<PAGE> 1
CUSIP No. 053431 10 2 13D Page 1 of 17 Pages
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
SCHEDULE 13D
UNDER THE SECURITIES EXCHANGE ACT OF 1934
AVALON COMMUNITY SERVICES, INC.
(NAME OF ISSUER)
COMMON STOCK, PAR VALUE $.001 PER SHARE
(TITLE OF CLASS OF SECURITIES)
053431 10 2
(CUSIP NUMBER)
JAMES P. WILSON
RSTW PARTNERS III, L.P.
5847 SAN FELIPE
SUITE 4350
HOUSTON, TEXAS 77057
(NAME, ADDRESS AND TELEPHONE NUMBER OF PERSON
AUTHORIZED TO RECEIVE NOTICES AND COMMUNICATIONS)
SEPTEMBER 16, 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 [x].
(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).
<PAGE> 2
CUSIP No. 053431 10 2 13D Page 2 of 17 Pages
CUSIP No. 053431 10 2
<TABLE>
<S> <C> <C> <C>
1. NAME OF REPORTING PERSON.
S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
RSTW Partners III, L.P.
76-0536454
2. CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP*
(a) [ ]
(b) [x]
3. SEC USE ONLY
4. SOURCE OF FUNDS*
WC
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 SHARES BENEFICIALLY 7. SOLE VOTING POWER 1,622,448
OWNED BY EACH REPORTING PERSON
WITH 8. SHARED VOTING POWER -0-
9. SOLE DISPOSITIVE POWER 1,622,448
10. SHARED DISPOSITIVE POWER -0-
11. AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
1,622,448
12. CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES.
[ ]
13. PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
34.8%
14. TYPE OF REPORTING PERSON*
PN
</TABLE>
<PAGE> 3
CUSIP No. 053431 10 2 13D Page 3 of 17 Pages
CUSIP No. 053431 10 2
<TABLE>
<S> <C> <C> <C>
1. NAME OF REPORTING PERSON.
S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
Don K. Rice
2. CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP*
(a) [ ]
(b) [x]
3. SEC USE ONLY
4. SOURCE OF FUNDS*
WC
5. CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) or 2(e) [ ]
6. CITIZENSHIP OR PLACE OF ORGANIZATION
Citizen of the United States
NUMBER OF SHARES BENEFICIALLY 7. SOLE VOTING POWER 1,622,448
OWNED BY EACH REPORTING PERSON
WITH 8. SHARED VOTING POWER -0-
9. SOLE DISPOSITIVE POWER 1,622,448
10. SHARED DISPOSITIVE POWER -0-
11. AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
1,622,448
12. CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES.
[ ]
13. PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
34.8%
14. TYPE OF REPORTING PERSON*
IN
</TABLE>
<PAGE> 4
CUSIP No. 053431 10 2 13D Page 4 of 17 Pages
CUSIP No. 053431 10 2
<TABLE>
<S> <C> <C> <C>
1. NAME OF REPORTING PERSON.
S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
Jeffrey P. Sangalis
2. CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP*
(a) [ ]
(b) [x]
3. SEC USE ONLY
4. SOURCE OF FUNDS*
WC
5. CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) or 2(e) [ ]
6. CITIZENSHIP OR PLACE OF ORGANIZATION
Citizen of the United States
NUMBER OF SHARES BENEFICIALLY 7. SOLE VOTING POWER 1,622,448
OWNED BY EACH REPORTING PERSON
WITH 8. SHARED VOTING POWER -0-
9. SOLE DISPOSITIVE POWER 1,622,448
10. SHARED DISPOSITIVE POWER -0-
11. AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
1,622,448
12. CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES.
[ ]
13. PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
34.8%
14. TYPE OF REPORTING PERSON*
IN
</TABLE>
<PAGE> 5
CUSIP No. 053431 10 2 13D Page 5 of 17 Pages
CUSIP No. 053431 10 2
<TABLE>
<S> <C> <C> <C>
1. NAME OF REPORTING PERSON.
S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
Jeffrey A. Toole
2. CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP*
(a) [ ]
(b) [x]
3. SEC USE ONLY
4. SOURCE OF FUNDS*
WC
5. CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) or 2(e) [ ]
6. CITIZENSHIP OR PLACE OF ORGANIZATION
Citizen of the United States
NUMBER OF SHARES BENEFICIALLY 7. SOLE VOTING POWER 1,622,448
OWNED BY EACH REPORTING PERSON
WITH 8. SHARED VOTING POWER -0-
9. SOLE DISPOSITIVE POWER 1,622,448
10. SHARED DISPOSITIVE POWER -0-
11. AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
1,622,448
12. CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES.
[ ]
13. PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
34.8%
14. TYPE OF REPORTING PERSON*
IN
</TABLE>
<PAGE> 6
CUSIP No. 053431 10 2 13D Page 6 of 17 Pages
CUSIP No. 053431 10 2
<TABLE>
<S> <C> <C> <C>
1. NAME OF REPORTING PERSON.
S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
James P. Wilson
2. CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP*
(a) [ ]
(b) [x]
3. SEC USE ONLY
4. SOURCE OF FUNDS*
WC
5. CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) or 2(e) [ ]
6. CITIZENSHIP OR PLACE OF ORGANIZATION
Citizen of the United States
NUMBER OF SHARES BENEFICIALLY 7. SOLE VOTING POWER 1,622,448
OWNED BY EACH REPORTING PERSON
WITH 8. SHARED VOTING POWER -0-
9. SOLE DISPOSITIVE POWER 1,622,448
10. SHARED DISPOSITIVE POWER -0-
11. AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
1,622,448
12. CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES.
[ ]
13. PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
34.8%
14. TYPE OF REPORTING PERSON*
IN
</TABLE>
<PAGE> 7
CUSIP No. 053431 10 2 13D Page 7 of 17 Pages
ITEM 1. SECURITY AND ISSUER
The class of securities to which this statement relates is the Common
Stock, par value $.001 per share (the "Common Stock"), of Avalon Community
Services, Inc., a Nevada corporation (the "Issuer"), the principal executive
offices of which are located at 13401 Railway Drive, Oklahoma City, Oklahoma
73157.
ITEM 2. IDENTITY AND BACKGROUND
1. (a) - (c), (f) This statement is being filed on behalf of RSTW
Partners III, L.P., a Delaware limited partnership ("RSTW").
RSTW is engaged in the principal business of acquiring and
holding securities for investment purposes. The principal
offices of RSTW is located at 5847 San Felipe, Suite 4350,
Houston, Texas 77057. RSTW has entered into the Shareholder
Agreement (as defined herein) with the Issuer and certain
other security holders of the Issuer that, while RSTW holds
any securities of the Issuer, requires such security holders,
at any election or removal of directors, to vote any voting
securities of the Issuer held by such security holders: (i)
for the election of one nominee of RSTW to the board of
directors of the Issuer (the "RSTW Nominee"), and (ii) against
the removal of the RSTW Nominee. The board of directors of
the Issuer currently has five members, including the RSTW
Nominee. Other than the voting agreement regarding the RSTW
Nominee described above, neither RSTW nor any of its
affiliates has any authority to vote or dispose of any
securities of the Issuer held by any party other than RSTW.
As a result, RSTW does not believe that it is a member of a
group, as contemplated by Rule 13d-3, with any other security
holder of the Issuer. For additional information regarding
the Shareholder Agreement, see Item 4 and Item 6.
(d) None.
(e) None.
2. (a) Enumerated Persons:
RSTW Management, L.P., a Delaware limited
partnership, is the general partner of RSTW, and is
engaged in the principal business of serving as
RSTW's general partner and providing management and
consulting services to RSTW. Rice Mezzanine
Corporation, a Texas corporation, is the general
partner of RSTW Management, L.P., and is engaged in
the principal business of being RSTW Management,
L.P.'s general partner and providing management and
consulting services to RSTW Management, L.P. and
other entities. The principal offices of RSTW
Management, L.P. and Rice Mezzanine Corporation are
located at 5847 San Felipe, Suite 4350, Houston,
Texas 77057. Other than RSTW Management, L.P. and
Rice Mezzanine Corporation, there are no other
persons for whom
<PAGE> 8
CUSIP No. 053431 10 2 13D Page 8 of 17 Pages
information is required to be given by General
Instruction C to Schedule 13D with respect to RSTW.
The executive officers and directors of Rice
Mezzanine Corporation are as follows:
<TABLE>
<CAPTION>
Name Position
---- --------
<S> <C>
Don K. Rice Director, Managing Director, President,
Secretary and Treasurer
Jeffrey P. Sangalis Director, Managing Director, Vice President
and Assistant Secretary
Jeffrey A. Toole Director, Managing Director, Vice President
and Assistant Secretary
James P. Wilson Director, Managing Director, Vice President
and Assistant Secretary
</TABLE>
(b) The address of each of the enumerated executive
officers and directors is the principal offices of
Rice Mezzanine Corporation.
(c) The principal employment, name of employer and
principal business of each of the enumerated Rice
Mezzanine Corporation's executive officers and
directors are as follows: Messrs. Rice, Sangalis,
Toole and Wilson are employed at Rice Mezzanine
Corporation in the capacities described above.
(d) None for any of the enumerated persons.
(e) None for any of the enumerated persons.
(f) Each of the individual enumerated persons is a citizen
of the United States.
THE FOLLOWING ITEMS 3 THROUGH 6 ARE PROVIDED AS TO THE INDICATED REPORTING
PERSON AND ALL ENUMERATED PERSONS SET FORTH ABOVE.
ITEM 3. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION
Beneficial ownership of the reported securities was acquired by RSTW
through the utilization of working capital derived from contributions of
capital by its partners and in consideration for an investment in the Issuer as
more fully described in Item 4.
<PAGE> 9
CUSIP No. 053431 10 2 13D Page 9 of 17 Pages
ITEM 4. PURPOSE OF TRANSACTION
RSTW acquired its shares of the Common Stock for investment purposes.
Pursuant to a certain Stock Purchase Agreement, dated as of September 16, 1998,
by and between Issuer and RSTW (the "Stock Agreement"), RSTW agreed to purchase
1,622,448 shares of Common Stock (the "Shares") for a purchase price of Five
Million and No/100 dollars ($5,000,000). The Stock Agreement is attached
hereto as Exhibit 1.
The Stock Agreement provides, among other things, that pursuant to
Section 2.07(b) any time the Issuer issues any shares of Common Stock to any
holder of Permitted Stock, as set out in Schedule 1 to the Stock Agreement (the
"Permitted Stock"), upon the exercise of any options or warrants constituting
Permitted Stock, the Issuer will issue to RSTW additional shares of Common
Stock in an amount equal to 25% of the Common Stock so issued to such holder of
Permitted Stock (on a fully diluted basis), but only to the extent the shares
of Common Stock so issued to such holder of the Permitted Stock were not
included in the fully diluted share calculation on September 16, 1998 (the
"Closing Date"). Each new additional share of Common Stock so issued by the
Issuer to RSTW pursuant to this provision shall be issued to RSTW for a
purchase price of $.001 per share. In addition, the number of Shares held by
RSTW may also be subject to further adjustment pursuant to Section 2.07 of the
Stock Agreement.
RSTW has also been granted the right pursuant to Section 4.11 of the
Stock Agreement to designate, by written notice, one person to serve as a
member of the Issuer's board of directors at all times during which RSTW is a
holder of all or any portion of the $10,000,000 Senior Subordinated Note issued
by the Issuer to RSTW pursuant to a certain Note Purchase Agreement, dated as
of September 16, 1998, by and among the Issuer, Southern Correction Systems,
Inc., an Oklahoma corporation, and RSTW (the "Note Agreement"), or is a holder
of any capital stock, including the Shares, warrants or other equity interest
in the Issuer.
Pursuant to Section 4.04(b) of the Stock Agreement, the Issuer must
obtain the prior written consent of RSTW to declare or make any dividends or
distributions of its cash, stock, property or assets or redeem, retire,
purchase or otherwise acquire, directly or indirectly, any of the Capital Stock
(as defined in the Stock Agreement) of the Issuer or the capital stock or
securities of any of its Affiliates, subject to certain exceptions.
In connection with the Stock Agreement, the Issuer, RSTW and Donald E.
Smith and Jerry M. Sunderland (each a "Shareholder" and, collectively, the
"Shareholders") entered into a certain Shareholder Agreement, dated as of
September 16, 1998 (the "Shareholder Agreement"), attached hereto as Exhibit 2.
Pursuant to Section 2.01 of the Shareholder Agreement, the Issuer has granted,
among other things, to each Holder (as defined in the Stock Agreement) the
preemptive right to purchase, pro rata, all or any part of any New Securities
(as defined in the Stock Agreement) that the Issuer may, from time to time,
propose to sell or issue.
The Issuer, pursuant to Article IV of the Shareholder Agreement, has
granted to each Holder an option to sell to the Issuer, and the Issuer is
obligated to purchase from each Holder under such option (the "Put Option"),
all (or such portion as is designated by any such Holder
<PAGE> 10
CUSIP No. 053431 10 2 13D Page 10 of 17 Pages
pursuant to Section 4.03 of the Shareholder Agreement ) of the Shares plus any
other shares of Capital Stock issued to any Holder from time to time pursuant
to Section 2.07 of the Stock Agreement as a result of owning the Shares (the
"Put Shares"). The Put Option will be effective at any time or times after the
earlier to occur of (i) the fifth anniversary of the date of the Shareholder
Agreement, or (ii) at any time or times after the occurrence of any of the
events listed in any of clauses (a), (b), (c) or (d) below and will terminate
upon the closing of a Qualified Secondary Public Offering (as defined in the
Stock Agreement) (the "Put Option Period"):
(a) the payment or prepayment of all indebtedness,
liabilities and obligations owing by the Issuer to RSTW under the Note
Agreement (other than from the proceeds of a Qualified Secondary
Public Offering);
(b) a Change of Control, which shall be deemed to have
occurred at such times as: (a) any person, or two or more persons
acting in concert (other than RSTW and its affiliates and Donald E.
Smith), directly or indirectly acquire beneficial ownership (within
the meaning of Rule 13d-3 of the Securities and Exchange Commission
under the Securities Exchange Act of 1934) of 25% or more of the
outstanding shares of securities of the Issuer or any subsidiary of
the Issuer (excluding any acquisitions of securities arising from the
conversion of the Convertible Notes (as defined in the Stock
Agreement) of the Issuer or the issuance or exercise of options,
warrants or securities constituting Permitted Stock; or (b) the Issuer
ceases to own, free and clear of all liens other than certain
permitted liens, all of the outstanding capital stock of Southern
Corrections Systems, Inc.; or (c) Donald E. Smith shall cease to
directly own and control any capital stock of the Issuer owned by him
on the Closing Date (other than any shares of capital stock that he is
permitted to transfer pursuant to Section 5.01(i), (ii), (iii) or (v)
of the Shareholder Agreement); or (d) Donald E. Smith ceases to be
employed as Chief Executive Officer of the Company.
(c) a merger, consolidation, share exchange, or similar
transaction involving the Issuer and one or more persons or a sale in
one or more related transactions of all or a substantial portion of
the assets, business, or revenue or income generating operations of
the Issuer or any substantial change in the type of business conducted
by the Issuer, or
(d) after the occurrence and during the continuance of an
Event of Default (as defined in the Note Agreement) pursuant to
Sections 8.1(a), (b), (f) or (h) of the Note Agreement or any failure
of the Issuer in any material respect to perform any of its
obligations under the Shareholder Agreement or the Stock Agreement;
provided, however, that the Put Option Period will continue with
respect to such Event of Default or other failure, even after the same
has been cured, if notice of exercise of the Put Option by such Holder
is provided pursuant to Article IV of the Shareholder Agreement during
the continuance of such Event of Default or such other failure, as the
case may be; provided further, however, that any such Put Option
Period will cease to continue with respect to any such Event of
Default or other failure if the Holders have waived in writing such
Event of Default or other failure.
<PAGE> 11
CUSIP No. 053431 10 2 13D Page 11 of 17 Pages
In the event that any Holder exercises the Put Option as described in
the previous paragraph, the price (the "Put Price") to be paid to each such
Holder will be cash (denominated in U.S. Dollars) in the sum of the amount
determined by multiplying (a) the Fair Market Value (as defined in the Stock
Agreement) per share of Common Stock as of the end of the month immediately
preceding the date notice is given of the exercise of the Put Option pursuant
to Section 4.03 of the Shareholder Agreement, times (b) the number of Put
Shares for which the Put Option is being exercised by such Holder.
Pursuant to Article VII of the Shareholder Agreement, the Shareholder
irrevocably covenants and agrees to vote, or give or withhold consent with
respect to, all shares of Capital Stock now owned or later acquired by them,
all in accordance with the terms of Article VII. The agreement to vote
contained in Article VII will expire on the earlier to occur of (a) the day
prior to maximum period permitted under applicable law or (b) the date RSTW or
its Affiliates cease to hold the Shares. Pursuant to Section 7.02 of the
Shareholder Agreement, so long as the provisions of this Article VII remain in
effect, the Shareholders will, at the request of RSTW, vote, or give or
withhold consent with respect to, all shares of Capital Stock now owned or
later acquired by them so that at all times an individual designated by RSTW or
its designee will be a member of the board of directors of the Issuer in
accordance with Section 4.11 of the Stock Agreement and Section 6.21 of the
Note Agreement; provided, however, that RSTW does not have any obligation to
designate or cause any individual to serve on the board of directors of the
Issuer. No director designated by RSTW or its designee may be removed without
the consent of RSTW. RSTW may, at any time, terminate its rights under Article
VII of the Shareholder Agreement by providing written notice of such
termination to the Issuer.
