such proposed transaction as may be necessary for the
Purchaser to determine whether or not to exercise the rights granted in this
Section. At any time within 20 days after its receipt of the Participation
Notice, the Purchaser may exercise its participation rights to purchase or
subscribe for shares of such shares of capital stock, as provided for in this
Section, by so informing the Company in writing (an "Exercise Notice"). Each
Exercise Notice shall state the percentage of the proposed sale or issuance that
the Purchaser elects to purchase.
(c) Terms of Sale. The purchase or subscription by the Purchaser or
-------------
an Affiliate thereof, as the case may be, pursuant to this Section shall 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 Investor to make such
purchase or subscription shall be net of payment of any underwriting, placement
agent or similar fee associated with such purchase or subscription), which price
and other terms and conditions shall be substantially as stated in the relevant
Participation Notice (which standard shall be satisfied if the price, in the
case of a negotiated transaction, is not greater than 110% of the estimated
price set forth in the relevant Participation Notice or, in the case of an
underwritten or privately placed offering, is not greater than the greater of
(i) 110% of the estimated price set forth in the relevant Participation Notice,
and (ii) the most recent Quoted Price on or prior to the date of the pricing of
the offering); provided, however, that in the event the purchases or
-------- -------
subscriptions giving rise to the participation rights are effected by an
offering of securities registered under the Securities Act and in which offering
it is not legally permissible for the securities to be purchased by the
Purchaser to be included, such securities to be purchased by Investor will be
purchased in a concurrent private placement.
(d) Timing of Sale. If, with respect to any Participation Notice,
--------------
the Purchaser fails to deliver an Exercise Notice within the requisite time
period, the Company shall have sixty (60) days after the expiration of the time
in which the Exercise Notice is required to be delivered in which to sell not
more than 110% of the number of shares of capital stock of the Company described
in the Participation Notice (plus, in the event such shares are to be sold in an
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<PAGE>
underwritten public offering, an additional number of shares of capital stock of
the Company, not in excess of 15% of 110% of the number of shares of capital
stock of the Company described in the Participation Notice, in respect of any
underwriters overallotment option) and not less than 90% of the number of shares
of capital stock of the Company described in the Participation Notice at a price
of not less than 90% of the estimated price set forth in the Participation
Notice. If, at the end of sixty (60) days following the expiration of the time
in which the Exercise Notice is required to be delivered, the Company has not
completed the sale or issuance of capital stock of the Company in accordance
with the terms described in the Participation Notice (or at a price which is at
least 90% of the estimated price set forth in the Participation Notice), or in
the event of any contemplated sale or issuance within such sixty (60)-day period
but outside such price parameters, the Company shall again be obligated to
comply with the provisions of this Section with respect to, and provide the
opportunity to participate in, any proposed sale or issuance of shares of
capital stock of the Company; provided, however, that notwithstanding the
-------- -------
foregoing, if the price at which such capital stock is to be sold in an
underwritten offering is not at least 90% of the estimated price set forth in
the Participation Notice, the Company may inform Investor of such fact and
Investor shall be entitled to elect, by written notice delivered within three
(3) Business Days following such notice from the Company, to participate in such
offering in accordance with the provisions of this Section 4.1.
ARTICLE V.
TAG-ALONG RIGHTS
----------------
Section 5.1. Tag-Along Rights. (a) Each of the Executive
----------------
Shareholders agrees that (i) from the date hereof through the third anniversary
of the date hereof he shall not Transfer, whether in a single transaction or in
a series of linked transactions, more than ten percent (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 hereof and (ii) from
the third anniversary of the date hereof through the fourth anniversary of the
date hereof he shall not Transfer, whether in a single transaction or in a
series of linked transactions, more than five percent (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 hereof, unless, the terms and
conditions of such Transfer shall include an offer to the Purchaser to include
in the transfer to the proposed transferee (the "Third Party"), at the
Purchaser's option and on the same price and on the same terms and conditions as
apply to the Executive Shareholder, an amount of Preferred Stock and Common
Stock held by the Purchaser determined in accordance with this Section 5.1. Each
of the Homebuilder Shareholders agrees that from and after the date hereof, he
shall not Transfer, whether in a single transaction or in a series of linked
transactions, more than fifty percent (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 shall include an offer
to the Purchaser to include in the transfer to the Third Party at the
Purchaser's Option and on the same price and on the same terms and conditions as
apply to the Homebuilder Shareholder, an amount of Preferred Stock and Common
Stock determined in accordance with this Section 5.1.
13
<PAGE>
The Third Party shall be required to purchase from the Purchaser, if
the Purchaser desires to participate in such transaction, the number of shares
of Common Stock Beneficially Owned by the Purchaser equaling the lesser of (x)
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 shall be the number of shares of Common Stock Beneficially Owned by the
Purchaser and the denominator of which shall be the number of shares of Common
Stock Beneficially Owned by the Purchaser and the applicable Selling Shareholder
or (y) such lesser number of shares as the Purchaser shall designate in the Tag-
Along Notice (defined below). If the Tag-Along Right results in the Purchaser
including more shares of Common Stock Beneficially Owned by him in any Tag-Along
Notice, than will, on the date of transfer by the Purchaser to the Third Party,
have been converted into Common Stock, the Purchaser and the Company shall take
such steps as are reasonably required to convert to Common Stock any Preferred
Stock and Supplemental Warrants to be purchased by the Third Party (at the
prevailing Conversion Price(s) for the Preferred Stock being sold, and at the
prevailing Exercise Rate for the Supplemental Warrants being sold, by the
Purchaser) which the Purchaser desires to transfer immediately prior to such
transfer and contingent upon such transfer occurring, it being the parties'
intention that only Common Stock will be transferred to the Third Party pursuant
to this Section 5.1.
The Selling Shareholder shall notify the Company and the Purchaser of
any proposed Transfer to which the provisions of this Section 5.1 apply. Each
such notice shall set forth: (i) the name of the Third Party and the number of
shares of Common Stock proposed to be transferred, (ii) the address of the Third
Party, (iii) the proposed amount and form of consideration and terms and
conditions of payment offered by the Third Party, and any other material terms
pertaining to the Transfer (the "Third Party Terms") and (iv) that the Third
Party has been informed of the "Tag-Along Rights" provided for in this Section
5.1 and has agreed to purchase shares of Common Stock in accordance with the
terms hereof.
The Tag-Along Rights set forth above in this Section 5.1 may be
exercised by the Purchaser by delivery of a written notice to the Company and
the Selling Shareholder (the "Tag-Along Notice") within thirty (30) days
following receipt of the notice specified in the preceding paragraph. The Tag-
Along Notice shall state the number of shares of Common Stock that the Purchaser
wishes to include in such transfer to the Third Party.
Upon the giving of a Tag-Along Notice, the Purchaser shall be entitled
and obligated to sell the number of shares of Common Stock set forth in the Tag-
Along Notice to the Third Party on the Third Party Terms; provided, however,
-------- -------
that neither the Selling Shareholder nor the Purchaser shall consummate the sale
of any shares offered by it if the Third Party does not purchase all shares
which the Selling Shareholder and the Purchaser are entitled and desire to sell
pursuant hereto. After expiration of the thirty-day period referred to above,
if the provisions of this Section have been complied with in all respects, the
Selling Shareholder shall have the right for a sixty (60)-day period to transfer
the shares of Common Stock to the Third Party on the Third Party Terms (or on
other terms no more favorable to the Selling Shareholder) without further notice
to the Purchaser, but after such sixty (60)-day period no such transfer may be
made without again giving notice to the Purchaser of the proposed transfer and
complying with the requirements of this Section 5.1.
14
<PAGE>
(b) At the closing of the transfer to any Third Party (of which the
Selling Shareholder shall give the Purchaser who has elected to exercise the
Tag-Along Right provided by this Section 5.1 at least five (5) Business Days'
prior written notice), the Third Party shall remit to the Purchaser the
consideration for the total sales price of the Common Stock of the Purchaser
sold pursuant thereto, against delivery by the Purchaser of certificates for
such Common Stock, duly endorsed or with duly executed stock powers and the
compliance by such Shareholder with any other conditions to closing generally
applicable to the Selling Shareholder and all Other Shareholders selling shares
in such transaction.
(c) Notwithstanding the foregoing, the Tag-Along Rights provided by
this Section 5.1 shall terminate upon a Termination Event.
ARTICLE VI.
MISCELLANEOUS
-------------
Section 6.1. Counterparts. This Agreement maybe executed in one or
------------
more counterparts, all of which shall be considered one and the same agreement,
and shall become effective when one or more counterparts have been signed by
each of the parties and delivered to the other party. Copies of executed
counterparts transmitted by telecopy, telefax or other electronic transmission
service shall be considered original executed counterparts for purposes of this
Section, provided receipt of copies of such counterparts is confirmed.
Section 6.2. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND
-------------
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE WITHOUT REFERENCE
TO THE CHOICE OF LAW PRINCIPLES THEREOF.
Section 6.3. Expenses. The Company shall pay all costs and expenses
--------
incurred by the Company and the Purchaser in connection with the transactions
contemplated by this Agreement.
Section 6.4. Notices. Unless otherwise provided herein, any notice,
-------
request, instruction or other document to be given hereunder by any party to the
other shall be in writing and delivered by hand-delivery, registered first-class
mail, telex, confirmed telecopy, or air courier guaranteeing overnight delivery,
as follows:
If to the Company:
The Fortress Group, Inc.
1921 Gallows Road, Suite 730
Vienna, VA 22182
Telephone: (703) 442-4545
Facsimile: (703) 442-7730
Attn: J. Marshall Coleman
15
<PAGE>
with a copy to: Secretary
With an additional copy to:
Arent Fox Kintner Plotkin & Kahn
1050 Connecticut Avenue, NW
Washington, DC 20036
Telephone: (202) 857-6235
Facsimile: (202) 857-6120
Attn: Jeffrey E. Jordan
If to the Purchaser:
Prometheus Homebuilders LLC
c/o Lazard Freres Real Estate Investors, LLC
Thirty Rockefeller Plaza, 63rd Floor
New York, NY 10020
Telephone: (212) 632-6060
Facsimile: (212) 632-6052
Attn: Robert P. Freeman
Murry N. Gunty
With a copy to:
Latham & Watkins
885 Third Avenue
New York, NY 10022
Telephone: (212) 906-1200
Facsimile: (212) 751-4864
Attn: R. Ronald Hopkinson
or to such other place and with such other copies as either party may designate
as to itself by written notice to the other.
16
<PAGE>
All such notices, requests, instructions or other documents shall be
deemed to have been duly given; at the time delivered by hand, if personally
delivered; four (4) Business Days after being deposited in the mail, postage
prepaid, if mailed; when answered back, if telexed; when receipt acknowledged by
addressee, if by telecopier transmission; and on the next Business Day if timely
delivered to an air courier guaranteeing overnight delivery.
Section 6.5. Successors and Assigns. This Agreement shall be binding
----------------------
upon and inure to the benefit of the parties hereto and their respective
successors. No party shall be permitted to assign any of its rights hereunder to
any third party without the prior written consent of the other parties, except
that the Purchaser may, without such consent, assign its rights hereunder, in
whole or in part, to one or more affiliates of the Purchaser or any transferee
or assignee or group of transferees or assignees of any of the Preferred Stock
provided that such person agrees to be bound by this Agreement.
Section 6.6. Headings. The Section, Article and other headings
--------
contained in this Agreement are inserted for convenience of reference only and
will not affect the meaning or interpretation of this Agreement. All references
to Sections or Articles contained herein mean Sections or Articles of this
Agreement unless otherwise stated.
Section 6.7. Amendments and Waivers. This Agreement may not be
----------------------
modified or amended except by an instrument or instruments in writing signed by
the party against whom enforcement of any such modification or amendment is
sought. Any party hereto may, only by an instrument in writing, waive compliance
by another party hereto with any term or provision hereof on the part of such
other party hereto to be performed or complied with. The waiver by any party
hereto of a breach of any term or provision hereof shall not be construed as a
waiver of any subsequent breach.
Section 6.8. Interpretation, Absence of Presumption. For the
--------------------------------------
purposes hereof, (i) words in the singular shall be held to include the plural
and vice versa and words of one gender shall be held to include the other gender
as the context requires, (ii) the terms "hereof, "herein", and "herewith" and
words of similar import shall, unless otherwise stated, be construed to refer to
this Agreement as a whole (including all of the Schedules and Exhibits hereto)
and not to any particular provision of this Agreement, and Article, Section and
paragraph, references are to the Articles, Sections and paragraphs to this
Agreement unless otherwise specified, (iii) the word "including" and words of
similar import when used in this Agreement shall mean "including, without
limitation," unless the context otherwise requires or unless otherwise
specified, (iv) the word "or" shall not be exclusive, and (v) provisions shall
apply, when appropriate, to successive events and transactions.
(b) This Agreement shall be construed without regard to any
presumption or rule requiring construction or interpretation against the party
drafting or causing any instrument to be drafted.
17
<PAGE>
Section 6.9. Severability. Any provision hereof which is invalid or
------------
unenforceable shall be ineffective to the extent of such invalidity or
unenforceability, without affecting in any way the remaining provisions hereof.
Section 6.10. Further Assurances. The Company and the Purchaser agree
------------------
that, from time to time, each of them will, and will cause their respective
Affiliates to, execute and deliver such further instruments and take such other
action as may be necessary to carry out the purposes and intents hereof.
Section 6.11. Specific Performance. The Company and the Purchaser
--------------------
each acknowledge that, in view of the uniqueness of arrangements contemplated by
this Agreement, the parties hereto would not have an adequate remedy at law for
money damages in the event that this Agreement were not performed in accordance
with its terms, and therefore agree that the parties hereto shall be entitled to
specific enforcement of the terms hereof in addition to any other remedy to
which the parties hereto may be entitled at law or in equity.
Section 6.12. Confidentiality. The Purchaser and the Company agrees
---------------
that all information provided to each other or any of their respective
representatives pursuant to this Agreement shall be kept confidential, and such
parties shall not (x) disclose such information to any persons other than the
directors, officers, employees, financial advisors, legal advisors, accountants,
consultants and affiliates of such parties who reasonably need to have access to
the confidential information and who are advised of the confidential nature of
such information or (y) use such information in a manner which would be
detrimental to the Company or the Purchaser; provided, however, the foregoing
-------- -------
obligation of such parties shall not (a) relate to any information that (i) is
or becomes generally available other than as a result of unauthorized disclosure
by such parties or by persons to whom such parties have made such information
available, (ii) is or becomes available to such parties on a non-confidential
basis from a third party that is not, to such parties' knowledge, bound by any
other confidentiality agreement with the other party, or (b) prohibit disclosure
of any information if required by law, rule, regulation, court order or other
legal or governmental process.
[Signature Page Follows]
18
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
THE FORTRESS GROUP, INC.
By:
------------------------------------------------
Name:
Title:
PROMETHEUS HOMEBUILDERS LLC
by: LF Strategic Realty Investors II L.P.,
its member
by: Lazard Freres Real Estate Investors L.L.C.,
its general partner
By:
------------------------------------------------
Name:
Title:
STOCKHOLDERS
---------------------------------------------------
Name: J. Marshall Coleman
---------------------------------------------------
Name: James J. Martell, Jr.
---------------------------------------------------
Name: Robert Short
---------------------------------------------------
Name: J. Christopher Stuhmer
---------------------------------------------------
Name: Thomas Buffington
---------------------------------------------------
Name: Lawrence Witek
19
<PAGE>
---------------------------------------------------
Name: Ted Kirkpatrick
---------------------------------------------------
Name: Lanold Caldwell
---------------------------------------------------
Name: James Giddens
---------------------------------------------------
Name: Patricia Donnelly
---------------------------------------------------
Name: Mary Ann Martell
20
<PAGE>
EXHIBIT 5
AMENDED AND RESTATED
WARRANT AGREEMENT
by and between
THE FORTRESS GROUP, INC.
and
PROMETHEUS HOMEBUILDERS LLC
Dated as of February __, 1998
<PAGE>
AMENDED AND RESTATED WARRANT AGREEMENT, dated as of February __, 1998,
between The Fortress Group, Inc., a Delaware corporation (the "Company") and
Prometheus Homebuilders LLC (the "Warrant Holder").
WHEREAS, the Company and the Warrant Holder have entered into that
certain Warrant Agreement dated as of September 30, 1997 (the "Original Warrant
Agreement").
WHEREAS, the Company has issued warrants (the "Initial Warrants") to
purchase 325,000 shares of Common Stock, $0.01 per share of the Company (the
"Common Stock") to the Warrant Holder on the terms of the Original Warrant
Agreement.
WHEREAS, the Company and the Warrant Holder have entered into that
certain Second Amended and Restated Stock Purchase Agreement dated as of
February __, 1998 (the "Stock Purchase Agreement").
WHEREAS, it is a condition to the Second Closing (as defined in the
Stock Purchase Agreement) that the parties amend and restate the Original
Warrant Agreement as set forth herein.
WHEREAS, pursuant to the Stock Purchase Agreement, the Company
proposes, in part, to issue to the Warrant Holder, or its assignees, additional
warrants (together with the Initial Warrants, the "Warrants"), to purchase up to
an aggregate of 675,000 shares of Common Stock, subject to adjustment as set
forth herein. The Common Stock issuable on exercise of the Warrants is referred
to herein as the "Warrant Shares". Certain capitalized terms used herein and
not elsewhere defined are defined in the Stock Purchase Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein set forth, the parties hereto agree as follows:
SECTION 1. Warrant Certificates. The certificates evidencing the Warrants (the
--------------------
"Warrant Certificates") to be delivered pursuant to this Warrant Agreement shall
be in registered form only and shall be substantially in the form set forth in
Exhibit A attached hereto.
SECTION 2. Execution of Warrant Certificates. Warrant Certificates shall be
---------------------------------
signed on behalf of the Company by its Chairman of the Board or its President or
a Vice President and by its Secretary or an Assistant Secretary under its
corporate seal. Each such signature upon the Warrant Certificates may be in the
form of a facsimile signature of the present or any future Chairman of the
Board, President, Vice President, Secretary or Assistant Secretary and may be
imprinted or otherwise reproduced on the Warrant Certificates and for that
purpose the Company may adopt and use the facsimile signature of any person who
shall have been Chairman of the Board, President, Vice President, Secretary or
Assistant Secretary, notwithstanding the fact that at the time the Warrant
Certificates shall be delivered or disposed of he shall have ceased to hold such
office. The seal of the Company may be in the form of a facsimile thereof and
may be impressed, affixed, imprinted or otherwise reproduced on the Warrant
Certificates.
1
<PAGE>
In case any officer of the Company who shall have signed any of the
Warrant Certificates shall cease to be such officer before the Warrant
Certificates so signed shall have been disposed of by the Company, such Warrant
Certificates nevertheless may be delivered or disposed of as though such person
had not ceased to be such officer of the Company; and any Warrant Certificate
may be signed on behalf of the Company by any person who, at the actual date of
the execution of such Warrant Certificate, shall be a proper officer of the
Company to sign such Warrant Certificate, although at the date of the execution
of this Warrant Agreement any such person was not such officer.
SECTION 3. Registration. The Company shall number and register the Warrant
------------
Certificates in a register as they are issued. The Company may deem and treat
the registered holder(s) of the Warrant Certificates as the absolute owner(s)
thereof (notwithstanding any notation of ownership or other writing thereon made
by anyone) for all purposes, and shall not be affected by any notice to the
contrary.
SECTION 4. Registration of Transfers and Exchanges. The Company shall from time
---------------------------------------
to time register the transfer of any outstanding Warrant Certificates in a
Warrant register to be maintained by the Company upon surrender thereof
accompanied by a written instrument or instruments of transfer in form
satisfactory to the Company, duly executed by the registered holder or holders
thereof or by the duly appointed legal representative thereof or by a duly
authorized attorney. Upon any such registration of transfer, a new Warrant
Certificate shall be issued to the transferee(s) and the surrendered Warrant
Certificate shall be canceled and disposed of by the Company.
SECTION 5. Warrants; Exercise of Warrants. Subject to the terms of this
------------------------------
Agreement, each Warrant holder shall have the right, which may be exercised
during the period commencing on September 30, 1999, until 11:59 p.m., New York
City time, September 30, 2004 (the "Exercise Period"), to receive from the
Company the number of fully paid and nonassessable Warrant Shares which the
holder may at the time be entitled to receive on exercise of such Warrants and
payment of the Exercise Price (as defined below) then in effect for such Warrant
Shares. In the alternative, each Warrant holder may exercise his right to
receive Warrant Shares on a net basis, such that, without the exchange of any
funds, the Warrant holder receives that number of Warrant Shares otherwise
issuable (or payable) upon exercise of his Warrants less that number of Warrant
Shares having an aggregate fair market value (as defined below) at the time of
exercise equal to the aggregate Exercise Price that would otherwise have been
paid by the holder of the Warrant Shares. For purposes of the foregoing
sentence, "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. Such determination of the Non-Preferred Stock
Directors may be challenged in good faith by holders of a majority of the
Warrants, and any dispute shall be resolved at the Company's cost, by an
investment banking firm of recognized national standing selected by the Company
and acceptable to such Warrant holders and shall be made in good faith and be
conclusive absent manifest error; provided, however, that in the event that the
-------- -------
determination by the majority of the Non-Preferred Stock 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 Warrant holders
who
2
<PAGE>
challenged such price. Each Warrant not exercised on or before 11:59 p.m., New
York City time, on September 30, 2004 shall become void and all rights
thereunder and all rights in respect thereof under this Agreement shall cease as
of such time. No adjustments as to dividends will be made upon exercise of the
Warrants.
For purposes hereof, "Non-Preferred Stock Directors" means directors
of the Company excluding any director elected to the Board of Directors by the
holders of the Preferred Stock voting as a separate class.
On or after September 30, 2001, and on or before September 30, 2003
(the "Adjustment Period"), a holder of Warrants may elect to adjust up to five
(5) times per year (i) the Exercise Price of each Warrant and (ii) the number of
shares of Common Stock into which each Warrant held by such holder shall convert
upon exercise of the Warrants ("Additional Shares"), by reference to the Average
of the Quoted Price of the Common Stock for the 60 days preceding such
adjustment (the "Adjustment Price"). Upon such election the Company will
deliver a new Warrant Certificate to reflect the revised Exercise Price and
number of shares into which such Warrant is convertible. Notwithstanding this,
any such adjustments to the Exercise Prices and Adjustment Prices shall take
effect immediately upon any Warrant holder electing any such adjustments.
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
For purposes of illustration, if the Common Stock price is $9.00 per
share, the total number of Warrant Shares will be 2,500,000.
If any adjustment to the Exercise Price is made pursuant to Section 10
hereof, the Adjustment Prices shall be adjusted in like manner as set forth in
Section 10 hereof. The
3
<PAGE>
Exercise Prices set forth above are subject to the adjustments set forth in
Section 10 hereto. If during the Adjustment Period it is possible for a holder
of Warrants to adjust the Exercise Price and such holder elects to do so, he
must inform the Company in writing of such election. The Company will then be
obligated to notify such electing holder and all other holders of Warrants in
writing within three (3) Business Days of receipt of the election by the holder
of the new Exercise Price for such holder's Warrants and/or the number of
Additional Shares to which such holder is entitled. Such new Exercise Price and
such entitlement to Additional Shares shall remain the Exercise Price and such
entitlement to Additional Shares for such Warrants until such time, if any, as
the then holder elects to re-adjust the Exercise Price and such entitlement to
Additional Shares of the Warrants then held by such holder. If any other holder
of Warrants, upon receipt of a notice from the Company, wishes to adjust the
Exercise Price in respect of the Warrants held by him, he may do so by notifying
the Company accordingly in writing within fifteen (15) Business Days of the
receipt of notice from the Company. Upon such notification in writing, the
Exercise Price of Warrants and the number of Additional Shares for which such
Warrants may be exercised shall be adjusted by the Company with effect from the
date of his receipt of notification from the Company.
Notwithstanding any provision in this Agreement to the contrary, in
the event that the Stock Purchase Agreement is terminated (other than as a
result of a default by the Purchaser of its obligations under the Stock Purchase
Agreement), the Exercise Price of each Warrant shall immediately be adjusted to
one cent ($0.01).