The above transactions and the funds received by the Issuer pursuant
to the Stock Agreement, in conjunction with the Note Agreement, will facilitate
and allow the Issuer to achieve the following endeavors: (i) to assist in
funding the Issuer's construction, reconstruction and/or expansion of its
community correctional and juvenile facilities, (ii) to repay certain existing
indebtedness of the Issuer, (iii) to assist in the acquisition of certain
permitted acquisitions under the Note Agreement, and (iv) to provide general
working capital to the Issuer and its Subsidiaries (the "Use of the Proceeds").
RSTW is engaged in the principal business of acquiring and holding
securities for investment purposes. The above transaction was entered into by
RSTW for investment purposes in order to facilitate the Issuer's Use of the
Proceeds. The described transactions have provided RSTW with the right to
designate, as described above, a person to serve on the board of directors of
the Issuer, and the right to sell to the Issuer and the obligation of the
Issuer to purchase the Put Shares held by RSTW.
Except as described above, RSTW has no plans or proposals to:
(a) acquire additional securities of the Issuer or to dispose of
any securities of the Issuer;
<PAGE> 12
CUSIP No. 053431 10 2 13D Page 12 of 17 Pages
(b) enter into, or cause the Issuer or any of its subsidiaries to
enter into, any extraordinary corporate transactions, other than that the
Issuer plans to seek the acquisition of community correctional or juvenile
facilities or operations, whether by an asset or stock purchase or otherwise,
as permitted by the Note Agreement, as a means of expanding its business;
(c) enter into or cause the Issuer or any of its subsidiaries to
sell or transfer a material amount of its assets;
(d) change the present board of directors or management of the
Issuer, including any plans or proposals to change the number or term of
directors or to fill any existing vacancies on the board, except as described
above;
(e) change the present capitalization or dividend policy of the
Issuer except as described above;
(f) make any other material change in the Issuer's business or
corporate structure;
(g) make any change in the issuer's charter or bylaws or other
actions which may impede the acquisition of control of the Issuer by any
person;
(h) cause a class of securities of the Issuer to be delisted from
a national securities exchange or to cease to be authorized to be quoted in an
inter-dealer quotation system of a registered national securities association;
(i) cause a class of equity securities of the Issuer to become
eligible for termination of registration pursuant to Section 12(g)(4) of the
Securities Exchange Act of 1934; or
(j) any action similar to those described above.
ITEM 5. INTEREST IN SECURITIES OF THE ISSUER
The Shareholder Agreement requires, while RSTW holds any securities of
the Issuer, Donald E. Smith and Jerry M. Sunderland (collectively, the
"Shareholders"), at any election or removal of directors, to vote any voting
securities of the Issuer held by the Shareholders: (i) for the election of the
RSTW Nominee, and (ii) against the removal of the RSTW Nominee. The board of
directors of the Issuer currently has five members, including the RSTW Nominee.
Other than the voting agreement regarding the RSTW Nominee described above,
neither RSTW nor any of its affiliates has any authority to vote or dispose of
any securities of the Issuer held by any party other than RSTW. As a result,
RSTW does not believe that it is a member of a group, as contemplated by Rule
13d-3, with any other security holder of the Issuer.
The following table sets forth certain information regarding the
beneficial ownership of the Common Stock that was issued to RSTW.
<PAGE> 13
CUSIP No. 053431 10 2 13D Page 13 of 17 Pages
<TABLE>
<CAPTION>
RSTW Partners III, L.P. Shares of Common Stock
<S> <C> <C>
(a) Beneficial Ownership: 1,622,448/(1)/
Percentage Ownership: 34.8%/(2)/
(b) Sole Voting Power: 1,622,448
Shared Voting Power: -0-
Sole Disposition Power: 1,622,448
Shared Disposition Power: -0-
</TABLE>
The remaining enumerated persons listed in Item 2 do not hold any beneficial
ownership of the Issuer, other than through RSTW.
(1) RSTW Management, L.P., as the general partner of RSTW, and
Rice Mezzanine Corporation as the general partner of RSTW
Management, L.P., may be deemed to beneficially own the
Common Stock.
(2) The total number of outstanding shares of Common Stock as
reported in Stock Agreement (as of September 16, 1998) by the
Issuer was 3,041,880. After the issuance of the 1,622,448
shares of Common Stock to RSTW on September 16, 1998 by the
Issuer, the total number of outstanding shares of Common Stock
of the Issuer was 4,664,328.
(c) No transactions in the capital stock of the Issuer were undertaken by
RSTW during the sixty days preceding the date of this filing except as
described above at Item 4.
(d) None.
(e) Not applicable.
ITEM 6. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH
RESPECT TO SECURITIES OF THE ISSUER.
See Item 4 above. The Stock Agreement includes provisions that:
(i) the Issuer will not by any action, including, without limitation,
amending, or permitting the amendment of, the charter documents,
by-laws, or similar instruments of the Issuer as through
reorganization, reclassification, transfer of assets, consolidation,
merger, share exchange, dissolution, issue or sale of securities, or
any other similar voluntary action, avoid or seek to avoid the
observance or performance of any terms of the Stock Agreement or the
Shares;
(ii) except for preferred stock issued by the Issuer for Fair Market
Value to any Person to pay all or part of the purchase price of any
permitted acquisition under the Note Agreement, the Issuer will not
issue any Capital Stock other than Common Stock and
<PAGE> 14
CUSIP No. 053431 10 2 13D Page 14 of 17 Pages
Common Stock Equivalents, and will not permit any subsidiary of the
Issuer to issue Capital Stock (other than the shares of Capital Stock
owned, directly or indirectly, by the Company on the Closing Date);
(iii) the Issuer warrants and represents that it will not during the
term of the Stock Agreement and the Shareholder Agreement enter into
any agreement, arrangement, or understanding involving the Issuer or
any shareholder of the Issuer, other than the Stock Agreement, the
Shareholder Agreement, and the documents contemplated thereby,
modifying, restricting, or in any way affecting the rights of any
securities holder to vote securities of the Issuer;
(iv) prohibit action by the Issuer to amend or modify its articles of
incorporation or bylaws in a way that would adversely affect the
rights of the Holders of the Shares or alter the duties and
obligations of the Issuer under the Stock Agreement or the Shareholder
Agreement without the prior written consent of the Holders of the
Shares;
(v) prohibit the sale, lease or other transfer of the Issuer's assets
or operations (other than inventory in the ordinary course of business
and other assets reasonably and in good faith determined by the Issuer
to be obsolete or no longer necessary to the Issuer), without the
consent of the Holders of the Shares;
(vi) prohibit the Issuer from entering into any new business or
acquiring any substantial business operation or assets (through a
stock or asset purchase or otherwise) without the consent of the
Holders of the Shares;
(vii) prohibit the Issuer from entering into transactions with its
directors, officers, employees or shareholders, or their affiliates or
relatives, except on terms that the Holders of the Shares deem fair
and reasonable;
(viii) except for certain permitted acquisitions, prohibit the Issuer
from acquiring debt or equity interests in any Person or establish or
acquire a subsidiary or make any additional capital contribution or
purchase any additional equity in any subsidiary or make any advance
or loans to any subsidiary or transfer any technology or assets to any
subsidiary without the consent of the Holders of the Shares;
(ix) prohibit modifications to the employment agreements of certain
key employees without the consent of the Holders of the Shares;
(x) prohibit the Issuer from issuing or selling or otherwise
disposing of its Capital Stock or Capital Stock of any subsidiary
(except for Permitted Stock or pursuant to the Stock Agreement, the
Shareholder Agreement or the Convertible Note Agreement), or
dissolving or liquidating, or effecting any consolidation or merger
involving the Issuer or any Subsidiary or any reclassification,
corporate reorganization, stock split or reverse stock split, or other
change of any class of Capital Stock without the prior written consent
of the Holders of the Shares; and
<PAGE> 15
CUSIP No. 053431 10 2 13D Page 15 of 17 Pages
(xi) prohibit the Issuer from increasing the amounts of benefits
payable under any benefit plan, or increasing beyond the amounts
permitted pursuant to the Note Agreement, the aggregate amount of
salary and any other direct or indirect remuneration paid or accrued
by the Issuer during any fiscal year to any of its officers,
directors, affiliates or security holders without the prior written
consent of the Holders of the Shares.
The Shareholder Agreement includes provisions that:
(i) require that the Holders of the Shares be paid a dilution fee to
the extent that dividends are paid on Capital Stock of the Issuer
while any Holder beneficially owns any Shares;
(ii) pursuant to Article V of the Stockholder Agreement, the
Shareholders have agreed that in the event that any Shareholder
intends to sell or transfer, directly or indirectly, any shares of any
class of Capital Stock held by it to any Person, each Holder will have
the right to participate in such sale or transfer in the terms set
forth in Article V of the Shareholder Agreement, subject to certain
exceptions set out in Section 5.01 of the Shareholder Agreement;
(iii) pursuant to Section 5.02 of the Shareholder Agreement, the
Shareholder is prohibited from selling or transferring any shares of
Capital Stock unless the transferee of such Capital Stock first agrees
in writing to be bound by the same terms and conditions that apply to
the Shareholder under the Shareholder Agreement and the Shareholder
before selling or transferring any of its Capital Stock must comply
with certain provisions set out in Section 5.02(a), (b), (c) and (d)
of the Shareholder Agreement;
(iv) pursuant to Section 5.03 of the Stockholder Agreement, the
Shareholder in conjunction with any sale or transfer of its Capital
Stock to a Related Party must require that such Related Party first
agrees to assume the obligations of the Shareholder under the
Shareholder Agreement with respect to the shares of Capital Stock
thereby acquired by it and to be bound by the same terms and
conditions that apply to the Shareholder under the Shareholder
Agreement and the Stock Agreement;
(v) pursuant to Section 5.04 of the Shareholder Agreement, the
Shareholder is prohibited from selling, pledging or otherwise
disposing of any of its Capital Stock to any Person unless permitted
by Section 5.01(i), (ii), (iii), (iv) or (v) or 5.03 of the
Shareholder Agreement;
(vi) pursuant to Article VI of the Shareholder Agreement, the Holders
have been granted certain registration rights and exchange rights
under certain circumstances.
The foregoing is only a summary of the Stock Agreement and the
Shareholder Agreement, and is qualified in its entirety by reference
to such Agreements, copies of which are filed as Exhibits to this
Schedule 13D, and are hereby incorporated by reference.
<PAGE> 16
CUSIP No. 053431 10 2 13D Page 16 of 17 Pages
To the best knowledge of the undersigned, there are no other
contracts, arrangements, understandings or relationships (legal or
otherwise) among the persons named in Item 2 between such persons and
any person with respect to any securities of the Issuer, including but
not limited to, transfer or voting of any of the securities, finder's
fees, joint ventures, loan or option agreements, puts or calls,
guarantees of profits, division of profits or loss, or the giving or
withholding of proxies other than those contained in the Agreements
referenced above.
ITEM 7. MATERIAL TO BE FILED AS EXHIBITS
99.1 Stock Purchase Agreement, dated as of September 16, 1998, by
and between Issuer and RSTW; and
99.2 Shareholder Agreement, dated as of September 16, 1998, by and
among Issuer, RSTW and the Shareholders.
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.
RSTW PARTNERS III, L.P.
By: RSTW Management, L.P.,
its general partner
By: Rice Mezzanine Corporation,
its general partner
By: /s/ JAMES P. WILSON
------------------------
James P. Wilson
Managing Director
By: /s/ DON K. RICE
---------------------------
Name: Don K. Rice
Date: September 28, 1998
By: /s/ JEFFREY P. SANGALIS
---------------------------
Name: Jeffrey P. Sangalis
Date: September 28, 1998
By: /s/ JEFFREY A. TOOLE
---------------------------
Name: Jeffrey A. Toole
Date: September 28, 1998
By: /s/ JAMES P. WILSON
---------------------------
Name: James P. Wilson
Date: September 28, 1998
<PAGE> 17
CUSIP No. 053431 10 2 13D Page 17 of 17 Pages
ATTACHED EXHIBITS
<TABLE>
<S> <C>
Exhibit 99.1 Stock Purchase Agreement, dated as of September 16, 1998, by and between Issuer and RSTW;
and
Exhibit 99.2 Shareholder Agreement, dated as of September 16, 1998, by and among Issuer, RSTW and the
Shareholders.
</TABLE>
<PAGE> 1
================================================================================
EXHIBIT 99.1
STOCK PURCHASE AGREEMENT
AVALON COMMUNITY SERVICES, INC.
THE "COMPANY"
AND
RSTW PARTNERS III, L.P.
THE "PURCHASER"
SEPTEMBER 16, 1998
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Article I Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Article II The Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.01 The Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.02 Legend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.03 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.04 Stock Register . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.05 Transfer and Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.06 Lost, Stolen, Mutilated, or
Destroyed Certificates . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.07 Adjustments to Number of Shares Purchasable . . . . . . . . . . . . . . . . . 9
Article III Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
3.01 Representations and Warranties of the
Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
3.02 Representations and Warranties of the
Purchaser . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Article IV Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
4.01 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
4.02 Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
4.03 Inspection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
4.04 Certain Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
4.05 Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
4.06 Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
4.07 Existence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
4.08 Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
4.09 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
4.10 Maintenance of Exchange Quotation . . . . . . . . . . . . . . . . . . . . . 20
4.11 Board of Directors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
4.12 Employment Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Article V Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
5.01 Opinion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
5.02 Note Agreement Conditions . . . . . . . . . . . . . . . . . . . . . . . . . 21
</TABLE>
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<TABLE>
<CAPTION>
<S> <C> <C>
5.03 Material Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
5.04 Shareholder Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
5.05 Representations and Agreements . . . . . . . . . . . . . . . . . . . . . . 21
5.06 Proceedings; Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
5.07 Closing Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Article VI Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
6.01 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
6.02 Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
6.03 Integration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
6.04 Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
6.05 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
6.06 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
6.07 Successors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
6.08 Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
6.09 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
6.10 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
6.11 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
6.12 Other Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
6.13 Choice of Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
6.14 Duties Among Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
ANNEX A Form of Shareholder Agreement
SCHEDULE I Capitalization
</TABLE>
ii
<PAGE> 4
STOCK PURCHASE AGREEMENT
This STOCK PURCHASE AGREEMENT (the "Agreement") dated as of September
16, 1998, is by and between AVALON COMMUNITY SERVICES, INC., a Nevada
corporation doing business as Avalon Correctional Services, Inc. (the
"Company"), and RSTW PARTNERS III, L.P., a Delaware limited partnership
("Purchaser").
W I T N E S S E T H:
WHEREAS, the Company, Southern Corrections Systems, Inc., an Oklahoma
corporation ("SCS"), and Purchaser have entered into a Note Purchase Agreement
(the "Note Agreement") dated of even date with this Agreement;
WHEREAS, the Company, certain shareholders of the Company and
Purchaser have entered into a Shareholder Agreement (the "Shareholder
Agreement") dated of even date with this Agreement; and
WHEREAS, Purchaser is willing to enter into and consummate the
transactions contemplated by the Note Agreement only if, among other things,
the Company and certain shareholders of the Company enter into, and perform
under, this Agreement and the Shareholder Agreement.
NOW, THEREFORE, in consideration of the foregoing, the mutual
covenants contained in this Agreement, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
Purchaser and the Company, intending to be legally bound, agree as follows:
ARTICLE I
DEFINITIONS
As used in this Agreement, the following terms have the meanings
indicated:
Additional RSTW Shares. This term is defined in Section 2.07(b).
Adjustment Fair Market Value. With respect to the issuance of any
Capital Stock by the Company, and as of any date of determination, the
lesser of (a) the Fair Market Value or (b) the purchase price in cash
that a Person not an Affiliate of the Company offers to the Company
for such Capital Stock (provided that the Company has received an
opinion from an independent investment banker acceptable to the
Holders that such purchase price is fair and reasonable under the
circumstances).
Affiliate. With respect to any Person, (a) a Person that, directly or
indirectly or through one or more intermediaries, controls, is
controlled by, or is under common control with,
1
<PAGE> 5
such Person; (b) any Person of which such Person or such Person's
spouse is an officer, director, security holder, partner, or, in the
case of a trust, the beneficiary or trustee, and (c) any Person that
is an officer, director, security holder, partner, or, in the case of
a trust, the beneficiary or trustee of such Person. The term
"control" as used with respect to any Person, means the possession,
directly or indirectly, of the power to direct or cause the direction
of the management or policies of such Person, whether through the
ownership of voting securities, by contract, or otherwise.
Agreement. This term is defined in the preamble.
Appraised Value. The value determined in accordance with the
following procedures. For a period of thirty (30) days after the date
of a Valuation Event (the "Negotiation Period"), each party to this
Agreement agrees to negotiate in good faith to reach agreement upon
the Appraised Value of the securities or property at issue, as of the
date of the Valuation Event, which will be the fair market value of
such securities or property, without premium for control or discount
for minority interests, illiquidity, or restrictions on transfer. In
the event that the parties are unable to agree upon the Appraised
Value of such securities or other property by the end of the
Negotiation Period, then the Appraised Value of such securities or
property will be determined for purposes of this Agreement by a
recognized appraisal or investment banking firm mutually agreeable to
the Holders and the Company (the "Appraiser"). If the Holders and the
Company cannot agree on an Appraiser within fifteen (15) days after
the end of the Negotiation Period, the Company, on the one hand, and
the Holders, on the other hand, shall each select an Appraiser within
twenty-one (21) days after the end of the Negotiation Period and those
two Appraisers shall select within twenty-five (25) days after the end
of the Negotiation Period an independent Appraiser to determine the
fair market value of such securities or property, without premium for
control or discount for minority interests. Such independent
Appraiser shall be directed to determine fair market value of such
securities or property as soon as practicable, but in no event later
than thirty (30) days from the date of its selection. The
determination by an Appraiser of the fair market value will be
conclusive and binding on all parties to this Agreement. Appraised
Value of each share of Common Stock at a time when (i) the Company is
not a reporting company under the Exchange Act and (ii) the Common
Stock is not traded in the organized securities markets, will, in all
cases, be calculated by determining the Appraised Value of the entire
Company taken as a whole and dividing that value by the sum of (x) the
number of shares of Common Stock then outstanding plus (y) the number
of shares of Common Stock Equivalents, without premium for control or
discount for minority interests, illiquidity, or restrictions on
transfer. The costs of the Appraiser will be borne by the Company.
In no event will the Appraised Value of the Common Stock or Other
Securities be less than the per share consideration received or
receivable with respect to the Common Stock or securities or property
of the same class as the Other Securities, as the case may be, in
connection with a pending transaction involving a sale, merger,
recapitalization, reorganization, consolidation, or share exchange,
dissolution of the Company, sale or transfer of all or a majority of
its assets or revenue or income generating capacity, or similar
transaction.
2
<PAGE> 6
The prevailing market prices for any security or property will not be
dispositive of the Appraised Value thereof.
Appraiser. This term is defined in the definition of Appraised Value.
Average Market Value. The average of the Closing Price for the
security in question for the thirty (30) trading days immediately
preceding the date of determination.
Buyer. This term is defined in Section 5.02(a)(ii) of the Shareholder
Agreement.
Capital Stock. As to any Person, its common stock and any other
capital stock of such Person authorized from time to time, and any
other shares, options, interests, participations, or other equivalents
(however designated) of or in such Person, whether voting or
nonvoting, including, without limitation, common stock, options,
warrants, preferred stock, phantom stock, stock appreciation rights,
preferred stock, convertible notes or debentures, stock purchase
rights, and all agreements, instruments, documents, and securities
convertible, exercisable, or exchangeable, in whole or in part, into
any one or more of the foregoing.
Change of Control. This term is defined in Section 11.1 of the Note
Agreement.
Closing Date. September 16, 1998.
Closing Price.
(a) If the primary market for the security in question is
a national securities exchange registered under the Exchange Act or
other market or quotation system in which last sale transactions are
reported on a contemporaneous basis, the last reported sales price,
regular way, of such security for such day, or, if there has not been
a sale on such trading day, the highest closing or last bid quotation
therefor on such trading day (excluding, in any case, any price that
is not the result of bona fide arm's length trading); or
(b) If the primary market for such security is not an
exchange or quotation system in which last sale transactions are
contemporaneously reported, the highest closing or last bona fide bid
quotation by disinterested Persons in the over-the-counter market on
such trading day as reported by the National Association of Securities
Dealers or such other generally accepted source of publicly reported
bid quotations as the Holders designate.
Common Stock. The common stock, par value $.001 per share, of the
Company.
Common Stock Equivalent. Any option, warrant, right, or similar
security exercisable into, exchangeable for, or convertible into
Common Stock.
3
<PAGE> 7
Commission. The Securities and Exchange Commission and any successor
federal agency having similar powers.
Company. Avalon Community Services, Inc., a Nevada corporation doing
business as Avalon Correctional Services, Inc., and any successor or
assign, and, unless the context requires otherwise, the term Company
includes any Subsidiary.
Convertible Note Agreement. The Debenture Purchase Agreement dated as
of August 26, 1997 by and between Company and the purchasers listed on
Schedule A thereto, as in effect on the Closing Date.
Convertible Notes. The Company's 7.5% Convertible Debentures due
August 26, 2007 and September 12, 2007, respectively, in the aggregate
principal amount of $4,150,000, issued pursuant to the Convertible
Note Agreement.
Co-Sell Shares. This term is defined in Section 5.02(c) of the
Shareholder Agreement.
Co-Sellers. This term is defined in Section 5.02(c) of the
Shareholder Agreement.
Dilution Fee. This term is defined in Article III of the Shareholder
Agreement.
Election Notice. This term is defined in Section 5.02(b) of the
Shareholder Agreement.
Employment Agreement. This term is defined in Section 11.1 of the
Note Agreement.
Exchange Act. The Securities Exchange Act of 1934, as amended, and
the rules and regulations thereunder.
Exchange Common Stock. This term is defined in Section 6.12 of the
Shareholder Agreement.
Exchange Company. This term is defined in Section 6.12 of the
Shareholder Agreement.
Exchange Notice. This term is defined in Section 6.12 of the
Shareholder Agreement.
Fair Market Value.
(a) As to securities regularly traded in the organized
securities markets, the Average Market Value; and
(b) as to all securities not regularly traded in the
securities markets and other property, the fair market value of such
securities or property as determined in good faith by the Board of
Directors of the Company at the time it authorizes the transaction (a
"Valuation Event") requiring a determination of Fair Market Value
under this Agreement;
4
<PAGE> 8
provided, however, that, at the election of the Holders, the Fair
Market Value of such securities and other property will be the
Appraised Value.
GAAP. The generally accepted accounting principles, applied on a
consistent basis, as set forth in Opinions of the Accounting
Principles Board of the American Institute of Certified Public
Accountants and/or in statements of the Financial Accounting Standards
Board and/or their respective successors and which are applicable in
the circumstances as of the date in question, provided, that the
Company may not change the use or application of any accounting
method, practice or principle without the prior written consent of
Purchaser, which consent may require that an adjustment be made to any
and all the financial covenants and the capital expenditure covenant
set forth herein. Accounting principles are applied on a "consistent
basis" when the accounting principles observed in a current period are
comparable in all material respects to those accounting principles
applied in a preceding period.
Holders. Purchaser and all Persons holding Registrable Securities,
except that neither the Company nor any Shareholder nor any Affiliate
of the Company or the Shareholder will at any time be a Holder.
Unless otherwise provided in this Agreement, in each instance that the
Holders are required to request or consent in concert to an action,
the Holders will be deemed to have requested or consented to such
action if the Holders of a majority-in-interest of the Registrable
Securities so request or consent.
Indebtedness. For any Person: (a) all indebtedness, whether or not
represented by bonds, debentures, notes, securities, or other
evidences of indebtedness, for the repayment of money borrowed, (b)
all indebtedness representing deferred payment of the purchase price
of property or assets, (c) all indebtedness under any lease which, in
conformity with GAAP, is required to be capitalized for balance sheet
purposes and leases of property or assets made as a part of any sale
and lease-back transaction if required to be capitalized, (d) all
indebtedness under guaranties, endorsements, assumptions, or other
contractual obligations, including any letters of credit, or the
obligations in respect of, or to purchase or otherwise acquire,
indebtedness of others, (e) all indebtedness secured by a Lien
existing on property owned, subject to such Lien, whether or not the
indebtedness secured thereby shall have been assumed by the owner
thereof, and (f) all amendments, renewals, extensions, modifications
and refundings of any indebtedness or obligations referred to in
clauses (a), (b), (c), (d) or (e).
Indemnified Party. This term is defined in Section 6.01 hereof and in
Section 10.01 of the Shareholder Agreement.
Initial Holders. Purchaser and any Affiliate of Purchaser to which
any of the Shares or any part of or interest in the Shares is
transferred or assigned.
Intellectual Property. This term is defined in Section 3.01(g).
5
<PAGE> 9
Lien. Any lien, mortgage, security interest, tax lien, pledge,
encumbrance, financing statement, or conditional sale or title
retention agreement, or any other interest in property designed to
secure the repayment of Indebtedness or any other obligation, whether
arising by agreement, operation of law, or otherwise.
Negotiation Period. This term is defined in the definition of
Appraised Value.
New Securities. Any Capital Stock other than (a) the Shares, (b) the
Permitted Stock, (c) Capital Stock issued by the Company to any Person
to pay all or part of the purchase price of any Permitted Acquisition,
and (d) Capital Stock issued in a Qualified Secondary Public Offering.
Note. All or any portion of any of the Senior Subordinated Note (as
defined in the Note Agreement) and any and all documents evidencing
the indebtedness under the Note and any refinancing, refunding, or
replacement of the Note.
Note Agreement. This term is defined in the preamble and includes the
Note Purchase Agreement of even date with this Agreement between the
Company and Purchaser and all documents evidencing indebtedness
thereunder or otherwise related to the Note Agreement as the same may
be amended from time to time, and any refinancing, refunding, or
replacements of the indebtedness under the Note Agreement.
Notice of Sale. This term is defined in Section 5.02(a) of the
Shareholder Agreement.
Other Securities. Any stock, other securities, property, or rights
that the Holders become entitled to receive as a result of owning the
Shares.
Permitted Acquisition. This term is defined in Section 11.1 of the
Note Agreement.
Permitted Stock. The Common Stock and/or options or warrants to
acquire Common Stock set forth on Schedule I attached hereto, issued
or reserved for issuance to the Persons set forth on Schedule I.
Person. This term will be interpreted broadly to include any
individual, sole proprietorship, partnership, joint venture, trust,
unincorporated organization, association, corporation, company,
institution, entity, party, or government (whether national, federal,
state, county, city, municipal, or otherwise, including, without
limitation, any instrumentality, division, agency, body, or department
of any of the foregoing).
Purchaser. This term is defined in the preamble.
Put Option. This term is defined in Section 4.01 of the Shareholder
Agreement.
Put Option Closing. This term is defined in Section 4.05 of the
Shareholder Agreement.
6
<PAGE> 10
Put Option Period. This term is defined in Section 4.01 of the
Shareholder Agreement.
Put Price. This term is defined in Section 4.02 of the Shareholder
Agreement.
Put Shares. The Shares plus any other shares of Capital Stock issued
to any Holder from time to time pursuant to Section 2.07 as a result
of owning the Shares.
Qualified Secondary Public Offering. A firm commitment underwritten
public offering of Common Stock to the general public pursuant to one
or more registration statements declared effective by the Commission
which results in gross cash proceeds of at least $25,000,000.
"Register," "registered," and "registration" refer to a registration
effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of
the effectiveness of such registration statement.
Registrable Securities. (a) The Shares and (b) the Other Securities.
Related Party. An entity wholly owned by a Selling Shareholder or one
or more Related Parties.
RSTW. RSTW Partners III, L.P., a Delaware limited partnership.
Selling Shareholder. This term is defined in Section 5.02 of the
Shareholder Agreement.
Securities Act. The Securities Act of 1933, as amended, and the rules
and regulations thereunder.
Senior Lender. This term is defined in Section 11.1 of the Note
Agreement.
Senior Loan Agreement. This term is defined in Section 11.1 of the
Note Agreement.
Senior Loan Documents. This term is defined in Section 11.1 of the
Note Agreement.
Shareholder and Shareholders. This term is defined in the preamble of
the Shareholder Agreement.
Shareholder Agreement. This term is defined in the preamble and
includes the Shareholder Agreement dated as of the Closing Date
between the Company, certain shareholders of the Company and Purchaser
in substantially the form attached to this Agreement as Annex A and
incorporated in this Agreement by reference.
Shares. The 1,622,448 shares of Common Stock referred to in Section
2.01 issued to Initial Holders on the Closing Date, and all securities
issued upon the subdivision,
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combination or reclassification, or in respect of, or in substitution
for, such shares of Common Stock.
Subsidiary. Each Person of which or in which the Company or its other
Subsidiaries own directly or indirectly fifty-one percent (51%) or
more of (i) the combined voting power of all classes of stock having
general voting power under ordinary circumstances to elect a majority
of the board of directors or equivalent body of such Person, if it is
a corporation or similar person; (ii) the capital interest or profits
interest of such Person, if it is a partnership, joint venture, or
similar entity; or (iii) the beneficial interest of such Person, if it
is a trust, association, or other unincorporated organization.
Valuation Event. This term is defined in the definition of Fair
Market Value.
ARTICLE II
THE SHARES
2.01 The Shares. On the Closing Date, Purchaser agrees to purchase
from the Company for the purchase price set forth beneath the name of Purchaser
on the signature page of this Agreement, and the Company agrees to issue to
Purchaser, the Shares, all in accordance with the terms and conditions of this
Agreement.
2.02 Legend. The Company will deliver to Purchaser on the Closing
Date one or more certificates representing the Shares purchased by Purchaser in
such denominations as Purchaser requests. Such certificates will be issued in
Purchaser's name or in the name or names of its designee or designees, as the
case may be. It is understood and agreed that the certificates evidencing the
Shares will bear the following legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND NOT WITH A VIEW TO DISTRIBUTION OR FOR SALE. THE
SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS,
AND MAY NOT BE PLEDGED, SOLD, OFFERED FOR SALE, TRANSFERRED, OR
OTHERWISE DISPOSED OF IN THE ABSENCE OF REGISTRATION UNDER OR
EXEMPTION FROM SUCH ACT AND ALL APPLICABLE STATE SECURITIES LAWS."
"THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE TERMS
AND PROVISIONS OF A STOCK PURCHASE AGREEMENT AND A SHAREHOLDER
AGREEMENT, EACH DATED AS OF SEPTEMBER 16, 1998, BETWEEN AVALON
COMMUNITY SERVICES, INC. (THE "COMPANY") AND RSTW PARTNERS III, L.P.,
AMONG OTHERS (AS SUCH AGREEMENTS MAY BE SUPPLEMENTED, MODIFIED,
AMENDED, OR RESTATED FROM TIME TO TIME, THE "AGREEMENTS"). COPIES OF
THE AGREEMENTS ARE AVAILABLE AT THE EXECUTIVE OFFICES OF THE COMPANY."
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2.03 Taxes. The issuance of the Shares and any Other Securities
will be made without charge to any Holder for any tax, other than income taxes
assessed on such Holder, in respect of such issuance.
2.04 Stock Register. The Company will, at all times while any of
the Shares remain outstanding, keep and maintain at its principal office or
other location a register in which the registration, transfer, and exchange of
the Shares will be provided for. The Company will not at any time, except upon
the dissolution, liquidation, or winding up of the Company, close such register
so as to result in preventing or delaying the transfer of any Shares.
2.05 Transfer and Exchange. The Shares and all options and rights
under the Shares are transferable, as to all or any part of the Shares, by the
Holders of the Shares, in person or by duly authorized attorney, on the books
of the Company upon surrender of the certificates representing the Shares at
the principal offices of the Company, together with the form of transfer
authorization attached to the certificates representing the Shares duly
executed. Absent any such transfer and subject to the Shareholder Agreement,
the Company may deem and treat the registered Holders of the Shares at any time
as the absolute owners of the Shares for all purposes and will not be affected
by any notice to the contrary. If any of the Shares are transferred in part,
the Company will, at the time of surrender of the certificate representing such
Shares, issue to the transferee a certificate representing the Shares
transferred and to the transferor a certificate representing the Shares not
transferred.
2.06 Lost, Stolen, Mutilated, or Destroyed Certificates. If any
certificate representing the Shares is lost, stolen, mutilated, or destroyed,
the Company will issue a new certificate of like denomination, tenor, and date
as the certificate so lost, stolen, mutilated, or destroyed. Any such new
certificate will constitute a binding obligation of the Company, whether or not
the allegedly lost, stolen, mutilated, or destroyed certificate is at any time
enforceable by any Person.
2.07 Adjustments to Number of Shares.
(a) The number of shares of Common Stock constituting
Shares shall be adjusted, to the extent necessary, to give effect
(without duplication) to the following events:
(i) In case at any time or from time to time, the
holders of any class of Common Stock or Common Stock
Equivalent have received, or (on or after the record date
fixed for the determination of shareholders eligible to
receive) have become entitled to receive, without payment
therefor:
(A) consideration (other than cash) by
way of dividend or distribution; or
(B) consideration (including cash) by
way of spin-off, split-up, reclassification
(including any reclassification in connection with a
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consolidation or merger in which the Company is the
surviving corporation), recapitalization, combination
of shares into a smaller number of shares, or similar
corporate restructuring;
other than additional shares of Common Stock issued as a stock
dividend or in a stock-split (adjustments in respect of which
are provided for in Sections 2.07(a)(ii) and (iii)), then, and
in each such case, the Holders will be entitled to receive for
each Share, as of the record date fixed for such distribution,
the greatest per share amount of consideration received by any
holder of any class of Common Stock or Common Stock Equivalent
or to which such holder is entitled less the amount of any
Dilution Fee actually and irrevocably paid to such Holders.
All such consideration receivable with respect to such a
distribution will be deemed to be outstanding and owned by the
Holders for purposes of determining the amount of
consideration to which the Holders are entitled with respect
to any subsequent distribution.
(ii) If at any time there occurs any stock split,
stock dividend or distribution (including, without limitation,
any distribution of Common Stock to the holders of the
Convertible Notes in lieu of cash interest payments thereon),
reverse stock split, or other subdivision of the Common Stock,
then the number of Shares will be proportionately adjusted.
(iii) In case of any reclassification or change of
outstanding shares of any class of Common Stock or Common
Stock Equivalent (other than a change in par value, or from
par value to no par value, or from no par value to par value),
or in the case of any consolidation of the Company with, or
merger or share exchange of the Company with or into, another
Person, or in case of any sale of all or a majority of the
property, assets, business, income or revenue generating
capacity, or goodwill of the Company, the Company, or such
successor or other Person, as the case may be, will provide
that the Holders of the Shares will thereafter be entitled to
receive the highest per share kind and amount of consideration
received or receivable (including cash) upon such
reclassification, change, consolidation, merger, share
exchange, or sale by any holder of any class of Common Stock
or Common Stock Equivalent that the Shares entitle the Holders
to receive immediately prior to such reclassification, change,
consolidation, merger, share exchange, or sale (as adjusted
pursuant to Section 2.07(a)(i) and otherwise in this
Agreement). Any such successor Person, which thereafter will
be deemed to be the Company for purposes of the Shares, will
provide for adjustments that are as nearly equivalent as may
be possible to the adjustments provided for by this Section
2.07.