A Warrant may be exercised upon surrender to the Company at its office
designated for such purpose (the address of which is set forth in Section 14
hereof) of the certificate or certificates evidencing the Warrants to be
exercised with the form of election to purchase on the reverse thereof duly
filled in and signed, which signature shall be guaranteed by a bank or trust
company having an office or correspondent in the United States or a broker or
dealer which is a member of a registered securities exchange or the National
Association of Securities Dealers, Inc. (the "NASD"), and upon payment to the
Company of the exercise price (the "Exercise Price") which is set forth in the
form of Warrant Certificate attached hereto as Exhibit A as adjusted as herein
provided, for the number of Warrant Shares in respect of which such Warrants are
then exercised. Payment of the aggregate Exercise Price shall be made, at the
option of the Warrant holder (i) in cash or by certified or official bank check
payable to the order of the Company, (ii) 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 (the Company will pay the accrued interest or dividends on such
surrendered debt or preferred equity securities in cash at the time of surrender
notwithstanding the stated terms thereof), or (iii) in the manner provided in
the first paragraph of this Section 5.
Subject to the provisions of Section 6 hereof, upon such surrender of
Warrants and payment of the Exercise Price, the Company shall issue and cause to
be delivered with all reasonable dispatch to or upon the written order of the
holder and in such name or names as the Warrant holder may designate, a
certificate or certificates for the number of full Warrant Shares issuable upon
the exercise of such Warrants together with cash as provided in Section 11;
provided, however, that if any consolidation, merger or lease or sale of assets
- -------- -------
is proposed to be
4
<PAGE>
effected by the Company as described in Section 10(m) hereof, or a tender offer
or an exchange offer for shares of Common Stock of the Company shall be made,
upon such surrender of Warrants and payment of the Exercise Price as aforesaid,
the Company shall, as soon as possible, but in any event not later than two
business days thereafter, issue and cause to be delivered the full number of
Warrant Shares issuable upon the exercise of such Warrants in the manner
described in this sentence together with cash as provided in Section 11. Such
certificate or certificates shall be deemed to have been issued and any person
so designated to be named therein shall be deemed to have become a holder of
record of such Warrant Shares as of the date of the surrender of such Warrants
and payment of the Exercise Price.
The Warrants shall be exercisable, at the election of the holders
thereof, either in full or from time to time in part and, in the event that a
certificate evidencing Warrants is exercised in respect of fewer than all of the
Warrant Shares issuable on such exercise at any time prior to the date of
expiration of the Warrants, a new certificate evidencing the remaining Warrant
or Warrants will be issued and delivered by the Company and at its expense
pursuant to the provisions of this Section and of Section 2 hereof.
All Warrant Certificates surrendered upon exercise of Warrants shall
be canceled and disposed of by the Company. The Company shall keep copies of
this Agreement and any notices given or received hereunder available for
inspection by the holders during normal business hours at its office.
SECTION 6. Payment of Taxes. The Company will pay all documentary stamp taxes
----------------
attributable to the initial issuance of Warrant Shares upon the exercise of
Warrants; provided, however, that the Company shall not be required to pay any
-------- -------
tax or taxes which may be payable in respect of any transfer involved in the
issue of any Warrant Certificates or any certificates for Warrant Shares in a
name other than that of the registered holder of a Warrant Certificate
surrendered upon the exercise of a Warrant, and the Company shall not be
required to issue or deliver such Warrant Certificates unless or until the
person or persons requesting the issuance thereof shall have paid to the Company
the amount of such tax or shall have established to the satisfaction of the
Company that such tax has been paid.
SECTION 7. Mutilated or Missing Warrant Certificates. In case any of the
-----------------------------------------
Warrant Certificates shall be mutilated, lost, stolen or destroyed, the Company
may in its discretion issue, in exchange and substitution for and upon
cancellation of the mutilated Warrant Certificate, or in lieu of and
substitution for the Warrant Certificate lost, stolen or destroyed, a new
Warrant Certificate of like tenor and representing an equivalent number of
Warrants, but only upon receipt of evidence reasonably satisfactory to the
Company of such loss, theft or destruction of such Warrant Certificate and
indemnity, if requested, also reasonably satisfactory to it. Applicants for such
substitute Warrant Certificates shall also comply with such other reasonable
regulations and pay such other reasonable charges as the Company may prescribe.
SECTION 8. Reservation of Warrant Shares. The Company will at all times 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 its treasury, for the
5
<PAGE>
purpose of enabling it to satisfy any obligation to issue Warrant Shares upon
exercise of 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 of Directors from time to time based on the Exercise Price
in effect at such time.
The Company or, if appointed, the transfer agent for the Common Stock
(the "Transfer Agent") and every subsequent transfer agent for any shares of the
Company's capital stock issuable upon the exercise of any of the rights of
purchase aforesaid will be irrevocably authorized and directed at all times to
reserve such number of authorized shares as shall be required for such purpose.
The Company will keep a copy of this Agreement on file with the Transfer Agent
and with every subsequent transfer agent for any shares of the Company's capital
stock issuable upon the exercise of the rights of purchase represented by the
Warrants. The Company will furnish such Transfer Agent a copy of all notices of
adjustments and certificates related thereto, transmitted to each holder
pursuant to Section 13 hereof.
The Company covenants that all Warrant Shares which may be issued upon
exercise of Warrants will, upon issue, be fully paid, nonassessable, free of
preemptive rights and free from all taxes, liens, charges and security interests
with respect to the issue thereof.
SECTION 9. Stock Exchange Listings. The Company will from time to time take all
-----------------------
action, at its expense, which may be necessary so that the Warrant Shares,
immediately upon their issuance upon the exercise of Warrants, will be listed
and maintained on the principal securities exchanges and markets within the
United States of America, if any, on which other shares of Common Stock are then
listed and register under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), all shares of Common Stock from time to time issuable upon
exercise if and at the time that any existing shares of the Company's capital
stock are so registered.
SECTION 10. Adjustment of Exercise Price and Number of Warrant Shares Issuable.
------------------------------------------------------------------
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 occurrence
of the events enumerated in this Section 10. For purposes of this Section 10,
"Common Stock" means shares now or hereafter authorized of any class of common
stock of the Company, including the Common Stock, and any other stock of the
Company, howsoever designated, authorized after this date hereof, has the right
(subject always to prior rights of any class or series of preferred stock) to
participate in any distribution of the assets and earnings of the Company
without limit as to per share amount.
(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;
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<PAGE>
(iii) combines its outstanding shares of Common Stock into a smaller number
of shares; or
(iv) issues by reclassification of its Common Stock any shares of its
capital stock;
then the Exercise Price in effect immediately prior to such action shall be
adjusted so that each holder of a Warrant thereafter converted may receive the
number of shares of capital stock of the Company which he would have owned
immediately following such action if he had exercised such Warrant immediately
prior to such action. The adjustment shall become effective immediately after
the record date in the case of a 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 a Warrant upon exercise of it may receive shares of two or more
classes of capital stock of the Company, the Company shall determine the
allocation of the adjusted Exercise Prices between the classes of capital stock.
After such allocation, the Exercise Price of each class of capital stock shall
thereafter be subject to adjustment on terms comparable to those applicable to
Common Stock in this Section 10(a).
(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 per share on the record date
mentioned below, the Exercise Price shall be adjusted in accordance with
the formula:
NxP
---
C'= C x O + M
-----
O + N
where:
C' = the adjusted Exercise Price.
C = the then current Exercise Price.
O = the number of shares of Common Stock outstanding on the
record date.
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<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 rights or warrants are
exercisable, not all rights or warrants shall have been exercised, the Exercise
Price shall be immediately readjusted to what it would have been if "N" in the
above formula had been the number of shares actually issued.
(c) If the Company distributes to all holders of shares of its Common Stock (i)
any shares of 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 three percent (3%) of 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 (other
than rights, options or warrants referred to in Section 10(b) above), the
Exercise Price shall be adjusted in accordance with the formula:
C'= C x M - F
-----
M
where:
C' = the adjusted Exercise Price.
C = the then current Exercise 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 Section 10(c) 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 of the Company shall determine the fair
market value.
8
<PAGE>
The adjustment shall be made successively whenever any such
distribution is made and shall become effective immediately after the record
date for the determination of stockholders entitled to receive the distribution.
(d) If the Company issues shares of 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, the Exercise Price shall be
adjusted in accordance with the formula:
P
-
C'= C x O + M
-----
A
where:
C' = the adjusted Exercise Price.
C = the then current Exercise 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
Section 10(d) does not apply to (i) any transaction or issuance described in
Section 10(b) or Section 10(c) above or Section 10(e) 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 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 Section 10(b) or Section 10(c) above or Section 10(e)
below, (iii) Common Stock issued to the Company's employees under bona fide
employee benefit plans adopted by the Board of Directors of the Company and
approved by the holders of Common Stock when required by law, if such Common
Stock would otherwise be covered by this Section 10(d) (but only to the extent
that the aggregate number of shares excluded hereby (together with the aggregate
number of shares issuable upon conversion, exchange or exercise of the
securities excluded by clause (iii) of
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<PAGE>
Section 10(e) 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 Company 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.
(e) If the Company 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 Section 10(b) or Section
10(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 Exercise Price shall be adjusted
in accordance with the formula:
P
-
C'= C x O + M
-----
O + D
where:
C' = the adjusted Exercise Price.
C = the then current Exercise 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 are no longer outstanding,
then the Exercise Price shall promptly be readjusted to the Exercise Price which
would then be in effect had the adjustment upon the issuance of such
10
<PAGE>
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 Section
10(e) 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 Company 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 Company's employees under bona fide
employee benefit plans adopted by the Board of Directors of the Company and
approved by the holders of Common Stock when required by law, if such securities
would otherwise by covered by this Section 10(e) (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 Section 10(d) above)
and issued after the Initial Issue Date shall not exceed 5% of the Common Stock
outstanding at the time of any such issuance).
The reduction shall become effective immediately prior to the opening of
business on the day following the Expiration Time.
(f) Current Market Price.
--------------------
In Sections 10(b)-(e) the current market price per share of Common
Stock on any date is the average of the Quoted Prices of the Common Stock for 30
consecutive Trading Days commencing 45 trading days before the date in question
(the "Current Market Price"). "Trading Day" means, with respect to any
security, 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. The
"Quoted Price" means, with respect to Common Stock, the last reported sales
price for Common Stock as reported by the NASD Automatic 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 (which shall be for consolidated trading if applicable to such
exchange), 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. In
the event that the Quoted Price cannot be determined as aforesaid, the Board of
Directors of the Company 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 Warrants, and any dispute
shall be resolved at the Company's cost, by an investment banking firm of
recognized national standing selected by the Company and acceptable to such
holders of Warrants 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 of the Company 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 Warrant holders who challenged such price.
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<PAGE>
(g) Consideration Received.
----------------------
For purposes of any computation respecting consideration received
pursuant to Sections 10(d)-(e), the following shall apply:
(i) in the 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 Company for any underwriting of the issue or
otherwise in connection therewith;
(ii) 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
in good faith by the Board of Directors, (irrespective of the accounting
treatment thereof);
(iii) 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 Company for the issuance of such securities
plus the additional minimum consideration, if any, to be received by the
Company upon the conversion, 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 section)
(h) No adjustment in the Exercise Price need be made unless the adjustment
would require an increase or decrease of at least 1% in the Exercise Price.
Any adjustments that are not made shall be carried forward and taken into
account in any subsequent adjustment. All calculations under this Section
shall be made to the nearest cent or to the nearest 1/100th of a share, as
the case may be.
(i) To the extent the Warrants become convertible into cash, no adjustment need
be made thereafter as to the cash. Interest will not accrue on the cash.
(j) Whenever the Exercise Price is adjusted, the Company shall provide the
notices required by Section 13 hereof.
(k) 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
Exercise Price be less than the par value of a share of Common Stock.
Whenever the Exercise Price is reduced, the Company shall mail to Warrant
holders a notice of the reduction first class, postage prepaid. The Company
shall mail the notice at least 15 days before the date the reduced Exercise
Price takes effect. The notice shall state the reduced Exercise Price and
the period it will be in effect. A reduction of the Exercise Price does not
change or adjust the Exercise Price otherwise in effect for purposes of
Sections 10(a)-(e).
12
<PAGE>
(l) If:
(i) the Company takes any action that would require an adjustment in the
Exercise Price pursuant to Sections 10(a)-(e) and if the Company does not
arrange for Warrant holders to participate pursuant to Section 10(h);
(ii) the Company takes any action that would require a supplemental
Warrant Agreement pursuant to Section 10(m); or
(iii) there is a liquidation or dissolution of the Company,
the Company shall mail to Warrant holders a notice stating the proposed record
date for a dividend or distribution or the proposed effective date of a
subdivision, combination, reclassification, consolidation, merger, transfer,
lease, liquidation or dissolution. The Company shall mail the notice at least
15 days before such date. Failure to mail the notice or any defect in it shall
not affect the validity of the transaction.
(m) If the Company consolidates or merges with or into, or transfers or leases
all or substantially all its assets to, any person, upon consummation of
such transaction the Warrants shall 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 the holder had exercised the Warrant immediately
before the effective date of the transaction. Concurrently with the
consummation of such transaction, the Company formed by or surviving any
such consolidation or merger if other than the Company, or the person to
which such sale or conveyance shall have been made, shall enter into a
supplemental Warrant Agreement so providing and further providing for
adjustments which shall be as nearly equivalent as may be practical to the
adjustments provided for in this Section. The successor Company shall mail
to Warrant holders a notice describing the supplemental Warrant Agreement.
If the issuer of securities deliverable upon exercise of Warrants
under the supplemental Warrant Agreement is an affiliate of the formed,
surviving, transferee or lessee Company, that issuer shall join in the
supplemental Warrant Agreement.
If this Section 10(m) applies, Sections 10(a)-(e) do not apply.
(n) In addition, in the event that any other transaction or event occurs to
which the foregoing Exercise Price adjustment provisions are not strictly
applicable but the failure to make any adjustment would adversely affect
the rights represented by the Warrants in accordance with the essential
intent and principles of such provisions, then, in each such case, the
Company shall appoint an investment banking firm of recognized national
standing, or any other financial expert that does not (or whose directors,
officers, employees, affiliates or stockholders do not) have a direct or
material indirect financial interest in the Company or any of its
subsidiaries, who has not been, and, at the time it is called upon to give
independent financial advice to the Company, is not (and none of its
directors, officer, employees, affiliates or stockholders are) a promoter,
director or officer of the Company or any of its subsidiaries, which
13
<PAGE>
will give their opinion upon the adjustment, if any, on a basis consistent
with the essential intent and principles established in the foregoing
Exercise Price adjustment provisions, necessary to preserve, without
dilution, the rights represented by the Warrants. Upon receipt of such
opinion or determination, the Company shall promptly mail a copy thereof to
the Warrant holders and will make the adjustments described therein.
(o) Except as provided in the immediately following sentence, any determination
that the Company or its Board of Directors must make pursuant to Section 10
shall be conclusive. Whenever the Company, its Board of Directors or the
Non-Preferred Stock Directors shall be required to make a determination
under this Section 10, such determination shall be made in good faith and
may be challenged in good faith by the holders of a majority of Warrants
and any dispute shall be resolved at the Company's expense, by an
investment banking firm of recognized national standing selected by the
Company and acceptable to such Warrant holders; provided, however, that in
-------- -------
the event the determination by the Board of Directors of the Company 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
Warrant holders who challenged such price.
(p) In any case in which this Section 10 shall require that an adjustment in
the Exercise Price be made effective as of a record date for a specified
event, the Company may elect to defer until the occurrence of such event
(i) issuing to the holder of any Warrant exercised after such record date
the Warrant Shares and other capital stock of the Company, if any, issuable
upon such exercise over and above the Warrant Shares and other capital
stock of the Company, if any, issuable upon such exercise on the basis of
the Exercise Price and (ii) paying to such holder any amount in cash in
lieu of a fractional share pursuant to Section 11; provided, however, that
-------- --------
that the Company shall deliver to such holder a due bill or other
appropriate instrument evidencing such holder's right to receive such
additional Warrant Shares, other capital stock and cash upon the occurrence
of the event requiring such adjustment.
(q) Upon each adjustment of the Exercise Price pursuant to this Section 10,
each Warrant outstanding prior to the making of the adjustment in the
Exercise Price shall thereafter evidence the right to receive upon payment
of the adjusted Exercise Price that number of shares of Common Stock
(calculated to the nearest hundredth) obtained from the following formula:
N' = N x (E/E')
where:
N' = the adjusted number of Warrant Shares issuable upon exercise of a
Warrant by payment of the adjusted Exercise Price.
N = the number or Warrant Shares previously issuable upon exercise of a
Warrant by payment of the Exercise Price prior to adjustment.
E' = the adjusted Exercise Price.
14
<PAGE>
E = the Exercise Price prior to adjustment.
(r) Irrespective of any adjustments in the Exercise Price or the number or kind
of shares purchasable upon the exercise of the Warrants, Warrants therefore
or thereafter issued may continue to express the same price and number and
kind of shares as are stated in the Warrants initially issuable pursuant to
this Agreement.
SECTION 11. Fractional Interests. The Company shall not be required to issue
--------------------
fractional Warrant Shares on the exercise of Warrants. If more than one Warrant
shall be presented for exercise in full at the same time by the same holder, the
number of full Warrant Shares which shall be issuable upon the exercise thereof
shall be computed on the basis of the aggregate number of Warrant Shares
purchasable on exercise of the Warrants so presented. If any fraction of a
Warrant Share would, except for the provisions of this Section 11, be issuable
on the exercise of any Warrants (or specified portion thereof), the Company
shall pay an amount in cash equal to the Exercise Price on the day immediately
preceding the date the Warrant is presented for exercise, multiplied by such
fraction.
SECTION 12. Financial Statements.
--------------------
(a) Whether or not required by the rules and regulations of the Securities and
Exchange Commission (the "Commission"), so long as any of the Warrants
remain outstanding, the Company shall furnish to the Warrant Holder (i) all
quarterly and annual financial information that would be required to be
contained in a filing with the Commission on Forms 10-Q and 10-K if the
Company were required to file such Forms, including "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and, with respect to the annual information only, a report thereon by the
Company's certified independent accountants and (ii) all current reports
that would be required to be filed with the Commission on Form 8-K if the
Company were required to file such reports. In addition, whether or not
required by the rules and regulations of the Commission, the Company shall
file a copy of all such information and reports with the Commission for
public availability (unless the Commission will not accept such a filing)
and make such information available to securities analysts and prospective
investors upon request. In addition, for so long as any Warrant remains
outstanding, the Company shall furnish to the Warrant Holder and to
securities analysts and prospective investors, upon their request, the
information required to be delivered pursuant to Rule 144A(d)(4) under the
Securities Act.
(b) The Company shall, so long as any of the Warrants are outstanding, deliver
to the Warrant Holder, forthwith upon any Executive Officer of the Company
becoming aware of any default under this Agreement, an Officers'
Certificate specifying such default and what action the Company is taking
or proposes to take with respect thereto.
SECTION 13. Notices to Warrant Holder. Upon any adjustment of the Exercise
-------------------------
Price pursuant to Section 10, the Company shall promptly thereafter (i) cause to
be filed with the Company a certificate of a firm of independent public
accountants of recognized standing selected by the Board of Directors of the
Company (who may be the regular auditors of the Company) setting forth the
Exercise Price after such adjustment and setting forth in
15
<PAGE>
reasonable detail the method of calculation and the facts upon which such
calculations are based and setting forth the number of Warrant Shares (or
portion thereof) issuable after such adjustment in the Exercise Price, upon
exercise of a Warrant and payment of the adjusted Exercise Price, which
certificate shall be conclusive evidence of the correctness of the matters set
forth therein, and (ii) cause to be given to each of the registered holders of
the Warrant Certificates at his address appearing on the Warrant register
written notice of such adjustments by first-class mail, postage prepaid. Where
appropriate, such notice may be given in advance and included as a part of the
notice required to be mailed under the other provisions of this Section 13.
In case:
(a) the Company shall authorize the issuance to all holders of shares of Common
Stock of Rights to subscribe for or purchase shares of Common Stock or of
any other subscription rights or warrants; or
(b) the Company shall authorize the distribution to all holders of shares of
Common Stock of evidences of its indebtedness or assets (other than cash
dividends or cash distributions payable out of consolidated earnings or
earned surplus or dividends payable in shares of Common Stock or
distributions referred to in Section 10(a) hereof); or
(c) of any consolidation or merger to which the Company is a party and for
which approval of any shareholders of the Company is required, or of the
conveyance or transfer of the properties and assets of the Company
substantially as an entirety, or of any reclassification or change of
Common Stock issuable upon exercise of the Warrants (other than a change in
par value, or from par value to no par value, or from no par value to par
value, or as a result of a subdivision or combination), or a tender offer
or exchange offer for shares of Common Stock; or
(d) of the voluntary or involuntary dissolution, liquidation or winding up of
the Company; or
(e) the Company proposes to take any action (other than actions of the
character described in Section 10(a)) which would require an adjustment of
the Exercise Price pursuant to Section 10; then the Company shall cause to
be given to each of the registered holders of the Warrant Certificates at
his address appearing on the Warrant register, at least 20 days prior to
the applicable record date hereinafter specified, or promptly in the case
of events for which there is no record date, by first-class mail, postage
prepaid, a written notice stating (i) the date as of which the holders of
record of shares of Common Stock to be entitled to receive any such Rights
or distribution are to be determined, or (ii) the initial expiration date
set forth in any tender offer or exchange offer for shares of Common Stock,
or (iii) the date on which any such consolidation, merger, conveyance,
transfer, dissolution, liquidation or winding up is expected to become
effective or consummated, and the date as of which it is expected that
holders of record of shares of Common Stock shall be entitled to exchange
such shares for securities or other property, if any, deliverable upon such
reclassification, consolidation, merger, conveyance, transfer, dissolution,
liquidation or winding up. The failure to give the notice required by this
Section 13 or any defect therein shall not affect the legality or validity
of any distribution, right,
16
<PAGE>
option, warrant, consolidation, merger, conveyance, transfer, dissolution,
liquidation or winding up, or the vote upon any action.
Nothing contained in this Agreement or in any of the Warrant
Certificates shall be construed as conferring upon the holders thereof the right
to vote or to consent or to receive notice as shareholders in respect of the
meetings of shareholders or the election of Directors of the Company or any
other matter, or any rights whatsoever as shareholders of the Company.
SECTION 14. Notices to Company and Warrant Holder. Any notice or demand
-------------------------------------
authorized by this Agreement to be given or made by the registered holder of any
Warrant Certificate to or on the Company shall be sufficiently given or made
when and if deposited in the mail, first class or registered, postage prepaid,
addressed to the office of the Company expressly designated by the Company at
its office for purposes of this Agreement (until the Warrant holders are
otherwise notified in accordance with this Section by the Company), as follows:
The Fortress Group, Inc.
1650 Tysons Boulevard, Suite 600
McLean, Virginia 22102
Telephone (703) 442-4545
Facsimile: (703) 442-7730
Attention: J. Marshall Coleman
Any notice pursuant to this Agreement to be given by the Company to
the registered holder(s) of any Warrant Certificate shall be sufficiently given
when and if deposited in the mail, first-class or registered, postage prepaid,
addressed (until the Company is otherwise notified in accordance with this
Section by such holder) to such holder at the address appearing on the Warrant
register of the Company.
SECTION 15. Supplements and Amendments. The Company may from time to time
--------------------------
supplement or amend this Agreement without the approval of any holders of
Warrant Certificates in order to cure any ambiguity or to correct or supplement
any provision contained herein which may be defective or inconsistent with any
other provision herein, or to make any other provisions in regard to matters or
questions arising hereunder which the Company may deem necessary or desirable
and which shall not in any way adversely affect the interests of the holders of
Warrant Certificates.
SECTION 16. Successors. All the covenants and provisions of this Agreement by
----------
or for the benefit of the Company shall bind and inure to the benefit of its
respective successors and assigns hereunder.
SECTION 17. Termination. This Agreement shall terminate at 11:59 p.m., Eastern
-----------
Standard Time on September 30, 2004. Notwithstanding the foregoing, this
Agreement will terminate on any earlier date if all Warrants have been
exercised.
17
<PAGE>
SECTION 18. Governing Law. This Agreement and each Warrant Certificate issued
-------------
hereunder shall be deemed to be a contract made under the laws of the State of
New York and for all purposes shall be construed in accordance with the internal
laws of said State.