(iv) If at any time the Company issues or sells
any shares of any Common Stock or any Common Stock Equivalent,
other than Permitted Stock, at a per unit or share
consideration (which consideration will include the price paid
upon issuance plus the minimum amount of any exercise,
conversion, or similar
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<PAGE> 14
payment made upon exercise or conversion of any Common Stock
Equivalent) less than the Adjustment Fair Market Value (which
determination shall exclude any underwriter commissions or
discounts payable in respect of any such issuance) per share
of Common Stock immediately prior to the time such Common
Stock or Common Stock Equivalent is issued or sold (the
"Additional Securities"), then the number of shares of Common
Stock issued to all Holders will equal the aggregate number of
Common Stock set forth beneath the name of each Purchaser on
the signature pages of this Agreement, as adjusted upwards by
taking the product of the Adjustment Fair Market Value of the
Shares multiplied by a fraction, the numerator of which is the
total Adjustment Fair Market Value of the Shares (i.e., the
number of shares of Common Stock held by such Holder
multiplied by the Adjustment Fair Market Value per share) plus
the total consideration paid to Company for the Additional
Securities (i.e., the number of Additional Securities
multiplied by the price per share paid to the Company), and
the denominator of which is the total number of shares of
Common Stock outstanding after the issuance of the Additional
Securities (for purposes of this Section 2.07(iv), the date as
of which the Adjustment Fair Market Value per share of Common
Stock will be computed will be the earlier of the date upon
which the Company (aa) enters into a firm contract for the
issuance of such shares, or (bb) issues such shares); and
(v) In case any event occurs as to which the
preceding Sections 2.07(a)(i) through (iv) are not strictly
applicable, but as to which the failure to make any adjustment
would not fairly protect the purchase rights represented by
the Shares in accordance with the essential intent and
principles of this Agreement, then, in each such case, the
Holders may appoint an independent investment bank or firm of
independent public accountants, which will give its opinion as
to the adjustment, if any, on a basis consistent with the
essential intent and principles established in this Agreement,
necessary to preserve the purchase rights represented by the
Shares. Upon receipt of such opinion, the Company will
promptly deliver a copy of such opinion to the Holders and
will make the adjustments described in such opinion. The fees
and expenses of such investment bank or independent public
accountants will be borne by the Company.
(b) At any time and from time to time that the Company
issues any shares of Common Stock to any holder of Permitted Stock
upon the exercise of any options or warrants constituting Permitted
Stock, the Company shall issue the Holders additional shares of Common
Stock of the Company (hereinafter "Additional RSTW Shares") in an
amount equal to 25% of the Common Stock of the Company so issued to
such holder of Permitted Stock (on a fully diluted basis), but only to
the extent the shares of Common Stock of the Company so issued to such
holder were not included in the fully diluted share calculation on the
Closing Date (for purposes of determining the number of Shares issued
to RSTW on the Closing Date). Each Additional RSTW Share shall be
issued by the Company to the Holders for a purchase price of $.001 per
share.
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(c) The Company will not by any action, including,
without limitation, amending, or permitting the amendment of, the
charter documents, bylaws, or similar instruments of the Company or
through any reorganization, reclassification, transfer of assets,
consolidation, merger, share exchange, dissolution, issue or sale of
securities, or any other similar voluntary action, avoid or seek to
avoid the observance or performance of any of the terms of this
Agreement or the Shares, but will at all times in good faith assist in
the carrying out of all such terms and in the taking of all such
actions as may be necessary or appropriate to protect the rights of
the Holders against impairment or dilution. Without limiting the
generality of the foregoing, the Company will (i) take all such action
as may be necessary or appropriate in order that the Company may
validly and legally issue fully paid and nonassessable shares of
Common Stock and Other Securities, free and clear of all liens,
encumbrances, equities, and claims and (ii) use its best efforts to
obtain all such authorizations, exemptions, or consents from any
public regulatory body having jurisdiction as may be necessary to
enable the Company to perform its obligations under the Shares.
Without limiting the generality of the foregoing, the Company
represents and warrants that the board of directors of the Company has
determined the purchase price for the Shares to be adequate and the
issuance of the Shares to be in the best interests of the Company.
(d) Any calculation under this Section 2.07 will be made
without rounding, using fractions expressed with a numerator and a
denominator. The number of Shares resulting from such calculations
will be expressed as such a fraction and the Company and any successor
will issue such fractional shares with respect to such shares and will
not issue scrip, cash, or property in lieu of fractional shares.
(e) Except for preferred stock issued by the Company for
Fair Market Value to any Person to pay all or part of the purchase
price of any Permitted Acquisition, the Company will not issue any
Capital Stock other than Common Stock and Common Stock Equivalents,
and will not permit any Subsidiary to issue any Capital Stock (other
than the shares of Capital Stock owned, directly or indirectly, by the
Company on the Closing Date).
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.01 Representations and Warranties of the Company. The Company
represents and warrants to Purchaser that:
(a) The Company is a corporation duly organized and
existing and in good standing under the laws of its state of
incorporation and is qualified or licensed to do business in all other
countries, states, and jurisdictions the laws of which require it to
be so qualified or licensed. The Company has no Subsidiaries or debt
or equity investment in any Person except as set forth on Schedule
4.15 to the Note Agreement. No Person has any rights, whether granted
by the Company or any other Person, to acquire any portion of the
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<PAGE> 16
equity interest of the Company or the assets of the Company except as
set forth on Schedule 4.15 to the Note Agreement.
(b) The Company has, and at all times that this Agreement
is in force will have, the right and power, and is duly authorized, to
enter into, execute, deliver, and perform this Agreement and the
Shareholder Agreement, and the officers of Company executing and
delivering this Agreement and the Shareholder Agreement are duly
authorized to do so. This Agreement and the Shareholder Agreement
have been duly and validly executed, issued and delivered and
constitute the legal, valid and binding obligations of Company,
enforceable in accordance with their respective terms.
(c) The execution, delivery and performance of this
Agreement and the Shareholder Agreement will not, by the lapse of
time, the giving of notice, or otherwise, constitute a violation of
any applicable provision contained in the charter, bylaws, or
organizational documents of the Company or contained in any agreement,
instrument, or document to which the Company is a party or is bound.
(d) As of the Closing Date, the authorized capital stock
of the Company consists of (i) 20,000,000 shares of Common Stock, of
which 3,041,880 shares are issued and outstanding and owned of record
by the persons designated on Schedule I attached hereto, (ii)
4,000,000 shares of Series B common stock, no par value per share, of
which -0- shares are issued and outstanding, and (iii) 1,000,000
shares of preferred stock, $.001 par value per share, of which -0-
shares are issued and outstanding. All such issued and outstanding
shares have been duly authorized and validly issued, are fully paid
and nonassessable, and have been offered, issued, sold, and delivered
by Company free from preemptive rights, rights of first refusal, or
similar rights and in compliance with applicable federal and state
securities laws. Except pursuant to this Agreement and except for the
Permitted Stock, the Company is not obligated to issue or sell any
Capital Stock, and, except for this Agreement and the Shareholder
Agreement, neither the Company nor the Shareholder is party to, or
otherwise bound by, any agreement affecting the voting of any Capital
Stock. Except for the Shareholder Agreement, the Convertible Note
Agreement, existing warrant agreements, and underwriter warrant
agreements previously issued, the Company is not, nor will it be, a
party to, or otherwise bound by, any agreement obligating it to
register any of its Capital Stock.
(e) The Shares have been duly and validly authorized and,
when issued in accordance with the terms of this Agreement will be
validly issued, fully paid, and nonassessable and free of preemptive
rights, rights of first refusal, or similar rights.
(f) The Company has good, indefeasible, merchantable, and
marketable title to, and ownership of, all of its assets free and
clear of all liens, pledges, security interests, claims, or other
encumbrances except those in favor of (i) the Purchaser pursuant to
the Note Agreement or (ii) the Senior Lender pursuant to the Senior
Loan Documents.
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(g) The Company has the exclusive right to use all
patents, patent rights, patent applications, licenses, inventions,
trade secrets, know-how, proprietary techniques, including processes
and substances, trademarks, service marks, trade names, and copyrights
used in or necessary or desirable to its business as presently, or
presently proposed to be, conducted (the "Intellectual Property"), and
the use by the Company of the Intellectual Property does not infringe
the rights of any other Person. No other Person is infringing the
rights of the Company in any of the Intellectual Property. The
Company owes no royalties, honoraria, or fees to any Person by reason
of its use of any of Intellectual Property.
(h) There is not now, and at no time during the term of
this Agreement or the Shareholder Agreement will there be, any
agreement, arrangement, or understanding involving the Company or any
shareholder of the Company, other than this Agreement, the Shareholder
Agreement, and the documents contemplated hereby and thereby,
modifying, restricting, or in any way affecting the rights of any
security holder to vote securities of the Company.
(i) Each of the representations and warranties made by
the Company pursuant to the Note Agreement and the Shareholder
Agreement is true and correct.
(j) None of the documents, instruments, or other
information furnished to the Purchaser by the Company, contains any
untrue statement of a material fact or omits to state any material
fact necessary in order to make any statements made therein not
misleading. No representation, warranty, or statement made by the
Company in this Agreement, the Note Agreement, the Shareholder
Agreement or in any document, certificate, exhibit or schedule
attached hereto or thereto or delivered in connection herewith or
therewith, contains or will contain any untrue statement of a material
fact, or omits or will omit to state a material fact necessary to make
any statements made herein or therein not misleading. There is no
fact that materially and adversely affects the condition (financial or
otherwise), results of operations, business, properties, or prospects
of the Company or any of its Subsidiaries that has not been disclosed
in the documents provided to Purchaser.
(k) The Company has filed with the Commission all proxy
statements and periodic reports required to be filed by it under the
Exchange Act (collectively, the "SEC Reports"). The Company has
furnished or made available to the Purchaser copies of the SEC
Reports, each as filed with the Commission. Each SEC Report was in
compliance in all respects with the requirements of the Exchange Act
and the rules and regulations of the Commission thereunder and did not
on the date of its filing (and the SEC Reports as a whole will not on
the Closing Date, except as otherwise disclosed to the Purchaser in
writing), contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which
they were made, not misleading.
3.02 Representations and Warranties of Purchaser. Purchaser
represents and warrants to the Company:
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(a) It is a limited partnership duly organized and
existing and in good standing under the laws of the state of its
organization.
(b) It has the right and power and is duly authorized to
enter into, execute, deliver, and perform this Agreement and the
Shareholder Agreement, and its partners, officers or agents executing
and delivering this Agreement and the Shareholder Agreement are duly
authorized to do so. This Agreement and the Shareholder Agreement
have been duly and validly executed, issued, and delivered and
constitute the legal, valid, and binding obligation of Purchaser,
enforceable in accordance with its terms.
(c) It (i) is an "accredited investor," as that term is
defined in Regulation D under the Securities Act; and (ii) has such
knowledge, skill, and experience in business and financial matters,
based on actual participation, that it is capable of evaluating the
merits and risks of an investment in the Company and the suitability
thereof as an investment for Purchaser.
(d) Except as otherwise contemplated by this Agreement
and the Shareholder Agreement, Purchaser is acquiring the Shares for
investment for its own account and not with a view to any distribution
thereof in violation of applicable securities laws.
(e) It agrees that the certificates representing the
Shares will bear the legends referenced in this Agreement, and the
Shares, will not be offered, sold, or transferred in the absence of
registration or exemption under applicable securities laws.
ARTICLE IV
COVENANTS
The Company covenants and agrees as follows:
4.01 Financial Statements. The Company will keep books of account
and prepare financial statements and will cause to be furnished to Purchaser or
other Holder (all of the foregoing and following to be kept and prepared in
accordance with United States generally accepted accounting principles applied
on a consistent basis):
(a) As soon as available, and in any event within ninety
(90) days after the end of each fiscal year of the Company (unless the
Company has requested an extension from the Commission regarding the
date of filing of the Company's Form 10-K, in which case the ninety
(90) day period referenced above shall instead be one hundred-five
(105) days), beginning with the fiscal year ending December 31, 1998,
(i) a copy of the financial statements of the Company for such fiscal
year containing a balance sheet, statement of income, statement of
stockholders' equity, and statement of cash flow as at the end of such
fiscal year and for the fiscal year then ended, in each case setting
forth in comparative form the figures for the preceding fiscal year,
all in reasonable detail and audited by Grant Thornton, LLP or any
"Big Four" firm of independent certified public
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<PAGE> 19
accountants (or any other firm of independent certified public
accountants of recognized national standing selected by the Company
and consented to by the Holders to the effect that such financial
statements have been prepared in accordance with GAAP; (ii) a letter
from such independent certified public accountants confirming the
calculations set forth in the officers' certificate delivered
simultaneously therewith in accordance with Section 4.01(g); and (iii)
the Company's unaudited comparison of the actual results during such
fiscal year to those originally budgeted by the Company prior to the
beginning of such fiscal year, along with management's discussion and
analysis of variances, as well as, variances between actual results
for such fiscal year and actual results for the previous fiscal year.
The annual audit report required hereby shall not be qualified on the
basis that the Company is not a going concern or otherwise qualified
or limited because of restricted or limited examination by the
accountant of any material portion of any of the records of the
Company.
(b) As soon as available, and in any event within thirty
(30) days after the end of each calendar month, a copy of an unaudited
financial report of the Company as of the end of such calendar month
and for the portion of the fiscal year then ended, containing balance
sheets, statements of income, and statements of cash flow, in each
case setting forth in comparative form the figures for the
corresponding period of the preceding fiscal year, along with
management's discussion and analysis all in reasonable detail,
including, without limitation, a comparison of the actual results for
such period to those originally budgeted by the Company prior to the
beginning of such fiscal period and for the fiscal year to date.
(c) Simultaneously with the delivery of financial information
pursuant to Section 4.01(b) in respect of any month which is the last
month of any fiscal quarter, management's discussion and analysis of
variances between the results for the portion of the current fiscal
year ended on the last day of such fiscal quarter and the
corresponding period of the preceding fiscal year.
(d) As soon as available, and in any event within 60 days
after the Closing Date, an unaudited balance sheet of the Company,
dated as of the Closing Date, which gives effect to the issuance of
the Senior Subordinated Note and the Securities Documents, and the
financing transactions contemplated by the Senior Loan Agreement as if
all commitments therein available to the Company as of the Closing
Date were fully utilized, certified by the Chief Executive Officer and
the Vice President of Finance of the Company as fairly presenting the
Company's financial position.
(e) On or before thirty (30) days prior to the beginning
of each fiscal year of the Company, an annual budget or business plan
for such fiscal year, including a projected consolidated and
consolidating balance sheet, income statement, and cash flow statement
for such year, and, promptly during each fiscal year, all revisions
thereto approved by the Board of Directors of the Company.
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(f) as soon as available, copies of all final reports or
letters submitted to the Company by its independent certified public
accountants in connection with each annual, interim or special audit
of the financial statements of the Company made by such accountants,
including, without limitation, any management report, and the Company
agrees to obtain such a report in connection with each of the annual
audits.
(g) Concurrently with the delivery of each of the
financial statements referred to in Section 4.01(a)and Section
4.01(b), a certificate of an authorized officer of the Company in the
form of the officer's certificate attached to the Note Agreement as
Exhibit C (i) stating that the financial statements attached have been
prepared in accordance with GAAP and fairly and accurately present
(subject to year-end audit adjustments, for the annual certificates)
the financial condition and results of operations of the Company at
the date and for the period indicated therein, (ii) containing
summaries of accounts payable (including a list of any payables that
are more than thirty (30) days past due), accounts receivable agings,
and inventory, (iii) (A) containing a schedule of the outstanding
Indebtedness for borrowed money of the Company describing in
reasonable detail each such debt issue or loan outstanding, the name,
address and telephone/fax numbers of each of the holders or lenders,
as the case may be, of such debt issue or loan outstanding, the
principal amount and amount of accrued and unpaid interest with
respect to each such debt issue or loan outstanding and (B) making a
statement in respect each thereof similar to statement required in
clause (g)(i) above.
(h) As soon as available, (i) a copy of each financial
statement, report, notice or proxy statement sent by the Company to
its stockholders in their capacity as stockholders, (ii) a copy of
each regular, periodic or special report, registration statement, or
prospectus filed by the Company with any securities exchange or the
Commission or any successor agency, (iii) any material order issued by
any court, governmental authority, or arbitrator in any material
proceeding to which the Company is a party, (iv) copies of all press
releases and other statements made available generally by the Company
to the public generally concerning material developments in the
Company's business, and (v) a copy of all correspondence and reports
sent by the Company to the Senior Lender (except for ordinary loan
administration reporting pertaining any assets that serve as
collateral for the Senior Loans and accounts payable, unless otherwise
requested by the Holders).
(i) Promptly, such additional information concerning the
Company as any Holder may request, including, without limitation,
auditor management reports and audit "waive" lists.
4.02 Laws. The Company will comply with all applicable statutes,
regulations, and orders of the United States, domestic and foreign states, and
municipalities, agencies, and instrumentalities of the foregoing applicable to
the Company.
4.03 Inspection. The Company will permit any representative
designated by the Holders to (a) visit and inspect any of the properties of the
properties of the Company; (b) examine the corporate and
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financial records of the Company and make copies thereof or extracts therefrom;
and (c) discuss the affairs, finances, and accounts of the Company with the
directors, officers, key employees, and independent accountants of the Company.
4.04 Certain Actions. Without the prior written consent of the
Holders, which consent may be withheld in the sole discretion of the Holders,
the Company will not:
(a) permit to occur any amendment, alteration, or
modification of its Articles of Incorporation, Bylaws or other charter
or organizational documents of the Company, as constituted on the date
of this Agreement, the effect of which, in the sole judgment of the
Holders, would be to alter, impair, or affect adversely, either the
rights and benefits of the Holders or the duties and obligations of
Company under this Agreement or the Shareholder Agreement;
(b) declare or make any dividends or distributions of its
cash, stock, property or assets or redeem, retire, purchase or
otherwise acquire, directly or indirectly, any of the Capital Stock or
capital stock or securities of any Affiliate of the Company, or any
securities convertible or exchangeable into Capital Stock or capital
stock or securities of any Affiliate of the Company, except (i)
pursuant to this Agreement or the Shareholder Agreement or (ii) to the
extent permitted pursuant to Section 7.4 of the Note Agreement;
(c) effect any sale, lease, assignment, transfer, or
other conveyance of any portion of the assets or operations or the
revenue or income generating capacity of the Company (other than
inventory in the ordinary course of business and other assets
reasonably and in good faith determined by the Company to be obsolete
or no longer necessary to the business of the Company) or to take any
such action that has the effect of any of the foregoing;
(d) issue or sell, or otherwise dispose of any Capital
Stock or Capital Stock of any Subsidiary (except for Permitted Stock
or pursuant to this Agreement, the Shareholder Agreement or the
Convertible Note Agreement), or dissolve or liquidate, or effect any
consolidation or merger involving the Company or any Subsidiary or any
reclassification, corporate reorganization, stock split or reverse
stock split, or other change of any class of Capital Stock;
(e) enter into any business that the Company is not
conducting on the date of this Agreement or acquire any substantial
business operation or assets (through a stock or asset purchase or
otherwise);
(f) except for the issuance of Permitted Stock, enter
into any transaction or transactions with any director, officer,
employee, or shareholder of the Company, or any Affiliate or relative
of the foregoing except upon terms that, in the opinion of the
Holders, are fair and reasonable and that are, in any event, at least
as favorable as would result in a comparable arm's-length transaction
with a Person not a director, officer, employee, shareholder, or
Affiliate of the Company or any Affiliate or related party of the
foregoing,
18
<PAGE> 22
or advance any monies to any such Persons, except for travel advances
in the ordinary course of business;
(g) increase the amount of benefits payable under any
benefit plan in the aggregate, or increase beyond the amounts
permitted pursuant to the Note Agreement, the aggregate amount of
salary and any other direct and indirect remuneration (including, but
not limited to, employee benefits, professional, management, and
consulting fees and expenses, and bonuses under any plans) paid or
accrued by the Company during any fiscal year to or for the direct or
indirect benefit of any of its officers, directors, Affiliates or
security holders;
(h) except for Permitted Acquisitions, acquire any debt
or equity interest in any Person or establish or acquire a Subsidiary
or make any additional capital contribution or purchase any additional
equity in any Subsidiary or make any advances or loans to any
Subsidiary or transfer any technology or assets to any Subsidiary;
(i) modify, amend, terminate or waive any provision of
the Employment Agreements; or
(j) obligate itself or otherwise agree to take, permit or
enter into any of the events described in subsections (a) through (i)
above.
4.05 Records. The Company and each of its Subsidiaries will keep
books and records of account in which full, true, and correct entries will be
made of all dealings and transactions in relation to its business and affairs
in accordance with GAAP.
4.06 Accountants. The Company will retain independent public
accountants who will audit the consolidated financial statements of the Company
at the end of each fiscal year, and in the event that the services of the
independent public accountants so selected, or any firm of independent public
accounts hereafter employed by Company, are terminated, the Company will
promptly thereafter notify each Holder and upon the Holders' request, the
Company will request the firm of independent public accountants whose services
are terminated to deliver (without liability for such firm) to each Holder a
letter of such firm setting forth the reasons for the termination of their
services and in its notice to each Holder the Company will state whether the
change of accountants was recommended or approved by the board of directors of
the Company or any committee thereof.
4.07 Existence. The Company will maintain in full force and effect
its corporate existence, rights, and franchises and all licenses and other
rights to use Intellectual Property.
4.08 Notice.
(a) In the event of (i) any setting by the Company of a
record date with respect to the holders of any class of Capital Stock
for the purpose of determining which of such holders are entitled to
dividends, repurchases of securities or other distributions, or any
right
19
<PAGE> 23
to subscribe for, purchase or otherwise acquire any shares of Capital
Stock or other property or to receive any other right; or (ii) any
capital reorganization of the Company, or reclassification or
recapitalization of the Capital Stock or any transfer of all or a
majority of the assets, business, or revenue or income generating
capacity of the Company, or consolidation, merger, share exchange,
reorganization, or similar transaction involving the Company; or (iii)
any voluntary or involuntary dissolution, liquidation, or winding up
of the Company; or (iv) any proposed issue or grant by the Company of
any Capital Stock, or any right or option to subscribe for, purchase,
or otherwise acquire any Capital Stock, then, in each such event, the
Company will deliver or cause to be delivered to the Holders a notice
specifying, as the case may be, (A) the date on which any such record
is to be set for the purpose of such dividend, distribution, or right,
and stating the amount and character of such dividend, distribution,
or right; (B) the date as of which the holders of record will be
entitled to vote on any reorganization, reclassification,
recapitalization, transfer, consolidation, merger, share exchange,
conveyance, dissolution, liquidation, or winding-up; (C) the date on
which any such reorganization, reclassification, recapitalization,
transfer, consolidation, merger, share exchange, conveyance,
dissolution, liquidation, or winding-up is to take place and the time,
if any is to be fixed, as of which the holders of record of any class
of Capital Stock will be entitled to exchange their shares of Capital
Stock for securities or other property deliverable upon such event;
(D) the amount and character of any Capital Stock, property, or rights
proposed to be issued or granted, the consideration to be received
therefor, and, in the case of rights or options, the exercise price
thereof, and the date of such proposed issue or grant and the Persons
or class of Persons to whom such proposed issue or grant will be
offered or made; and (E) such other information as the Holders may
reasonably request. Any such notice will be deposited in the United
States mail, postage prepaid, at least thirty (30) days prior to the
date therein specified.
(b) If there is any adjustment as provided above in
Article II, or if any Other Securities become issuable in lieu of the
Shares, the Company will immediately cause written notice thereof to
be sent to each Holder, which notice will be accompanied by a
certificate of the Vice President of Finance of the Company setting
forth in reasonable detail the basis for the Holders' becoming
entitled to receive such Other Securities, the facts requiring any
such adjustment in the number of shares receivable after such
adjustment, or the kind and amount of any Other Securities that are
issuable in respect of the Shares, as the case may be. At the request
of any Holder and upon surrender of any certificate or certificates
representing its Shares, the Company will reissue one or more new
certificates to such Holder conforming to such adjustments.
4.09 Taxes. The Company will file all required tax returns,
reports, and requests for refunds on a timely basis and will pay on a timely
basis all taxes imposed on either of it or upon any of its assets, income, or
franchises.
4.10 Maintenance of Quotation. The Company covenants and agrees
that so long as any Shares are held by any Holder, the Company will cause the
Common Stock to continue to be quoted on the NASDAQ Stock Market, Inc., or
listed for trading on either the New York Stock Exchange or the American Stock
Exchange (unless the Company's Common Stock fails to be so
20
<PAGE> 24
quoted or listed solely as a result of the increase by any such exchange of the
minimum market capitalization requirements applicable to its listed companies).
4.11 Board of Directors. The Company will deliver to Purchaser and
the Holders Representative (i) a certified copy of all materials distributed at
or prior to all meetings of the Company's board of directors, certified as true
and accurate by the Secretary of the Company, promptly following each such
meeting and (ii) a certified copy of the minutes of each of the meetings of the
Company's board of directors, certified as true and accurate by the secretary
of the Company, as soon as available but in any event promptly following the
end of the next subsequent regular meeting of the Company's board of directors.
The Company (a) will permit Purchaser, at all times during which (i) RSTW is a
Holder of all or any portion of the Senior Subordinated Note or the RSTW Common
Stock or any stock, warrants or other equity interest in the Company issued to
it or received by it upon exercise, conversion or exchange thereof or as a
dividend or other distribution with respect thereto, to designate, by written
notice, one Person to serve as a member of the Company's board of directors and
(ii) RSTW is not a Holder of all or any portion of the Senior Subordinated Note
or the RSTW Common Stock or any stock, warrants or other equity interest in the
Company issued to it or received by it upon exercise, conversion or exchange
thereof or as a dividend or other distribution with respect thereto, to
designate, by written notice, one Person to serve as a member of the Company's
board of directors (but only if Purchaser then owns, directly or indirectly,
five percent (5%) or more of the fully diluted capital stock of the Company)
and (b) will permit the Majority Holders (as defined in the Note Agreement), at
all times during which all or any part of the Senior Subordinated Note remains
outstanding, to designate one Person in addition to the Person designated by
Purchaser under the immediately preceding clause (a) to attend and observe all
meetings of the Company's board of directors. The Company will (a) provide
such designee or designees, as the case may be, notice of all such meetings not
less than seven calendar days in advance, except that (x) if longer advance
notice is given to the members of the board of directors, the same advance
notice will be given to such designee or designees, as the case may be, and
(ii) if exceptional circumstances arise which make it prudent for a special
meeting of the board of directors to be called on less than seven calendar
days' notice, then such meeting may be called with such notice as may be
reasonable at the time and the same advance notice given to the members of the
board of directors will be given to such designee or designees, as the case may
be, and (b) provide to such designee or designees, as the case may be, a copy
of all materials distributed at such meetings. Such meetings shall be held in
person at least quarterly, and may be called at any time on two occasions per
calendar year on seven calendar days' actual notice to the Company by the
Person designated to serve as a member of the Company's board of directors by
Purchaser (unless no such Person has been designated to serve as a member of
the Company's board of directors by Purchaser, in which case any Person
designated to serve as an observer of the Company's board of directors by the
Majority Holders shall be permitted to call such meetings). The Purchaser may
change its designee by written notice to the Company. The Company shall
reimburse each such observer for all reasonable expenses incurred in traveling
to and from such meetings and attending such meetings.
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<PAGE> 25
4.12 Employment Agreements. The Company will maintain the
Employment Agreements in full force and effect, and diligently enforce the
Employment Agreements against any parties thereto who violate or attempt to
violate such Employment Agreements.
ARTICLE V
CONDITIONS
The obligations of Purchaser to effect the transactions contemplated
by this Agreement are subject to the following conditions precedent:
5.01 Opinion. Purchaser will have received favorable opinions,
dated the Closing Date, from Robertson & Williams, Inc., counsel for the
Company covering matters raised by the Note Agreement, this Agreement, the
Shareholder Agreement and such other matters as Purchaser or its counsel may
request, and otherwise in form and substance satisfactory to Purchaser and its
counsel.
5.02 Note Agreement Conditions. All of the conditions precedent to
the obligations of Purchaser under the Note Agreement will have been satisfied
in full.
5.03 Material Change. There will have occurred no material adverse
change in the business, prospects, results, operations, or condition, financial
or otherwise, of the Company.
5.04 Shareholder Agreement. The Company and certain shareholders
of the Company will have entered into the Shareholder Agreement with Purchaser.
5.05 Representations and Agreements. Each representation and
warranty of the Company set forth in this Agreement will be true and correct
when made and as of the Closing Date, and the Company will have fully performed
all their covenants and agreements set forth in this Agreement.
5.06 Proceedings; Consents. All proceedings taken in connection
with the transactions contemplated by this Agreement, and all documents
necessary to the consummation of this Agreement, will be satisfactory in form
and substance to Purchaser and their counsel, and Purchaser and their counsel
will have received certificates of compliance and copies (executed or certified
as may be appropriate) of all documents, instruments, and agreements that
Purchaser or such counsel may request in connection with the consummation of
such transactions. All consents of any Person necessary to the consummation of
the transactions contemplated by this Agreement and the Shareholder Agreement
will have been received, be in full force and effect, and not be subject to any
onerous condition.
5.07 Closing Fee. The Company shall have paid to Purchaser a
closing fee of $100,000 (2.0% of the purchase price for the Shares), in
immediately available funds, which fee shall be deemed fully earned and
nonrefundable on the Closing Date. Purchaser may, at its option, deduct the
amount of the closing fee from the purchase price for the Shares.
22
<PAGE> 26
ARTICLE VI
MISCELLANEOUS
6.01 Indemnification. In addition to any other rights or remedies
to which Purchaser and the Holders may be entitled, the Company agrees to and
will indemnify and hold harmless Purchaser, the Holders, and their Affiliates
and their respective successors, assigns, officers, directors, employees,
attorneys, and agents (individually and collectively, an "Indemnified Party")
from and against any and all losses, claims, obligations, liabilities,
deficiencies, diminutions in value, penalties, causes of action, damages,
costs, and expenses (including, without limitation, costs of investigation and
defense, attorneys' fees, and expenses), including, without limitation, those
arising out of the sole or contributory negligence of any Indemnified Party,
that the Indemnified Party may suffer, incur, or be responsible for, arising or
resulting from any misrepresentation, breach of warranty, or nonfulfillment of
any covenant or agreement on the part of the Company under this Agreement, the
Shareholder Agreement, or under any other agreement to which the Company is a
party in connection with this transaction, or from any misrepresentation in or
omission from any certificate or other instrument furnished or to be furnished
to Purchaser or the Holders under this Agreement.
6.02 Default. It is agreed that a violation by any party of the
terms of this Agreement cannot be adequately measured or compensated in money
damages, and that any breach or threatened breach of this Agreement by a party
to this Agreement would do irreparable injury to the nondefaulting party. It
is, therefore, agreed that in the event of any breach or threatened breach by a
party to this Agreement of the terms and conditions set forth in this
Agreement, the nondefaulting party will be entitled, in addition to any and all
other rights and remedies that it may have in law or in equity, to apply for
and obtain injunctive relief requiring the defaulting party to be restrained
from any such breach or threatened breach or to refrain from a continuation of
any actual breach.
6.03 Integration. This Agreement and the Shareholder Agreement
constitute the entire agreement between the parties with respect to the subject
matter hereof and thereof and supersede all previous written, and all previous
or contemporaneous oral, negotiations, understandings, arrangements, and
agreements. This Agreement may not be amended or supplemented except by a
writing signed by Company and each Holder.
6.04 Headings. The headings in this Agreement are for convenience
and reference only and are not part of the substance of this Agreement.
References in this Agreement to Sections and Articles are references to the
Sections and Articles of this Agreement unless otherwise specified.
6.05 Severability. The parties to this Agreement expressly agree
that it is not the intention of any of them to violate any public policy,
statutory or common law rules, regulations, or decisions of any governmental or
regulatory body. If any provision of this Agreement is judicially or
administratively interpreted or construed as being in violation of any such
policy, rule, regulation, or decision, the provision, section, sentence, word,
clause, or combination thereof causing such violation will be inoperative (and
in lieu thereof there will be inserted such provision, sentence, word, clause,
or combination thereof as may be valid and consistent with the intent of the
23
<PAGE> 27
parties under this Agreement) and the remainder of this Agreement, as amended,
will remain binding upon the parties, unless the inoperative provision would
cause enforcement of the remainder of this Agreement to be inequitable under
the circumstances.
6.06 Notices. Whenever it is provided herein that any notice,
demand, request, consent, approval, declaration, or other communication be
given to or served upon any of the parties by another, such notice, demand,
request, consent, approval, declaration, or other communication will be in
writing and will be deemed to have been validly served, given or delivered (and
"the date of such notice" or words of similar effect will mean the date) five
(5) days after deposit in the United States mails, certified mail, return
receipt requested, with proper postage prepaid, or upon receipt thereof
(whether by non-certified mail, telecopy, telegram, express delivery, or
otherwise), whichever is earlier, and addressed to the party to be notified as
follows:
If to Purchaser, at: RSTW Partners III, L.P.
5847 San Felipe, Suite 4350
Houston, Texas 77057
Attention: James P. Wilson
Fax: (713) 783-9750
with courtesy copies to: Patton Boggs LLP
2200 Ross Avenue
Suite 900
Dallas, Texas 75201
Attn: R. Jeffery Cole, Esq.
Fax: (214) 871-2688
If to the Company, at 13401 Railway Drive
Oklahoma City, Oklahoma 73114
Attn: Donald E. Smith
Randall J. Wood, Esq.
Fax: (405) 752-8852
with courtesy copies to: Robertson & Williams
3033 N.W. 63rd Street, Suite 160
Oklahoma City, Oklahoma 73116
Attn: Mark Robertson, Esq.
Fax: (405) 843-6707
or to such other address as each party may designate for itself by like notice.
Notice to any Holder other than Purchaser will be delivered as set forth above
to the address shown on the stock transfer books of the Company unless such
Holder has advised the Company in writing of a different address to which
notices are to be sent under this Agreement. Failure or delay in delivering
courtesy copies of any notice, demand, request, consent, approval, declaration,
or other communication to the persons designated above to receive copies of the
actual notice will in no way
24
<PAGE> 28
adversely affect the effectiveness of such notice, demand, request, consent,
approval, declaration, or other communication. No notice, demand, request,
consent, approval, declaration or other communication will be deemed to have
been given or received unless and until it sets forth all items of information
required to be set forth therein pursuant to the terms of this Agreement.
6.07 Successors. This Agreement will be binding upon and inure to
the benefit of the parties and their respective successors and assigns.
6.08 Remedies. The failure of any party to enforce any right or
remedy under this Agreement, or promptly to enforce any such right or remedy,
will not constitute a waiver thereof, nor give rise to any estoppel against
such party, nor excuse any other party from its obligations under this
Agreement. Any waiver of any such right or remedy by any party must be in
writing and signed by the party against which such waiver is sought to be
enforced.
6.09 Survival. All warranties, representations, and covenants made
by any party in this Agreement or in any certificate or other instrument
delivered by such party or on its behalf under this Agreement will be
considered to have been relied upon by the party to which it is delivered and
will survive the Closing Date, regardless of any investigation made by such
party or on its behalf. All statements in any such certificate or other
instrument will constitute warranties and representations under this Agreement.
6.10 Fees. Any and all fees, costs, and expenses, of whatever kind
and nature, including attorneys' fees and expenses, incurred by the Holders in
connection with the defense or prosecution of any actions or proceedings
arising out of or in connection with this Agreement will be borne and paid by
the Company within ten (10) days of demand by the Holders.