SECTION 19. Benefits of This Agreement. Nothing in this Agreement shall be
--------------------------
construed to give to any person or Company other than the Company and the
registered holders of the Warrant Certificates any legal or equitable right,
remedy or claim under this Agreement; but this Agreement shall be for the sole
and exclusive benefit of the Company and the registered holders of the Warrant
Certificates.
SECTION 20. HSR Act. Promptly (but in no event later than five days) after
-------
receipt of notice from any Warrant Holder of its intention to exercise any
Warrants, the Company shall make all 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 shall have expired or been terminated prior to the issuance of any
Warrant Shares upon exercise of Warrants.
SECTION 21. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
[Signature Page Follows]
18
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed, as of the day and year first above written.
THE FORTRESS GROUP, INC.
By:______________________________________
Name:
Title:
PROMETHEUS HOMEBUILDERS LLC
by: LF Strategic Realty Investors II L.P.,
its member
by: Lazard Freres Real Estate Investors
L.L.C., its general partner
By:______________________________________
Name:
Title:
19
<PAGE>
EXHIBIT A
[FORM OF WARRANT CERTIFICATE]
EXERCISABLE ON OR BEFORE SEPTEMBER 30, 2004
No. _____ Warrants
Warrant Certificate
THE FORTRESS GROUP, INC.
This Warrant Certificate certifies that [ ] or registered
assigns, is the registered holder of Warrants expiring September 30, 2004 (the
"Warrants") to purchase Common Stock, $0.01 par value (the "Common Stock"), of
The Fortress Group, Inc., a Delaware Company (the "Company"). Each Warrant
entitles the holder upon exercise to receive from the Company on or before 11:59
p.m. on New York City time, on September 30, 2004, one fully paid and
nonassessable share of Common Stock (a "Warrant Share") at the exercise price of
$7.00 (the "Exercise Price"), payable in lawful money of the United States of
America upon surrender of this Warrant Certificate and payment of the Exercise
Price at the office of the Company designated for such purpose, but only subject
to the conditions set forth herein and in the Warrant Agreement. The Exercise
Price and number of Warrant Shares issuable upon exercise of the Warrants are
subject to adjustment upon the occurrence of certain events set forth in the
Warrant Agreement.
No Warrant may be exercised after 11:59 p.m., New York City time, on
September 30, 2004, and to the extent not exercised by such time such Warrants
shall become void.
Reference is hereby made to the further provisions of this Warrant
Certificate set forth on the reverse hereof and such further provisions shall
for all purposes have the same effect as though fully set forth at this place.
This Warrant Certificate shall not be valid unless countersigned by
the Company, as such term is used in the Warrant Agreement.
20
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be signed by its President and by its Secretary and has caused its corporate
seal to be affixed hereunto or imprinted hereon.
Dated:
THE FORTRESS GROUP, INC.
By ______________________
President
By ______________________
Secretary
21
<PAGE>
[FORM OF WARRANT CERTIFICATE]
[REVERSE]
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants expiring September 30, 2004, entitling the holder
on exercise to receive shares of Common Stock, $0.01 par value, of the Company
(the "Common Stock"), and are issued or to be issued pursuant to a Warrant
Agreement dated as of September 30, 1997 (the "Warrant Agreement"), duly
executed and delivered by the Company, which Warrant Agreement is hereby
incorporated by reference in and made a part of this instrument and is hereby
referred to for a description of the rights, limitation of rights, obligations,
duties and immunities thereunder of the Company and the holders (the words
"holders" or "holder" meaning the registered holders or registered holder) of
the Warrants (the "Warrant Holder"). A copy of the Warrant Agreement may be
obtained by the holder hereof upon written request to the Company.
Warrants may be exercised at any time on or before September 30, 2004.
The holder of Warrants evidenced by this Warrant Certificate may exercise them
by surrendering this Warrant Certificate, with the form of election to purchase
set forth hereon properly completed and executed, together with payment of the
Exercise Price in cash at the office of the Company designated for such purpose.
In the alternative, each Warrant Holder may exercise its right, during the
Exercise Period, as defined in the Warrant Agreement, to receive Warrant Shares
on a net basis, such that, without the exchange of any funds, the Warrant Holder
receives that number of Warrant Shares otherwise issuable (or payable) upon
exercise of its Warrants less that number of Warrant Shares having an aggregate
fair market value (as defined below) at the time of exercise equal to the
aggregate Exercise Price that would otherwise have been paid by the Warrant
Holder of the Warrant Shares. For purposes of the foregoing sentence, "fair
market value" of the Warrant Shares will be determined in good faith by the Non-
Preferred Stock Directors of the Company, as defined in the Warrant Agreement,
as of the date of any such exercise. In the event that upon any exercise of
Warrants evidenced hereby the number of Warrants exercised shall be less than
the total number of Warrants evidenced hereby, there shall be issued to the
holder hereof or his assignee a new Warrant Certificate evidencing the number of
Warrants not exercised. No adjustment shall be made for any dividends on any
Common Stock issuable upon exercise of this Warrant.
The Warrant Agreement provides that upon the occurrence of certain
events the Exercise Price set forth on the face hereof and the number of shares
of Common Stock issuable upon exercise of the Warrants may, subject to certain
conditions, be adjusted. If the Exercise Price is adjusted, the Warrant
Agreement provides that the number of shares of Common Stock issuable upon the
exercise of each Warrant shall be adjusted. No fractions of a share of Common
Stock will be issued upon the exercise of any Warrant, but the Company will pay
the cash value thereof determined as provided in the Warrant Agreement.
The holders of the Warrants are entitled to certain registration
rights with respect to the Common Stock purchasable upon exercise thereof. Said
registration rights are set forth in full in a Registration Rights Agreement
dated as of September 30, 1997, between the Company
22
<PAGE>
and the Warrant Holder. A copy of the Registration Rights may be obtained by the
holder hereof upon written request to the Company.
Warrant Certificates, when surrendered at the office of the Company by
the registered holder thereof in person or by legal representative or attorney
duly authorized in writing, may be exchanged, in the manner and subject to the
limitations provided in the Warrant Agreement, but without payment of any
service charge, for another Warrant Certificate or Warrant Certificates of like
tenor evidencing in the aggregate a like number of Warrants.
Upon due presentation for registration of transfer of this Warrant
Certificate at the office of the Company a new Warrant Certificate or Warrant
Certificates of like tenor and evidencing in the aggregate a like number of
Warrants shall be issued to the transferee(s) in exchange for this Warrant
Certificate, subject to the limitations provided in the Warrant Agreement,
without charge except for any tax or other governmental charge imposed in
connection therewith.
The Company may deem and treat the registered holder(s) thereof as the
absolute owner(s) of this Warrant Certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, of any distribution to the holder(s) hereof, and for all other
purposes, and the Company shall not be affected by any notice to the contrary.
Neither the Warrants nor this Warrant Certificate entitles any holder hereof to
any rights of a stockholder of the Company.
23
<PAGE>
[FORM OF ELECTION TO PURCHASE]
(TO BE EXECUTED UPON EXERCISE OF WARRANT)
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to receive __________ shares of Common
Stock and herewith tenders payment for such shares to the order of The Fortress
Group, Inc. in the amount of $______ or by delivery of ___ Warrants or in
accordance with the terms hereof. The undersigned requests that a certificate
for such shares be registered in the name of ________________, whose address is
_______________________________ and that such shares be delivered to
________________ whose address is ___________ ______________________. If said
number of shares is less than all of the shares of Common Stock purchasable
hereunder after giving effect to any delivery of Warrants in payment of the
Exercise Price, the undersigned requests that a new Warrant Certificate
representing the remaining balance of such shares be registered in the name of
______________, whose address is _________________________, and that such
Warrant Certificate be delivered to _________________, whose address is
__________________.
Signature:
Date:
Signature Guaranteed:
24
<PAGE>
EXHIBIT 6
WARRANT AGREEMENT
by and between
THE FORTRESS GROUP, INC.
and
PROMETHEUS HOMEBUILDERS LLC
Dated as of ________ __, 1998
[SUPPLEMENTAL WARRANTS]
<PAGE>
WARRANT AGREEMENT, dated as of _________ __, 1998, between The
Fortress Group, Inc., a Delaware corporation (the "Company") and ____________
(the "Warrant Holder").
WHEREAS, the Company and the Warrant Holder have entered into that
certain Second Amended and Restated Stock Purchase Agreement dated as of
February 19, 1998 (the "Stock Purchase Agreement").
WHEREAS, pursuant to the Stock Purchase Agreement, the Company
proposes, in part, to issue to the Warrant Holder, or its assignees, warrants
(the "Warrants"), to purchase up to an aggregate of 5,714,286 shares of Common
Stock, subject to adjustment as set forth herein. The Common Stock issuable on
exercise of the Warrants is referred to herein as the "Warrant Shares". Certain
capitalized terms used herein and not elsewhere defined are defined in the Stock
Purchase Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein set forth, the parties hereto agree as follows:
SECTION 1. Warrant Certificates. The certificates evidencing the
--------------------
Warrants (the "Warrant Certificates") to be delivered pursuant to this Warrant
Agreement shall be in registered form only and shall be substantially in the
form set forth in Exhibit A attached hereto.
SECTION 2. Execution of Warrant Certificates. Warrant Certificates
---------------------------------
shall be signed on behalf of the Company by its Chairman of the Board or its
President or a Vice President and by its Secretary or an Assistant Secretary
under its corporate seal. Each such signature upon the Warrant Certificates may
be in the form of a facsimile signature of the present or any future Chairman of
the Board, President, Vice President, Secretary or Assistant Secretary and may
be imprinted or otherwise reproduced on the Warrant Certificates and for that
purpose the Company may adopt and use the facsimile signature of any person who
shall have been Chairman of the Board, President, Vice President, Secretary or
Assistant Secretary, notwithstanding the fact that at the time the Warrant
Certificates shall be delivered or disposed of he shall have ceased to hold such
office. The seal of the Company may be in the form of a facsimile thereof and
may be impressed, affixed, imprinted or otherwise reproduced on the Warrant
Certificates.
In case any officer of the Company who shall have signed any of the
Warrant Certificates shall cease to be such officer before the Warrant
Certificates so signed shall have been disposed of by the Company, such Warrant
Certificates nevertheless may be delivered or disposed of as though such person
had not ceased to be such officer of the Company; and any Warrant Certificate
may be signed on behalf of the Company by any person who, at the actual date of
the execution of such Warrant Certificate, shall be a proper officer of the
Company to sign such Warrant Certificate, although at the date of the execution
of this Warrant Agreement any such person was not such officer.
1
<PAGE>
SECTION 3. Registration. The Company shall number and register the
------------
Warrant Certificates in a register as they are issued. The Company may deem and
treat the registered holder(s) of the Warrant Certificates as the absolute
owner(s) thereof (notwithstanding any notation of ownership or other writing
thereon made by anyone) for all purposes, and shall not be affected by any
notice to the contrary.
SECTION 4. Registration of Transfers and Exchanges. The Company shall
---------------------------------------
from time to time register the transfer of any outstanding Warrant Certificates
in a Warrant register to be maintained by the Company upon surrender thereof
accompanied by a written instrument or instruments of transfer in form
satisfactory to the Company, duly executed by the registered holder or holders
thereof or by the duly appointed legal representative thereof or by a duly
authorized attorney. Upon any such registration of transfer, a new Warrant
Certificate shall be issued to the transferee(s) and the surrendered Warrant
Certificate shall be canceled and disposed of by the Company.
SECTION 5. Warrants; Exercise of Warrants.
(a) If and whenever the holder(s) of Class AA Preferred Stock, or any
successor stock thereto of the Company adjust the Conversion Price (as defined
in the Certificate of Designations of the Class AA Preferred Stock) the Company
shall calculate the Issue Price (as defined below) as of such date (the
"Adjustment Date") and from and including such date, during the Exercise Period,
the Warrant Holder shall have the right to exercise Warrants hereunder such that
the aggregate number of Warrants exercisable pursuant to this Agreement equals
the number of Warrants set forth in the table below corresponding to the
specified Issue Price as of the Adjustment Date. Such number of Warrants
exercisable shall remain the number of Warrants exercisable (subject to
adjustment as set forth in Section 10) until the next adjustment, if any, as
provided above. "Issue Price" shall mean, as of any date, the Average of the
Quoted Prices of the Common Stock for the 60 days preceding such date.
<TABLE>
<CAPTION>
Issue Price ($) Warrants
- --------------- --------
<S> <C>
10.01 - or greater 0
8.01 - 10.00 380,952
6.01 - 8.00 2,380,952
5.01 - 6.00 5,714,286
5.00 or less 0
</TABLE>
For purposes of illustration, if the Issue Price as of September 30,
2001 is $9.00 per share, the number of Warrants exercisable on September 30,
2001 will be 380,952. If any adjustment is made to the Exercise Rate pursuant
to Section 10, whether before or after any
2
<PAGE>
Warrants become exercisable, equivalent adjustments shall be made to the Issue
Prices and the Threshold Price.
(b) Subject to the terms of this Agreement, each Warrant holder shall
have the right, which may be exercised during the period (the "Exercise Period")
commencing on September 30, 2001, until the earliest to occur of (i) 11:59 p.m.,
New York City time, March 31, 2004, (ii) the first Adjustment Date in respect of
which the Issue Price is $5.00 (the "Threshold Price") or less and (iii) the
Mandatory Conversion Date (as defined in the Certificate of Designations of the
Class AA Preferred Stock), upon exercise of any Warrants which are then
exercisable pursuant to the terms of Section 5(a), to receive from the Company
the number of fully paid and nonassessable Warrant Shares which the holder may
at the time be entitled to receive on exercise of such Warrants and payment of
the Exercise Price (as defined below) then in effect for such Warrant Shares.
In the alternative, each Warrant holder may exercise his right to receive
Warrant Shares on a net basis, such that, without the exchange of any funds, the
Warrant holder receives that number of Warrant Shares otherwise issuable (or
payable) upon exercise of his Warrants less that number of Warrant Shares having
an aggregate fair market value (as defined below) at the time of exercise equal
to the aggregate Exercise Price that would otherwise have been paid by the
holder of the Warrant Shares. For purposes of the foregoing sentence, "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. Such determination of the Non-Preferred Stock Directors may
be challenged in good faith by holders of a majority of the Warrants, and any
dispute shall be resolved at the Company's cost, by an investment banking firm
of recognized national standing selected by the Company and acceptable to such
Warrant holders and shall be made in good faith and be conclusive absent
manifest error; provided, however, that in the event that the determination by
-----------------
the majority of the Non-Preferred Stock 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 Warrant holders who challenged
such price. Each Warrant not exercised on or before 11:59 p.m., New York City
time, on March 31, 2004 shall become void and all rights thereunder and all
rights in respect thereof under this Agreement shall cease as of such time. No
adjustment as to dividends will be made upon exercise of the Warrants.
For purposes hereof, "Non-Preferred Stock Directors" means directors
of the Company excluding any director elected to the Board of Directors by the
holders of the Preferred Stock voting as a separate class.
A Warrant may be exercised upon surrender to the Company at its office
designated for such purpose (the address of which is set forth in Section 14
hereof) of the certificate or certificates evidencing the Warrants to be
exercised with the form of election to purchase on the reverse thereof duly
filled in and signed, which signature shall be guaranteed by a bank or trust
company having an office or correspondent in the United States or a broker or
dealer which is a member of a registered securities exchange or the National
Association of Securities Dealers, Inc. (the "NASD") or, if no such certificate
shall have been issued, by written notice, and upon payment to the Company of
the exercise price (the "Exercise Price") which is
3
<PAGE>
set forth in the form of Warrant Certificate attached hereto as Exhibit A, for
the number of Warrant Shares in respect of which such Warrants are then
exercised. Payment of the aggregate Exercise Price shall be made, at the option
of the Warrant holder (i) in cash or by certified or official bank check payable
to the order of the Company, (ii) 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
(the Company will pay the accrued interest or dividends on such surrendered debt
or preferred equity securities in cash at the time of surrender notwithstanding
the stated terms thereof), or (iii) in the manner provided in the first
paragraph of this Section 5(b).
Subject to the provisions of Section 6 hereof, upon such surrender of
Warrants and payment of the Exercise Price, the Company shall issue and cause to
be delivered with all reasonable dispatch to or upon the written order of the
holder and in such name or names as the Warrant holder may designate, a
certificate or certificates for the number of full Warrant Shares issuable upon
the exercise of such Warrants together with cash as provided in Section 11;
provided, however, that if any consolidation, merger or lease or sale of assets
- -----------------
is proposed to be effected by the Company as described in Section 10(m) hereof,
or a tender offer or an exchange offer for shares of Common Stock of the Company
shall be made, upon such surrender of Warrants and payment of the Exercise Price
as aforesaid, the Company shall, as soon as possible, but in any event not later
than two business days thereafter, issue and cause to be delivered the full
number of Warrant Shares issuable upon the exercise of such Warrants in the
manner described in this sentence together with cash as provided in Section 11.
Such certificate or certificates shall be deemed to have been issued and any
person so designated to be named therein shall be deemed to have become a holder
of record of such Warrant Shares as of the date of the surrender of such
Warrants and payment of the Exercise Price.
The Warrants shall be exercisable, at the election of the holders
thereof, either in full or from time to time in part and, in the event that a
certificate evidencing Warrants is exercised in respect of fewer than all of the
Warrants exercisable or potentially exercisable or Warrant Shares issuable on
such exercise at any time prior to the date of expiration of the Warrants, a new
certificate evidencing the remaining Warrant or Warrants will be issued and
delivered by the Company and at its expense pursuant to the provisions of this
Section and of Section 2 hereof.
All Warrant Certificates surrendered upon exercise of Warrants shall
be canceled and disposed of by the Company. The Company shall keep copies of
this Agreement and any notices given or received hereunder available for
inspection by the holders during normal business hours at its office.
SECTION 6. Payment of Taxes. The Company will pay all documentary
----------------
stamp taxes attributable to the initial issuance of Warrant Shares upon the
exercise of Warrants; provided, however, that the Company shall not be required
-----------------
to pay any tax or taxes which may be payable in respect of any transfer involved
in the issue of any Warrant Certificates or any certificates for Warrant Shares
in a name other than that of the registered holder of a Warrant
4
<PAGE>
Certificate surrendered upon the exercise of a Warrant, and the Company shall
not be required to issue or deliver such Warrant Certificates unless or until
the person or persons requesting the issuance thereof shall have paid to the
Company the amount of such tax or shall have established to the satisfaction of
the Company that such tax has been paid.
SECTION 7. Mutilated or Missing Warrant Certificates. In case any of the
-----------------------------------------
Warrant Certificates shall be mutilated, lost, stolen or destroyed, the Company
may in its discretion issue, in exchange and substitution for and upon
cancellation of the mutilated Warrant Certificate, or in lieu of and
substitution for the Warrant Certificate lost, stolen or destroyed, a new
Warrant Certificate of like tenor and representing an equivalent number of
Warrants, but only upon receipt of evidence reasonably satisfactory to the
Company of such loss, theft or destruction of such Warrant Certificate and
indemnity, if requested, also reasonably satisfactory to it. Applicants for such
substitute Warrant Certificates shall also comply with such other reasonable
regulations and pay such other reasonable charges as the Company may prescribe.
SECTION 8. Reservation of Warrant Shares. The Company will at all
-----------------------------
times 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 its treasury, for the purpose of enabling it to
satisfy any obligation to issue Warrant Shares upon exercise of 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 of
Directors from time to time based on the Exercise Rate in effect at such time.
The Company or, if appointed, the transfer agent for the Common Stock
(the "Transfer Agent") and every subsequent transfer agent for any shares of the
Company's capital stock issuable upon the exercise of any of the rights of
purchase aforesaid will be irrevocably authorized and directed at all times to
reserve such number of authorized shares as shall be required for such purpose.
The Company will keep a copy of this Agreement on file with the Transfer Agent
and with every subsequent transfer agent for any shares of the Company's capital
stock issuable upon the exercise of the rights of purchase represented by the
Warrants. The Company will furnish such Transfer Agent a copy of all notices of
adjustments and certificates related thereto, transmitted to each holder
pursuant to Section 13 hereof.
The Company covenants that all Warrant Shares which may be issued upon
exercise of Warrants will, upon issue, be fully paid, nonassessable, free of
preemptive rights and free from all taxes, liens, charges and security interests
with respect to the issue thereof.
SECTION 9. Stock Exchange Listings. The Company will from time to time
-----------------------
take all action, at its expense, which may be necessary so that the Warrant
Shares, immediately upon their issuance upon the exercise of Warrants, will be
listed and maintained on the principal securities exchanges and markets within
the United States of America, if any, on which other shares of Common Stock are
then listed and register under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), all shares of Common Stock from time to time issuable upon
5
<PAGE>
exercise if and at the time that any existing shares of the Company's capital
stock are so registered.
SECTION 10. Adjustment of Exercise Rate. The number of Warrant Shares
---------------------------
for which a Warrant may be exercised (the "Exercise Rate") is subject to
adjustment from time to time upon the occurrence of the events enumerated in
this Section 10. For purposes of this Section 10, "Common Stock" means shares
now or hereafter authorized of any class of common stock of the Company,
including the Common Stock, and any other stock of the Company, howsoever
designated, authorized after this date hereof, has the right (subject always to
prior rights of any class or series of preferred stock) to participate in any
distribution of the assets and earnings of the Company without limit as to per
share amount.
(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; or
(iv) issues by reclassification of its Common Stock any shares of
its capital stock;
then the Exercise Rate in effect immediately prior to such action shall be
adjusted so that each holder of a Warrant thereafter converted may receive the
number of shares of capital stock of the Company which he would have owned
immediately following such action if he had exercised such Warrant immediately
prior to such action. The adjustment shall become effective immediately after
the record date in the case of a 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 a Warrant upon exercise of it may receive shares of two or more
classes of capital stock of the Company, the Company shall determine the
allocation of the adjusted Exercise Rates between the classes of capital stock.
After such allocation, the exercise privilege and the Exercise Rates in respect
of each class of capital stock issuable shall thereafter be subject to
adjustment on terms comparable to those applicable to Common Stock in this
Section 10(a).
(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 per share on the record
date mentioned below, the Exercise Rate shall be adjusted in accordance
with the formula:
6
<PAGE>
<TABLE>
<CAPTION>
C'= C x O + N
-------------
O + (N x P/M)
where:
<S> <C> <C>
C' = the adjusted Exercise Rate.
C = the then current Exercise Rate.
O = the number of shares of Common Stock outstanding on the record date.
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.
</TABLE>
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 rights or warrants are
exercisable, not all rights or warrants shall have been exercised, the Exercise
Rate shall be immediately readjusted to what it would have been if "N" in the
above formula had been the number of shares actually issued.
(c) If the Company distributes to all holders of shares of its Common
Stock (i) any shares of 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 three percent (3%) of 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 (other than rights, options or warrants referred
to in Section 10(b) above), the Exercise Rate shall be adjusted in accordance
with the formula:
<TABLE>
<CAPTION>
C'= C x M
----
M-F
where:
<S> <C> <C>
C' = the adjusted Exercise Rate.
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
C = the then current Exercise Rate.
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 Section 10(c) 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 of the Company shall determine the fair
market value.
</TABLE>
The adjustment shall be made successively whenever any such
distribution is made and shall become effective immediately after the record
date for the determination of stockholders entitled to receive the distribution.
(d) If the Company issues shares of 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, the Exercise Rate shall be
adjusted in accordance with the formula:
C'= C x A
-----------
O + P/M
<TABLE>
<CAPTION>
where:
<S> <C> <C>
C' = the adjusted Exercise Rate.
C = the then current Exercise Rate.
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.
</TABLE>
8
<PAGE>
The adjustment shall be made successively whenever any such issuance
is made, and shall become effective immediately after such issuance. This
Section 10(d) does not apply to (i) any transaction or issuance described in
Section 10(b) or Section 10(c) above or Section 10(e) 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,
the issuance and exercise of any Warrants pursuant to the terms of this
Agreement 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 Section 10(b) or Section 10(c) above or
Section 10(e) below, (iii) Common Stock issued to the Company's employees under
bona fide employee benefit plans adopted by the Board of Directors of the
Company and approved by the holders of Common Stock when required by law, if
such Common Stock would otherwise be covered by this Section 10(d) (but only to
the extent that the aggregate number of shares excluded hereby (together with
the aggregate number of shares issuable upon conversion, exchange or exercise of
the securities excluded by clause (iii) of Section 10(e) 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 Company 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.