6.11 Counterparts. This Agreement may be executed in any number of
counterparts, which will individually and collectively constitute one
agreement.
6.12 Other Business. It is understood and accepted that Purchaser,
the Holders, and their Affiliates have interests in other business ventures
that may be in conflict with the activities of the Company and that nothing in
this Agreement will limit the current or future business activities of such
parties whether or not such activities are competitive with those of the
Company. The Company and the Shareholder agree that all business opportunities
in any field substantially related to the business of the Company will be
pursued exclusively through the Company.
6.13 CHOICE OF LAW. THIS AGREEMENT HAS BEEN EXECUTED, DELIVERED,
AND ACCEPTED BY THE PARTIES IN THE STATE OF TEXAS WILL BE DEEMED TO HAVE BEEN
MADE IN THE STATE OF TEXAS, AND WILL BE INTERPRETED AND THE RIGHTS OF THE
PARTIES DETERMINED IN ACCORDANCE WITH THE LAWS OF THE UNITED STATES APPLICABLE
THERETO AND THE INTERNAL LAWS OF THE STATE OF TEXAS APPLICABLE TO AN AGREEMENT
EXECUTED, DELIVERED AND PERFORMED THEREIN WITHOUT GIVING EFFECT TO THE
CHOICE-OF-LAW RULES THEREOF OR ANY
25
<PAGE> 29
OTHER PRINCIPLE THAT COULD REQUIRE THE APPLICATION OF THE SUBSTANTIVE LAW OF
ANY OTHER JURISDICTION.
6.14 Duties Among Holders. Each Holder agrees that no other Holder
will by virtue of this Agreement be under any fiduciary or other duty to give
or withhold any consent or approval under this Agreement or to take any other
action or omit to take any action under this Agreement, and that each other
Holder may act or refrain from acting under this Agreement as such other Holder
may, in its discretion, elect.
[REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
26
<PAGE> 30
IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement as of the date first above written.
COMPANY:
AVALON COMMUNITY SERVICES, INC.
By: /s/ DONALD E. SMITH
-------------------------------------
Name: Donald E. Smith
Title: Chief Executive Officer
PURCHASER:
RSTW PARTNERS III, L.P.
By: RSTW Management, L.P.,
its general partner
By: Rice Mezzanine Corporation,
its general partner
By: /s/ PHILIP A. DAVIDSON
-------------------------
Name: Philip A. Davidson
Title:
Number of Shares: 1,622,448
Purchase Price: $5,000,000
<PAGE> 31
SCHEDULES OMITTED
<PAGE> 1
EXHIBIT 99.2
================================================================================
SHAREHOLDER AGREEMENT
AVALON COMMUNITY SERVICES, INC.
THE "COMPANY",
RSTW PARTNERS III, L.P.
THE "PURCHASER",
AND
DONALD E. SMITH,
AND
JERRY M. SUNDERLAND,
EACH A "SHAREHOLDER" AND COLLECTIVELY, THE "SHAREHOLDERS"
SEPTEMBER 16, 1998
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Article I Definitions................................................................................. 1
Article II Holders' Preemptive Rights.................................................................. 1
2.01 Preemptive Right............................................................................ 1
2.02 Notice to Holders........................................................................... 2
2.03 Allocation of Unsubscribed New Securities................................................... 2
Article III Dilution Fee................................................................................ 2
Article IV Put Option.................................................................................. 3
4.01 Grant of Option............................................................................. 3
4.02 Put Price................................................................................... 3
4.03 Exercise of Put Option...................................................................... 4
4.04 Certain Remedies............................................................................ 4
4.05 Put Option Closing.......................................................................... 4
Article V First Refusal; Co-Sale Rights; Look-Up...................................................... 4
5.01 Rights of Co-Sale........................................................................... 4
5.02 Method of Electing Sale; Allocation of Sales................................................ 5
5.03 Sales to Related Parties.................................................................... 6
5.04 Look-Up..................................................................................... 7
Article VI Liquidity................................................................................... 7
6.01 Required Registration....................................................................... 7
6.02 Incidental Registration..................................................................... 7
6.03 Form S-3 Registrations...................................................................... 8
6.04 Rule 144 Availability....................................................................... 8
6.05 Registration Procedures..................................................................... 8
6.06 Allocation of Expenses...................................................................... 10
6.07 Listing on Securities Exchange.............................................................. 11
6.08 Holdback Agreements......................................................................... 11
6.09 Rule 144.................................................................................... 11
6.10 Rule 144A................................................................................... 11
6.11 Limitation on Subsequent Registration Rights................................................ 12
6.12 Other Rights................................................................................ 12
6.13 Exchange Rights............................................................................. 12
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
<S> <C> <C>
Article VII Directors................................................................................... 13
7.01 Voting Agreement............................................................................ 13
7.02 Board of Directors.......................................................................... 13
Article VIII Representations and Warranties; Covenants................................................... 13
8.01 Representations and Warranties and Covenants of the
Company and the Shareholder................................................................. 13
8.02 Representations and Warranties of the Shareholders.......................................... 14
8.03 Representations and Warranties of Purchaser................................................. 15
8.04 Covenants of Shareholders................................................................... 15
Article IX Conditions.................................................................................. 15
9.01 Note Agreement and Stock Agreement Conditions............................................... 15
9.02 Proceedings................................................................................. 15
Article X Miscellaneous............................................................................... 16
10.01 Indemnification............................................................................. 16
10.02 Default..................................................................................... 16
10.03 Integration................................................................................. 16
10.04 Headings.................................................................................... 16
10.05 Severability................................................................................ 17
10.06 Notices..................................................................................... 17
10.07 Successors.................................................................................. 18
10.08 Remedies.................................................................................... 18
10.09 Survival.................................................................................... 18
10.10 Fees........................................................................................ 18
10.11 Counterparts................................................................................ 19
10.12 Other Business.............................................................................. 19
10.13 Choice of Law............................................................................... 19
10.14 Nominees for Beneficial Owners.............................................................. 19
10.15 Fiduciary Duties............................................................................ 19
10.16 Duties Among Holders........................................................................ 19
10.17 Confidentiality............................................................................. 20
</TABLE>
<PAGE> 4
SHAREHOLDER AGREEMENT
Shareholder Agreement (the "Agreement") made as of September 16, 1998,
by and among AVALON COMMUNITY SERVICES, INC. a Nevada corporation doing business
as Avalon Correctional Services, Inc. (the "Company"), RSTW PARTNERS III, L.P.,
a Delaware limited partnership ("Purchaser"), and DONALD E. SMITH and JERRY M.
SUNDERLAND (each a "Shareholder" and, collectively, the "Shareholders").
W I T N E S S E T H:
WHEREAS, the Shareholders collectively own beneficially 29.6% of the
fully-diluted capital stock of the Company;
WHEREAS, the Company and the Purchaser have entered into a Note
Purchase Agreement (the "Note Agreement") dated of even date with this Agreement
pursuant to which the Company has issued a certain 12.5% Senior Subordinated
Note in the stated principal amount of $10 million to Purchaser (the "Note");
WHEREAS, the Company and Purchaser have entered into a Stock Purchase
Agreement (the "Stock Agreement") dated of even date with this Agreement;
WHEREAS, Purchaser is willing to enter into and consummate the
transactions contemplated by the Note Agreement and the Stock Agreement only if,
among other things, the Company and the Shareholders enter into, and perform
under, this Agreement.
NOW, THEREFORE, in consideration of the foregoing, the mutual covenants
contained in this Agreement, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, Purchaser, the
Shareholders, and the Company, intending to be legally bound, agree as follows:
ARTICLE I
DEFINITIONS
Capitalized terms used in this Agreement have the meanings ascribed to
them in the Stock Agreement unless otherwise specifically defined in this
Agreement.
ARTICLE II
HOLDERS' PREEMPTIVE RIGHTS
2.01 Preemptive Right. The Company will not issue or sell any New
Securities without first complying with this Article II. The Company hereby
grants to each Holder the preemptive right to purchase, pro rata, all or any
part of the New Securities that the Company may, from time to time, propose to
sell or issue. In the event New Securities are offered or sold as part of a unit
with other New Securities, the preemptive right granted by this Article II will
<PAGE> 5
apply to such units and not to the individual New Securities composing such
units. Each Holder's pro rata share for purposes of Article II is the ratio that
the number of shares of Common Stock held by such Holder immediately prior to
the issuance of the New Securities, bears to the sum of (x) the total number of
shares of Common Stock then outstanding, plus (y) the number of shares of Common
Stock issuable upon exercise or conversion of all securities exercisable for or
convertible into Common Stock then outstanding.
2.02 Notice to Holders. In the event the Company proposes to issue or
sell New Securities, it will give each Holder written notice of its intention,
describing the type of New Securities and the price and terms upon which the
Company proposes to issue or sell the New Securities. Each Holder will have
thirty (30) days from the date of receipt of any such notice and such
information as the Holders may reasonably request to facilitate their investment
decision to agree to purchase up to its respective pro rata share of the New
Securities for the price (valued at Fair Market Value for any noncash
consideration) and upon the terms specified in the notice by giving written
notice to the Company stating the quantity of New Securities agreed to be
purchased.
2.03 Allocation of Unsubscribed New Securities. In the event a Holder
fails to exercise such preemptive right within such thirty (30) day period, the
other Holders, if any, will have an additional five (5) day period to purchase
such Holder's portion not so agreed to be purchased in the same proportion in
which such other Holders were entitled to purchase the New Securities (excluding
for such purposes such nonpurchasing Holder). Thereafter, the Company will have
ninety (90) days to sell the New Securities not elected to be purchased by the
Holders at the same price and upon the same terms specified in the Company's
notice described in Section 2.02. In the event the Company has not sold the New
Securities within such ninety (90) day period, the Company will not thereafter
issue or sell any New Securities without first offering such securities in the
manner provided above.
ARTICLE III
DILUTION FEE
In the event that, while any Holder beneficially owns any Shares, the
Company pays any cash dividend or makes any cash distribution to any holder of
any class of its Capital Stock other than the Common Stock with respect to such
Capital Stock, each Holder will be entitled to receive in respect of its Shares
a dilution fee in cash (the "Dilution Fee") on the date of payment of such
dividend or distribution, which Dilution Fee will be equal to the difference
between (a) the highest amount per share paid to any class of Capital Stock
times the number of Shares then owned by such Holder, and (b) the amount of such
dividend or distribution otherwise paid to such Holder as a result of its
ownership of any Shares.
ARTICLE IV
PUT OPTION
4.01 Grant of Option. The Company hereby grants to each Holder an
option to sell to the Company, and the Company is obligated to purchase from
each Holder under such option
2
<PAGE> 6
(the "Put Option"), all (or such portion as is designated by any such Holder
pursuant to Section 4.03 below) of the Put Shares. The Put Option will be
effective at any time or times after the earlier to occur of (i) the fifth
anniversary of the date of this Agreement, or (ii) at any time or times after
the occurrence of any of the events listed in any of clauses (a), (b), (c) or
(d) below and will terminate upon the closing of a Qualified Secondary Public
Offering (the "Put Option Period"):
(a) the payment or prepayment of all indebtedness, liabilities
and obligations owing by the Company to Purchaser under the Note
Agreement (other than from the proceeds of a Qualified Secondary Public
Offering);
(b) a Change of Control; or
(c) a merger, consolidation, share exchange, or similar
transaction involving the Company and one or more Persons or a sale in
one or more related transactions of all or a substantial portion of the
assets, business, or revenue or income generating operations of the
Company or any substantial change in the type of business conducted by
the Company; or
(d) after the occurrence and during the continuance of an
Event of Default (as defined in the Note Agreement) pursuant to
Sections 8.1(a), (b), (f) or (h) of the Note Agreement or any failure
of the Company in any material respect to perform any of its
obligations hereunder or under the Stock Agreement; provided, however,
that the Put Option Period will continue with respect to such Event of
Default or other failure, even after the same has been cured, if notice
of exercise of the Put Option by such Holder is provided pursuant to
this Article IV during the continuance of such Event of Default or such
other failure, as the case may be; provided further, however, that any
such Put Option Period will cease to continue with respect to any such
Event of Default or other failure if the Holders have waived in writing
such Event of Default or other failure.
4.02 Put Price. In the event that any Holder exercises the Put Option,
the price (the "Put Price") to be paid to each such Holder pursuant to this
Agreement will be cash (denominated in U.S. Dollars) in the sum of the amount
determined by multiplying (a) the Fair Market Value per share of Common Stock as
of the end of the month immediately preceding the date notice is given of the
exercise of the Put Option pursuant to Section 4.03, times (b) the number of Put
Shares for which the Put Option is being exercised by such Holder.
4.03 Exercise of Put Option. The Put Option may be exercised during the
Put Option Period with respect to all or any portion of the Put Shares, by such
Holder giving notice to the Company and each other Holder during the Put Option
Period of the Holder's election to exercise the Put Option, and the date of the
Put Option Closing (as defined below), which will be not less than fifteen (15)
nor more than thirty (30) days after the date of such notice. The Company will
provide each Holder desiring to exercise its Put Option the name and address of
each other Holder. Notwithstanding the foregoing, if a Holder receives such
notice of another Holder's exercise of such other Holder's Put Option, the
Holder receiving such notice may elect
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to exercise its Put Option and designate a Put Option Closing simultaneous and
pari passu with that of such other Holder.
4.04 Certain Remedies. In the event that the Company defaults in its
obligation to purchase all or any portion of the Put Shares upon exercise of the
Put Option (other than as a result of the circumstances described in the
following sentence), in addition to any other rights or remedies of each Holder,
the unpaid portion of the Put Price will bear interest at the lesser of (i)
twelve and one half percent (12.5%) (or such higher rate as is then applicable
to the Note) or (ii) the highest rate permitted by applicable law. If the Put
Option is exercised at any time that all or any portion of the Put Price is not
permitted to be paid in cash pursuant to the terms of the Senior Loan Agreement,
then, in such event, the portion of the Put Price not paid in cash will bear
interest at the lesser of (i) twelve and one-half percent (12.5%) (or such
higher rate as is then applicable to the Note), or (ii) the highest rate
permitted by applicable law. The Company will, upon the request of any Holder,
execute and deliver to such Holder a promissory note in form and substance
satisfactory to such Holder evidencing such obligation. Upon delivery by the
Company of any such promissory note to any such Holder, such Holder shall
surrender the certificate or certificates evidencing the Put Shares being
purchased, duly endorsed in blank.
4.05 Put Option Closing. The closing for the purchase and sale of all
or such portion of the Put Shares as to which the Holder has notified the
Company of its intention to exercise the Put Option, will take place at the
office of the Company on the date specified in such notice of exercise (a "Put
Option Closing"). At any Put Option Closing, to the extent applicable, the
Holder of the Put Shares will deliver the certificate or certificates evidencing
the Put Shares being purchased, duly endorsed in blank. In consideration
therefor, the Company will deliver to the Holder the Put Price, which will be
payable in cash.
4.06 Restrictions on Sales of Capital Stock Prior to Scheduled Put
Option Date. Notwithstanding anything to the contrary contained in this
Agreement, the Holders shall not sell or otherwise transfer any shares of
Capital Stock held by them in the organized securities markets during the period
used to determine the Put Price preceding the fifth anniversary of the date of
this Agreement, unless, during such period, the Company causes or initiates any
of the events listed in Section 4.01(a), (b), (c) or (d) (in which case, the
Holders shall not be bound by the provisions of this Section 4.06).
ARTICLE V
CO-SALE RIGHTS; LOCK-UP
5.01 Rights of Co-Sale. In the event that any Shareholder intends to
sell or transfer, directly or indirectly, any shares of any class of Capital
Stock held by it to any Person, each Holder will have the right to participate
in such sale or transfer on the terms set forth in this Article V; provided,
however, none of the provisions of this Article V will apply to (i) the sale by
each of Donald E. Smith and Jerry M. Sunderland of up to 25,000 shares per year,
such allowable annual sales limits to be cumulative, in sales transactions which
comply with the manner of sale and volume restrictions of Rule 144 under the
Securities Act, (ii) the sale or transfer by Donald E. Smith of any shares of
Capital Stock to his former spouse, or for payment
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<PAGE> 8
of settlement fees as required by any judicial decree, and for payment of
related tax liabilities resulting from such payment, and for any settlement
approved by the court, (iii) the sale or transfer by Donald E. Smith of any
shares of Capital Stock for settlement of certain notes to Kensington Capital
Plc., and for payment of related tax liabilities resulting from such transfer,
(iv) the sale by Jerry M. Sunderland of any shares of Capital Stock upon his
retirement as an officer of the Company, or (v) any sale by the Shareholder of
shares of Capital Stock in a Qualified Secondary Public Offering, so long as all
Holders have had an opportunity to participate in such offering pursuant to the
registration rights under this Agreement. All restrictions on sale or transfer
of stock by Donald E. Smith or Jerry M. Sunderland will expire at the time they
are no longer employed as Chief Executive Officer and President, respectively,
by the Company.
5.02 Method of Electing Sale; Allocation of Sales. No sale or transfer
by any Shareholder of any shares of Capital Stock will be valid unless the
transferee of such Capital Stock first agrees in writing to be bound by the same
terms and conditions that apply to the Shareholder under this Agreement. In
addition, before any shares of Capital Stock held, directly or indirectly, by
any Shareholder may be sold or transferred to any Person, such Shareholder (as
such, the "Selling Shareholder") will comply with the following provisions:
(a) The Selling Shareholder will deliver or cause to be
delivered a written notice (the "Notice of Sale") to each Holder at
least fifteen (15) days prior to making any such sale or transfer. The
Company agrees to provide the Selling Shareholder with a list of the
names and addresses of each such Holder for such purpose. The Notice of
Sale will include (i) a statement of the Selling Shareholder's bona
fide intention to sell or transfer; (ii) the name of the and address of
the prospective transferee (the "Buyer"); (iii) the number of shares of
Capital Stock of the Company to be sold or transferred; (iv) the terms
and conditions of the contemplated sale or transfer; (v) the purchase
price in cash that the Buyer will pay for such shares of Capital Stock;
(vi) the expected closing date of the transaction; and (vii) such other
information as the Holders may reasonably request to facilitate their
decision as to whether or not to exercise the rights granted by this
Article V.
(b) Any Holder receiving the Notice of Sale may elect to
participate in the contemplated sale or transfer by exercising its
right to co-sell its Capital Stock pursuant to Section 5.02(c). Such
rights may be exercised in the sole discretion of the Holder by
delivering a written notice (an "Election Notice") to the Company and
the Selling Shareholder within fifteen (15) days after receipt of such
Notice of Sale stating the election of the Holder to exercise its right
of co-sale pursuant to Section 5.02(c).
(c) Each Holder may elect to sell or transfer in the
contemplated transaction up to the total of the number of shares of
Capital Stock then held by it. Promptly after the receipt of an
Election Notice exercising such right, the Selling Shareholder will use
its best efforts to cause the Buyer to amend its offer so as to provide
for the Buyer's purchase, upon the same terms and conditions as those
contained in the Notice of Sale, of all of the shares of Capital Stock
elected to be sold in such Election Notices (the "Co-Sell
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<PAGE> 9
Shares"). In the event that the Buyer is unwilling to amend its offer
to purchase all of the Co-Sell Shares in addition to the shares of
Capital Stock described in the related Notice of Sale, if the Selling
Shareholder desires to proceed with the sale, the total number of
shares that such Buyer is willing to purchase will be allocated to the
Selling Shareholder and each Holder having given an Election Notice
exercising its right pursuant to this Section 5.02(c) (the
"Co-Sellers") in proportion to the aggregate number of shares of
Capital Stock held by each such Person; provided, however, that no such
Person will be so allocated a number of shares greater than the number
of shares that it has sought to sell to such Buyer in the related
Notice of Sale or Election Notice. All Capital Stock sold or
transferred by the Selling Shareholder and the Co-Sellers with respect
to a single Notice of Sale under Section 5.02(b) will be sold or
transferred to the Buyer in a single closing on the terms described in
such Notice of Sale, and each such share will receive the same per
share consideration. In the event that the Buyer for whatever reason,
declines to purchase any shares from any Holder delivering an Election
Notice, then (x) the Selling Shareholder will not be permitted to sell
or transfer any shares of Capital Stock to such Buyer and (y) the
shares of Capital Stock of the Selling Shareholder that were to have
been sold or transferred to the Buyer will be subject to the Holders'
right of first refusal pursuant to Section 5.02(c) for a period of
thirty (30) days thereafter on the terms and conditions that the Buyer
would have purchased such shares of Capital Stock from the Selling
Shareholder had it not declined to purchase shares from the Co-Seller
under this Section 5.02(c).
(d) No Prejudice to Put Option. Nothing contained in this
Article V shall limit, impair or restrain in any way the rights of any
Holder to exercise the Put Option under any of the circumstances
described in Section 4.01 of this Agreement.
5.03 Sales to Related Parties. No sale or transfer of shares of Capital
Stock by the Shareholder to a Related Party will be subject to the provisions of
Section 5.02; provided, however, that such Related Party first agrees to assume
the obligations of the Shareholder (without relieving the Shareholder of any
obligations under this Agreement) under this Agreement with respect to the
shares of Capital Stock thereby acquired by it and to be bound by the same terms
and conditions that apply to the Shareholder under this Agreement and the Stock
Agreement in a written instrument in a form and substance satisfactory to the
Holders.
5.04 Lock-Up Notwithstanding anything to the contrary contained in this
Article V or elsewhere in this Agreement, until such time as the Holders no
longer own any Shares, neither Donald E. Smith nor Jerry M. Sunderland shall be
permitted to sell, pledge or otherwise dispose of any Capital Stock of the
Company to any Person or Persons; provided, however, this Section 5.04 will not
apply to any sale of any Capital Stock otherwise permitted by Section 5.01(i),
(ii), (iii), (iv) or (v) or 5.03 of this Agreement.
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ARTICLE VI
LIQUIDITY
6.01 Required Registration. At any time the Holders may, upon not more
than two occasions, make a written request to the Company requesting that the
Company effect the registration of Registrable Securities. After receipt of such
a request, the Company will, as soon as practicable, notify all Holders of such
request and use its best efforts to effect the registration of all Registrable
Securities that the Company has been so requested to register by any Holder for
sale, all to the extent required to permit the disposition (in accordance with
the intended method or methods thereof) of the Registrable Securities so
registered. In no event will any Person other than a Holder be entitled to
include any shares of Capital Stock in any registration statement filed pursuant
to this Section 6.01.
6.02 Incidental Registration. If the Company at any time proposes to
file on its behalf or on behalf of any of its security holders a registration
statement under the Securities Act on any form (other than a registration
statement on Form S-4 or S-8 or any successor form unless such forms are being
used in lieu of or as the functional equivalent of, registration rights) for any
class that is the same or similar to Registrable Securities, it will give
written notice setting forth the terms of the proposed offering and such other
information as the Holders may reasonably request to all holders of Registrable
Securities at least thirty (30) days before the initial filing with the
Commission of such registration statement, and offer to include in such filing
such Registrable Securities as any Holder may request. Each Holder of any such
Registrable Securities desiring to have Registrable Securities registered under
this Section 6.02 will advise the Company in writing within thirty (30) days
after the date of receipt of such notice from the Company, setting forth the
amount of such Registrable Securities for which registration is requested. The
Company will thereupon include in such filing the number of Registrable
Securities for which registration is so requested, and will use its best efforts
to effect registration under the Securities Act of such Registrable Securities.
Notwithstanding the foregoing, if the managing underwriter or
underwriters, if any, of such offering deliver a written opinion to each Holder
of such Registrable Securities that the success of the offering would be
materially and adversely affected by the inclusion of the Registrable Securities
requested to be included, then the amount of securities to be offered for the
accounts of Holders will be reduced pro rata (according to the Registrable
Securities proposed for registration) to the extent necessary to reduce the
total amount of securities to be included in such offering to the amount
recommended by such managing underwriter or underwriters; provided, however,
that if securities are being offered for the account of other persons as well as
the Company, then with respect to the Registrable Securities intended to be
offered to Holders, the proportion by which the amount of such class of
securities intended to be offered by Holders is reduced will not exceed the
proportion by which the amount of such class of securities intended to be
offered by such other Persons (other than the Company) is reduced.
6.03 Form S-3 Registrations. In addition to the registration rights
provided in Sections 6.01 and 6.02 above, if at any time the Company is eligible
to use Form S-3 (or any successor form) for registration of secondary sales of
Registrable Securities, any Holder of
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Registrable Securities may request in writing that the Company register shares
of Registrable Securities on such form. Upon receipt of such request, the
Company will promptly notify all holders of Registrable Securities in writing of
the receipt of such request and each such Holder may elect (by written notice
sent to the Company within thirty (30) days of receipt of the Company's notice)
to have its Registrable Securities included in such registration pursuant to
this Section 6.03. Thereupon, the Company will, as soon as practicable, use its
best efforts to effect the registration on Form S-3 of all Registrable
Securities that the Company has so been requested to register by such Holder for
sale. The Company will use its best efforts to qualify and maintain its
qualification for eligibility to use Form S-3 for such purposes.
6.04 Rule 144 Availability. Notwithstanding the foregoing, the Company
will not be obligated to register any Registrable Securities as to which counsel
acceptable to the Holders renders an opinion in form and substance satisfactory
to the Holders and the Company to the effect that such Registrable Securities
are freely saleable without limitation as to volume, manner of sale, or
otherwise under Rule 144 under the Securities Act.
6.05 Registration Procedures. In connection with any registration of
Registrable Securities under this Article VI, the Company will, as soon as
practicable:
(a) prepare and file with the Commission a registration
statement with respect to such Registrable Securities and use its best
efforts to cause such registration statement to become and remain
effective until the earlier of such time as all Registrable Securities
subject to such registration statement have been disposed of or the
expiration of two years (except with respect to registrations effected
on Form S-3 or any successor form, as to which no such period shall
apply);
(b) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration
statement effective and to comply with the provisions of the Securities
Act with respect to the sale or other disposition of all Registrable
Securities covered by such registration statement until the earlier of
such time as all of such Registrable Securities have been disposed of
or the expiration of two years (except with respect to registrations
effected on Form S-3 or any successor form, as to which no such period
shall apply);
(c) furnish to each Holder such number of copies of the
registration statement and prospectus (including, without limitation, a
preliminary prospectus) in conformity with the requirements of the
Securities Act (in each case including all exhibits) and each amendment
or supplement thereto, together with such other documents as any Holder
may reasonably request;
(d) use its best efforts to register or qualify the
Registrable Securities covered by such registration statement under
such other securities or blue sky laws of such jurisdictions within the
United States and Puerto Rico as each Holder reasonably requests, and
do such other acts and things as may be reasonably required of it to
enable
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such holder to consummate the disposition in such jurisdiction of the
securities covered by such registration statement;
(e) otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission, and make available
to its securities holders, as soon as practicable, an earnings
statement covering the period of at least twelve months beginning with
the first month after the effective date of such registration
statement, which earnings statement will satisfy the provisions of
Section 11(a) of the Securities Act;
(f) provide and cause to be maintained a transfer agent and
registrar for Registrable Securities covered by such registration
statement from and after a date not later than the effective date of
such registration statement;
(g) if requested by the underwriters for any underwritten
offering or Registrable Securities on behalf of a Holder of Registrable
Securities pursuant to a registration requested under Section 6.01, the
Company will enter into an underwriting agreement with such
underwriters for such offering, such agreement to contain such
representations and warranties by the Company and such other terms and
provisions as are customarily contained in underwriting agreements with
respect to secondary distributions, including, without limitation,
provisions with respect to indemnities and contribution as are
reasonably satisfactory to such underwriters and the Holders; the
Holders on whose behalf Registrable Securities are to be distributed by
such underwriters will be parties to any such underwriting agreement
and the representations and warranties by, and the other agreements on
the part of, the Company to and for the benefit of such underwriters,
will also be made to and for the benefit of such Holders of Registrable
Securities; and no Holder of Registrable Securities will be required by
the Company to make any representations or warranties to or agreements
with the Company or the underwriters other than reasonable and
customary representations, warranties, or agreements regarding such
Holder, such Holder's Registrable Securities, such Holder's intended
method or methods of disposition, and any other representation required
by law;
(h) furnish, at the written request of any Holder, on the date
that such Registrable Securities are delivered to the underwriters for
sale pursuant to such registration, or, if such Registrable Securities
are not being sold through underwriters, on the date that the
registration statement with respect to such Registrable Securities
becomes effective, (i) an opinion in form and substance reasonably
satisfactory to such Holders, and addressing matters customarily
addressed in underwritten public offerings, of the counsel representing
the Company for the purposes of such registration (who will not be an
employee of the Company and who will be satisfactory to such Holders),
addressed to the underwriters, if any, and to the selling Holders; and
(ii) a letter (the "comfort letter") in form and substance reasonably
satisfactory to such Holders, from the independent certified public
accountants of the Company, addressed to the underwriters, if any, and
to the selling Holders making such request (and, if such accountants
refuse to deliver the comfort letter to such Holders, then the comfort
letter will be addressed to the
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Company and accompanied by a letter from such accountants addressed to
such Holders stating that they may rely on the comfort letter addressed
to the Company); and
(i) during the period when the registration statement is
required to be effective, notify each selling Holder of the happening
of any event as a result of which the prospectus included in the
registration statement contains an untrue statement of a material fact
or omits to state any material fact required to be stated therein or
necessary to make the statements therein not misleading, and prepare a
supplement or amendment to such prospectus so that, as thereafter
delivered to the purchasers of such Registrable Securities, such
prospectus will not contain an untrue statement of a material fact or
omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading.
It will be a condition precedent to the obligation of the Company to
take any action pursuant to this Article VI in respect of the Registrable
Securities that are to be registered at the request of any Holder of Registrable
Securities that such Holder furnish to the Company such information regarding
the Registrable Securities held by such Holder and the intended method of
disposition thereof as is legally required in connection with the action taken
by the Company. The managing underwriter or underwriters, if any, for any
offering of Registrable Securities to be registered pursuant to Section 6.01 or
6.03 will be selected by the Holders of a majority of the Registrable Securities
being so registered.
6.06 Allocation of Expenses. Except as provided in the following
sentence, the Company will bear all expenses arising or incurred in connection
with any of the transactions contemplated by this Article VI, including, without
limitation, (a) all expenses incident to filing with the National Association of
Securities Dealers, Inc.; (b) registration fees; (c) printing expenses; (d)
accounting and legal fees and expenses; (e) expenses of any special audits or
comfort letters incident to or required by any such registration or
qualification; and (f) expenses of complying with the securities or blue sky
laws of any jurisdictions in connection with such registration or qualification.
Each Holder will severally bear the expense of its underwriting fees, discounts,
or commissions relating to its sale of Registrable Securities and its own legal
fees.
6.07 Listing on Securities Exchange. If the Company lists any shares of
Capital Stock on any securities exchange' on the NASDAQ Stock Market, Inc. or on
any similar system, it will, at its expense, list thereon, maintain and, when
necessary, increase such listing of, all Registrable Securities.
6.08 Holdback Agreements.
(a) If any registration pursuant to Section 6.02 is in
connection with an underwritten public offering, each Holder of
Registrable Securities agrees, if so required by the managing
underwriter, not to effect any public sale or distribution of
Registrable Securities (other than as part of such underwritten public
offering) during the period beginning seven (7) days prior to the
effective date of such registration statement and
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ending on the one hundred twentieth (120th) day after the effective
date of such registration statement; provided, however, that the
Shareholder and each Person that is an officer, director, or beneficial
owner of five percent (5%) or more of the outstanding shares of any
class of Capital Stock enters into such an agreement.
(b) The Company and the Shareholder agree (i) not to effect
any public sale or distribution during the period seven (7) days (or
such longer period as may be prescribed by Regulation M) prior to the
effective date of the registration statement employed in any
underwritten public offering and ending on the one hundred eightieth
(180th) day after any such registration statement contemplated by
Sections 6.01 or 6.03 has become effective, except as part of such
underwritten public offering pursuant to such registration statement
and except pursuant to securities registered on Forms S-4 or S-8 of the
Commission or any successor forms, and (ii) use their best efforts to
cause each holder of its equity securities or any securities
convertible into or exchangeable or exercisable for any of such
securities, in each case purchased from the Company at any time after
the date of this Agreement (other than in a public offering), to agree
not to effect any such public sale or distribution of such securities
during such period.
6.09 Rule 144. At all times the Company will take such action as any
Holder may reasonably request, all to the extent required from time to time to
enable such Holder to sell shares of Registrable Securities without registration
pursuant to and in accordance with (a) Rule 144 under the Securities Act, as
such Rule may be amended from time to time, or (b) any similar rule or
regulation adopted by the Commission. Upon the request of any Holder of
Registrable Securities, the Company will deliver to such Holder a written
statement as to whether it has complied with such requirements.
6.10 Rule 144A. The Company agrees that, upon the request of any Holder
or any prospective purchaser of Shares designated by a Holder, the Company will
promptly provide (but in any case within fifteen (15) days of a request) to such
Holder or potential purchaser, the following information:
(a) a brief statement of the nature of the business of the
Company and any Subsidiaries and the products and services they offer;
(b) the most recent consolidated balance sheets and profit and
losses and retained earnings statements, and similar financial
statements of the Company for such part of the two preceding fiscal
years prior to such request as the Company has been in operation (such
financial information will be audited, to the extent reasonably
available); and
(c) such other information about the Company, any
Subsidiaries, and their business, financial condition, and results of
operations as the requesting Holder or purchaser of such Shares
requests in order to comply with Rule 144A, as amended, and the
antifraud provisions of the federal and state securities laws.
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The Company hereby represents and warrants to any such requesting Holder and any
prospective purchaser of Shares from such Holder that the information provided
by the Company pursuant to this Section 6.10 will not contain any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements made, in light of the circumstances under which they were
made, not misleading.
6.11 Limitations on Subsequent Registration Rights. From and after the
date of this Agreement, the Company will not, without the prior written consent
of the Holders of a majority of the outstanding Registrable Securities, enter
into any agreement with any holder or prospective holder of any securities of
the Company that would allow such holder or prospective holder (a) to include
such securities in any registration filed under Section 6.01, unless under the
terms of such agreement, such holder or prospective holder may include such
securities in any such registration only to the extent that the inclusion of its
securities will not reduce the amount of the Registrable Securities of the
Holders that is included or (b) within one hundred twenty (120) days of the
effective date of any registration effected pursuant to Section 6.01.
6.12 Exchange Rights. At the option of any Holder, any such Holder may
exchange its Shares for fully paid and nonassessable shares (calculated as to
each exchange to the nearest one-thousandth (1/1000) of a share and rounded
upward) of common stock of any Subsidiary of the Company that on the date of
receipt of the Exchange Notice has a class of capital stock registered under
section 12 of the Exchange Act or within one year and 120 days will have a class
of capital stock so registered (such Subsidiary will be referred to in this
Agreement as the "Exchange Company" and the common stock of such Subsidiary will
be referred to in this Agreement as "Exchange Common Stock"). Each $1,000 worth
of Shares (valued at Fair Market Value on the date of the Exchange Notice was
sent), will be exchangeable for $1,000 worth of Exchange Common Stock (valued at
Fair Market Value on the date that the Exchange Notice was sent). To exchange
Shares into Exchange Common Stock, the Holder will surrender at the principal
office of the Exchange Company the certificate or certificates evidencing the
Shares duly endorsed or assigned to the Company, and give written notice to the
Company at such office that it elects to exchange such Shares (the "Exchange
Notice"). Shares will be deemed to have been exchanged immediately prior to the
close of business on the day of the surrender for exchange in accordance with
the foregoing provisions, and the Person or Persons entitled to receive the
Exchange Common Stock issuable upon any such exchange will thereupon be treated
for all purposes as the record holder or holders of the Exchange Common Stock.