(e) If the Company 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,
the issuance and exercise of any Warrants pursuant to the terms of this
Agreement or securities issued in transactions described in Section 10(b) or
Section 10(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 Exercise Rate shall be adjusted in accordance
with the formula:
C'= C x O + D
-------
O + P/M
9
<PAGE>
<TABLE>
<CAPTION>
where:
<S> <C> <C>
C' = the adjusted Exercise Rate.
C = the then current Exercise Rate.
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.
</TABLE>
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 are no longer outstanding,
then the Exercise Rate shall promptly be readjusted to the Exercise Rate 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 Section 10(e)
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 Company 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 Company's employees under bona fide
employee benefit plans adopted by the Board of Directors of the Company and
approved by the holders of Common Stock when required by law, if such securities
would otherwise by covered by this Section 10(e) (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 Section 10(d) above)
and issued after the Initial Issue Date shall not exceed 5% of the Common Stock
outstanding at the time of any such issuance).
The reduction shall become effective immediately prior to the opening
of business on the day following the Expiration Time.
10
<PAGE>
(f) Current Market Price.
--------------------
In Sections 10(b)-(e) the current market price per share of Common
Stock on any date is the average of the Quoted Prices of the Common Stock for 30
consecutive Trading Days commencing 45 trading days before the date in question
(the "Current Market Price"). "Trading Day" means, with respect to any
security, 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. The
"Quoted Price" means, with respect to Common Stock, the last reported sales
price for Common Stock as reported by the NASD Automatic 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 (which shall be for consolidated trading if applicable to such
exchange), 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.
In the event that the Quoted Price cannot be determined as aforesaid, the Board
of Directors of the Company 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 Warrants, and any
dispute shall be resolved at the Company's cost, by an investment banking firm
of recognized national standing selected by the Company and acceptable to such
holders of Warrants 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 of the Company 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 Warrant holders who challenged such price.
(g) Consideration Received.
----------------------
For purposes of any computation respecting consideration received
pursuant to Sections 10(d)-(e), the following shall apply:
(i) in the 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 Company for any underwriting of the issue or
otherwise in connection therewith;
(ii) 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
in good faith by the Board of Directors, (irrespective of the accounting
treatment thereof);
(iii) 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 Company for the issuance of such securities
plus the additional minimum
11
<PAGE>
consideration, if any, to be received by the Company upon the conversion,
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
section)
(h) No adjustment in the Exercise Rate need be made unless the
adjustment would require an increase or decrease of at least 1% in the Exercise
Rate. Any adjustments that are not made shall be carried forward and taken into
account in any subsequent adjustment. All calculations under this Section shall
be made to the nearest cent or to the nearest 1/100th of a share, as the case
may be.
(i) To the extent the Warrants become convertible into cash, no
adjustment need be made thereafter as to the cash. Interest will not accrue on
the cash.
(j) Whenever the Exercise Rate is adjusted, the Company shall provide
the notices required by Section 13 hereof.
(k) The Company from time to time may increase the Exercise Rate 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. Whenever the Exercise Rate is
increased, the Company shall mail to Warrant holders a notice of the increase
first class, postage prepaid. The Company shall mail the notice at least 15 days
before the date the increased Exercise Rate takes effect. The notice shall state
the increased Exercise Rate and the period it will be in effect. An increase in
the Exercise Rate does not change or adjust the Exercise Rate otherwise in
effect for purposes of Sections 10(a)-(e).
(l) If:
(i) the Company takes any action that would require an
adjustment in the Exercise Rate pursuant to Sections 10(a)-(e) and if the
Company does not arrange for Warrant holders to participate pursuant to
Section 10(h);
(ii) the Company takes any action that would require a
supplemental Warrant Agreement pursuant to Section 10(m); or
(iii) there is a liquidation or dissolution of the Company,
the Company shall mail to Warrant holders a notice stating the proposed record
date for a dividend or distribution or the proposed effective date of a
subdivision, combination, reclassification, consolidation, merger, transfer,
lease, liquidation or dissolution. The Company shall mail the notice at least
15 days before such date. Failure to mail the notice or any defect in it shall
not affect the validity of the transaction.
(m) If the Company consolidates or merges with or into, or transfers
or leases all or substantially all its assets to, any person, upon consummation
of such transaction the Warrants shall automatically become exercisable for the
kind and amount of securities, cash or
12
<PAGE>
other assets which the holder of a Warrant would have owned immediately after
the consolidation, merger, transfer or lease if the holder had exercised the
Warrant immediately before the effective date of the transaction. Concurrently
with the consummation of such transaction, the Company formed by or surviving
any such consolidation or merger if other than the Company, or the person to
which such sale or conveyance shall have been made, shall enter into a
supplemental Warrant Agreement so providing and further providing for
adjustments which shall be as nearly equivalent as may be practical to the
adjustments provided for in this Section. The successor Company shall mail to
Warrant holders a notice describing the supplemental Warrant Agreement.
If the issuer of securities deliverable upon exercise of Warrants
under the supplemental Warrant Agreement is an affiliate of the formed,
surviving, transferee or lessee Company, that issuer shall join in the
supplemental Warrant Agreement.
If this Section 10(m) applies, Sections 10(a)-(e) do not apply.
(n) In addition, in the event that any other transaction or event
occurs to which the foregoing Exercise Rate adjustment provisions are not
strictly applicable but the failure to make any adjustment would adversely
affect the rights represented by the Warrants in accordance with the essential
intent and principles of such provisions, then, in each such case, the Company
shall appoint an investment banking firm of recognized national standing, or any
other financial expert that does not (or whose directors, officers, employees,
affiliates or stockholders do not) have a direct or material indirect financial
interest in the Company or any of its subsidiaries, who has not been, and, at
the time it is called upon to give independent financial advice to the Company,
is not (and none of its directors, officer, employees, affiliates or
stockholders are) a promoter, director or officer of the Company or any of its
subsidiaries, which will give their opinion upon the adjustment, if any, on a
basis consistent with the essential intent and principles established in the
foregoing Exercise Rate adjustment provisions, necessary to preserve, without
dilution, the rights represented by the Warrants. Upon receipt of such opinion
or determination, the Company shall promptly mail a copy thereof to the Warrant
holders and will make the adjustments described therein.
(o) Except as provided in the immediately following sentence, any
determination that the Company or its Board of Directors must make pursuant to
Section 10 shall be conclusive. Whenever the Company, its Board of Directors or
the Non-Preferred Stock Directors shall be required to make a determination
under this Section 10, such determination shall be made in good faith and may be
challenged in good faith by the holders of a majority of Warrants and any
dispute shall be resolved at the Company's expense, by an investment banking
firm of recognized national standing selected by the Company and acceptable to
such Warrant holders; provided, however, that in the event the determination by
-----------------
the Board of Directors of the Company 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 Warrant holders who challenged such price.
13
<PAGE>
(p) In any case in which this Section 10 shall require that an
adjustment in the Exercise Rate be made effective as of a record date for a
specified event, the Company may elect to defer until the occurrence of such
event (i) issuing to the holder of any Warrant exercised after such record date
the Warrant Shares and other capital stock of the Company, if any, issuable upon
such exercise over and above the Warrant Shares and other capital stock of the
Company, if any, issuable upon such exercise on the basis of the Exercise Rate
and (ii) paying to such holder any amount in cash in lieu of a fractional share
pursuant to Section 11; provided, however, that the Company shall deliver to
such holder a due bill or other appropriate instrument evidencing such holder's
right to receive such additional Warrant Shares, other capital stock and cash
upon the occurrence of the event requiring such adjustment.
(q) Irrespective of any adjustments in the Exercise Rate or the number
or kind of shares purchasable upon the exercise of the Warrants, Warrants
therefore or thereafter issued may continue to express the same price and number
and kind of shares as are stated in the Warrants initially issuable pursuant to
this Agreement.
SECTION 11. Fractional Interests. The Company shall not be required to
--------------------
issue fractional Warrant Shares on the exercise of Warrants. If more than one
Warrant shall be presented for exercise in full at the same time by the same
holder, the number of full Warrant Shares which shall be issuable upon the
exercise thereof shall be computed on the basis of the aggregate number of
Warrant Shares purchasable on exercise of the Warrants so presented. If any
fraction of a Warrant Share would, except for the provisions of this Section 11,
be issuable on the exercise of any Warrants (or specified portion thereof), the
Company shall pay an amount in cash equal to the Exercise Rate on the day
immediately preceding the date the Warrant is presented for exercise, multiplied
by such fraction.
SECTION 12. Financial Statements.
--------------------
(a) Whether or not required by the rules and regulations of the
Securities and Exchange Commission (the "Commission"), so long as any of the
Warrants remain outstanding, the Company shall furnish to the Warrant Holder (i)
all quarterly and annual financial information that would be required to be
contained in a filing with the Commission on Forms 10-Q and 10-K if the Company
were required to file such Forms, including "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and, with respect to
the annual information only, a report thereon by the Company's certified
independent accountants and (ii) all current reports that would be required to
be filed with the Commission on Form 8-K if the Company were required to file
such reports. In addition, whether or not required by the rules and regulations
of the Commission, the Company shall file a copy of all such information and
reports with the Commission for public availability (unless the Commission will
not accept such a filing) and make such information available to securities
analysts and prospective investors upon request. In addition, for so long as any
Warrant remains outstanding, the Company shall furnish to the Warrant Holder and
to securities analysts and prospective investors, upon their request, the
information required to be delivered pursuant to Rule 144A(d)(4) under the
Securities Act.
14
<PAGE>
(b) The Company shall, so long as any of the Warrants are outstanding,
deliver to the Warrant Holder, forthwith upon any Executive Officer of the
Company becoming aware of any default under this Agreement, an Officers'
Certificate specifying such default and what action the Company is taking or
proposes to take with respect thereto.
SECTION 13. Notices to Warrant Holder. Upon any adjustment of the
-------------------------
Exercise Rate pursuant to Section 10, the Company shall promptly thereafter (i)
cause to be filed with the Company a certificate of a firm of independent public
accountants of recognized standing selected by the Board of Directors of the
Company (who may be the regular auditors of the Company) setting forth the
Exercise Rate after such adjustment and setting forth in reasonable detail the
method of calculation and the facts upon which such calculations are based and
setting forth the number of Warrant Shares (or portion thereof) issuable after
such adjustment in the Exercise Rate, upon exercise of a Warrant and payment of
the adjusted Exercise Rate, which certificate shall be conclusive evidence of
the correctness of the matters set forth therein, and (ii) cause to be given to
each of the registered holders of the Warrant Certificates at his address
appearing on the Warrant register written notice of such adjustments by first-
class mail, postage prepaid. Where appropriate, such notice may be given in
advance and included as a part of the notice required to be mailed under the
other provisions of this Section 13.
In case:
(a) the Company shall authorize the issuance to all holders of shares
of Common Stock of Rights to subscribe for or purchase shares of Common Stock or
of any other subscription rights or warrants; or
(b) the Company shall authorize the distribution to all holders of
shares of Common Stock of evidences of its indebtedness or assets (other than
cash dividends or cash distributions payable out of consolidated earnings or
earned surplus or dividends payable in shares of Common Stock or distributions
referred to in Section 10(a) hereof); or
(c) of any consolidation or merger to which the Company is a party and
for which approval of any shareholders of the Company is required, or of the
conveyance or transfer of the properties and assets of the Company substantially
as an entirety, or of any reclassification or change of Common Stock issuable
upon exercise of the Warrants (other than a change in par value, or from par
value to no par value, or from no par value to par value, or as a result of a
subdivision or combination), or a tender offer or exchange offer for shares of
Common Stock; or
(d) of the voluntary or involuntary dissolution, liquidation or
winding up of the Company; or
(e) the Company proposes to take any action (other than actions of the
character described in Section 10(a)) which would require an adjustment of the
Exercise Rate pursuant to Section 10; then the Company shall cause to be given
to each of the registered
15
<PAGE>
holders of the Warrant Certificates at his address appearing on the Warrant
register, at least 20 days prior to the applicable record date hereinafter
specified, or promptly in the case of events for which there is no record date,
by first-class mail, postage prepaid, a written notice stating (i) the date as
of which the holders of record of shares of Common Stock to be entitled to
receive any such Rights or distribution are to be determined, or (ii) the
initial expiration date set forth in any tender offer or exchange offer for
shares of Common Stock, or (iii) the date on which any such consolidation,
merger, conveyance, transfer, dissolution, liquidation or winding up is expected
to become effective or consummated, and the date as of which it is expected that
holders of record of shares of Common Stock shall be entitled to exchange such
shares for securities or other property, if any, deliverable upon such
reclassification, consolidation, merger, conveyance, transfer, dissolution,
liquidation or winding up. The failure to give the notice required by this
Section 13 or any defect therein shall not affect the legality or validity of
any distribution, right, option, warrant, consolidation, merger, conveyance,
transfer, dissolution, liquidation or winding up, or the vote upon any action.
Nothing contained in this Agreement or in any of the Warrant
Certificates shall be construed as conferring upon the holders thereof the right
to vote or to consent or to receive notice as shareholders in respect of the
meetings of shareholders or the election of Directors of the Company or any
other matter, or any rights whatsoever as shareholders of the Company.
SECTION 14. Notices to Company and Warrant Holder. Any notice or
-------------------------------------
demand authorized by this Agreement to be given or made by the registered holder
of any Warrant Certificate to or on the Company shall be sufficiently given or
made when and if deposited in the mail, first class or registered, postage
prepaid, addressed to the office of the Company expressly designated by the
Company at its office for purposes of this Agreement (until the Warrant holders
are otherwise notified in accordance with this Section by the Company), as
follows:
The Fortress Group, Inc.
1650 Tysons Boulevard, Suite 600
McLean, Virginia 22102
Telephone (703) 442-4545
Facsimile: (703) 442-7730
Attention: J. Marshall Coleman
Any notice pursuant to this Agreement to be given by the Company to
the registered holder(s) of any Warrant Certificate shall be sufficiently given
when and if deposited in the mail, first-class or registered, postage prepaid,
addressed (until the Company is otherwise notified in accordance with this
Section by such holder) to such holder at the address appearing on the Warrant
register of the Company.
SECTION 15. Supplements and Amendments. The Company may from time to
--------------------------
time supplement or amend this Agreement without the approval of any holders of
Warrant Certificates in order to cure any ambiguity or to correct or supplement
any provision contained
16
<PAGE>
herein which may be defective or inconsistent with any other provision herein,
or to make any other provisions in regard to matters or questions arising
hereunder which the Company may deem necessary or desirable and which shall not
in any way adversely affect the interests of the holders of Warrant
Certificates.
SECTION 16. Successors. All the covenants and provisions of this
----------
Agreement by or for the benefit of the Company shall bind and inure to the
benefit of its respective successors and assigns hereunder.
SECTION 17. Termination. This Agreement shall terminate at 11:59 p.m.,
-----------
Eastern Standard Time on March 31, 2004. Notwithstanding the foregoing, this
Agreement will terminate on any earlier date if all Warrants have been
exercised.
SECTION 18. Governing Law. This Agreement and each Warrant Certificate
-------------
issued hereunder shall be deemed to be a contract made under the laws of the
State of New York and for all purposes shall be construed in accordance with the
internal laws of said State.
SECTION 19. Benefits of This Agreement. Nothing in this Agreement
--------------------------
shall be construed to give to any person or Company other than the Company and
the registered holders of the Warrant Certificates any legal or equitable right,
remedy or claim under this Agreement; but this Agreement shall be for the
sole and exclusive benefit of the Company and the registered holders of the
Warrant Certificates.
SECTION 20. HSR Act. Promptly (but in no event later than five days)
-------
after receipt of notice from any Warrant Holder of its intention to exercise any
Warrants, the Company shall make all 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 shall have expired or been terminated prior to the issuance of any
Warrant Shares upon exercise of Warrants.
SECTION 21. Counterparts. This Agreement may be executed in one or
------------
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
[Signature Page Follows]
17
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed, as of the day and year first above written.
THE FORTRESS GROUP, INC.
By:______________________________________
Name:
Title:
PROMETHEUS HOMEBUILDERS LLC
by: LF Strategic Realty Investors II L.P.,
its member
by: Lazard Freres Real Estate Investors
L.L.C.,
its general partner
By:______________________________________
Name:
Title:
18
<PAGE>
EXHIBIT A
[FORM OF WARRANT CERTIFICATE]
EXERCISABLE ON OR BEFORE MARCH 31, 2004
No. Up to 5,714,286 Warrants, as determined
in accordance with the Warrant Agreement
Warrant Certificate
THE FORTRESS GROUP, INC.
This Warrant Certificate certifies that [ ] or registered
assigns, is the registered holder of Warrants expiring March 31, 2004 (the
"Warrants") to purchase Common Stock, $0.01 par value (the "Common Stock"), of
The Fortress Group, Inc., a Delaware Company (the "Company"). Each Warrant
entitles the holder upon exercise to receive from the Company on or before the
earliest to occur of (i) 11:59 p.m., New York City time, on March 31, 2004, (ii)
the first Adjustment Date in respect of which the Issue Price is equal to or
less than the Threshold Price and (iii) the Mandatory Conversion Date (as
defined in the Certificate of Designations of the Class AA Preferred Stock), one
fully paid and nonassessable share of Common Stock (a "Warrant Share") at the
exercise price of $0.01 provided, however, that the exercise price per Warrant
Share shall at all times be not less than the par value of such Warrant Share,
(the "Exercise Price"), payable in lawful money of the United States of America
upon surrender of this Warrant Certificate and payment of the Exercise Price at
the office of the Company designated for such purpose, but only subject to the
conditions set forth herein and in the Warrant Agreement. The number of Warrant
Shares issuable upon exercise of the Warrants (the "Exercise Rate") is subject
to adjustment upon the occurrence of certain events set forth in the Warrant
Agreement.
No Warrant may be exercised after 11:59 p.m., New York City time, on
March 31, 2004, and to the extent not exercised by such time such Warrants shall
become void.
Reference is hereby made to the further provisions of this Warrant
Certificate set forth on the reverse hereof and such further provisions shall
for all purposes have the same effect as though fully set forth at this place.
This Warrant Certificate shall not be valid unless countersigned by
the Company, as such term is used in the Warrant Agreement.
A-1
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be signed by its President and by its Secretary and has caused its corporate
seal to be affixed hereunto or imprinted hereon.
Dated:
THE FORTRESS GROUP, INC.
By ______________________
President
By ______________________
Secretary
A-2
<PAGE>
[FORM OF WARRANT CERTIFICATE]
[REVERSE]
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants expiring March 31, 2004, entitling the holder on
exercise to receive shares of Common Stock, $0.01 par value, of the Company (the
"Common Stock"), and are issued or to be issued pursuant to a Warrant Agreement
dated as of _____________, 1998 (the "Warrant Agreement"), duly executed and
delivered by the Company, which Warrant Agreement is hereby incorporated by
reference in and made a part of this instrument and is hereby referred to for a
description of the rights, limitation of rights, obligations, duties and
immunities thereunder of the Company and the holders (the words "holders" or
"holder" meaning the registered holders or registered holder) of the Warrants
(the "Warrant Holder"). A copy of the Warrant Agreement may be obtained by the
holder hereof upon written request to the Company.
Warrants may be exercised at any time on or before the earliest to
occur of (i) 11:59 p.m., New York City time, on March 31, 2004, (ii) the first
Adjustment Date in respect of which the Issue Price is equal to or less than the
Threshold Price and (iii) the Mandatory Conversion Date (as defined in the
Certificate of Designations of the Class AA Preferred Stock). The holder of
Warrants evidenced by this Warrant Certificate may exercise them by surrendering
this Warrant Certificate, with the form of election to purchase set forth hereon
properly completed and executed, together with payment of the Exercise Price in
cash at the office of the Company designated for such purpose. In the
alternative, each Warrant Holder may exercise its right, during the Exercise
Period, as defined in the Warrant Agreement, to receive Warrant Shares on a net
basis, such that, without the exchange of any funds, the Warrant Holder receives
that number of Warrant Shares otherwise issuable (or payable) upon exercise of
its Warrants less that number of Warrant Shares having an aggregate fair market
value (as defined below) at the time of exercise equal to the aggregate Exercise
Price that would otherwise have been paid by the Warrant Holder of the Warrant
Shares. For purposes of the foregoing sentence, "fair market value" of the
Warrant Shares will be determined in good faith by the Non-Preferred Stock
Directors of the Company, as defined in the Warrant Agreement, as of the date of
any such exercise. In the event that upon any exercise of Warrants evidenced
hereby the number of Warrants exercised shall be less than the total number of
Warrants evidenced hereby, there shall be issued to the holder hereof or his
assignee a new Warrant Certificate evidencing the number of Warrants not
exercised. No adjustment shall be made for any dividends on any Common Stock
issuable upon exercise of this Warrant.
The Warrant Agreement provides that upon the occurrence of certain
events the Exercise Rate may, subject to certain conditions, be adjusted. If
the Exercise Rate is adjusted, the Warrant Agreement provides that the number of
shares of Common Stock issuable upon the exercise of each Warrant shall be
adjusted. No fractions of a share of Common Stock will be issued upon the
exercise of any Warrant, but the Company will pay the cash value thereof
determined as provided in the Warrant Agreement.
A-3
<PAGE>
The holders of the Warrants are entitled to certain registration
rights with respect to the Common Stock purchasable upon exercise thereof. Said
registration rights are set forth in full in an Amended and Restated
Registration Rights Agreement dated as of ________________, 1998, between the
Company and the Warrant Holder. A copy of the Registration Rights may be
obtained by the holder hereof upon written request to the Company.
Warrant Certificates, when surrendered at the office of the Company by
the registered holder thereof in person or by legal representative or attorney
duly authorized in writing, may be exchanged, in the manner and subject to the
limitations provided in the Warrant Agreement, but without payment of any
service charge, for another Warrant Certificate or Warrant Certificates of like
tenor evidencing in the aggregate a like number of Warrants.
Upon due presentation for registration of transfer of this Warrant
Certificate at the office of the Company a new Warrant Certificate or Warrant
Certificates of like tenor and evidencing in the aggregate a like number of
Warrants shall be issued to the transferee(s) in exchange for this Warrant
Certificate, subject to the limitations provided in the Warrant Agreement,
without charge except for any tax or other governmental charge imposed in
connection therewith.
The Company may deem and treat the registered holder(s) thereof as the
absolute owner(s) of this Warrant Certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, of any distribution to the holder(s) hereof, and for all other
purposes, and the Company shall not be affected by any notice to the contrary.
Neither the Warrants nor this Warrant Certificate entitles any holder hereof to
any rights of a stockholder of the Company.
A-4
<PAGE>
[FORM OF ELECTION TO PURCHASE]
(TO BE EXECUTED UPON EXERCISE OF WARRANT)
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to receive __________ shares of Common
Stock and herewith tenders payment for such shares to the order of The Fortress
Group, Inc. in the amount of $______ or by delivery of ___ Warrants or in
accordance with the terms hereof. The undersigned requests that a certificate
for such shares be registered in the name of ________________, whose address is
_______________________________ and that such shares be delivered to
________________ whose address is ___________ ______________________. If said
number of shares is less than all of the shares of Common Stock purchasable
hereunder after giving effect to any delivery of Warrants in payment of the
Exercise Price, the undersigned requests that a new Warrant Certificate
representing the remaining balance of such shares be registered in the name of
______________, whose address is _________________________, and that such
Warrant Certificate be delivered to _________________, whose address is
__________________.
Signature:
Date:
Signature Guaranteed:
A-5
<PAGE>
EXHIBIT 7
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 53,333 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:
1. Certain Definitions; Number of Shares and Designation.
-----------------------------------------------------
(a) 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 Directors" shall have the meaning set forth in subparagraph 5(d).
<PAGE>
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 Brothers, Inc., Washington Homes, Inc., Zaring National
Corporation, M/I
2
<PAGE>
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 executive committee of the Board of Directors to which substantial
operational matters regarding the Corporation shall be delegated.
3
<PAGE>
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.
Optional Conversion Date. The term "Optional Conversion Date" shall
------------------------
have the meaning set forth in subparagraph 4(b)(i) below.
4
<PAGE>
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 be more than thirty (30) days nor less than ten
(10) days prior to the respective Dividend
5
<PAGE>
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.
(b) 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").
2. Dividends.
---------
(a) 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.
6
<PAGE>
(b) 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 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.
(c) 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.
(d) 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
7
<PAGE>
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 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.
3. Distributions Upon Liquidation, Dissolution or Winding Up.
---------------------------------------------------------
(a) 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.
(b) 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.
8
<PAGE>
4. Conversion Rights.
-----------------
(a) (i) 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:
<TABLE>
<CAPTION>
ADJUSTMENT PRICE(S) Optional Conversion Price(s)
<S> <C>
$10.01-12.00 $5.50
5.00-10.00 5.25
4.01-4.99 3.00
2.01-4.00 2.00
0.00-2.00 1.00
</TABLE>
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.
(ii) 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.
(b) (i) 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
9
<PAGE>
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 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.
(ii) 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
10
<PAGE>
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 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.
(c) 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.
(d) 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.
11
<PAGE>
(e) 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.
(f) If the Corporation:
(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; or
(iv) 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).
(g) 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:
12
<PAGE>
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.
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.
(h) 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.
13
<PAGE>
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 and shall become effective immediately after the record
date for the determination of stockholders entitled to receive the distribution.
(i) 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.
14
<PAGE>
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 thereafter,
or the exercise of warrants to purchase Common Stock pursuant to the Warrant
Agreement, dated as of ________, 1998, 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 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.
(j) If the Corporation issues any options, warrants (other than
warrants to purchase Common Stock issued to the initial holder of Class AA
Preferred Stock on the Initial Issue Date or thereafter or pursuant to the
Warrant Agreement, dated as of _______, 1998) 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
15
<PAGE>
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 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).
(k) For purposes of any computation respecting consideration received
pursuant to subparagraphs 4(i) and 4(j) above, the following shall apply:
(i) 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
16
<PAGE>
made for any commissions, discounts or other expenses incurred by the
Corporation for any underwriting of the issue or otherwise in connection
therewith;
(ii) 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
(iii) 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)).
(l) 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.
(m) No adjustment in the Conversion Prices need be made under this
paragraph 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.
(n) 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.
17
<PAGE>
(o) 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.
(p) If:
(i) 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;
(ii) 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
(iii) 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 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).
(q) 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.
18
<PAGE>
(r) 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.
(s) 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.
(t) 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, 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.
5. Voting Rights.
-------------
(a) 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.
(b) 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
19
<PAGE>
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.
(c) 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 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
20
<PAGE>
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 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
21
<PAGE>
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:
(i) 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 Preferred Stock;
(ii) 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;
(iii) Any increase or decrease (other than by conversion) in the
total number of authorized shares of Class AA Preferred Stock;
(iv) 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
22
<PAGE>
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;
(v) 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
(vi) 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.
6. Financial Statements.
--------------------
(a) 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 thereon by the Corporation's certified independent accountants,
(ii) all current reports required to be filed with the Commission on Form 8-K.
(b) 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.
7. 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
23
<PAGE>
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.
8. 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.
9. 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.
10. 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.
11. 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 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.
12. 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.
24
<PAGE>
13. 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]
25
<PAGE>
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: /s/ Jeffrey Shirley
------------------------------
Name: Jeffrey Shirley
Title: Vice President of Finance
ATTEST:
By: /s/ Jamie M. Pirrello
------------------------------
Name: Jamie M. Pirrello
Title: Secretary
26
<PAGE>
EXHIBIT 8
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:
1 Certain Definitions; Number of Shares and Designation.
-----------------------------------------------------
(a) 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 Directors" shall have the meaning set forth in subparagraph
6(d).
<PAGE>
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 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 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.
2
<PAGE>
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, 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
3
<PAGE>
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 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 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 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 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
4
<PAGE>
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.
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).
5
<PAGE>
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.
(b) 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").
2 Dividends.
---------
(a) 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.
(b) 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 , 1998]. 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.
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 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.
(c) 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
6
<PAGE>
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.
(d) 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 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.
3 Distributions Upon Liquidation, Dissolution or Winding Up.
---------------------------------------------------------
(a) 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.
(b) 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
7
<PAGE>
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.
4 Conversion Rights.
-----------------
(a) (i) 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).
(ii) 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 ABI 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 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 ABII Preferred Stock shall be treated for all
purposes as having become the owners of such Common Stock.
(b) (i) 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 ABII 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
8
<PAGE>
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 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.
(ii) 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
9
<PAGE>
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.
(c) 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.
(d) 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.
(e) 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 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 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.
(f) 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.
(g) 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 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
10
<PAGE>
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 ABI Preferred Stock.
(h) 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.
(i) 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 ABII Preferred
Stock who challenged such price.
(j) 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 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 ABI Preferred Stock.
5 Redemption by the Corporation.
-----------------------------
(a) 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.
(b) 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 ABI Preferred Stock at
their respective last addresses as they shall appear on the books of
11
<PAGE>
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.
(c) 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.
(d) Any funds deposited with a bank or trust company for the purpose
of redeeming Class ABI Preferred Stock shall be irrevocable except that:
(i) 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
(ii) 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 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.
12
<PAGE>
(e) No Class ABI Preferred Stock may be redeemed except with funds
legally available for the payment of the Redemption Price.
(f) 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 document entered into pursuant thereto)
thereafter be reissued as shares of any series of preferred stock other than
shares of Class ABI Preferred Stock.
6 Voting Rights.
-------------
(a) 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.
(a) 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.
(c) 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 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
13
<PAGE>
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.
(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 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. Any such successor shall hold office for the unexpired
term in respect of which such vacancy occurred. Upon the occurrence of a
Termination Event,
14
<PAGE>
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 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.
(g) 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 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.
(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 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:
15
<PAGE>
(i) 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;
(ii) 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;
(iii) Any increase or decrease (other than by redemption or
conversion) in the total number of authorized shares of Class ABI Preferred
Stock;
(iv) 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;
(v) 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;
(vi) 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.
7 Financial Statements.
--------------------
(a) 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
16
<PAGE>
$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.
(b) 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.
8 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 Corporation.
9 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.
10 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.
17
<PAGE>
11 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.
12 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.
13 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 contrary.
14 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.
18
<PAGE>
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:
19
<PAGE>
EXHIBIT 9
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:
1. Certain Definitions; Number of Shares and Designation.
-----------------------------------------------------
(a) 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 Directors" shall have the meaning set forth in subparagraph
- -------------------------
6(d).
<PAGE>
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 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 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.
2
<PAGE>
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, 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
3
<PAGE>
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 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
4
<PAGE>
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.
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.
(b) Number of Shares and Designation. _______ shares of the
--------------------------------
preferred
5
<PAGE>
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").
2. Dividends.
---------
(a) 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.
(b) 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 _______________ ___, 1998]. 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. 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.
(c) 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
6
<PAGE>
money sufficient for the payment thereof has been set apart.
(d) 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 such dividends as and when provided herein, subject only to compliance
with the Legal Funds Requirement.
3. Distributions Upon Liquidation, Dissolution or Winding Up.
---------------------------------------------------------
(a) 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.
(b) 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.
7
<PAGE>
4. Conversion Rights.
-----------------
(a) (i) 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).
(ii) 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 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.
(b) (i) 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
8
<PAGE>
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 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.
(ii) 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
9
<PAGE>
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.
(c) 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 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.
(d) 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.
(e) 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.
(f) 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.
(g) 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
10
<PAGE>
property thereafter deliverable upon the conversion of Class ABII Preferred
Stock.
(h) 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 check for any remaining fractional shares of
Common Stock as provided in subparagraph 4(c) above.
(i) 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.
(j) 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.
5. Redemption by the Corporation.
-----------------------------
(a) 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.
(b) 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
11
<PAGE>
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.
(c) 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.
(d) Any funds deposited with a bank or trust company for the
purpose of redeeming Class ABII Preferred Stock shall be irrevocable except
that:
(i) 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
(ii) 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.
(e) No Class ABII Preferred Stock may be redeemed except with
funds legally available for the payment of the Redemption Price.
(f) All shares of Class ABII Preferred Stock redeemed pursuant to
this
12
<PAGE>
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 document entered into pursuant thereto)
thereafter be reissued as shares of any series of preferred stock other than
shares of Class ABII Preferred Stock.
6. Voting Rights.
-------------
(a) 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.
(b) 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.
(c) 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.
(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
13
<PAGE>
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.
(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 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. 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.
14
<PAGE>
(f) 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.
(g) 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.
(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
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:
(i) 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
15
<PAGE>
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;
(ii) 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;
(iii) Any increase or decrease (other than by redemption or
conversion) in the total number of authorized shares of Class ABII Preferred
Stock;
(iv) 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;
(v) 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;
(vi) 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.
7. Financial Statements.
--------------------
(a) 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
16
<PAGE>
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.
(b) 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.
8. 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.
9. 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 ABII
Preferred Stock then outstanding.
10. 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.
11. 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.
17
<PAGE>
12. 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.
13. 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.
14. 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 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.
18
<PAGE>
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:
19
<PAGE>
EXHIBIT 10
STOCK PURCHASE AGREEMENT
------------------------
THIS STOCK PURCHASE AGREEMENT ("Agreement"), dated as of February 19, 1998,
by and between Prometheus Homebuilders LLC, a Delaware limited liability company
(the "Purchaser") and Edward A. Kirkpatrick (the "Shareholder").
R E C I T A L S:
A. The Purchaser has entered into an Amended and Restated Stock Purchase
Agreement dated as of September 30, 1997, and an Amended and Restated Stock
Purchase Agreement dated as of February 19, 1998 (the "Purchase Agreement") with
The Fortress Group, Inc. (the "Company") pursuant to which the Purchaser has
purchased, and expects to purchase, certain securities from the Company.
B. In connection with the Second Closing under the Purchase Agreement (as
that term is defined in the Purchase Agreement), the Purchaser desires to
purchase certain shares of the Company's common stock ("Common Stock") from the
Shareholder and certain other shareholders of the Company. The Purchaser is
concurrently entering into Stock Purchase Agreements substantially identical to
this Agreement with certain other shareholders of the Company.
FOR GOOD AND VALUABLE CONSIDERATION, the parties hereto agree as follows:
ARTICLE I
---------
PURCHASE AND SALE OF COMMON STOCK
---------------------------------
1.01 Purchase and Sale. On and subject to the terms and conditions set
-----------------
forth herein, the Purchaser agrees to acquire from the Shareholder, and the
Shareholder agrees to transfer and deliver to the Purchaser, all right, title
and interest in and to 125,000 shares of the Common Stock (the "Shares"), for
the consideration specified below in this Article I.
1.02 Consideration. At the Closing hereunder, the Purchaser shall pay to
-------------
the Shareholder $5.50 per Share in exchange for the Shares by delivery of cash
or good check.
1.03 The Closing. Unless this Agreement shall have been terminated and the
-----------
transactions contemplated hereby shall have been abandoned, the closing of the
transactions contemplated by this Agreement (the "Closing") shall take place
concurrent with the Second Closing under the Purchase Agreement at the offices
of Latham & Watkins, 885 Third Avenue, New York, New York, or at such other time
and at such other place or places as the parties hereto may agree.
1.04 Deliveries at the Closing. At the Closing, the Shareholder shall
-------------------------
deliver to the Purchaser stock certificates representing the Shares, properly
endorsed in blank or accompanied by duly executed assignment documents.
<PAGE>
ARTICLE II
----------
REPRESENTATIONS AND WARRANTIES OF
---------------------------------
THE SHAREHOLDER
---------------
The Shareholder hereby represents and warrants to the Purchaser as
follows:
2.01 Share Ownership. The Shareholder owns the Shares and is the exclusive
---------------
record and beneficial owner of such Shares. Good and valid title to the Shares,
free and clear of any claim, interest, mortgage, pledge, lien or security
interest, will be transferred to the Purchaser at the Closing.
2.02 Authorization. The Shareholder has full power and authority to enter
-------------
into this Agreement and to carry out the transactions contemplated hereby. No
other action by or on behalf of the Shareholder is necessary to authorize and
approve this Agreement and the transactions contemplated hereby, and this
Agreement has been duly executed and delivered by, and is the legal, valid and
binding obligation of, the Shareholder, enforceable against the Shareholder in
accordance with its terms.
2.03 No Violation. The Shareholder is not subject to or obligated under any
------------
law, rule or regulation of any governmental authority, or any order, writ,
injunction or decree, or any agreement, instrument, license, franchise or
permit, which would be breached or violated by the Shareholder's execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated hereby. The execution, delivery and performance of
this Agreement by the Shareholder and the consummation of the transactions
contemplated hereby do not and will not conflict with, or result in a breach or
violation of, or a default under (i) any obligation under any mortgage, lease,
agreement or instrument applicable to the Shareholder or (ii) any law, rule,
regulation, judgment, order or decree of any government, governmental or
regulatory authority or court having jurisdiction over the Shareholder.
2.04 Governmental Authorities. No consent, approval, order or authorization
------------------------
of, or registration, declaration or filing with, any governmental entity is
required by or with respect to the Shareholder in connection with the execution
and delivery of this Agreement or the consummation of the transactions
contemplated hereby, except for (i) such disclosures, filings, statements and
reports under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), as may be required in connection with this Agreement and the transactions
contemplated hereby to be filed with the Securities and Exchange Commission
("SEC") or the Nasdaq Stock Market, Inc. ("Nasdaq"), and (ii) such other
consents, authorizations, filings, approvals and registrations which if not
obtained or made would not have a material adverse effect on the Shareholder's
ability to consummate the transactions hereunder.
2.05 Knowledge. The Shareholder acknowledges that the Purchaser is an
---------
affiliate of the Company and, as a result of such status, certain information
has been made available to the Purchaser by the Company. The Company has offered
to make such information available to the Shareholder prior to any sale of the
Shares hereunder. The Shareholder confirms that he has either taken the
- 2 -
<PAGE>
opportunity to receive such information or has declined voluntarily to do so
without compulsion of any kind. The Shareholder is an "Accredited Investor" as
defined under Regulation D of the Securities Act and has such knowledge and
experience in financial and business matters as may be required to evaluate the
merits and risks of selling the Shares to the Purchaser.
ARTICLE III
-----------
REPRESENTATIONS AND WARRANTIES OF
---------------------------------
THE PURCHASER
-------------
The Purchaser represents and warrants to the Shareholder that:
3.01 Organization. The Purchaser is a limited liability company duly
------------
organized, validly existing and in good standing under the laws of the State of
Delaware.
3.02 Authorization. The Purchaser has full power and authority to enter
-------------
into this Agreement and to carry out the transactions contemplated hereby. No
other action by or on behalf of the Purchaser is necessary to authorize and
approve this Agreement and the transactions contemplated hereby, and this
Agreement has been duly executed and delivered by, and is the legal, valid and
binding obligation of, the Purchaser, enforceable against the Purchaser in
accordance with its terms.
3.03 No Violation. The Purchaser is not subject to or obligated under any
------------
law, rule or regulation of any governmental authority, or any order, writ,
injunction or decree, or any agreement, instrument, license, franchise or
permit, which would be breached or violated by the Purchaser's execution,
delivery and performance of this Agreement and consummation of the transactions
contemplated hereby. The execution, delivery and performance of this Agreement
by the Purchaser and the consummation of the transactions contemplated hereby do
not and will not conflict with, result in a breach or violation of, or a default
under (i) the Purchaser's certificate of organization or operating agreement,
(ii) any obligation under any mortgage, lease, agreement or instrument
applicable to the Purchaser or (iii) any law, rule, regulation, judgment, order
or decree of any government, governmental or regulatory authority or court
having jurisdiction over the Purchaser.
3.04 Governmental Authorities. No consent, approval, order or authorization
------------------------
of, or registration, declaration or filing with, any governmental entity is
required by or with respect to the Purchaser in connection with the execution
and delivery of this Agreement or the consummation of the transactions
contemplated hereby, except for (i) such disclosures, filings, statements and
reports under the Exchange Act as may be required in connection with this
Agreement and the transactions contemplated hereby to be filed with the SEC or
Nasdaq, and (ii) such other consents, authorizations, filings, approvals and
registrations which if not obtained or made would not have a material adverse
effect on the Purchaser's ability to consummate the transactions hereunder.
- 3 -
<PAGE>
3.05 Securities Laws. The Purchaser is acquiring the Shares for the
---------------
Purchaser's own account, for investment purposes and without any view to resell
or effect any distribution of such Shares, other than as contemplated in the
Registration Agreement or as otherwise permitted by applicable law. The
Purchaser has been fully informed as to the circumstances under which it is
required to take and hold such Shares pursuant to the requirements of the
Securities Act of 1933, as amended (the "Securities Act"), and any applicable
state securities laws. The Purchaser understand that the Shares have not been
registered under the Securities Act or any applicable state securities law and
may not be offered or sold unless registered under the Securities Act and any
applicable state law or an exemption therefrom is available. The Purchaser is an
"accredited investor" as defined under Regulation D of the Securities Act.
ARTICLE IV
----------
CONDITIONS PRECEDENT TO THE OBLIGATIONS
---------------------------------------
OF THE PURCHASER
----------------
Each and every obligation of the Purchaser under this Agreement to be
performed at or before the Closing shall be subject to the satisfaction, at or
before the Closing, of each of the following conditions, except to the extent
that the Purchaser shall have waived such satisfaction:
4.01 Representations and Warranties; Performance. Each of the
-------------------------------------------
representations and warranties made by the Shareholder herein shall be true and
correct in all material respects as of the Closing with the same effect as
though made at such time; and the Shareholder shall have performed and complied
in all material respects with all agreements, covenants and conditions required
by this Agreement to be performed and complied with by him prior to the Closing.
4.02 Closing under the Purchase Agreement. The Second Closing under the
------------------------------------
Purchase Agreement shall have occurred by January 31, 1998 or such later date as
the parties to the Purchase Agreement may agree, including, without limitation,
satisfaction or waiver of the condition set forth in Section 8.2(c) of the
Purchase Agreement.
4.03 Closings Under Substantially Identical Stock Purchase Agreements.
----------------------------------------------------------------
Closing shall have occurred under each of those certain Stock Purchase
Agreements, substantially identical to this Agreement, between the Purchaser and
each of the following individuals: J. Christopher Stuhmer; Thomas B. Buffington;
James M. Giddens; Edward A. Kirkpatrick; Lawrence J. Witek; and Lanold W.
Caldwell.
4.04 Registration Rights Agreement. The Company and the Purchaser shall
-----------------------------
have executed an amendment to the Registration Rights Agreement dated as of
September 30, 1997 (the "Registration Agreement") to include the Shares among
the Registrable Securities (as that term is defined in the Registration
Agreement).
- 4 -
<PAGE>
ARTICLE V
---------
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF
------------------------------------------
THE SHAREHOLDER
---------------
Each and every obligation of the Shareholder under this Agreement to be
performed at or before the Closing shall be subject to the satisfaction, at or
before the Closing, of each of the following conditions, except to the extent
that the Shareholder shall have waived such satisfaction:
5.01 Representations and Warranties; Performance. Each of the
-------------------------------------------
representations and warranties made by the Purchaser herein shall be true and
correct in all material respects as of the Closing with the same effect as
though made at such time; and the Purchaser shall have performed and complied in
all material respects with all agreements, covenants and conditions required by
this Agreement to be performed and complied with by it prior to the Closing.
5.02 Closing under the Purchase Agreement. The Second Closing under the
------------------------------------
Purchase Agreement shall have occurred by January 31, 1998 or such later date as
the parties to the Purchase Agreement may agree.
ARTICLE VI
----------
MISCELLANEOUS PROVISIONS
------------------------
6.01 Amendment and Modification. This Agreement may be amended, modified
--------------------------
and supplemented only by written agreement of the Shareholder and the Purchaser.
6.02 Waiver of Compliance; Consents. Any failure of the Shareholder or the
------------------------------
Purchaser to comply with any obligation, covenant, agreement or condition herein
may be waived in writing by the other party, but no waiver shall be effective
for any purpose unless it is expressed and in writing, and any such waiver or
failure to insist upon strict compliance with such obligation, covenant,
agreement or condition shall not operate as a waiver of, or estoppel with
respect to, any subsequent or other failure. Whenever this Agreement requires or
permits consent by or on behalf of any party hereto, such consent shall be
effective only if given in writing in a manner consistent with the requirements
for a waiver of compliance as set forth in this Section 6.02.
6.03 Investigations; Survival of Representations and Warranties. The
----------------------------------------------------------
respective representations and warranties of the Shareholder and the Purchaser
contained herein shall not be deemed waived or otherwise affected by any
investigation made by any party hereto. Each and every such representation and
warranty shall survive the Closing.
6.04 Notices. All notices, requests, demands and other communications
-------
required or permitted hereunder shall be in writing and shall be deemed to have
been duly given when delivered by hand, facsimile transmission or mailed first
class with postage prepaid:
- 5 -
<PAGE>
(a) If to the Shareholder, to:
Edward A. Kirkpatrick
c/o Buffington Homes
8716 Mopac Expressway, Suite 100
Austin, Texas 78759
or to such other person or address as the Shareholder shall furnish to the
Purchaser in writing pursuant to the above;
(b) If to the Purchaser, to:
Prometheus Homebuilders LLC
c/o Lazard Freres Real Estate Investors, LLC
Thirty Rockefeller Plaza, 63rd floor
New York, New York 10020
or to such other person or address as the Purchaser shall furnish to the
Shareholder in writing pursuant to the above.
6.05 Assignment. This Agreement and all of the provisions hereof shall be
----------
binding upon the parties hereto and their respective successors and assigns and
inure to the benefit of the parties hereto and their respective successors and
permitted assigns, but neither this Agreement nor any of the rights, interests
or obligations hereunder shall be assigned by any party hereto without the prior
written consent of the other party.
6.06 Counterparts. This Agreement may be executed in two fully or partially
------------
executed counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
6.07 Headings; Interpretation. The article and section headings contained
------------------------
in this Agreement are for reference purposes only and shall not affect in any
way the meaning or interpretation of this Agreement. Words of any gender used in
this Agreement shall include any other gender. Words in the singular number
shall include the plural, and words in the plural shall include the singular,
when the sense requires.
6.08 Governing Law. This Agreement shall be governed by and enforced and
-------------
construed in accordance with the laws of the State of Delaware as applied to
contracts entered into in and to be wholly performed within such State.
6.09 Entire Agreement. This Agreement embodies the entire agreement and
----------------
understanding of the parties hereto in respect of the subject matter contained
herein. There are no restrictions, promises, representations, warranties,
covenants, or undertakings with respect to the subject matter hereof, other than
those expressly set forth or referred to herein. This Agreement supersedes all
prior negotiations, agreements and understandings among the parties with respect
to such subject matter.
- 6 -
<PAGE>
6.10 Termination. This Agreement shall terminate, and the parties shall
-----------
have no further obligations hereunder, if the Purchase Agreement shall be
terminated in accordance with its terms.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement TO BE
duly executed and delivered, all as of the date first above written.
The Purchaser: PROMETHEUS Homebuilders LLC
By: LF Strategic Realty Investors II L.P.,
its member
By: Lazard Freres Real Estate
Investors L.L.C., its general partner
By: /s/ Murry N. Gunty
--------------------------------------
The Shareholder:
/s/ Edward A. Kirkpatrick
--------------------------------------
Edward A. Kirkpatrick
The Fortress Group, Inc. hereby joins this Agreement solely for the purpose
of setting forth its agreement to take the actions required by Section 4.03 of
this Agreement.
The Fortress Group, Inc.
By: /s/ James J. Martell, Jr.
--------------------------------------
- 7 -
<PAGE>
EXHIBIT 11
STOCK PURCHASE AGREEMENT
------------------------
THIS STOCK PURCHASE AGREEMENT ("Agreement"), dated as of February 19, 1998,
by and between Prometheus Homebuilders LLC, a Delaware limited liability company
(the "Purchaser") and James M. Giddens (the "Shareholder").
RECITALS:
--------
A. The Purchaser has entered into an Amended and Restated Stock Purchase
Agreement dated as of September 30, 1997, and an Amended and Restated Stock
Purchase Agreement dated as of February 19, 1998 (the "Purchase Agreement") with
The Fortress Group, Inc. (the "Company") pursuant to which the Purchaser has
purchased, and expects to purchase, certain securities from the Company.
B. In connection with the Second Closing under the Purchase Agreement (as
that term is defined in the Purchase Agreement), the Purchaser desires to
purchase certain shares of the Company's common stock ("Common Stock") from the
Shareholder and certain other shareholders of the Company. The Purchaser is
concurrently entering into Stock Purchase Agreements substantially identical to
this Agreement with certain other shareholders of the Company.
FOR GOOD AND VALUABLE CONSIDERATION, the parties hereto agree as follows:
ARTICLE I
---------
PURCHASE AND SALE OF COMMON STOCK
---------------------------------
1.01 Purchase and Sale. On and subject to the terms and conditions set
-----------------
forth herein, the Purchaser agrees to acquire from the Shareholder, and the
Shareholder agrees to transfer and deliver to the Purchaser, all right, title
and interest in and to 142,342 shares of the Common Stock (the "Shares"), for
the consideration specified below in this Article I.
1.02 Consideration. At the Closing hereunder, the Purchaser shall pay to
-------------
the Shareholder $5.50 per Share in exchange for the Shares by delivery of cash
or good check.
1.03 The Closing. Unless this Agreement shall have been terminated and the
-----------
transactions contemplated hereby shall have been abandoned, the closing of the
transactions contemplated by this Agreement (the "Closing") shall take place
concurrent with the Second Closing under the Purchase Agreement at the offices
of Latham & Watkins, 885 Third Avenue, New York, New York, or at such other time
and at such other place or places as the parties hereto may agree.
1.04 Deliveries at the Closing. At the Closing, the Shareholder shall
-------------------------
deliver to the Purchaser stock certificates representing the Shares, properly
endorsed in blank or accompanied by duly executed assignment documents.
<PAGE>
ARTICLE II
----------
REPRESENTATIONS AND WARRANTIES OF
---------------------------------
THE SHAREHOLDER
---------------
The Shareholder hereby represents and warrants to the Purchaser as follows:
2.01 Share Ownership. The Shareholder owns the Shares and is the exclusive
---------------
record and beneficial owner of such Shares. Good and valid title to the Shares,
free and clear of any claim, interest, mortgage, pledge, lien or security
interest, will be transferred to the Purchaser at the Closing.
2.02 Authorization. The Shareholder has full power and authority to enter
-------------
into this Agreement and to carry out the transactions contemplated hereby. No
other action by or on behalf of the Shareholder is necessary to authorize and
approve this Agreement and the transactions contemplated hereby, and this
Agreement has been duly executed and delivered by, and is the legal, valid and
binding obligation of, the Shareholder, enforceable against the Shareholder in
accordance with its terms.
2.03 No Violation. The Shareholder is not subject to or obligated under any
------------
law, rule or regulation of any governmental authority, or any order, writ,
injunction or decree, or any agreement, instrument, license, franchise or
permit, which would be breached or violated by the Shareholder's execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated hereby. The execution, delivery and performance of
this Agreement by the Shareholder and the consummation of the transactions
contemplated hereby do not and will not conflict with, or result in a breach or
violation of, or a default under (i) any obligation under any mortgage, lease,
agreement or instrument applicable to the Shareholder or (ii) any law, rule,
regulation, judgment, order or decree of any government, governmental or
regulatory authority or court having jurisdiction over the Shareholder.
2.04 Governmental Authorities. No consent, approval, order or authorization
------------------------
of, or registration, declaration or filing with, any governmental entity is
required by or with respect to the Shareholder in connection with the execution
and delivery of this Agreement or the consummation of the transactions
contemplated hereby, except for (i) such disclosures, filings, statements and
reports under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), as may be required in connection with this Agreement and the transactions
contemplated hereby to be filed with the Securities and Exchange Commission
("SEC") or the Nasdaq Stock Market, Inc. ("Nasdaq"), and (ii) such other
consents, authorizations, filings, approvals and registrations which if not
obtained or made would not have a material adverse effect on the Shareholder's
ability to consummate the transactions hereunder.
2.05 Knowledge. The Shareholder acknowledges that the Purchaser is an
---------
affiliate of the Company and, as a result of such status, certain information
has been made available to the Purchaser by the Company. The Company has offered
to make such information available to the Shareholder prior to any sale of the
Shares hereunder. The Shareholder confirms that he has either taken the
-2-
<PAGE>
opportunity to receive such information or has declined voluntarily to do so
without compulsion of any kind. The Shareholder is an "Accredited Investor" as
defined under Regulation D of the Securities Act and has such knowledge and
experience in financial and business matters as may be required to evaluate the
merits and risks of selling the Shares to the Purchaser.
ARTICLE III
-----------
REPRESENTATIONS AND WARRANTIES OF
---------------------------------
THE PURCHASER
-------------
The Purchaser represents and warrants to the Shareholder that:
3.01 Organization. The Purchaser is a limited liability company duly
------------
organized, validly existing and in good standing under the laws of the State of
Delaware.
3.02 Authorization. The Purchaser has full power and authority to enter
-------------
into this Agreement and to carry out the transactions contemplated hereby. No
other action by or on behalf of the Purchaser is necessary to authorize and
approve this Agreement and the transactions contemplated hereby, and this
Agreement has been duly executed and delivered by, and is the legal, valid and
binding obligation of, the Purchaser, enforceable against the Purchaser in
accordance with its terms.
3.03 No Violation. The Purchaser is not subject to or obligated under any
------------
law, rule or regulation of any governmental authority, or any order, writ,
injunction or decree, or any agreement, instrument, license, franchise or
permit, which would be breached or violated by the Purchaser's execution,
delivery and performance of this Agreement and consummation of the transactions
contemplated hereby. The execution, delivery and performance of this Agreement
by the Purchaser and the consummation of the transactions contemplated hereby do
not and will not conflict with, result in a breach or violation of, or a default
under (i) the Purchaser's certificate of organization or operating agreement,
(ii) any obligation under any mortgage, lease, agreement or instrument
applicable to the Purchaser or (iii) any law, rule, regulation, judgment, order
or decree of any government, governmental or regulatory authority or court
having jurisdiction over the Purchaser.
3.04 Governmental Authorities. No consent, approval, order or authorization
------------------------
of, or registration, declaration or filing with, any governmental entity is
required by or with respect to the Purchaser in connection with the execution
and delivery of this Agreement or the consummation of the transactions
contemplated hereby, except for (i) such disclosures, filings, statements and
reports under the Exchange Act as may be required in connection with this
Agreement and the transactions contemplated hereby to be filed with the SEC or
Nasdaq, and (ii) such other consents, authorizations, filings, approvals and
registrations which if not obtained or made would not have a material adverse
effect on the Purchaser's ability to consummate the transactions hereunder.
-3-
<PAGE>
3.05 Securities Laws. The Purchaser is acquiring the Shares for the
---------------
Purchaser's own account, for investment purposes and without any view to resell
or effect any distribution of such shares, other than as contemplated in the
Registration Agreement or as otherwise permitted by applicable law. The
Purchaser has been fully informed as to the circumstances under which it is
required to take and hold such Shares pursuant to the requirements of the
Securities Act of 1933, as amended (the "Securities Act"), and any applicable
state securities laws. The Purchaser understand that the Shares have not been
registered under the Securities Act or any applicable state securities law and
may not be offered or sold unless registered under the Securities Act and any
applicable state law or an exemption therefrom is available. The Purchaser is an
"accredited investor" as defined under Regulation D of the Securities Act.
ARTICLE IV
----------
CONDITIONS PRECEDENT TO THE OBLIGATIONS
---------------------------------------
OF THE PURCHASER
----------------
Each and every obligation of the Purchaser under this Agreement to be
performed at or before the Closing shall be subject to the satisfaction, at or
before the Closing, of each of the following conditions, except to the extent
that the Purchaser shall have waived such satisfaction:
4.01 Representations and Warranties; Performance. Each of the
-------------------------------------------
representations and warranties made by the shareholder herein shall be true and
correct in all material respects as of the Closing with the same effect as
though made at such time; and the Shareholder shall have performed and complied
in all material respects with all agreements, covenants and conditions required
by this Agreement to be performed and complied with by him prior to the Closing.
4.02 Closing under the Purchase Agreement. The Second Closing under the
------------------------------------
Purchase Agreement shall have occurred by January 31, 1998 or such later date as
the parties to the Purchase Agreement may agree, including, without limitation,
satisfaction or waiver of the condition set forth in Section 8.2(c) of the
Purchase Agreement.
4.03 Closings Under Substantially Identical Stock Purchase Agreements.
----------------------------------------------------------------
Closing shall have occurred under each of those certain Stock Purchase
Agreements, substantially identical to this Agreement, between the Purchaser and
each of the following individuals: J. Christopher Stuhmer; Thomas B. Buffington;
James M. Giddens; Edward A. Kirkpatrick; Lawrence J. Witek; and Lanold W.
Caldwell.
4.04 Registration Rights Agreement. The Company and the Purchaser shall
-----------------------------
have executed an amendment to the Registration Rights Agreement dated as of
September 30, 1997 (the "Registration Agreement") to include the Shares among
the Registrable Securities (as that term is defined in the Registration
Agreement).
-4-
<PAGE>
ARTICLE V
---------
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF
------------------------------------------
THE SHAREHOLDER
---------------
Each and every obligation of the Shareholder under this Agreement to be
performed at or before the Closing shall be subject to the satisfaction, at or
before the Closing, of each of the following conditions, except to the extent
that the Shareholder shall have waived such satisfaction:
5.01 Representations and Warranties; Performance. Each of the
-------------------------------------------
representations and warranties made by the Purchaser herein shall be true and
correct in all material respects as of the Closing with the same effect as
though made at such time; and the Purchaser shall have performed and complied in
all material respects with all agreements, covenants and conditions required by
this Agreement to be performed and complied with by it prior to the Closing.
5.02 Closing under the Purchase Agreement. The Second Closing under the
------------------------------------
Purchase Agreement shall have occurred by January 31, 1998 or such later date as
the parties to the Purchase Agreement may agree.
ARTICLE VI
----------
MISCELLANEOUS PROVISIONS
------------------------
6.01 Amendment and Modification. This Agreement may be amended, modified
--------------------------
and supplemented only by written agreement of the Shareholder and the Purchaser.
6.02 Waiver of Compliance; Consents. Any failure of the Shareholder or the
------------------------------
Purchaser to comply with any obligation, covenant, agreement or condition herein
may be waived in writing by the other party, but no waiver shall be effective
for any purpose unless it is expressed and in writing, and any such waiver or
failure to insist upon strict compliance with such obligation, covenant,
agreement or condition shall not operate as a waiver of, or estoppel with
respect to, any subsequent or other failure. Whenever this Agreement requires or
permits consent by or on behalf of any party hereto, such consent shall be
effective only if given in writing in a manner consistent with the requirements
for a waiver of compliance as set forth in this Section 6.02.
6.03 Investigations; Survival of Representations and Warranties. The
----------------------------------------------------------
respective representations and warranties of the Shareholder and the Purchaser
contained herein shall not be deemed waived or otherwise affected by any
investigation made by any party hereto. Each and every such representation and
warranty shall survive the Closing.
6.04 Notices. All notices, requests, demands and other communications
-------
required or permitted hereunder shall be in writing and shall be deemed to have
been duly given when delivered by hand, facsimile transmission or mailed first
class with postage prepaid:
-5-
<PAGE>
(a) If to the Shareholder, to:
James M. Giddens
c/o Buffington Homes
8716 Mopac Expressway, Suite 100
Austin, Texas 78759
or to such other person or address as the Shareholder shall furnish to the
Purchaser in writing pursuant to the above;
(b) If to the Purchaser, to:
Prometheus Homebuilders LLC
c/o Lazard Freres Real Estate Investors, LLC
Thirty Rockefeller Plaza, 63rd floor
New York, New York 10020
or to such other person or address as the Purchaser shall furnish to the
Shareholder in writing pursuant to the above.
6.05 Assignment. This Agreement and all of the provisions hereof shall be
----------
binding upon the parties hereto and their respective successors and assigns and
inure to the benefit of the parties hereto and their respective successors and
permitted assigns, but neither this Agreement nor any of the rights, interests
or obligations hereunder shall be assigned by any party hereto without the prior
written consent of the other party.
6.06 Counterparts. This Agreement may be executed in two fully or partially
------------
executed counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
6.07 Headings; Interpretation. The article and section headings contained
------------------------
in this Agreement are for reference purposes only and shall not affect in any
way the meaning or interpretation of this Agreement. Words of any gender used in
this Agreement shall include any other gender. Words in the singular number
shall include the plural, and words in the plural shall include the singular,
when the sense requires.
6.08 Governing Law. This Agreement shall be governed by and enforced and
-------------
construed in accordance with the laws of the State of Delaware as applied to
contracts entered into in and to be wholly performed within such State.
6.09 Entire Agreement. This Agreement embodies the entire agreement and
----------------
understanding of the parties hereto in respect of the subject matter contained
herein. There are no restrictions, promises, representations, warranties,
covenants, or undertakings with respect to the subject matter hereof, other than
those expressly set forth or referred to herein. This Agreement supersedes all
prior negotiations, agreements and understandings among the parties with respect
to such subject matter.
-6-
<PAGE>
6.10 Termination. This Agreement shall terminate, and the parties shall
-----------
have no further obligations hereunder, if the Purchase Agreement shall be
terminated in accordance with its terms.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered, all as of the date first above written.
The Purchaser: PROMETHEUS Homebuilders LLC
By: LF Strategic Realty Investors II L.P.,
its member
By: Lazard Freres Real Estate Investors L.L.C.,
its general partner
By: /s/ Murry N. Gunty
-------------------------------------------
The Shareholder: /s/ James M. Giddens
-------------------------------------------
James M. Giddens
The Fortress Group, Inc. hereby joins this Agreement solely for the purpose
of setting forth its agreement to take the actions required by Section 4.04 of
this Agreement.
The Fortress Group, Inc.
By: /s/ James. J. Martell, Jr.
-------------------------------------------
-7-
<PAGE>
EXHIBIT 12
STOCK PURCHASE AGREEMENT
------------------------
THIS STOCK PURCHASE AGREEMENT ("Agreement"), dated as of February 19, 1998,
by and between Prometheus Homebuilders LLC, a Delaware limited liability company
(the "Purchaser") and J. Christopher Stuhmer (the "Shareholder").
R E C I T A L S:
A. The Purchaser has entered into an Amended and Restated Stock Purchase
Agreement dated as of September 30, 1997, and an Amended and Restated Stock
Purchase Agreement dated as of February 19, 1998 (the "Purchase Agreement") with
The Fortress Group, Inc. (the "Company") pursuant to which the Purchaser has
purchased, and expects to purchase, certain securities from the Company.
B. In connection with the Second Closing under the Purchase Agreement (as
that term is defined in the Purchase Agreement), the Purchaser desires to
purchase certain shares of the Company's common stock ("Common Stock") from the
Shareholder and certain other shareholders of the Company. The Purchaser is
concurrently entering into Stock Purchase Agreements substantially identical to
this Agreement with certain other shareholders of the Company.
FOR GOOD AND VALUABLE CONSIDERATION, the parties hereto agree as follows:
ARTICLE I
---------
PURCHASE AND SALE OF COMMON STOCK
---------------------------------
1.01 Purchase and Sale. On and subject to the terms and conditions set
-----------------
forth herein, the Purchaser agrees to acquire from the Shareholder, and the
Shareholder agrees to transfer and deliver to the Purchaser, all right, title
and interest in and to 181,818 shares of the Common Stock (the "Shares"), for
the consideration specified below in this Article I.
1.02 Consideration. At the Closing hereunder, the Purchaser shall pay to
-------------
the Shareholder $5.50 per Share in exchange for the Shares by delivery of cash
or good check.
1.03 The Closing. Unless this Agreement shall have been terminated and the
-----------
transactions contemplated hereby shall have been abandoned, the closing of the
transactions contemplated by this Agreement (the "Closing") shall take place
concurrent with the Second Closing under the Purchase Agreement at the offices
of Latham & Watkins,885 Third Avenue, New York, New York, or at such other time
and at such other place or places as the parties hereto may agree.
1.04 Deliveries at the Closing. At the Closing, the Shareholder shall
-------------------------
deliver to the Purchaser stock certificates representing the Shares, properly
endorsed in blank or accompanied by duly executed assignment documents.
<PAGE>
ARTICLE II
----------
REPRESENTATIONS AND WARRANTIES OF
---------------------------------
THE SHAREHOLDER
---------------
The Shareholder hereby represents and warrants to the Purchaser as follows:
2.01 Share Ownership. The Shareholder owns the Shares and is the exclusive
---------------
record and beneficial owner of such Shares. Good and valid title to the Shares,
free and clear of any claim, interest, mortgage, pledge, lien or security
interest, will be transferred to the Purchaser at the Closing.
2.02 Authorization. The Shareholder has full power and authority to enter
-------------
into this Agreement and to carry out the transactions contemplated hereby. No
other action by or on behalf of the Shareholder is necessary to authorize and
approve this Agreement and the transactions contemplated hereby, and this
Agreement has been duly executed and delivered by, and is the legal, valid and
binding obligation of, the Shareholder, enforceable against the Shareholder in
accordance with its terms.
2.03 No Violation. The Shareholder is not subject to or obligated under
------------
any law, rule or regulation of any governmental authority, or any order, writ,
injunction or decree, or any agreement, instrument, license, franchise or
permit, which would be breached or violated by the Shareholder's execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated hereby. The execution, delivery and performance of
this Agreement by the Shareholder and the consummation of the transactions
contemplated hereby do not and will not conflict with, or result in a breach or
violation of, or a default under (i) any obligation under any mortgage, lease,
agreement or instrument applicable to the Shareholder or (ii) any law, rule,
regulation, judgment, order or decree of any government, governmental or
regulatory authority or court having jurisdiction over the Shareholder.
2.04 Governmental Authorities. No consent, approval, order or
------------------------
authorization of, or registration, declaration or filing with, any governmental
entity is required by or with respect to the Shareholder in connection with the
execution and delivery of this Agreement or the consummation of the transactions
contemplated hereby, except for (i) such disclosures, filings, statements and
reports under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), as may be required in connection with this Agreement and the transactions
contemplated hereby to be filed with the Securities and Exchange Commission
("SEC") or the Nasdaq Stock Market, Inc. ("Nasdaq"), and (ii) such other
consents, authorizations, filings, approvals and registrations which if not
obtained or made would not have a material adverse effect on the Shareholder's
ability to consummate the transactions hereunder.
2.05 Knowledge. The Shareholder acknowledges that the Purchaser is an
---------
affiliate of the Company and, as a result of such status, certain information
has been made available to the Purchaser by the Company. The Company has offered
to make such information available to the Shareholder
-2-
<PAGE>
prior to any sale of the Shares hereunder. The Shareholder confirms that he has
either taken the opportunity to receive such information or has declined
voluntarily to do so without compulsion of any kind. The Shareholder is an
"Accredited Investor" as defined under Regulation D of the Securities Act and
has such knowledge and experience in financial and business matters as may be
required to evaluate the merits and risks of selling the Shares to the
Purchaser.
ARTICLE III
-----------
REPRESENTATIONS AND WARRANTIES OF
---------------------------------
THE PURCHASER
-------------
The Purchaser represents and warrants to the Shareholder that:
3.01 Organization. The Purchaser is a limited liability company duly
------------
organized, validly existing and in good standing under the laws of the State of
Delaware.
3.02 Authorization. The Purchaser has full power and authority to enter
-------------
into this Agreement and to carry out the transactions contemplated hereby. No
other action by or on behalf of the Purchaser is necessary to authorize and
approve this Agreement and the transactions contemplated hereby, and this
Agreement has been duly executed and delivered by, and is the legal, valid and
binding obligation of, the Purchaser, enforceable against the Purchaser in
accordance with its terms.
3.03 No Violation. The Purchaser is not subject to or obligated under any
------------
law, rule or regulation of any governmental authority, or any order, writ,
injunction or decree, or any agreement, instrument, license, franchise or
permit, which would be breached or violated by the Purchaser's execution,
delivery and performance of this Agreement and consummation of the transactions
contemplated hereby. The execution, delivery and performance of this Agreement
by the Purchaser and the consummation of the transactions contemplated hereby do
not and will not conflict with, result in a breach or violation of, or a default
under (i) the Purchaser's certificate of organization or operating agreement,
(ii) any obligation under any mortgage, lease, agreement or instrument
applicable to the Purchaser or (iii) any law, rule, regulation, judgment, order
or decree of any government, governmental or regulatory authority or court
having jurisdiction over the Purchaser.
3.04 Governmental Authorities. No consent, approval, order or
------------------------
authorization of, or registration, declaration or filing with, any governmental
entity is required by or with respect to the Purchaser in connection with the
execution and delivery of this Agreement or the consummation of the transactions
contemplated hereby, except for (i) such disclosures, filings, statements and
reports under the Exchange Act as may be required in connection with this
Agreement and the transactions contemplated hereby to be filed with the SEC or
Nasdaq, and (ii) such other consents, authorizations, filings, approvals and
registrations which if not obtained or made would not have a material adverse
effect on the Purchaser's ability to consummate the transactions hereunder.
-3-
<PAGE>
3.05 Securities Laws. The Purchaser is acquiring the Shares for the
---------------
Purchaser's own account, for investment purposes and without any view to resell
or effect any distribution of such Shares, other than as contemplated in the
Registration Agreement or as otherwise permitted by applicable law. The
Purchaser has been fully informed as to the circumstances under which it is
required to take and hold such Shares pursuant to the requirements of the
Securities Act of 1933, as amended (the "Securities Act"), and any applicable
state securities laws. The Purchaser understand that the Shares have not been
registered under the Securities Act or any applicable state securities law and
may not be offered or sold unless registered under the Securities Act and any
applicable state law or an exemption therefrom is available. The Purchaser is an
"accredited investor" as defined under Regulation D of the Securities Act.
ARTICLE IV
----------
CONDITIONS PRECEDENT TO THE OBLIGATIONS
---------------------------------------
OF THE PURCHASER
----------------
Each and every obligation of the Purchaser under this Agreement to be
performed at or before the Closing shall be subject to the satisfaction, at or
before the Closing, of each of the following conditions, except to the extent
that the Purchaser shall have waived such satisfaction:
4.01 Representations and Warranties; Performance. Each of the
-------------------------------------------
representations and warranties made by the Shareholder herein shall be true and
correct in all material respects as of the Closing with the same effect as
though made at such time; and the Shareholder shall have performed and complied
in all material respects with all agreements, covenants and conditions required
by this Agreement to be performed and complied with by him prior to the Closing.
4.02 Closing under the Purchase Agreement. The Second Closing under the
------------------------------------
Purchase Agreement shall have occurred by January 31, 1998 or such later date as
the parties to the Purchase Agreement may agree, including, without limitation,
satisfaction or waiver of the condition set forth in Section 8.2(c) of the
Purchase Agreement.
4.03 Closings Under Substantially Identical Stock Purchase Agreements.
----------------------------------------------------------------
Closing shall have occurred under each of those certain Stock Purchase
Agreements, substantially identical to this Agreement, between the Purchaser and
each of the following individuals: J. Christopher Stuhmer; Thomas B. Buffington;
James M. Giddens; Edward A. Kirkpatrick; Lawrence J. Witek; and Lanold W.
Caldwell.
4.04 Registration Rights Agreement. The Company and the Purchaser shall
-----------------------------
have executed an amendment to the Registration Rights Agreement dated as of
September 30, 1997 (the "Registration Agreement") to include the Shares among
the Registrable Securities (as that term is defined in the Registration
Agreement).
-4-
<PAGE>
ARTICLE V
---------
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF
------------------------------------------
THE SHAREHOLDER
---------------
Each and every obligation of the Shareholder under this Agreement to be
performed at or before the Closing shall be subject to the satisfaction, at or
before the Closing, of each of the following conditions, except to the extent
that the Shareholder shall have waived such satisfaction:
5.01 Representations and Warranties; Performance. Each of the
-------------------------------------------
representations and warranties made by the Purchaser herein shall be true and
correct in all material respects as of the Closing with the same effect as
though made at such time; and the Purchaser shall have performed and complied in
all material respects with all agreements, covenants and conditions required by
this Agreement to be performed and complied with by it prior to the Closing.
5.02 Closing under the Purchase Agreement. The Second Closing under the
------------------------------------
Purchase Agreement shall have occurred by January 31, 1998 or such later date as
the parties to the Purchase Agreement may agree.
ARTICLE VI
----------
MISCELLANEOUS PROVISIONS
------------------------
6.01 Amendment and Modification. This Agreement may be amended, modified
--------------------------
and supplemented only by written agreement of the Shareholder and the Purchaser.
6.02 Waiver of Compliance; Consents. Any failure of the Shareholder or the
------------------------------
Purchaser to comply with any obligation, covenant, agreement or condition herein
may be waived in writing by the other party, but no waiver shall be effective
for any purpose unless it is expressed and in writing, and any such waiver or
failure to insist upon strict compliance with such obligation, covenant,
agreement or condition shall not operate as a waiver of, or estoppel with
respect to, any subsequent or other failure. Whenever this Agreement requires or
permits consent by or on behalf of any party hereto, such consent shall be
effective only if given in writing in a manner consistent with the requirements
for a waiver of compliance as set forth in this Section 6.02.
6.03 Investigations; Survival of Representations and Warranties. The
-----------------------------------------------------------
respective representations and warranties of the Shareholder and the Purchaser
contained herein shall not be deemed waived or otherwise affected by any
investigation made by any party hereto. Each and every such representation and
warranty shall survive the Closing.
6.04 Notices. All notices, requests, demands and other communications
-------
required or permitted hereunder shall be in writing and shall be deemed to have
been duly given when delivered by hand, facsimile transmission or mailed first
class with postage prepaid:
-5-
<PAGE>
(a) If to the Shareholder, to:
J. Christopher Stuhmer
c/o Christopher Homes
9500 Hillwood Drive,Suite 200
Las Vegas, Nevada 89134
or to such other person or address as the Shareholder shall furnish to the
Purchaser in writing pursuant to the above;
(b) If to the Purchaser, to:
Prometheus Homebuilders LLC
c/o Lazard Freres Real Estate Investors, LLC
Thirty Rockefeller Plaza, 63rd floor
New York, New York 10020
or to such other person or address as the Purchaser shall furnish to the
Shareholder in writing pursuant to the above.
6.05 Assignment. This Agreement and all of the provisions hereof shall be
----------
binding upon the parties hereto and their respective successors and assigns and
inure to the benefit of the parties hereto and their respective successors and
permitted assigns, but neither this Agreement nor any of the rights, interests
or obligations hereunder shall be assigned by any party hereto without the prior
written consent of the other party.
6.06 Counterparts. This Agreement may be executed in two fully or
------------
partially executed counterparts, each of which shall be deemed an original, but
all of which together shall constitute one and the same instrument.
6.07 Headings; Interpretation. The article and section headings contained
------------------------
in this Agreement are for reference purposes only and shall not affect in any
way the meaning or interpretation of this Agreement. Words of any gender used in
this Agreement shall include any other gender. Words in the singular number
shall include the plural, and words in the plural shall include the singular,
when the sense requires.
6.08 Governing Law. This Agreement shall be governed by and enforced and
-------------
construed in accordance with the laws of the State of Delaware as applied to
contracts entered into in and to be wholly performed within such State.
6.09 Entire Agreement. This Agreement embodies the entire agreement and
----------------
understanding of the parties hereto in respect of the subject matter contained
herein. There are no restrictions, promises, representations, warranties,
covenants, or undertakings with respect to the subject matter hereof, other than
those expressly set forth or referred to herein. This Agreement supersedes all
prior negotiations, agreements and understandings among the parties with respect
to such subject matter.
-6-
<PAGE>
6.10 Termination. This Agreement shall terminate, and the parties shall
-----------
have no further obligations hereunder, if the Purchase Agreement shall be
terminated in accordance with its terms.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered, all as of the date first above written.
The Purchaser: PROMETHEUS Homebuilders LLC
By: LF Strategic Realty Investors II L.P.,
its member
By: Lazard Freres Real Estate Investors
L.L.C., its general partner
By: /s/ Murry N. Gunty
----------------------------------
The Shareholder: /s/ J. Christopher Stuhmer
----------------------------------
J. Christopher Stuhmer
The Fortress Group, Inc. hereby joins this Agreement solely for the purpose
of setting forth its agreement to take the actions required by Section 4.04 of
this Agreement.
The Fortress Group, Inc.
By: /s/ James J. Martell, Jr.
---------------------------------
-7-
<PAGE>
EXHIBIT 13
STOCK PURCHASE AGREEMENT
------------------------
THIS STOCK PURCHASE AGREEMENT ("Agreement"), dated as of February 19, 1998,
by and between Prometheus Homebuilders LLC, a Delaware limited liability company
(the "Purchaser") and Lanold W. Caldwell (the "Shareholder").
R E C I T A L S:
A. The Purchaser has entered into an Amended and Restated Stock Purchase
Agreement dated as of September 30, 1997, and an Amended and Restated Stock
Purchase Agreement dated as of February 19, 1998 (the "Purchase Agreement") with
The Fortress Group, Inc. (the "Company") pursuant to which the Purchaser has
purchased, and expects to purchase, certain securities from the Company.
B. In connection with the Second Closing under the Purchase Agreement (as
that term is defined in the Purchase Agreement), the Purchaser desires to
purchase certain shares of the Company's common stock ("Common Stock") from the
Shareholder and certain other shareholders of the Company. The Purchaser is
concurrently entering into Stock Purchase Agreements substantially identical to
this Agreement with certain other shareholders of the Company.
FOR GOOD AND VALUABLE CONSIDERATION, the parties hereto agree as follows:
ARTICLE I
---------
PURCHASE AND SALE OF COMMON STOCK
---------------------------------
1.01 Purchase and Sale. On and subject to the terms and conditions set
-----------------
forth herein, the Purchaser agrees to acquire from the Shareholder, and the
Shareholder agrees to transfer and deliver to the Purchaser, all right, title
and interest in and to 75,000 shares of the Common Stock (the "Shares"), for the
consideration specified below in this Article I.
1.02 Consideration. At the Closing hereunder, the Purchaser shall pay to
-------------
the Shareholder $5.50 per Share in exchange for the Shares by delivery of cash
or good check.
1.03 The Closing. Unless this Agreement shall have been terminated and the
-----------
transactions contemplated hereby shall have been abandoned, the closing of the
transactions contemplated by this Agreement (the "Closing") shall take place
concurrent with the Second Closing under the Purchase Agreement at the offices
of Latham & Watkins, 885 Third Avenue, New York, New York, or at such other time
and at such other place or places as the parties hereto may agree.
1.04 Deliveries at the Closing. At the Closing, the Shareholder shall
-------------------------
deliver to the Purchaser stock certificates representing the Shares, properly
endorsed in blank or accompanied by duly executed assignment documents.
<PAGE>
ARTICLE II
----------
REPRESENTATIONS AND WARRANTIES OF
---------------------------------
THE SHAREHOLDER
---------------
The Shareholder hereby represents and warrants to the Purchaser as follows:
2.01 Share Ownership. The Shareholder owns the Shares and is the exclusive
---------------
record and beneficial owner of such Shares. Good and valid title to the Shares,
free and clear of any claim, interest, mortgage, pledge, lien or security
interest, will be transferred to the Purchaser at the Closing.
2.02 Authorization. The Shareholder has full power and authority to enter
-------------
into this Agreement and to carry out the transactions contemplated hereby. No
other action by or on behalf of the Shareholder is necessary to authorize and
approve this Agreement and the transactions contemplated hereby, and this
Agreement has been duly executed and delivered by, and is the legal, valid and
binding obligation of, the Shareholder, enforceable against the Shareholder in
accordance with its terms.
2.03 No Violation. The Shareholder is not subject to or obligated under any
------------
law, rule or regulation of any governmental authority, or any order, writ,
injunction or decree, or any agreement, instrument, license, franchise or
permit, which would be breached or violated by the Shareholder's execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated hereby. The execution, delivery and performance of
this Agreement by the Shareholder and the consummation of the transactions
contemplated hereby do not and will not conflict with, or result in a breach or
violation of, or a default under (i) any obligation under any mortgage, lease,
agreement or instrument applicable to the Shareholder or (ii) any law, rule,
regulation, judgment, order or decree of any government, governmental or
regulatory authority or court having jurisdiction over the Shareholder.
2.04 Governmental Authorities. No consent, approval, order or authorization
------------------------
of, or registration, declaration or filing with, any governmental entity is
required by or with respect to the Shareholder in connection with the execution
and delivery of this Agreement or the consummation of the transactions
contemplated hereby, except for (i) such disclosures, filings, statements and
reports under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), as may be required in connection with this Agreement and the transactions
contemplated hereby to be filed with the Securities and Exchange Commission
("SEC") or the Nasdaq Stock Market, Inc. ("Nasdaq"), and (ii) such other
consents, authorizations, filings, approvals and registrations which if not
obtained or made would not have a material adverse effect on the Shareholder's
ability to consummate the transactions hereunder.
2.05 Knowledge. The Shareholder acknowledges that the Purchaser is an
---------
affiliate of the Company and, as a result of such status, certain information
has been made available to the Purchaser by the Company. The Company has offered
to make such information available to the Shareholder prior to any sale of the
Shares hereunder. The Shareholder confirms that he has either taken the
-2-
<PAGE>
opportunity to receive such information or has declined voluntarily to do so
without compulsion of any kind. The Shareholder is an "Accredited Investor" as
defined under Regulation D of the Securities Act and has such knowledge and
experience in financial and business matters as may be required to evaluate the
merits and risks of selling the Shares to the Purchaser.
ARTICLE III
-----------
REPRESENTATIONS AND WARRANTIES OF
---------------------------------
THE PURCHASER
-------------
The Purchaser represents and warrants to the Shareholder that:
3.01 Organization. The Purchaser is a limited liability company duly
------------
organized, validly existing and in good standing under the laws of the State of
Delaware.
3.02 Authorization. The Purchaser has full power and authority to enter
-------------
into this Agreement and to carry out the transactions contemplated hereby. No
other action by or on behalf of the Purchaser is necessary to authorize and
approve this Agreement and the transactions contemplated hereby, and this
Agreement has been duly executed and delivered by, and is the legal, valid and
binding obligation of, the Purchaser, enforceable against the Purchaser in
accordance with its terms.
3.03 No Violation. The Purchaser is not subject to or obligated under any
------------
law, rule or regulation of any governmental authority, or any order, writ,
injunction or decree, or any agreement, instrument, license, franchise or
permit, which would be breached or violated by the Purchaser's execution,
delivery and performance of this Agreement and consummation of the transactions
contemplated hereby. The execution, delivery and performance of this Agreement
by the Purchaser and the consummation of the transactions contemplated hereby do
not and will not conflict with, result in a breach or violation of, or a default
under (i) the Purchaser's certificate of organization or operating agreement,
(ii) any obligation under any mortgage, lease, agreement or instrument
applicable to the Purchaser or (iii) any law, rule, regulation, judgment, order
or decree of any government, governmental or regulatory authority or court
having jurisdiction over the Purchaser.
3.04 Governmental Authorities. No consent, approval, order or authorization
------------------------
of, or registration, declaration or filing with, any governmental entity is
required by or with respect to the Purchaser in connection with the execution
and delivery of this Agreement or the consummation of the transactions
contemplated hereby, except for (i) such disclosures, filings, statements and
reports under the Exchange Act as may be required in connection with this
Agreement and the transactions contemplated hereby to be filed with the SEC or
Nasdaq, and (ii) such other consents, authorizations, filings, approvals and
registrations which if not obtained or made would not have a material adverse
effect on the Purchaser's ability to consummate the transactions hereunder.
-3-
<PAGE>
3.05 Securities Laws. The Purchaser is acquiring the Shares for the
---------------
Purchaser's own account, for investment purposes and without any view to resell
or effect any distribution of such Shares, other than as contemplated in the
Registration Agreement or as otherwise permitted by applicable law. The
Purchaser has been fully informed as to the circumstances under which it is
required to take and hold such Shares pursuant to the requirements of the
Securities Act of 1933, as amended (the "Securities Act"), and any applicable
state securities laws. The Purchaser understands that the Shares have not been
registered under the Securities Act or any applicable state securities law and
may not be offered or sold unless registered under the Securities Act and any
applicable state law or an exemption therefrom is available. The Purchaser is an
"accredited investor" as defined under Regulation D of the Securities Act.
ARTICLE IV
----------
CONDITIONS PRECEDENT TO THE OBLIGATIONS
---------------------------------------
OF THE PURCHASER
----------------
Each and every obligation of the Purchaser under this Agreement to be
performed at or before the Closing shall be subject to the satisfaction, at or
before the Closing, of each of the following conditions, except to the extent
that the Purchaser shall have waived such satisfaction:
4.01 Representations and Warranties; Performance. Each of the
-------------------------------------------
representations and warranties made by the Shareholder herein shall be true and
correct in all material respects as of the Closing with the same effect as
though made at such time; and the Shareholder shall have performed and complied
in all material respects with all agreements, covenants and conditions required
by this Agreement to be performed and complied with by him prior to the Closing.
4.02 Closing under the Purchase Agreement. The Second Closing under the
------------------------------------
Purchase Agreement shall have occurred by January 31, 1998 or such later date as
the parties to the Purchase Agreement may agree, including, without limitation,
satisfaction or waiver of the condition set forth in Section 8.2(c) of the
Purchase Agreement.
4.03 Closings Under Substantially Identical Stock Purchase Agreements.
----------------------------------------------------------------
Closing shall have occurred under each of those certain Stock Purchase
Agreements, substantially identical to this Agreement, between the Purchaser and
each of the following individuals: J. Christopher Stuhmer, Thomas B. Buffington;
James M. Giddens; Edward A. Kirkpatrick; Lawrence J. Witek; and Lanold W.
Caldwell.
4.04 Registration Rights Agreement. The Company and the Purchaser shall
-----------------------------
have executed an amendment to the Registration Rights Agreement dated as of
September 30, 1997 (the "Registration Agreement") to include the Shares among
the Registrable Securities (as that term is defined in the Registration
Agreement).
-4-
<PAGE>
ARTICLE V
---------
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF
------------------------------------------
THE SHAREHOLDER
---------------
Each and every obligation of the Shareholder under this Agreement to be
performed at or before the Closing shall be subject to the satisfaction, at or
before the Closing, of each of the following conditions, except to the extent
that the Shareholder shall have waived such satisfaction:
5.01 Representations and Warranties; Performance. Each of the
-------------------------------------------
representations and warranties made by the Purchaser herein shall be true and
correct in all material respects as of the Closing with the same effect as
though made at such time; and the Purchaser shall have performed and complied in
all material respects with all agreements, covenants and conditions required by
this Agreement to be performed and complied with by it prior to the Closing.
5.02 Closing under the Purchase Agreement. The Second Closing under the
------------------------------------
Purchase Agreement shall have occurred by January 31, 1998 or such later date as
the parties to the Purchase Agreement may agree.
ARTICLE VI
----------
MISCELLANEOUS PROVISIONS
------------------------
6.01 Amendment and Modification. This Agreement may be amended, modified
--------------------------
and supplemented only by written agreement of the Shareholder and the Purchaser.
6.02 Waiver of Compliance; Consents. Any failure of the Shareholder or the
------------------------------
Purchaser to comply with any obligation, covenant, agreement or condition herein
may be waived in writing by the other party, but no waiver shall be effective
for any purpose unless it is expressed and in writing, and any such waiver or
failure to insist upon strict compliance with such obligation, covenant,
agreement or condition shall not operate as a waiver of, or estoppel with
respect to, any subsequent or other failure. Whenever this Agreement requires or
permits consent by or on behalf of any party hereto, such consent shall be
effective only if given in writing in a manner consistent with the requirements
for a waiver of compliance as set forth in this Section 6.02.
6.03 Investigations; Survival of Representations and Warranties. The
----------------------------------------------------------
respective representations and warranties of the Shareholder and the Purchaser
contained herein shall not be deemed waived or otherwise affected by any
investigation made by any party hereto. Each and every such representation and
warranty shall survive the Closing.
6.04 Notices. All notices, requests, demands and other communications
required or permitted hereunder shall be in writing and shall be deemed to have
been duly given when delivered by hand, facsimile transmission or mailed first
class with postage prepaid:
-5-
<PAGE>
(a) If to the Shareholder, to:
Lanold W. Caldwell
c/o Sunstar Homes
200 Commonwealth Court, #200
Cary, North Carolina 27511
or to such other person or address as the Shareholder shall furnish to
the Purchaser in writing pursuant to the above;
(b) If to the Purchaser, to:
Prometheus Homebuilders LLC
c/o Lazard Freres Real Estate Investors, LLC
Thirty Rockefeller Plaza, 63rd floor
New York, New York 10020
or to such other person or address as the Purchaser shall furnish to
the Shareholder in writing pursuant to the above.
6.05 Assignment. This Agreement and all of the provisions hereof shall be
----------
binding upon the parties hereto and their respective successors and assigns and
inure to the benefit of the parties hereto and their respective successors and
permitted assigns, but neither this Agreement nor any of the rights, interests
or obligations hereunder shall be assigned by any party hereto without the prior
written consent of the other party.
6.06 Counterparts. This Agreement may be executed in two fully or partially
------------
executed counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
6.07 Headings; Interpretation. The article and section headings contained
------------------------
in this Agreement are for reference purposes only and shall not affect in any
way the meaning or interpretation of this Agreement. Words of any gender used in
this Agreement shall include any other gender. Words in the singular number
shall include the plural, and words in the plural shall include the singular,
when the sense requires.
6.08 Governing Law. This Agreement shall be governed by and enforced and
-------------
construed in accordance with the laws of the State of Delaware as applied to
contracts entered into in and to be wholly performed within such State.
6.09 Entire Agreement. This Agreement embodies the entire agreement and
----------------
understanding of the parties hereto in respect of the subject matter contained
herein. There are no restrictions, promises, representations, warranties,
covenants, or undertakings with respect to the subject matter hereof, other than
those expressly set forth or referred to herein. This Agreement supersedes all
prior negotiations, agreements and understandings among the parties with respect
to such subject matter.
-6-
<PAGE>
6.10 Termination. This Agreement shall terminate, and the parties shall
have no further obligations hereunder, if the Purchase Agreement shall be
terminated in accordance with its terms.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered, all as of the date first above written.
The Purchaser: PROMETHEUS Homebuilders LLC
By: LF Strategic Realty Investors II L.P.,
its member
By: Lazard Freres Real Estate
Investors L.L.C., its general partner
By: /s/ Murry N. Gunty
--------------------------------------
The Shareholder:
/s/ Lanold W. Caldwell
--------------------------------------
Lanold W. Caldwell
The Fortress Group, Inc. hereby joins this Agreement solely for the purpose
of setting forth its agreement to take the actions required by Section 4.04 of
this Agreement.
The Fortress Group, Inc.
By: /s/ James J. Martell, Jr.
--------------------------------------
-7-
<PAGE>
EXHIBIT 14
STOCK PURCHASE AGREEMENT
------------------------
THIS STOCK PURCHASE AGREEMENT ("Agreement"), dated as of February 19, 1998,
by and between Prometheus Homebuilders LLC, a Delaware limited liability company
(the "Purchaser") and Lawrence J. Witek (the "Shareholder").
R E C I T A L S :
A. The Purchaser has entered into an Amended and Restated Stock Purchase
Agreement dated as of September 30, 1997, and an Amended and Restated Stock
Purchase Agreement dated as of February 19, 1998 (the "Purchase Agreement") with
The Fortress Group, Inc. (the "Company") pursuant to which the Purchaser has
purchased, and expects to purchase, certain securities from the Company.
B. In connection with the Second Closing under the Purchase Agreement (as
that term is defined in the Purchase Agreement), the Purchaser desires to
purchase certain shares of the Company's common stock ("Common Stock") from the
Shareholder and certain other shareholders of the Company. The Purchaser is
concurrently entering into Stock Purchase Agreements substantially identical to
this Agreement with certain other shareholders of the Company.
FOR GOOD AND VALUABLE CONSIDERATION, the parties hereto agree as follows:
ARTICLE I
---------
PURCHASE AND SALE OF COMMON STOCK
---------------------------------
1.01 Purchase and Sale. On and subject to the terms and conditions set
-----------------
forth herein, the Purchaser agrees to acquire from the Shareholder, and the
Shareholder agrees to transfer and deliver to the Purchaser, all right, title
and interest in and to 90,000 shares of the Common Stock (the "Shares"), for the
consideration specified below in this Article I.
1.02 Consideration. At the Closing hereunder, the Purchaser shall pay to
-------------
the Shareholder $5.50 per Share in exchange for the Shares by delivery of cash
or good check.
1.03 The Closing. Unless this Agreement shall have been terminated and the
-----------
transactions contemplated hereby shall have been abandoned, the closing of the
transactions contemplated by this Agreement (the "Closing") shall take place
concurrent with the Second Closing under the Purchase Agreement at the offices
of Latham & Watkins, 885 Third Avenue, New York, New York, or at such other time
and at such other place or places as the parties hereto may agree.
1.04 Deliveries at the Closing. At the Closing, the Shareholder shall
-------------------------
deliver to the Purchaser stock certificates representing the Shares, properly
endorsed in blank or accompanied by duly executed assignment documents.
<PAGE>
ARTICLE II
----------
REPRESENTATIONS AND WARRANTIES OF
---------------------------------
THE SHAREHOLDER
---------------
The Shareholder hereby represents and warrants to the Purchaser as follows:
2.01 Share Ownership. The Shareholder owns the Shares and is the exclusive
---------------
record and beneficial owner of such Shares. Good and valid title to the Shares,
free and clear of any claim, interest, mortgage, pledge, lien or security
interest, will be transferred to the Purchaser at the Closing.
2.02 Authorization. The Shareholder has full power and authority to enter
-------------
into this Agreement and to carry out the transactions contemplated hereby. No
other action by or on behalf of the Shareholder is necessary to authorize and
approve this Agreement and the transactions contemplated hereby, and this
Agreement has been duly executed and delivered by, and is the legal, valid and
binding obligation of, the Shareholder, enforceable against the Shareholder in
accordance with its terms.
2.03 No Violation. The Shareholder is not subject to or obligated under any
------------
law, rule or regulation of any governmental authority, or any order, writ,
injunction or decree, or any agreement, instrument, license, franchise or
permit, which would be breached or violated by the Shareholder's execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated hereby. The execution, delivery and performance of
this Agreement by the Shareholder and the consummation of the transactions
contemplated hereby do not and will not conflict with, or result in a breach or
violation of, or a default under (i) any obligation under any mortgage, lease,
agreement or instrument applicable to the Shareholder or (ii) any law, rule,
regulation, judgment, order or decree of any government, governmental or
regulatory authority or court having jurisdiction over the Shareholder.
2.04 Governmental Authorities. No consent, approval, order or authorization
------------------------
of, or registration, declaration or filing with, any governmental entity is
required by or with respect to the Shareholder in connection with the execution
and delivery of this Agreement or the consummation of the transactions
contemplated hereby, except for (i) such disclosures, filings, statements and
reports under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), as may be required in connection with this Agreement and the transactions
contemplated hereby to be filed with the Securities and Exchange Commission
("SEC") or the Nasdaq Stock Market, Inc. ("Nasdaq"), and (ii) such other
consents, authorizations, filings, approvals and registrations which if not
obtained or made would not have a material adverse effect on the Shareholder's
ability to consummate the transactions hereunder.
2.05 Knowledge. The Shareholder acknowledges that the Purchaser is an
---------
affiliate of the Company and, as a result of such status, certain information
has been made available to the Purchaser by the Company. The Company has offered
to make such information available to the Shareholder prior to any sale of the
Shares hereunder. The Shareholder confirms that he has either taken the
-2-
<PAGE>
opportunity to receive such information or has declined voluntarily to do so
without compulsion of any kind. The Shareholder is an "Accredited Investor" as
defined under Regulation D of the Securities Act and has such knowledge and
experience in financial and business matters as may be required to evaluate the
merits and risks of selling the Shares to the Purchaser.
ARTICLE III
-----------
REPRESENTATIONS AND WARRANTIES OF
---------------------------------
THE PURCHASER
-------------
The Purchaser represents and warrants to the Shareholder that:
3.01 Organization. The Purchaser is a limited liability company duly
------------
organized, validly existing and in good standing under the laws of the State of
Delaware.
3.02 Authorization. The Purchaser has full power and authority to enter
-------------
into this Agreement and to carry out the transactions contemplated hereby. No
other action by or on behalf of the Purchaser is necessary to authorize and
approve this Agreement and the transactions contemplated hereby, and this
Agreement has been duly executed and delivered by, and is the legal, valid and
binding obligation of, the Purchaser, enforceable against the Purchaser in
accordance with its terms.
3.03 No Violation. The Purchaser is not subject to or obligated under any
------------
law, rule or regulation of any governmental authority, or any order, writ,
injunction or decree, or any agreement, instrument, license, franchise or
permit, which would be breached or violated by the Purchaser's execution,
delivery and performance of this Agreement and consummation of the transactions
contemplated hereby. The execution, delivery and performance of this Agreement
by the Purchaser and the consummation of the transactions contemplated hereby do
not and will not conflict with, result in a breach or violation of, or a default
under (i) the Purchaser's certificate of organization or operating agreement,
(ii) any obligation under any mortgage, lease, agreement or instrument
applicable to the Purchaser or (iii) any law, rule, regulation, judgment, order
or decree of any government, governmental or regulatory authority or court
having jurisdiction over the Purchaser.
3.04 Governmental Authorities. No consent, approval, order or authorization
------------------------
of, or registration, declaration or filing with, any governmental entity is
required by or with respect to the Purchaser in connection with the execution
and delivery of this Agreement or the consummation of the transactions
contemplated hereby, except for (i) such disclosures, filings, statements and
reports under the Exchange Act as may be required in connection with this
Agreement and the transactions contemplated hereby to be filed with the SEC or
Nasdaq, and (ii) such other consents, authorizations, filings, approvals and
registrations which if not obtained or made would not have a material adverse
effect on the Purchaser's ability to consummate the transactions hereunder.
-3-
<PAGE>
3.05 Securities Laws. The Purchaser is acquiring the Shares for the
---------------
Purchaser's own account, for investment purposes and without any view to resell
or effect any distribution of such Shares, other than as contemplated in the
Registration Agreement or as otherwise permitted by applicable law. The
Purchaser has been fully informed as to the circumstances under which it is
required to take and hold such Shares pursuant to the requirements of the
Securities Act of 1933, as amended (the "Securities Act"), and any applicable
state securities laws. The Purchaser understand that the Shares have not been
registered under the Securities Act or any applicable state securities law and
may not be offered or sold unless registered under the Securities Act and any
applicable state law or an exemption therefrom is available. The Purchaser is an
"accredited investor" as defined under Regulation D of the Securities Act.
ARTICLE IV
----------
CONDITIONS PRECEDENT TO THE OBLIGATIONS
---------------------------------------
OF THE PURCHASER
----------------
Each and every obligation of the Purchaser under this Agreement to be
performed at or before the Closing shall be subject to the satisfaction, at or
before the Closing, of each of the following conditions, except to the extent
that the Purchaser shall have waived such satisfaction:
4.01 Representations and Warranties; Performance. Each of the
-------------------------------------------
representations and warranties made by the Shareholder herein shall be true and
correct in all material respects as of the Closing with the same effect as
though made at such time; and the Shareholder shall have performed and complied
in all material respects with all agreements, covenants and conditions required
by this Agreement to be performed and complied with by him prior to the Closing.
4.02 Closing under the Purchase Agreement. The Second Closing under the
------------------------------------
Purchase Agreement shall have occurred by January 31, 1998 or such later date as
the parties to the Purchase Agreement may agree, including, without limitation,
satisfaction or waiver of the condition set forth in Section 8.2(c) of the
Purchase Agreement.
4.03 Closings Under Substantially Identical Stock Purchase Agreements.
----------------------------------------------------------------
Closing shall have occurred under each of those certain Stock Purchase
Agreements, substantially identical to this Agreement, between the Purchaser and
each of the following individuals: J. Christopher Stuhmer; Thomas B. Buffington;
James M. Giddens; Edward A. Kirkpatrick; Lawrence J. Witek; and Lanold W.
Caldwell.
4.04 Registration Rights Agreement. The Company and the Purchaser shall
-----------------------------
have executed an amendment to the Registration Rights Agreement dated as of
September 30, 1997 (the "Registration Agreement") to include the Shares among
the Registrable Securities (as that term is defined in the Registration
Agreement).
-4-
<PAGE>
ARTICLE V
---------
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF
------------------------------------------
THE SHAREHOLDER
---------------
Each and every obligation of the Shareholder under this Agreement to be
performed at or before the Closing shall be subject to the satisfaction, at or
before the Closing, of each of the following conditions, except to the extent
that the Shareholder shall have waived such satisfaction:
5.01 Representations and Warranties; Performance. Each of the
-------------------------------------------
representations and warranties made by the Purchaser herein shall be true and
correct in all material respects as of the Closing with the same effect as
though made at such time; and the Purchaser shall have performed and complied in
all material respects with all agreements, covenants and conditions required by
this Agreement to be performed and complied with by it prior to the Closing.
5.02 Closing under the Purchase Agreement. The Second Closing under the
------------------------------------
Purchase Agreement shall have occurred by January 31, 1998 or such later date as
the parties to the Purchase Agreement may agree.
ARTICLE VI
----------
MISCELLANEOUS PROVISIONS
------------------------
6.01 Amendment and Modification. This Agreement may be amended, modified
--------------------------
and supplemented only by written agreement of the Shareholder and the Purchaser.
6.02 Waiver of Compliance; Consents. Any failure of the Shareholder or the
------------------------------
Purchaser to comply with any obligation, covenant, agreement or condition herein
may be waived in writing by the other party, but no waiver shall be effective
for any purpose unless it is expressed and in writing, and any such waiver or
failure to insist upon strict compliance with such obligation, covenant,
agreement or condition shall not operate as a waiver of, or estoppel with
respect to, any subsequent or other failure. Whenever this Agreement requires or
permits consent by or on behalf of any party hereto, such consent shall be
effective only if given in writing in a manner consistent with the requirements
for a waiver of compliance as set forth in this Section 6.02.
6.03 Investigations; Survival of Representations and Warranties. The
----------------------------------------------------------
respective representations and warranties of the Shareholder and the Purchaser
contained herein shall not be deemed waived or otherwise affected by any
investigation made by any party hereto. Each and every such representation and
warranty shall survive the Closing.
6.04 Notices. All notices, requests, demands and other communications
-------
required or permitted hereunder shall be in writing and shall be deemed to have
been duly given when delivered by hand, facsimile transmission or mailed first
class with postage prepaid:
-5-
<PAGE>
(a) If to the Shareholder, to:
Lawrence J. Witek
c/o Sunstar Homes
200 Commonwealth Court, #200
Cary, North Carolina 27511
or to such other person or address as the Shareholder shall furnish to the
Purchaser in writing pursuant to the above;
(b) If to the Purchaser, to:
Prometheus Homebuilders LLC
c/o Lazard Freres Real Estate Investors, LLC
Thirty Rockefeller Plaza, 63rd floor
New York, New York 10020
or to such other person or address as the Purchaser shall furnish to the
Shareholder in writing pursuant to the above.
6.05 Assignment. This Agreement and all of the provisions hereof shall be
----------
binding upon the parties hereto and their respective successors and assigns and
inure to the benefit of the parties hereto and their respective successors and
permitted assigns, but neither this Agreement nor any of the rights, interests
or obligations hereunder shall be assigned by any party hereto without the prior
written consent of the other party.
6.06 Counterparts. This Agreement may be executed in two fully or partially
------------
executed counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
6.07 Headings; Interpretation. The article and section headings contained
------------------------
in this Agreement are for reference purposes only and shall not affect in any
way the meaning or interpretation of this Agreement. Words of any gender used in
this Agreement shall include any other gender. Words in the singular number
shall include the plural, and words in the plural shall include the singular,
when the sense requires.
6.08 Governing Law. This Agreement shall be governed by and enforced and
-------------
construed in accordance with the laws of the State of Delaware as applied to
contracts entered into in and to be wholly performed within such State.
6.09 Entire Agreement. This Agreement embodies the entire agreement and
----------------
understanding of the parties hereto in respect of the subject matter contained
herein. There are no restrictions, promises, representations, warranties,
covenants, or undertakings with respect to the subject matter hereof, other than
those expressly set forth or referred to herein. This Agreement supersedes all
prior negotiations, agreements and understandings among the parties with respect
to such subject matter.
-6-
<PAGE>
6.10 Termination. This Agreement shall terminate, and the parties shall
-----------
have no further obligations hereunder, if the Purchase Agreement shall be
terminated in accordance with its terms.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered, all as of the date first above written.
The Purchaser: PROMETHEUS Homebuilders LLC
By: LF Strategic Realty Investors II L.P.,
its member
By: Lazard Freres Real Estate
Investors L.L.C., its general partner
By: /s/ Murry N. Gunty
--------------------------------------
Murry N. Gunty
The Shareholder:
By: /s/ Lawrence J. Witek
--------------------------------------
Lawrence J. Witek
The Fortress Group, Inc. hereby joins this Agreement solely for the purpose
of setting forth its agreement to take the actions required by Section 4.04 of
this Agreement.
The Fortress Group, Inc.
By: /s/ James J. Martell, Jr.
--------------------------------------
James J. Martell, Jr.
-7-
<PAGE>
EXHIBIT 15
STOCK PURCHASE AGREEMENT
------------------------
THIS STOCK PURCHASE AGREEMENT ("Agreement"), dated as of February 19, 1998,
by and between Prometheus Homebuilders LLC, a Delaware limited liability company
(the "Purchaser") and Thomas B. Buffington (the "Shareholder").
R E C I T A L S :
A. The Purchaser has entered into an Amended and Restated Stock Purchase
Agreement dated as of September 30, 1997, and an Amended and Restated Stock
Purchase Agreement dated as of February 19, 1998 (the "Purchase Agreement") with
The Fortress Group, Inc. (the "Company") pursuant to which the Purchaser has
purchased, and expects to purchase, certain securities from the Company.
B. In connection with the Second Closing under the Purchase Agreement (as
that term is defined in the Purchase Agreement), the Purchaser desires to
purchase certain shares of the Company's common stock ("Common Stock") from the
Shareholder and certain other shareholders of the Company. The Purchaser is
concurrently entering into Stock Purchase Agreements substantially identical to
this Agreement with certain other shareholders of the Company.
FOR GOOD AND VALUABLE CONSIDERATION, the parties hereto agree as follows:
ARTICLE I
---------
PURCHASE AND SALE OF COMMON STOCK
---------------------------------
1.01 Purchase and Sale. On and subject to the terms and conditions set
-----------------
forth herein, the Purchaser agrees to acquire from the Shareholder, and the
Shareholder agrees to transfer and deliver to the Purchaser, all right, title
and interest in and to 284,685 shares of the Common Stock (the "Shares"), for
the consideration specified below in this Article I.
1.02 Consideration. At the Closing hereunder, the Purchaser shall pay to
-------------
the Shareholder $5.50 per Share in exchange for the Shares by delivery of cash
or good check.
1.03 The Closing. Unless this Agreement shall have been terminated and
-----------
the transactions contemplated hereby shall have been abandoned, the closing of
the transactions contemplated by this Agreement (the "Closing") shall take place
concurrent with the Second Closing under the Purchase Agreement at the offices
of Latham & Watkins, 885 Third Avenue, New York, New York, or at such other time
and at such other place or places as the parties hereto may agree.
1.04 Deliveries at the Closing. At the Closing, the Shareholder shall
-------------------------
deliver to the Purchaser stock certificates representing the Shares, properly
endorsed in blank or accompanied by duly executed assignment documents.
<PAGE>
ARTICLE II
----------
REPRESENTATIONS AND WARRANTIES OF
---------------------------------
THE SHAREHOLDER
---------------
The Shareholder hereby represents and warrants to the Purchaser as follows:
2.01 Share Ownership. The Shareholder owns the Shares and is the
---------------
exclusive record and beneficial owner of such Shares. Good and valid title to
the Shares, free and clear of any claim, interest, mortgage, pledge, lien or
security interest, will be transferred to the Purchaser at the Closing.
2.02 Authorization. The Shareholder has full power and authority to enter
-------------
into this Agreement and to carry out the transactions contemplated hereby. No
other action by or on behalf of the Shareholder is necessary to authorize and
approve this Agreement and the transactions contemplated hereby, and this
Agreement has been duly executed and delivered by, and is the legal, valid and
binding obligation of, the Shareholder, enforceable against the Shareholder in
accordance with its terms.
2.03 No Violation. The Shareholder is not subject to or obligated under
------------
any law, rule or regulation of any governmental authority, or any order, writ,
injunction or decree, or any agreement, instrument, license, franchise or
permit, which would be breached or violated by the Shareholder's execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated hereby. The execution, delivery and performance of
this Agreement by the Shareholder and the consummation of the transactions
contemplated hereby do not and will not conflict with, or result in a breach or
violation of, or a default under (i) any obligation under any mortgage, lease,
agreement or instrument applicable to the Shareholder or (ii) any law, rule,
regulation, judgment, order or decree of any government, governmental or
regulatory authority or court having jurisdiction over the Shareholder.
2.04 Governmental Authorities. No consent, approval, order or
------------------------
authorization of, or registration, declaration or filing with, any governmental
entity is required by or with respect to the Shareholder in connection with the
execution and delivery of this Agreement or the consummation of the transactions
contemplated hereby, except for (i) such disclosures, filings, statements and
reports under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), as may be required in connection with this Agreement and the transactions
contemplated hereby to be filed with the Securities and Exchange Commission
("SEC") or the Nasdaq Stock Market, Inc. ("Nasdaq"), and (ii) such other
consents, authorizations, filings, approvals and registrations which if not
obtained or made would not have a material adverse effect on the Shareholder's
ability to consummate the transactions hereunder.
2.05 Knowledge. The Shareholder acknowledges that the Purchaser is an
---------
affiliate of the Company and, as a result of such status, certain information
has been made available to the Purchaser by the Company. The Company has offered
to make such information available to the Shareholder prior to any sale of the
Shares hereunder. The Shareholder confirms that he has either taken the
-2-
<PAGE>
opportunity to receive such information or has declined voluntarily to do so
without compulsion of any kind. The Shareholder is an "Accredited Investor" as
defined under Regulation D of the Securities Act and has such knowledge and
experience in financial and business matters as may be required to evaluate the
merits and risks of selling the Shares to the Purchaser.
ARTICLE III
-----------
REPRESENTATIONS AND WARRANTIES OF
---------------------------------
THE PURCHASER
-------------
The Purchaser represents and warrants to the Shareholder that:
3.01 Organization. The Purchaser is a limited liability company duly
------------
organized, validly existing and in good standing under the laws of the State of
Delaware.
3.02 Authorization. The Purchaser has full power and authority to enter
-------------
into this Agreement and to carry out the transactions contemplated hereby. No
other action by or on behalf of the Purchaser is necessary to authorize and
approve this Agreement and the transactions contemplated hereby, and this
Agreement has been duly executed and delivered by, and is the legal, valid and
binding obligation of, the Purchaser, enforceable against the Purchaser in
accordance with its terms.
3.03 No Violation. The Purchaser is not subject to or obligated under any
------------
law, rule or regulation of any governmental authority, or any order, writ,
injunction or decree, or any agreement, instrument, license, franchise or
permit, which would be breached or violated by the Purchaser's execution,
delivery and performance of this Agreement and consummation of the transactions
contemplated hereby. The execution, delivery and performance of this Agreement
by the Purchaser and the consummation of the transactions contemplated hereby do
not and will not conflict with, result in a breach or violation of, or a default
under (i) the Purchaser's certificate of organization or operating agreement,
(ii) any obligation under any mortgage, lease, agreement or instrument
applicable to the Purchaser or (iii) any law, rule, regulation, judgment, order
or decree of any government, governmental or regulatory authority or court
having jurisdiction over the Purchaser.
3.04 Governmental Authorities. No consent, approval, order or
------------------------
authorization of, or registration, declaration or filing with, any governmental
entity is required by or with respect to the Purchaser in connection with the
execution and delivery of this Agreement or the consummation of the transactions
contemplated hereby, except for (i) such disclosures, filings, statements and
reports under the Exchange Act as may be required in connection with this
Agreement and the transactions contemplated hereby to be filed with the SEC or
Nasdaq, and (ii) such other consents, authorizations, filings, approvals and
registrations which if not obtained or made would not have a material adverse
effect on the Purchaser's ability to consummate the transactions hereunder.
-3-
<PAGE>
3.05 Securities Laws. The Purchaser is acquiring the Shares for the
---------------
Purchaser's own account, for investment purposes and without any view to resell
or effect any distribution of such Shares, other than as contemplated in the
Registration Agreement or as otherwise permitted by applicable law. The
Purchaser has been fully informed as to the circumstances under which it is
required to take and hold such Shares pursuant to the requirements of the
Securities Act of 1933, as amended (the "Securities Act"), and any applicable
state securities laws. The Purchaser understands that the Shares have not been
registered under the Securities Act or any applicable state securities law and
may not be offered or sold unless registered under the Securities Act and any
applicable state law or an exemption therefrom is available. The Purchaser is an
"accredited investor" as defined under Regulation D of the Securities Act.
ARTICLE IV
----------
CONDITIONS PRECEDENT TO THE OBLIGATIONS
---------------------------------------
OF THE PURCHASER
----------------
Each and every obligation of the Purchaser under this Agreement to be
performed at or before the Closing shall be subject to the satisfaction, at or
before the Closing, of each of the following conditions, except to the extent
that the Purchaser shall have waived such satisfaction:
4.01 Representations and Warranties: Performance. Each of the
-------------------------------------------
representations and warranties made by the Shareholder herein shall be true and
correct in all material respects as of the Closing with the same effect as
though made at such time; and the Shareholder shall have performed and complied
in all material respects with all agreements, covenants and conditions required
by this Agreement to be performed and complied with by him prior to the Closing.
4.02 Closing under the Purchase Agreement. The Second Closing under the
------------------------------------
Purchase Agreement shall have occurred by January 31, 1998 or such later date as
the parties to the Purchase Agreement may agree, including, without limitation,
satisfaction or waiver of the condition set forth in Section 8.2(c) of the
Purchase Agreement.
4.03 Closings Under Substantially Identical Stock Purchase Agreements.
----------------------------------------------------------------
Closing shall have occurred under each of those certain Stock Purchase
Agreements, substantially identical to this Agreement, between the Purchaser and
each of the following individuals: J. Christopher Stuhmer; Thomas B. Buffington;
James M. Giddens; Edward A. Kirkpatrick; Lawrence J. Witek; and Lanold W.
Caldwell.
4.04 Registration Rights Agreement. The Company and the Purchaser shall
-----------------------------
have executed an amendment to the Registration Rights Agreement dated as of
September 30, 1997 (the "Registration Agreement") to include the Shares among
the Registrable Securities (as that term is defined in the Registration
Agreement).
-4-
<PAGE>
ARTICLE V
---------
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF
------------------------------------------
THE SHAREHOLDER
---------------
Each and every obligation of the Shareholder under this Agreement to be
performed at or before the Closing shall be subject to the satisfaction, at or
before the Closing, of each of the following conditions, except to the extent
that the Shareholder shall have waived such satisfaction:
5.01 Representations and Warranties: Performance. Each of the
-------------------------------------------
representations and warranties made by the Purchaser herein shall be true and
correct in all material respects as of the Closing with the same effect as
though made at such time; and the Purchaser shall have performed and complied in
all material respects with all agreements, covenants and conditions required by
this Agreement to be performed and complied with by it prior to the Closing.
5.02 Closing under the Purchase Agreement. The Second Closing under the
------------------------------------
Purchase Agreement shall have occurred by January 3l, 1998 or such later date
as the parties to the Purchase Agreement may agree.
ARTICLE VI
----------
MISCELLANEOUS PROVISIONS
------------------------
6.01 Amendment and Modification. This Agreement may be amended, modified
--------------------------
and supplemented only by written agreement of the Shareholder and the Purchaser.
6.02 Waiver of Compliance: Consents. Any failure of the Shareholder or
------------------------------
the Purchaser to comply with any obligation, covenant, agreement or condition
herein may be waived in writing by the other party, but no waiver shall be
effective for any purpose unless it is expressed and in writing, and any such
waiver or failure to insist upon strict compliance with such obligation,
covenant, agreement or condition shall not operate as a waiver of, or estoppel
with respect to, any subsequent or other failure. Whenever this Agreement
requires or permits consent by or on behalf of any party hereto, such consent
shall be effective only if given in writing in a manner consistent with the
requirements for a waiver of compliance as set forth in this Section 6.02.
6.03 Investigations: Survival of Representations and Warranties. The
----------------------------------------------------------
respective representations and warranties of the Shareholder and the Purchaser
contained herein shall not be deemed waived or otherwise affected by any
investigation made by any party hereto. Each and every such representation and
warranty shall survive the Closing.
6.04 Notices. All notices, requests, demands and other communications
-------
required or permitted hereunder shall be in writing and shall be deemed to have
been duly given when delivered by hand, facsimile transmission or mailed first
class with postage prepaid:
-5-
<PAGE>
(a) If to the Shareholder, to:
Thomas B. Buffington
c/o Buffington Homes
8716 Mopac Expressway, Suite 100
Austin, Texas 78759
or to such other person or address as the Shareholder shall furnish to the
Purchaser in writing pursuant to the above;
(b) If to the Purchaser, to:
Prometheus Homebuilders LLC
c/o Lazard Freres Real Estate Investors, LLC
Thirty Rockefeller Plaza, 63rd floor
New York, New York 10020
or to such other person or address as the Purchaser shall furnish to the
Shareholder in writing pursuant to the above.
6.05 Assignment. This Agreement and all of the provisions hereof shall be
----------
binding upon the parties hereto and their respective successors and assigns and
inure to the benefit of the parties hereto and their respective successors and
permitted assigns, but neither this Agreement nor any of the rights, interests
or obligations hereunder shall be assigned by any party hereto without the prior
written consent of the other party.
6.06 Counterparts. This Agreement may be executed in two fully or
------------
partially executed counterparts, each of which shall be deemed an original, but
all of which together shall constitute one and the same instrument.
6.07 Headings: Interpretation. The article and section headings contained
------------------------
in this Agreement are for reference purposes only and shall not affect in any
way the meaning or interpretation of this Agreement. Words of any gender used in
this Agreement shall include any other gender. Words in the singular number
shall include the plural, and words in the plural shall include the singular,
when the sense requires.
6.08 Governing Law. This Agreement shall be governed by and enforced and
-------------
construed in accordance with the laws of the State of Delaware as applied to
contracts entered into in and to be wholly performed within such State.
6.09 Entire Agreement. This Agreement embodies the entire agreement and
----------------
understanding of the parties hereto in respect of the subject matter contained
herein. There are no restrictions, promises, representations, warranties,
covenants, or undertakings with respect to the subject matter hereof, other than
those expressly set forth or referred to herein. This Agreement supersedes all
prior negotiations, agreements and understandings among the parties with respect
to such subject matter.
-6-
<PAGE>
6.10 Termination. This Agreement shall terminate, and the parties shall
------------
have no further obligations hereunder, if the Purchase Agreement shall be
terminated in accordance with its terms.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered, all as of the date first above written.
The Purchaser: PROMETHEUS Homebuilders LLC
By: LF Strategic Realty Investors II L.P.,
its member
By: Lazard Freres Real Estate
Investors L.L.C., its general partner
By: /s/ Murry N. Gunty
----------------------------------------
/s/ Thomas B. Buffington
The Shareholder -------------------------------------------
Thomas B. Buffington
The Fortress Group, Inc. hereby joins this Agreement solely for the purpose
of setting forth its agreement to take the actions required by Section 4.04 of
this Agreement.
The Fortress Group, Inc.
By: /s/ James J. Martell, Jr.
----------------------------------------
-7-
<PAGE>
EXHIBIT 16
JOINT FILING AGREEMENT
----------------------
In accordance with Rule 13d-1(f) promulgated under the Securities Exchange
Act of 1934, as amended, the undersigned hereby agree to the joint filing with
all other Reporting Persons (as such term is defined in the Schedule 13D
referred to below) on behalf of each of them of a statement on Schedule 13D
(including amendments thereto) with respect to the common stock of beneficial
interest, par value $.01 per share, of The Fortress Group, Inc., a Delaware
corporation, and that this Agreement may be included as an Exhibit to such joint
filing. This Agreement may be executed in any number of counterparts, all of
which taken together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the undersigned hereby execute this Agreement as of
the ____ day of February 1998.
PROMETHEUS HOMEBUILDERS LLC
By: LF Strategic Realty Investors II L.P.,
as sole member
By: Lazard Freres Real Estate Investors L.L.C.,
as general partner
By: /s/ Murry N. Gunty
__________________________________________
Name: Murry N. Gunty
Title: Principal
LF STRATEGIC REALTY INVESTORS II L.P.
By: Lazard Freres Real Estate Investors L.L.C.,
as general partner
By: /s/ Murry N. Gunty
__________________________________________
Name: Murry N. Gunty
Title: Principal