As promptly as practicable on or after the exchange date, the Exchange Company
will issue and deliver a certificate or certificates for the number of full
shares of Exchange Common Stock issuable upon exchange to the Person or Persons
entitled to receive such shares. Upon exchange of any Shares, the Company will
pay or make with respect to Shares any dividends or other distributions that
have been declared on the Shares in kind or cash, as the case may be. If any
Holder exchanges its Shares for shares of Exchange Common Stock pursuant to this
Section 6.12, such Holder will have all of the rights set forth in this Article
VI, except that for the purposes of this Article VI the term "Company" will
refer instead to the Exchange Company and the term "Registrable Securities" will
refer to the shares of Exchange Common Stock held by such Holder.
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ARTICLE VII
DIRECTORS
7.01 Voting Agreement. To ensure compliance with this Article VII, the
Shareholder hereby irrevocably covenants and agrees to vote, or give or withhold
consent with respect to, all shares of Capital Stock now owned or later acquired
by them, all in accordance with the terms of this Article VII. The agreement to
vote contained in this Article VII will expire on the earlier to occur of (a)
the day prior to maximum period permitted under applicable law or (b) the date
Purchaser and their Affiliates cease to hold the Shares. A counterpart of this
Agreement will be deposited with the Company at its principal place of business
or registered office and will be subject to the same right of examination by a
shareholder of the Company, in person or by agent or attorney, as are the books
and records of the Company.
7.02 Board of Directors. So long as the provisions of this Article VII
remain in effect, the Shareholder will, at the request of Purchaser, vote, or
give or withhold consent with respect to, all shares of Capital Stock now owned
or later acquired by such party so that at all times an individual designated by
Purchaser or its designee will be a director of the Company in accordance with
Section 4.11 of the Stock Agreement and Section 6.21 of the Note Agreement will
be a member of the Board of Directors of the Company; provided, however, that
Purchaser will not have any obligation to designate or cause any individual to
serve on the board of directors of the Company. No director designated by
Purchaser or its designee may be removed without the consent of Purchaser.
Purchaser may, at any time, terminate its rights under this Article VII by
providing written notice of such termination to the Company.
ARTICLE VIII
REPRESENTATIONS AND WARRANTIES; COVENANTS
8.01 Representations and Warranties and Covenants of the Company and
the Shareholder. Each of the representations and warranties set forth in Section
3.01 of the Stock Agreement and each of the covenants set forth in Article IV of
the Stock Agreement are hereby restated and incorporated by reference in this
Agreement as though set forth in this Agreement, and is made by the Company as
made in the Stock Agreement for the benefit of Purchaser.
8.02 Representations and Warranties of the Shareholders. Each
Shareholder hereby represents and warrants to Purchaser and the Company as
follows:
(a) The Shareholder has the right and power and is duly
authorized to enter into, execute, deliver and perform this Agreement,
and with respect to any Shareholder that is not an individual, its
officers or agents executing and delivering this Agreement are duly
authorized to do so. This Agreement has been duly and validly executed,
issued and delivered and constitutes a legal, valid and binding
obligation of each Shareholder, enforceable in accordance with its
terms.
(b) The execution, delivery, and performance of this Agreement
will not, by the lapse of time, the giving of notice, or otherwise,
constitute a violation of any applicable
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provision contained in (i) in the case of any Shareholder that is a
corporation or partnership, its charter, bylaws or other organizational
documents or (ii) any agreement, instrument, or document to which it is
a party or by which it is bound.
(c) There is not now, and at no time during the term of this
Agreement or this Agreement will there be, any agreement, arrangement,
or understanding involving it, other than this Agreement and the
documents contemplated hereby and thereby, modifying, restricting, or
in any way affecting its rights to vote securities of the Company.
(d) The Shareholder (i) is an "accredited investor", as that
term is defined in Regulation D under the Securities Act; and (ii) has
such knowledge, skill, and experience in business and financial
matters, based on actual participation, that it is capable of
evaluating the merits and risks of an investment in the Company and the
suitability thereof as an investment for the Shareholder.
(e) Except as otherwise contemplated by this Agreement, the
Shareholder has acquired its shares of Capital Stock of the Company for
investment for its own account and not with a view to any distribution
thereof in violation of applicable securities laws.
(f) It agrees that all certificates representing its
securities bear appropriate restrictive legends, and such securities
will not be offered, sold, or transferred in the absence of
registration or exemption under applicable securities laws.
(g) Schedule 4.15 to the Note Agreement accurately sets forth
the Shareholder's holdings of Capital Stock of the Company as of the
date hereof, and, except as set forth on Schedule 4.15 to the Note
Agreement, all of such Capital Stock is owned free and clear of all
liens, claims and encumbrances.
(h) If the Shareholder is any entity other than a natural
person, the Shareholder is duly organized and in good standing under
the laws of the jurisdiction of its incorporation.
(i) None of the documents, instruments, or other information
furnished to the Purchaser by it, contains any untrue statement of a
material fact or omits to state any material fact necessary in order to
make any statements made therein not misleading. No representation,
warranty, or statement made by it in this Agreement, or in any
document, certificate, exhibit or schedule attached hereto or thereto
or delivered in connection herewith or therewith, contains or will
contain any untrue statement of a material fact, or omits or will omit
to state a material fact necessary to make any statements made herein
or therein not misleading.
8.03 Representations and Warranties of Purchaser. Each of the
representations and warranties of Purchaser set forth in Section 3.02 of the
Stock Agreement is hereby restated and incorporated by reference in this
Agreement as though set forth in this Agreement, and is made
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by Purchaser as representations and warranties of Purchaser hereunder for the
benefit of the Company and the Shareholders.
ARTICLE IX
CONDITIONS
The obligations of Purchaser to effect the transactions contemplated by
this Agreement are subject to the following conditions:
9.01 Note Agreement and Stock Agreement Conditions. All of the
conditions precedent to the obligations of Purchaser under the Note Agreement
and the Stock Agreement shall have been satisfied in full or waived.
9.02 Proceedings. All proceedings taken in connection with the
transactions contemplated by this Agreement, and all documents necessary to the
consummation thereof, will be reasonably satisfactory in form and substance to
Purchaser and its counsel, and Purchaser and its counsel will have received
copies (executed or certified as may be appropriate) of all documents,
instruments, and agreements that Purchaser or its counsel may request in
connection with the consummation of such transactions.
ARTICLE X
MISCELLANEOUS
10.01 Indemnification. In addition to any other rights or remedies to
which Purchaser and the Holders may be entitled, the Company and each
Shareholder (each, an "Indemnitor") severally and not jointly agree to and will
indemnify and hold harmless Purchaser, the Holders, and their Affiliates and
their respective successors, assigns, officers, directors, employees, attorneys,
and agents (individually and collectively, an "Indemnified Party") from and
against any and all losses, claims, obligations, liabilities, deficiencies,
diminutions in value, penalties, causes of action, damages, costs, and expenses
(including, without limitation, costs of investigation and defense, attorneys'
fees, and expenses), including, without limitation, those arising out of the
sole or contributory negligence of any Indemnified Party (but excluding the
gross negligence or willful misconduct of such Indemnified Party), that the
Indemnified Party may suffer, incur, or be responsible for, arising or resulting
from any misrepresentation, breach of warranty, or nonfulfillment of any
covenant or agreement on the part of such Indemnitor under this Agreement, the
Shareholder Agreement, or under any other agreement to which such Indemnitor is
a party in connection with this transaction, or from any misrepresentation in or
omission from any certificate or other instrument furnished or to be furnished
by such Indemnitor to Purchaser or the Holders under this Agreement; provided,
however, that no Indemnitor shall be held responsible or liable for any
representation, warranty or covenant of any other Indemnitor.
10.02 Default. It is agreed that a violation by any party of the terms
of this Agreement cannot be adequately measured or compensated in money damages,
and that any breach or threatened
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breach of this Agreement by a party to this Agreement would do irreparable
injury to the nonbreaching party. It is, therefore, agreed that in the event of
any breach or threatened breach by a party to this Agreement of the terms and
conditions set forth in this Agreement, the nondefaulting party will be
entitled, in addition to any and all other rights and remedies that it may have
in law or in equity, to apply for and obtain injunctive relief requiring the
defaulting party to be restrained from any such breach, or threatened breach or
to refrain from a continuation of any actual breach.
10.03 Integration. This Agreement, the Note Agreement and the Stock
Agreement constitute the entire agreement among the parties with respect to the
subject matter hereof and thereof and supersede all previous written, and all
previous or contemporaneous oral, negotiations, understandings, arrangements,
and agreements. This Agreement may not be amended or supplemented except by a
writing signed by the Company, the Shareholder, and each Holder.
10.04 Headings. The headings in this Agreement are for convenience and
reference only and are not part of the substance of this Agreement. References
in this Agreement to Sections and Articles are references to the Sections and
Articles of this Agreement unless otherwise specified.
10.05 Severability. The parties to this Agreement expressly agree that
it is not their intention to violate any public policy, statutory or common law
rules, regulations, or decisions of any governmental or regulatory body. If any
provision of this Agreement is judicially or administratively interpreted or
construed as being in violation of any such policy, rule, regulation, or
decision, the provision, section, sentence, word, clause, or combination thereof
causing such violation will be inoperative (and in lieu thereof there will be
inserted such provision, sentence, word, clause, or combination thereof as may
be valid and consistent with the intent of the parties under this Agreement) and
the remainder of this Agreement, as amended, will remain binding upon the
parties to this Agreement, unless the inoperative provision would cause
enforcement of the remainder of this Agreement to be inequitable under the
circumstances.
10.06 Notices. Whenever it is provided herein that any notice, demand,
request, consent, approval, declaration, or other communication be given to or
served upon any of the parties by another, such notice, demand, request,
consent, approval, declaration, or other communication will be in writing and
will be deemed to have been validly served, given, or delivered (and "the date
of such notice" or words of similar effect will mean the date) five (5) days
after deposit in the United States mails, certified mail, return receipt
requested, with proper postage prepaid, or upon receipt thereof (whether by
non-certified mail, telecopy, telegram, express delivery, or otherwise),
whichever is earlier, and addressed to the party to be notified as follows:
If to Purchaser, at: RSTW Partners III, L.P.
5847 San Felipe, Suite 4350
Houston, Texas 77057
Attn: James P. Wilson
Fax: (713) 783-9750
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with courtesy copies to: Patton Boggs LLP
2200 Ross Avenue
Suite 900
Dallas, Texas 75201
Attn: R. Jeffery Cole, Esq.
Fax: (214) 871-2688
If to the Company, at 13401 Railway Drive
Oklahoma City, Oklahoma 73114
Attn: Donald E. Smith
Randall J. Wood, Esq.
Fax: (405) 752-8852
with courtesy copies to: Robertson & Williams
3033 N.W. 63rd Street, Suite 160
Oklahoma City, Oklahoma 73116
Attn: Mark Robertson, Esq.
Fax: (405) 843-6707
If to the Shareholder, at the address set forth on the signature pages
to this Agreement or to such other address as each party may designate for
itself by like notice. Notice to any Holder other than Purchaser will be
delivered as set forth above to the address shown on the stock transfer books of
the Company or the Stock Register unless such Holder has advised the Company in
writing of a different address to which notices are to be sent under this
Agreement.
Failure or delay in delivering the courtesy copies of any notice,
demand, request, consent, approval, declaration, or other communication to the
persons designated above to receive copies of the actual notice will in no way
adversely affect the effectiveness of such notice, demand, request, consent,
approval, declaration, or other communication.
No notice, demand, request, consent, approval, declaration, or other
communication will be deemed to have been given or received unless and until it
sets forth all items of information required to be set forth therein pursuant to
the terms of this Agreement.
10.07 Successors. This Agreement will be binding upon and inure to the
benefit of the parties and their respective successors and permitted assigns.
10.08 Remedies. The failure of any party to enforce any right or remedy
under this agreement, or to enforce any such right or remedy promptly, will not
constitute a waiver thereof, nor give rise to any estoppel against such party,
nor excuse any other party from its obligations under this Agreement. Any waiver
of any such right or remedy by any party must be in writing and signed by the
party against which such waiver is sought to be enforced.
10.09 Survival. All warranties, representations, and covenants made by
any party in this Agreement or in any certificate or other instrument delivered
by such party or on its behalf under
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this Agreement will be considered to have been relied upon by the party to which
it is delivered and will survive the Closing Date, regardless of any
investigation made by such party or on its behalf. All statements in any such
certificate or other instrument will constitute warranties and representations
under this Agreement.
10.10 Fees. Any and all fees, costs, and expenses, of whatever kind and
nature, including attorneys' fees and expenses, incurred by either the Holders
or the Company in connection with the defense or prosecution of any actions or
proceedings arising out of or in connection with this Agreement will be borne by
the prevailing party in such action or proceeding.
10.11 Counterparts. This Agreement may be executed in any number of
counterparts, which will individually and collectively constitute one agreement.
10.12 Other Business. It is understood and accepted that Purchaser, the
Initial Holder, the Holders, and their Affiliates have interests in other
business ventures that may be in conflict with the activities of the Company and
that nothing in this Agreement will limit the current or future business
activities of such parties whether or not such activities are competitive with
those of the Company. The Company and the Shareholder agree that all business
opportunities in any field substantially related to the business of the Company
will be pursued exclusively through the Company.
10.13 CHOICE OF LAW. THIS AGREEMENT HAS BEEN EXECUTED, DELIVERED, AND
ACCEPTED BY THE PARTIES IN WILL BE DEEMED TO HAVE BEEN MADE IN THE STATE OF
TEXAS AND WILL BE INTERPRETED AND THE RIGHTS OF THE PARTIES DETERMINED IN
ACCORDANCE WITH THE LAWS OF THE UNITED STATES APPLICABLE THERETO AND THE
INTERNAL LAWS OF THE STATE OF TEXAS APPLICABLE TO AN AGREEMENT EXECUTED,
DELIVERED AND PERFORMED THEREIN WITHOUT GIVING EFFECT TO THE CHOICE-OF-LAW RULES
THEREOF OR ANY OTHER PRINCIPLE THAT COULD REQUIRE THE APPLICATION OF THE
SUBSTANTIVE LAW OF ANY OTHER JURISDICTION.
10.14 Nominees for Beneficial Owners. In the event that any Registrable
Securities are held by a nominee for the beneficial owner of such Registrable
Securities, the beneficial owner of Registrable Securities may, at its election,
be treated as the Holder of such Registrable Securities for purposes of any
request or other action by any Holder or Holders of Registrable Securities
pursuant to this Agreement or any determination of any number or percentage of
shares of Registrable Securities held by any Holder or Holders of Registrable
Securities contemplated by this Agreement. If the beneficial owner of any
Registrable Securities so elects, the Company may require assurances reasonably
satisfactory to it of such owner's beneficial ownership of such Registrable
Securities.
10.15 Fiduciary Duties. The Company acknowledges and agrees that, for
so long as any Shares are outstanding, (a) the officers and directors of the
Company will owe the same duties
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(fiduciary and otherwise) to the Holder as are owed to a stockholder of the
Company and (b) the Holder will be entitled to all rights and remedies with
respect to such duties or that are otherwise available to a stockholder of the
Company under the General Corporation Law of the jurisdiction in which the
Company is organized, as amended from time to time.
10.16 Duties Among Holders. Each Holder agrees that no other Holder
will by virtue of this Agreement be under any fiduciary or other duty to give or
withhold any consent or approval under this Agreement or to take any other
action or omit to take any action under this Agreement, and that each other
Holder may act or refrain from acting under this Agreement as such other Holder
may, in its discretion, elect.
10.17 Confidentiality. Each Holder agrees to keep confidential any
information delivered by the Company to such Holder under this Agreement that
the Company clearly indicates in writing to be confidential information;
provided, however, that nothing in this Section 10.17 will prevent such Holder
from disclosing such information (a) to any Affiliate of such Holder or any
actual or potential purchaser, participant, assignee, or transferee of such
Holder's rights or obligations hereunder that agrees to be bound by the terms of
this Section 10.17, (b) upon order of any court or administrative agency, (c)
upon the request or demand of any regulatory agency or authority having
jurisdiction over such Holder, (d) that is in the public domain, (e) that has
been obtained from any Person that is not a party to this Agreement or an
Affiliate of any such party without breach by such Person of a confidentiality
obligation known to such Holder, (f) in connection with the exercise of any
remedy under this Agreement, or (g) to the certified public accountants for such
Holder. The Company agrees that such Holder will be presumed to have met its
obligations under this Section 10.17 to the extent that it exercises the same
degree of care with respect to information provided by the Company as it
exercises with respect to its own information of similar character.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement as of the date first above written.
THE COMPANY:
AVALON COMMUNITY SERVICES, INC.
By: /s/ DONALD E. SMITH
--------------------------------------
Name: Donald E. Smith
Its: Chief Executive Officer
THE SHAREHOLDER:
/s/ DONALD E. SMITH
---------------------------------------------
DONALD E. SMITH
/s/ JERRY M. SUNDERLAND
---------------------------------------------
JERRY M. SUNDERLAND
<PAGE> 24
PURCHASER:
RSTW PARTNERS III, L.P.
By: RSTW Management, L.P.,
its general partner
By: Rice Mezzanine Corporation,
its general partner
By: /s/ PHILIP A. DAVIDSON
---------------------------
Name: Philip A. Davidson
Title:
