SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
CURRENT REPORT ON FORM 8-K
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report, October 1, 1998
Commission File Number: 0-20307
AVALON COMMUNITY SERVICES, INC.
(Exact name of Registrant as
specified in its corporate charter)
Nevada 13-3592263
(State of Incorporation) (I.R.S. Employer I.D. Number)
13401 Railway Drive, Oklahoma City, Oklahoma 73114
(Address of Principal executive offices)
(405) 752-8802
(Issuer's telephone number)
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ITEM 2. Acquisition of Assets
On September 16, 1998, Avalon Community Services Inc. closed a private
placement with the firm of Rice Sangalis Toole & Wilson. The Company received
gross proceeds through the private placement of $15 million from RSTW Partners
III L.P. Neither the Company, nor any of its affiliates, officers or directors
has any material relationship with RSTW Partners III L.P. The Company will
utilize the proceeds to construct, develop and expand existing and new programs
and facilities, acquisitions and working capital requirements for the purpose of
growing the Company's business.
The private placement provides for a $10 million senior subordinated note
facility under a Note Purchase Agreement. The senior subordinated note accrues
interest at the rate of 12.5%, with interest payable in quarterly installments.
The maturity date of the senior subordinated note is September 15, 2006. The
private placement provides for a Stock Purchase Agreement for the issuance of
1,622,448 shares of class A common stock. The Stock Purchase Agreement provides
for certain rights and anti-dilution provisions which will effectively maintain
an equity position on a fully diluted basis of 25% of the Company. The Stock
Purchase Agreement provides for additional rights which may be terminated upon
the successful completion of a public secondary offering. A separate Shareholder
Agreement was executed to restrict sales of shares of stock by certain
beneficial owners.
ITEM 7. Financial Statements and Exhibits
a. Note Purchase Agreement dated September 16,1998 between RSTW Partners III,
L.P., Avalon Community Services Inc. and Southern Corrections Systems Inc.
b. Stock Purchase Agreement dated September 16,1998 between RSTW Partners III,
L.P. and Avalon Community Services Inc.
c. Shareholder Agreement dated September 16,1998 between RSTW Partners III,
L.P., Avalon Community Services Inc., Donald E. Smith and Jerry M.
Sunderland.
d. Accounting for this transaction requires the use of estimates and valuation
models which are not complete at this time. A pro forma balance sheet
reflecting the transation as if it had occurred at the quarter ended June
30, 1998, will be filed no later than November 15, 1998.
Page 1
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AVALON COMMUNITY SERVICES, INC. AND SUBSIDIARIES
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
Date: October 1, 1998 AVALON COMMUNITY SERVICES, INC.
By: \Jerry Sunderland
Jerry Sunderland, President
Exhibit 1
NOTE PURCHASE AGREEMENT
dated as of September 16, 1998
by and between
RSTW PARTNERS III, L.P.
"Purchaser"
and
AVALON COMMUNITY SERVICES, INC., doing
business as Avalon Correctional Services, Inc.
and
SOUTHERN CORRECTIONS SYSTEMS, INC.
individually and collectively, the "Company"
regarding
12.5% SENIOR SUBORDINATED NOTE
NOTE PURCHASE AGREEMENT
This Note Purchase Agreement (this "Agreement"), dated as of September 16,
1998, is by and among AVALON COMMUNITY SERVICES, INC., a Nevada corporation
doing business as Avalon Correctional Services, Inc. ("Avalon"), SOUTHERN
CORRECTIONS SYSTEMS, INC., an Oklahoma corporation ("SCS") (Avalon and SCS are
hereinafter referred to individually and collectively as the "Company"), and
RSTW PARTNERS III, L.P., a Delaware limited partnership ("RSTW"). Capitalized
terms used in this Agreement not otherwise defined herein are defined in Section
11.1.
To induce Purchaser to purchase the Senior Subordinated Note from the Company,
and for $10.00 and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows,
intending to be legally bound.
I. DESCRIPTION OF SENIOR SUBORDINATED NOTE AND COMMITMENT
1.1 Description of Senior Subordinated Note. The Company will authorize the
issuance and sale of its Senior Subordinated Note which shall be dated the
Closing Date, shall be in the aggregate original principal amount of
$10,000,000, and shall bear interest at the fixed rate of 12.5% per annum;
provided, however, that upon the occurrence of any Event of Default, and during
the continuation thereof, the unpaid principal amount of the Senior Subordinated
Note shall, at the option of Purchaser, bear interest at the rate of 14.5% per
annum. The Senior Subordinated Note shall be substantially in the form attached
hereto as Exhibit A. Interest on the Senior Subordinated Note shall be computed
on the basis of the actual number of days elapsed over a 360 day year.
1.2 Commitment; Funding. Subject to the terms and conditions hereof and on
the basis of the representations and warranties hereinafter set forth, the
Company agrees to issue and sell to Purchaser, and Purchaser agrees to purchase
from the Company, the Senior Subordinated Note in the principal amount of
$10,000,000 at a price of 100% of such principal amount. Delivery of the Senior
Subordinated Note shall be made on the Closing Date in the offices of Patton
Boggs LLP, 2200 Ross Avenue, Suite 900, Dallas, Texas 75201, against payment of
the purchase price thereof, disbursed to such Person as the Company shall
designate in writing. The Senior Subordinated Note will be delivered to
Purchaser in fully registered form, and shall be issued in its name or the name
of its nominee.
1.3 Closing Fee. The Company shall pay to Purchaser a closing fee of
$200,000 (2.0% of the face amount of the Senior Subordinated Note), in
immediately available funds, on the Closing Date, 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 of the
Senior Subordinated Note.
1.4 Use of Proceeds. The proceeds from the sale of the Senior Subordinated
Note shall be used solely (i) to finance a portion of the costs associated with
the Company's construction, reconstruction and/or expansion of community
correctional and juvenile facilities (ii) to repay existing Indebtedness of the
Company, (iii) for Permitted Acquisitions, and (iv) for general working capital
purposes.
II. PAYMENT AND PREPAYMENT OF SENIOR SUBORDINATED
OBLIGATIONS
2.1 Principal and Interest Payments. Principal and interest on the Senior
Subordinated Note shall be due and payable as follows:
(a) Principal shall be due and payable (i) in three (3) equal
installments, in the amount of $2,500,000 each, on the last Business Day of
each of December 2005, March 2006 and June 2006, and (ii) on the
Termination Date in an amount equal to the entire remaining unpaid
principal balance outstanding on the Termination Date.
(b) Interest shall be due and payable (i) quarterly in arrears on the
last Business Day of each March, June, September and December, commencing
on September 30, 1998, and (ii) on the Termination Date.
2.2 Optional Prepayments. At the Company's option, upon notice given as
provided below, the Company may, at any time and from time to time, prepay all
or any part of the principal of the Senior Subordinated Note, by payment to the
Holders of the principal amount to be prepaid, plus (a) any accrued and unpaid
interest on the principal amount so prepaid, plus (b) any expenses and/or
damages for which Purchaser may be entitled to receive payment or reimbursement
hereunder or, if the Senior Subordinated Note is being prepaid in full, the
aggregate amount of all other Senior Subordinated Obligations (other than Senior
Subordinated Obligations consisting of the Put Price under the Put Option in the
event that such prepayment is made from the proceeds of a Qualified Secondary
Public Offering), plus (c) a premium equal to the product of the applicable
Premium Percentage multiplied by the principal amount of the Senior Subordinated
Note so prepaid (unless such prepayment is made with the proceeds of a Qualified
Secondary Public Offering, in which case no such premium shall be due). Each
partial prepayment under this Section 2.2 shall be in a principal amount of not
less than $250,000 or, if greater than $250,000, then in integral multiples of
$50,000. Each prepayment under this Section 2.2 shall be applied first to
accrued and unpaid interest on the principal amount so prepaid, second to any
applicable Prepayment Fee, third to installments of principal in the inverse
order of their maturities, and fourth to any expenses and/or damages for which
Purchaser may be entitled. The amount of any such prepayment may not be
reborrowed by the Company. The Company shall give notice of any optional
prepayment to Purchaser not less than thirty (30) days nor more than sixty (60)
days before the date for prepayment, specifying in each such notice the date
upon which such prepayment is to be made and the principal amount (together with
accrued and unpaid interest, if any, thereon and any applicable Prepayment Fee)
to be prepaid on such date. Notice of prepayment having been so given, the
applicable prepayment amount shall become due and payable on the specified
prepayment date. The Company shall have no right to prepay the Senior
Subordinated Note except as provided in this Section 2.2 or in Section 2.3.
2.3 Mandatory Prepayments. The Company shall prepay the principal amount of
the Senior Subordinated Note on the dates and in the principal amounts specified
below, in each of the following circumstances:
(a) In the event of any public or private offering by the Company or
any of its Subsidiaries of any of its or their debt or equity securities
(other than any debt or equity securities issued in connection with a
Permitted Acquisition), the Company shall prepay the Senior Subordinated
Note in an amount equal to the lesser of the (i) net proceeds of any such
public or private offering (after any mandatory payments and prepayments in
permanent reduction of the Senior Debt required under the Senior Loan
Agreement made with respect thereto), or (ii) the aggregate amount of all
Senior Subordinated Obligations (other than Senior Subordinated Obligations
consisting of the Put Price under the Put Option in the event that such
prepayment is made from the proceeds of a Qualified Secondary Public
Offering), such prepayment to be made within five (5) Business Days of
receipt of such net proceeds. At such time as each payment by the Company
pursuant to this Section 2.3(a) is due, the Company shall also pay to
Purchaser a premium equal to the product of the applicable Premium
Percentage multiplied by the principal amount of the Senior Subordinated
Note required to be so paid by the Company pursuant to this Section 2.3(a)
(unless such prepayment is made with the proceeds of a Qualified Secondary
Public Offering, in which case no such premium shall be due).
(b) If during any fiscal year the Company or any of its Subsidiaries
sell or otherwise dispose of (other than (i) a disposition described in
Section 2.3(c) or (ii) a disposition permitted by Section 6.8 or Section
7.3) any property or properties, then the Company shall prepay the Senior
Subordinated Note in an amount equal to the lesser of (i) the aggregate net
cash proceeds of such sale or other disposition (after any mandatory
payments and prepayments in permanent reduction of the Senior Debt required
under the Senior Loan Agreement made with respect thereto) or (ii) the
aggregate amount of all Senior Subordinated Obligations, such prepayment
and premium to be made within five (5) Business Days of receipt of such net
proceeds. At such time as each payment by the Company pursuant to this
Section 2.3(b) is due, the Company shall also pay to Purchaser a premium
equal to the product of the applicable Premium Percentage multiplied by the
principal amount of the Senior Subordinated Note required to be so paid by
the Company pursuant to this Section 2.3(b).
(c) In the event of any sale or other disposition of all or
substantially all of the stock or assets of the Company or any of its
Subsidiaries in a single transaction or series of transactions, or any
Casualty Event, or any return to the Company or any of its Subsidiaries of
any surplus assets of any pension plan, the Company shall prepay the Senior
Subordinated Note in an amount equal to the lesser of (i) the aggregate net
cash proceeds of such sales or dispositions, Casualty Event (to the extent
not subsequently applied toward replacement, restoration, rebuilding or
repair of the damaged property within 90 days after the receipt of such net
cash proceeds) or return of surplus assets (in each case, after any
mandatory payments and prepayments in permanent reduction of the Senior
Debt required under the Senior Loan Agreement made with respect thereto) or
(ii) the aggregate amount of all Senior Subordinated Obligations (other
than Senior Subordinated Obligations consisting of the Put Price under the
Put Option in the event that such prepayment is made from the proceeds of a
Qualified Secondary Public Offering), such prepayment to be made within
five (5) Business Days of receipt of such net proceeds. At such time as
each payment by the Company pursuant to this Section 2.3(c) is due, the
Company shall also pay to Purchaser a premium equal to the product of the
applicable Premium Percentage multiplied by the principal amount of the
Senior Subordinated Note required to be so paid by the Company pursuant to
this Section 2.3(c) (unless such prepayment is made with the proceeds of a
Casualty Event or a Qualified Secondary Public Offering, in which case no
such premium shall be due).
Any prepayment under this Section 2.3 shall be applied first to accrued
interest, second to any applicable Prepayment Fee, third to installments of
principal in the inverse order of their maturities and fourth to any expenses
and/or damages for which Purchaser may be entitled. The amount of any such
mandatory prepayment may not be reborrowed by the Company.
2.4 Additional Payments. Except as otherwise provided herein or in the
Other Agreements, all Senior Subordinated Obligations payable by the Company to
the Holders shall be due within thirty (30) days following the date on which
demand therefor is made by the Holders and shall bear interest from the date due
until paid at the rate of interest then applicable under Section 1.1.
2.5 Liquidated Damages. Any Prepayment Fee payable pursuant to Section 2.2
or Section 2.3 shall be payable as liquidated damages for loss of the
opportunity to recover loan origination expenses and profits over the balance of
the term of this Agreement and not as a penalty.
2.6 Direct Payment. The Company will pay all sums becoming due hereunder
and on the Senior Subordinated Note to Purchaser at the address specified for
Purchaser on Annex I hereto, by wire transfer in U.S. Dollars of Federal Reserve
Funds or other immediately available funds, to the account specified for
Purchaser on Annex I, or at such other address or in such other form as
Purchaser shall have designated by notice to the Company at least five Business
Days prior to the date of any payment, in each case without presentment and
without notations being made thereon. All payments by the Company shall be made
without set-off or counterclaim. Any wire transfer shall identify such payment
as "Avalon Correctional Services, Inc., 12.5% Senior Subordinated Note" and
shall identify the payment as principal, premium, interest and/or reimbursement
of costs and expenses, together with the applicable date or period to which it
relates.
2.7 Payments Payable on Business Days. Payments of all amounts due
hereunder or under the Senior Subordinated Note shall be made on a Business Day.
Any payment due on a day that is not a Business Day shall be made on the next
Business Day, together with all interest (if any) accrued in the interim.
2.8 Interest Laws. Notwithstanding any provision to the contrary contained
in this Agreement or any Other Agreement, the Company shall not be required to
pay, and Purchaser shall not be permitted to contract for, take, reserve, charge
or receive, any compensation which constitutes interest under applicable law in
excess of the maximum amount of interest permitted by law ("Excess Interest").
If any Excess Interest is provided for or determined by a court of competent
jurisdiction to have been provided for in this Agreement or in any Other
Agreement or otherwise contracted for, taken, reserved, charged or received,
then in such event: (a) the provisions of this Section 2.8 shall govern and
control; (b) the Company shall not be obligated to pay any Excess Interest; (c)
any Excess Interest that the Holders may have contracted for, taken, reserved,
charged or received hereunder shall be, at the Holders' option, (i) applied as a
credit against the outstanding principal balance of the Senior Subordinated
Obligations or accrued and unpaid interest (not to exceed the maximum amount
permitted by law), (ii) refunded to the payor thereof, or (iii) any combination
of the foregoing; (d) the interest provided for shall be automatically reduced
to the maximum lawful rate allowed from time to time under applicable law (the
"Maximum Rate"), and this Agreement and the Other Agreements shall be deemed to
have been, and shall be, reformed and modified to reflect such reduction; and
(e) the Company shall have no action against the Holders for any damages arising
due to any Excess Interest. If for any period of time interest on any Senior
Subordinated Obligations is calculated at the Maximum Rate rather than the
applicable rate under this Agreement, and thereafter such applicable rate
becomes less than the Maximum Rate, the rate of interest payable on such Senior
Subordinated Obligations shall remain at the Maximum Rate until the Holders
shall have received the amount of interest which the Holders would have received
during such period on such Senior Subordinated Obligations had the rate of
interest not been limited to the Maximum Rate during such period. All sums paid
or agreed to be paid hereunder or under the Other Agreements for the use,
forbearance or detention of sums due shall, to the extent permitted by
applicable law, be amortized, pro-rated, allocated and spread throughout the
full term of the Senior Subordinated Obligations until payment in full so that
the rate or amounts of interest on account of the Senior Subordinated
Obligations does not exceed the Maximum Rate. The terms of this Section 2.8
shall be deemed incorporated into each Other Agreement and any other document or
instrument between the Company and any Holder or directed to the Company by any
Holder, whether or not specific reference to this Section 2.8 is made.
2.9 Joint and Several Liability; Rights of Contribution.
(a) Each Company states and acknowledges that: (i) pursuant to this
Agreement, the Companies desire to utilize their borrowing potential on a
consolidated basis to the same extent possible if they were merged into a single
corporate entity; (ii) it has determined that it will benefit specifically and
materially from the advances of credit contemplated by this Agreement; (iii) it
is both a condition precedent to the obligations of each Purchaser hereunder and
a desire of the Companies that each Company execute and deliver to each
Purchaser this Agreement; and (iv) the Companies have requested and bargained
for the structure and terms of and security for the advances contemplated by
this Agreement.
(b) Each Company hereby irrevocably and unconditionally: (i) agrees
that it is jointly and severally liable to each Purchaser for the full and
prompt payment of the Senior Subordinated Obligations, the performance by each
Company of its obligations hereunder in accordance with the terms hereof, and
the representations and warranties set forth in Article IV hereof; (ii) agrees
to fully and promptly perform all of its obligations hereunder with respect to
each advance of credit hereunder as if such advance had been made directly to
it; and (iii) agrees as a primary obligation to indemnify each Purchaser on
demand for and against any loss incurred by such Purchaser as a result of any of
the obligations of any Company being or becoming void, voidable, unenforceable
or ineffective for any reason whatsoever, whether or not known to such Purchaser
or any Person, the amount of such loss being the amount which such Purchaser
would otherwise have been entitled to recover from such Company.
(c) It is the intent of each Company that the indebtedness, obligations
and liability hereunder of no one of them be subject to challenge on any basis.
Accordingly, as of the date hereof, the liability of each Company under this
Section 2.9, together with all of its other liabilities to all Persons as of the
date hereof and as of any other date on which a transfer is deemed to occur by
virtue of this Agreement, calculated in amount sufficient to pay its probable
net liabilities on its existing Indebtedness as the same become absolute and
matured ("Dated Liabilities") is, and is to be, less than the amount of the
aggregate of a fair valuation of its assets as of such corresponding date
("Dated Assets"). To this end, each Company under this Section 2.9, (i) grants
to and recognizes in each other Company, ratably, rights of subrogation and
contribution in the amount, if any, by which the Dated Assets of such Company,
but for the aggregate of subrogation and contribution in its favor recognized
herein, would exceed the Dated Liabilities of such Company or, as the case may
be, (ii) acknowledges receipt of and recognizes its right to subrogation and
contribution ratably from each other Company in the amount, if any, by which the
Dated Liabilities of such Company, but for the aggregate of subrogation and
contribution in its favor recognized herein, would exceed the Dated Assets of
such Company under this Section 2.9. In recognizing the value of the Dated
Assets and the Dated Liabilities, it is understood that the Companies will
recognize, to at least the same extent of their aggregate recognition of
liabilities hereunder, their rights to subrogation and contribution hereunder.
It is a material objective of this Section 2.9 that each Company recognizes
rights to subrogation and contribution rather than be deemed to be insolvent (or
in contemplation thereof) by reason of an arbitrary interpretation of its joint
and several obligations hereunder.
III. REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser represents and warrants to the Company as follows:
3.1 Existence. It is a limited partnership duly organized, validly existing
and in good standing under the laws of the jurisdiction of its organization.
3.2 Authority. It has the right and corporate power and authority to enter
into, execute, deliver and perform its obligations under this Agreement, and its
partners, officers or agents executing and delivering this Agreement are duly
authorized to do so. This Agreement has been duly and validly executed and
delivered and constitutes the legal, valid and binding obligation of Purchaser,
enforceable in accordance with its terms.
3.3 Investor Status. It (i) is an "accredited investor," as that term is
defined in Regulation D under the Securities Act of 1933, as amended, and (ii)
has such knowledge, skill, sophistication and experience in business and
financial matters, based on actual participation, that it is capable of
evaluating the merits and risks of the purchase of the Senior Subordinated Note
from the Company and the suitability thereof for Purchaser.
3.4 Investment for own Account. Except as otherwise contemplated by this
Agreement, Purchaser is acquiring the Senior Subordinated Note for investment
for its own account and not with a view to any distribution thereof in violation
of applicable securities laws.
3.5 Legend on Note. It agrees that the Senior Subordinated Note will bear
the appropriate legends referencing restrictions on transfer and will not be
offered, sold or transferred in the absence of registration or exemption under
applicable securities laws.
IV. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
To induce Purchaser to enter into this Agreement, the Company represents
and warrants to Purchaser that the following statements are true, correct and
complete:
4.1. Corporate Existence and Authority. The Company (a) is a corporation
duly organized, validly existing, and in good standing under the laws of Nevada;
(b) has all requisite corporate power and authority to own its assets and carry
on its business as now conducted; and (c) is qualified to do business in all
jurisdictions in which the nature of its business makes such qualification
necessary and where failure to so qualify would have a Material Adverse Effect.
The Company has the corporate power and authority to execute, deliver, and
perform its obligations under this Agreement, the Senior Loan Documents, and all
Other Agreements to which it is or in connection with the transactions
contemplated hereby, may become, a party.
4.2 Financial Statements. The Company has delivered to Purchaser (a)
audited financial statements of the Company as at and for the fiscal year ended
December 31, 1997, (b) unaudited financial statements of the Company for the
six-month period ended June 30, 1998, and (c) an opening balance sheet for the
Company reflecting a valuation of all of the Company's assets and liabilities
based on GAAP, as of the Closing Date taking into account all transactions
taking place on such date, all certified by the Company's chief financial
officer and (except as stated above) based on GAAP and on financial data as of
June 30, 1998 (as adjusted to reflect the consummation of the transactions
contemplated under this Agreement, the Other Agreements and the Senior Loan
Documents as if the same had occurred on June 30, 1998), and which are attached
hereto as Schedule 4.2(a). The financial statements referred to in clauses (a)
and (b) of this Section 4.2 have been prepared in accordance with GAAP (except
as otherwise noted therein), and fairly present both the financial condition of
the Company as of the respective dates indicated therein and the results of the
Company's operations for the respective periods indicated therein. Attached
hereto as Schedule 4.2(b) are financial projections of the Company for the
period beginning on January 1, 1998 through December 31, 1999, together with a
written statement of the assumptions underlying them. Such cash flow projections
have been prepared in good faith based on estimates and assumptions believed by
the Company to be reasonable as of the date such projections were prepared, and
it is the Company's good faith belief that such cash flow projections are
reasonably achievable by the Company. The pro forma balance sheets are, to the
best knowledge of the Company after diligent inquiry and investigation, complete
and accurate and fairly present each of the Company's assets, liabilities and
financial condition, on the bases described above, as of the Closing Date, but
taking into account the transactions contemplated by this Agreement, and the
Senior Loan Documents and those contemplated as of the Closing Date under the
Other Agreements. To the best of the Company's knowledge after diligent inquiry
and investigation, there are no omissions from the pro forma balance sheets or
other facts and circumstances not reflected in the pro forma balance sheets
which are or may be material. At June 30, 1998, the Company had no liabilities
or obligations (absolute, accrued, contingent or otherwise) of a nature required
by GAAP to be reflected in such financial statements which were, individually or
in the aggregate, material to the condition, financial or otherwise, or
operations of the Company as of that date which are not reflected on such
financial statements. There has been no material adverse change in the
condition, financial or otherwise, or operations of the Company since June 30,
1998, nor has there otherwise occurred a Material Adverse Effect.
4.3 Default. The Company is not in violation of any material provision
under any loan agreement, indenture, mortgage, security agreement, lease,
franchise, permit, license or other agreement or obligation to which it is a
party or by which any of its properties is bound which is material. The Company
is paying its debts as they become due.
4.4 Authorization and Compliance with Laws and Material Agreements. The
execution, delivery and performance by the Company of this Agreement, the Senior
Loan Documents and the Other Agreements to which it is or may in connection with
the transactions contemplated hereby become a party, have been or prior to the
consummation of such transactions contemplated hereby will be duly authorized by
all requisite action on the part of the Company and do not and will not violate
its Articles of Incorporation or Bylaws or any law or any order of any court,
governmental authority or arbitrator, and do not and will not upon the
consummation of the transactions contemplated hereby conflict with, result in a
breach of, or constitute a default under, or result in the imposition of any
Lien (except Permitted Liens) upon any assets of the Company pursuant to the
provisions of any loan agreement, indenture, mortgage, security agreement,
franchise, permit, license or other instrument or agreement by which the Company
or any of its properties is bound. Except as set forth on Schedule 4.4, no
authorization, approval or consent of, and no filing or registration with, any
court, governmental authority or third Person is or will be necessary for the
execution, delivery or performance by the Company of this Agreement, the Senior
Loan Documents or the Other Agreements to which it is a party or the validity or
enforceability thereof. All such authorizations, approvals, consents, filings
and registrations described in Schedule 4.4 have been obtained. The Company is
not (a) in violation of any term of its Articles of Incorporation or Bylaws or
(b) in violation of any material provision of any contract, agreement, judgment
or decree that is material and is in full compliance with all material laws,
regulations and rules.
4.5 Environmental Condition of the Property. Except as disclosed on
Schedule 4.5:
(a) The location, construction, occupancy, operation and use of the
Property do not violate in any material respect any material applicable law,
statute, ordinance, rule, regulation, order or determination of any governmental
authority or other body exercising similar functions, or any restrictive
covenant or deed restriction (recorded or otherwise) affecting the Property in
any material way, including, without limitation, all applicable zoning
ordinances and building codes, flood disaster, occupational health and safety
laws and Environmental Laws and regulations (hereinafter sometimes collectively
called "applicable laws");
(b) Without limitation of paragraph (a) above, neither the Company nor
the Property is subject to any existing, pending or threatened material
investigation or inquiry by any governmental authority or subject to any
remedial obligations due to violations of applicable laws;
(c) The Company is not subject to any material liability or obligation
relating to (i) the environmental conditions on, under or about the Property,
including, without limitation, the soil and ground water conditions at the
Property, or (ii) the use, management, handling, transport, treatment,
generation, storage, disposal, release or discharge of any Polluting Substance;
(d) There is no Polluting Substance or other substance that may pose
any material risk to safety, health or the environment on, under or about any
Property;
(e) The Company has taken reasonable steps to determine and hereby
represents and warrants that no material amount of Polluting Substances have
been disposed of or otherwise released on, onto, into, or from the Property, and
the use which the Company makes and intends to make of the Property does not and
will not result in the disposal or other release of any material amount of
Polluting Substances on, onto, into or from the Property; and
(f) The Company has been issued all material required federal, state
and local licenses, certificates or permits relating to, and the Property, the
Company and the Company's facilities, business, assets, leaseholds and equipment
are all in compliance in all material respects with all applicable federal,
state and local laws, rules and regulations relating to, air emissions, water
discharge, noise emissions, solid or liquid waste disposal, Polluting
Substances, or other environmental, health or safety matters.
4.6 Solvency. The Company is not entering into the arrangements
contemplated by this Agreement and the Other Agreements with the actual intent
to hinder, delay or defraud either present or future creditors. After giving
effect to the transactions contemplated by the Senior Loan Agreement, this
Agreement and the Other Agreements, and after issuance of the RSTW Common Stock:
(a) the assets of the Company, at a fair valuation, will exceed the
total liabilities (including contingent, subordinated, unmatured and
unliquidated liabilities) of the Company;
(b) current projections which are based on underlying assumptions which
provide a reasonable basis for the projections and which reflect the Company's
judgment based on present circumstances, the most likely set of conditions and
the Company's most likely course of action for the period projected, demonstrate
that the Company will have sufficient cash flow to enable it to pay its debts as
they mature; and
(c) the Company will not have an unreasonably small capital base with
which to engage in its anticipated business.
For purposes of paragraph (a) of this Section 4.6, the "fair valuation" of the
assets of the Company shall be determined on the basis of the amount which may
be realized within a reasonable time, either through collection or sale of such
assets at market value, deeming the latter as the amount which could be obtained
for the property in question within such period by a capable and diligent
businessman from an interested buyer who is willing to purchase under ordinary
selling conditions.
4.7 Litigation and Judgments. Except as disclosed on Schedule 4.7, there is
no action, suit, proceeding or investigation before any court, governmental
authority or arbitrator pending, or to the knowledge of the Company threatened,
against or affecting the Company, this Agreement, the Senior Loan Documents
and/or the Other Agreements. Except as disclosed on Schedule 4.7, there are no
outstanding judgments against the Company. None of the matters listed on
Schedule 4.7 could reasonably be expected to have, either individually or in the
aggregate, a Material Adverse Effect.
4.8 Rights in Properties; Liens. The Company has good and indefeasible
title to all properties and assets reflected on its balance sheets (except for
the rights of its equipment lessors under its capitalized leases identified as
such on such balance sheets), and none of such properties or assets is subject
to any Liens, except Permitted Liens. The Company enjoys peaceful and
undisturbed possession under all leases necessary for the operation of its other
properties, assets, and businesses and all such leases are valid and subsisting
and are in full force and effect. There exists no default under any provision of
any lease which would permit the lessor thereunder to terminate any such lease
or to exercise any rights under such lease which, individually or together with
all other such defaults, could have a Material Adverse Effect. The Company has
the exclusive right to use all of the Intellectual Property necessary or
desirable to its business as presently conducted, and, to the best of the
Company's knowledge, the Company's use of the Intellectual Property does not
infringe on the rights of any other Person. To the best of the Company's
knowledge, no other person is infringing the rights of the Company in any of the
Intellectual Property. The Company and its Subsidiaries own or possess all
licenses, permits, franchises, authorizations, patents, patent applications,
copyrights, service marks, trademarks and trade names, or rights thereto, that
individually or in the aggregate are material, without known conflict with the
rights of others; to the best of the Company's knowledge, no such license or
trademark has been declared invalid, been limited by order of any governmental
authority or by agreement, or is the subject of any infringement, interference
or similar proceeding or challenge; to the best knowledge of the Company, no
product of the Company infringes in any material respect any license, permit,
franchise, authorization, patent, copyright, service mark, trademark, trade name
or other right owned by any other Person; and to the best knowledge of the
Company, there is no material violation by any Person of any right of the
Company or any of its Subsidiaries with respect to any patent, patent
applications, copyright, service mark, trademark, trade name or other right
owned or used by the Company or any of its Subsidiaries. The Company owes no
royalties, honoraria or fees to any Person by reason of its use of the
Intellectual Property.
4.9 Enforceability. This Agreement, the Senior Loan Documents and the Other
Agreements to which the Company is a party, when delivered, shall constitute the
legal, valid and binding obligations of the Company enforceable against the
Company in accordance with their respective terms.
4.10 Indebtedness. The Company has no Indebtedness, except Permitted
Indebtedness. All Indebtedness owed by the Company to any Affiliate is set forth
on Schedule 4.10.
4.11 Taxes. The Company has filed all tax returns (federal, state, and
local) required to be filed, including, without limitation, information returns,
reports and forms, and has paid all of its tax liabilities, other than
immaterial amounts and taxes that are being contested by the Company in good
faith by appropriate actions or proceedings diligently pursued, and for which
adequate reserves in conformity with GAAP with respect thereto have been
established to the reasonable satisfaction of Purchaser. The Company knows of no
pending investigation of the Company by any taxing authority or pending but
unassessed tax liability of the Company. The Company has made no presently
effective waiver of any applicable statute of limitations, and the Company is
not a party to any tax-sharing agreement.
4.12 Use of Proceeds; Margin Securities. The Company is not engaged
principally, or as one of its important activities, in the business of extending
credit for the purpose of purchasing or carrying margin stock (within the
meaning of Regulations G, U or X of the Board of Governors of the Federal
Reserve System), and no part of the proceeds of any extension of credit under
this Agreement will be used to purchase or carry any such margin stock or to
extend credit to others for the purpose of purchasing or carrying margin stock.
Neither the Company nor any Person acting on its behalf has taken any action
that might cause the transactions contemplated by this Agreement, the Senior
Loan Documents or any Other Agreements to violate Regulations G, U or X or to
violate the Securities Exchange Act of 1934, as amended.
4.13 ERISA. All members of any Controlled Group have complied with all
applicable minimum funding requirements and all other applicable and material
requirements of ERISA and the Code, applicable to the Employee Benefit Plans it
or they sponsor or maintain, and there are no existing conditions that would
give rise to material liability thereunder. With respect to any Employee Benefit
Plan, all members of any Controlled Group have made all contributions or
payments to or under each Employee Benefit Plan required by law, by the terms of
such Employee Benefit Plan or the terms of any contract or agreement. No
Termination Event has occurred in connection with any Pension Plan, and there
are no unfunded benefit liabilities, as defined in Section 4001(a)(18) of ERISA,
with respect to any Pension Plan which poses a risk of causing a Lien to be
created on the assets of the Company or which will result in the occurrence of a
Reportable Event. No member of any Controlled Group has been required to
contribute to a multiemployer plan, as defined in Section 4001(a)(3) of ERISA,
since September 2, 1974. No material liability to the Pension Benefit Guaranty
Corporation has been, or is expected to be, incurred by any member of a
Controlled Group. The term "liability," as referred to in this Section 4.13,
includes any joint and several liability. No prohibited transaction under ERISA
or the Code has occurred with respect to any Employee Benefit Plan which could
have a Material Adverse Effect or a material adverse effect on the condition,
financial or otherwise, of an Employee Benefit Plan.
4.14 Disclosure. No representation or warranty made by the Company in the
Senior Loan Documents or any Other Agreement to which the Company is a party
contains any untrue fact or omits to state any material fact necessary to make
the statements herein or therein not misleading. There is no fact known to the
Company which the Company has determined has a Material Adverse Effect, or which
the Company has determined could have a Material Adverse Effect, that has not
been disclosed in writing to Purchaser. No officer, director, shareholder (other
than Purchaser), 5% owner of Company stock other than Purchaser or Affiliate of
the Company or any of its Subsidiaries or any individual related by blood,
marriage or adoption to any such individual or any entity in which any such
Persons or individuals collectively own any beneficial interest in excess of
10%, is a party to any agreement, contract, commitment or transaction with the
Company any of its Subsidiaries or has any material interest in any material
property used by the Company or any of its Subsidiaries (each an "Affiliate
Transaction").
4.15 Subsidiaries and Capitalization. The Company has no Subsidiaries
except as set forth on Schedule 4.15. All the issued and outstanding shares of
capital stock of the Company are duly authorized, validly issued, fully paid and
nonassessable. The capitalization of the Company on the Closing Date is set
forth on Schedule 4.15. No violation of any preemptive rights of shareholders of
the Company has occurred by virtue of the transactions contemplated under this
Agreement, the Senior Loan Documents or any Other Agreement. There are no
outstanding contracts, options, warrants, instruments, documents or agreements
binding upon the Company granting to any Person or group of Persons any right to
purchase or acquire shares of the Company's capital stock, except pursuant to
the Securities Documents or except as set forth on Schedule 4.15.
4.16 Current Locations. Schedule 4.16 identifies (a) the Company's
principal place of business and chief executive office, (b) all the locations
where the Company maintains any books or records relating to any of its assets,
(c) all other locations where the Company has a place of business, and (d) each
address where any of the Company's assets are located. Schedule 4.16 accurately
indicates whether each such location is owned or leased, and, if leased,
identifies the owner of such location. No Person other than the Company has
possession of any material amount of the assets of the Company except as
disclosed on Schedule 4.16.
4.17 Investment Company Act. Neither the Company nor any company
controlling the Company is required to be registered as an "investment company"
within the meaning of the Investment Company Act of 1940, as amended.
4.18 Public Utility Holding Company Act. The Company is not a "holding
company" or a "subsidiary company" of a "holding company" or an "affiliate" of a
"holding company" or a "public utility" within the meaning of the Public Utility
Holding Company Act of 1935, as amended.
4.19 No Burdensome Restrictions. The Company is not a party to, or bound by
any agreement, condition, contract or arrangement which has, or which the
Company reasonably expects in the future will have, a Material Adverse Effect.
4.20 Securities Laws. The Company has complied with or is exempt from the
registration and/or qualification requirements of all federal and state
securities or blue sky laws applicable to the issuance or sale of the Senior
Subordinated Note and the RSTW Common Stock.
4.21 No Labor Disputes. The Company is not involved in any labor dispute.
There are no strikes or walkouts or union organization of any of the Company's
employees threatened or in existence and no labor contract is scheduled to
expire during the term of this Agreement. The Company is in compliance with all
laws, rules, regulations, orders and decrees applicable to the Company or its
properties, except for instances of noncompliance which, individually or in the
aggregate, will not have a Material Adverse Effect.
4.22 Brokers. Neither the Company nor any of its shareholders has dealt
with any broker, finder, commission agent or other Person in connection with the
transactions referenced in or contemplated by this Agreement, nor is the Company
or any of its shareholders under any obligation to pay any broker's fee or
commission in connection with such transactions, except as set forth on Schedule
4.22.
4.23 Insurance. The amount and types of insurance carried by the Company,
and the terms and conditions thereof, are substantially similar to the coverage
maintained by companies in the same or similar business as the Company and
similarly situated, and include, without limitation, property and casualty
insurance, general liability insurance, business interruption insurance and
other insurance in the amounts and of the types described in Section 6.12
hereof.
4.24 Conduct of Business. On the Closing Date, the Company is engaged only
in businesses of the type described in Schedule 4.24.
V. CONDITIONS PRECEDENT TO OBLIGATIONS OF PURCHASER
Purchaser's obligations hereunder shall be subject to (a) the performance
by the Company of its obligations hereunder which by the terms hereof are to be
performed at or prior to delivery of the Senior Subordinated Note, and (b) the
satisfaction of the following conditions on or before the Closing Date:
5.1 Minimum Availability. The Company shall have available cash and
immediately accessible availability under the Existing Loan Documents in an
amount equal to not less than $2,800,000 on the Closing Date after giving affect
to the payment of (a) all fees payable to Purchaser under the terms of this
Agreement, and (b) all costs and expenses arising as a result of the
transactions contemplated by this Agreement, the Senior Loan Documents and any
Other Agreement to which the Company is a party, and Purchaser shall have
received satisfactory evidence thereof.
5.2 Due Diligence. The results of Purchaser's due diligence regarding the
Company shall be satisfactory to Purchaser, and Purchaser shall be satisfied
with the assets and books and records and the business and financial condition
of the Company.
5.3 No Litigation; Consummation of Transactions. No injunction, preliminary
injunction, or temporary restraining order shall be threatened or shall exist
which prohibits or may prohibit the transactions contemplated herein or any
other related transaction, and no litigation or similar proceeding (including,
without limitation, any litigation or other proceeding seeking injunctive or
similar relief) shall be threatened or shall exist with respect to the
transactions contemplated herein, which, if adversely determined, could in the
judgment of Purchaser have a Material Adverse Effect.
5.4 Documents. Purchaser shall have received the following, each in form
and substance satisfactory to Purchaser:
(a) Senior Subordinated Note. The Senior Subordinated Note issued in
the name of RSTW duly executed by the Company;
(b) RSTW Common Stock and Securities Documents. The RSTW Common Stock,
duly issued by Avalon to RSTW, along with the other fully executed Securities
Documents and all other documents and instruments required pursuant thereto;
(c) Junior Subordination Agreements. A junior subordination agreement
duly executed in favor of Purchaser by a majority of the holders of Convertible
Notes and by each Affiliate of the Company to whom the Company owes
Indebtedness;
(d) Other Agreements. All Other Agreements, duly executed by the
parties thereto;
(e) Insurance. Certified copies of all insurance policies and
endorsements thereto required by Section 6.12, together with a written report
from an insurance broker acceptable to Purchaser, confirming that the amount of
such insurance coverage and the terms and conditions thereof are substantially
similar to policies maintained by companies similarly situated to the Company
and engaged in the same or a similar business;
(f) Approvals and Consents. Copies, certified by the Company of all
consents, authorizations, filings, licenses and approvals, if any, required in
connection with the execution, delivery and performance by the Company, or the
validity and enforceability of, this Agreement, the Senior Loan Documents or the
Other Agreements to which the Company is a party;
(g) Opinion of Counsel to the Company. The written legal opinion of
Robertson & Williams, legal counsel to the Company substantially in the form
attached hereto as Exhibit B;
(h) General Certificate of the Company's Secretary. A certificate of
the Secretary of the Company together with true, correct and complete copies of
the following:
(i) Articles of Incorporation. The Articles of Incorporation of
the Company, including all amendments thereto, certified by the Secretary
of State of the state of its incorporation and dated within thirty (30)
days prior to the Closing Date;
(ii) Bylaws. The Bylaws of the Company, including all amendments
thereto;
(iii) Resolutions. The resolutions of the Board of Directors of
the Company authorizing the execution, delivery and performance of this
Agreement, the Senior Loan Documents, and the Other Agreements to which the
Company is a party and, with respect to Avalon, authorizing the issuance of
the RSTW Common Stock;
(iv) Existence and Good Standing Certificates. Certificates of
the appropriate government officials of the state of incorporation of the
Company as to its existence and good standing, and certificates of the
appropriate government officials in each state where the Company does
business and where failure to qualify as a foreign corporation would have a
Material Adverse Effect, as to its good standing and due qualification to
do business in such state, each dated within thirty (30) days prior to the
Closing Date; and
(v) Incumbency. The names of the officers of the Company
authorized to sign this Agreement and the Other Agreements to be executed
by the Company, together with a sample of the true signature of each such
officer;
(i) Existing Loan Documents. Copies of the Existing Loan Documents and
each document relating thereto, and a certificate of the Chief Executive Officer
and Vice President of Finance of the Company certifying that the attached
documents are a true, correct and complete set of the Existing Loan Documents;
(j) Solvency Certificate. A certificate regarding the solvency of the
Company, which includes a pro forma balance sheet and cash flow projections and
analyses for the Company, executed by the Chief Executive Officer and the Vice
President of Finance of the Company;
(k) Sources and Uses Certificate. A certificate executed by the Chief
Executive Officer and Vice President of Finance of the Company, setting forth in
reasonable detail the sources and uses of funds in the transactions contemplated
herein, in the Senior Loan Documents and in the Other Agreements;
(l) Communication with Accountants. Purchaser shall have received a
copy of a letter from the Company addressed to its accountants authorizing such
accountants to disclose to Purchaser (or to Purchaser and the Holders
Representative if Purchaser is not at the time the holder of the majority of the
Senior Subordinated Obligations) such financial information concerning the
Company as the Purchaser (or the Purchaser and the Holders Representative, as
the case may be) may reasonably request to assist Purchaser (or Purchaser and
the Holders Representative, as the case may be) in determining compliance by the
Company with any of the financial covenants contained in Article VII hereof;
(m) Transaction Certificate. A certificate of the Chief Executive
Officer and the Vice President of Finance of the Company that, to the best of
their knowledge after due investigation, all conditions precedent to the
effectiveness of this Agreement have been satisfied or waived;
(n) Environmental Reports. Environmental reports of an independent
environmental consulting firm satisfactory to the Purchaser with respect to the
Property and all improvements, fixtures and equipment located thereon, which
reports shall evidence no violation of Environmental Laws or presence of
Polluting Substances which is unacceptable to Purchaser in its sole discretion;
and
(o) Additional Information, Other Documents and Agreements. Such other
information, documents, agreements, commitments and undertakings as Purchaser or
Purchaser's counsel shall reasonably request.
5.5 Material Adverse Change. For the period from June 30, 1998 to the
Closing Date, and except for the transactions contemplated by this Agreement,
the Other Agreements, and the Senior Loan Documents, there shall have been (a)
no occurrence or event which, in Purchaser's opinion, has or could have a
Material Adverse Effect, and (b) no occurrence or event which would lead the
Company or Purchaser to believe that the Company would fail to meet the
financial projections delivered to Purchaser pursuant to Section 4.2.
5.6 Fees. A closing fee in the amount set forth in Section 1.3 shall have
been paid to Purchaser. All other fees then payable pursuant to this Agreement
which are due on or prior to the Closing Date (including the fees, expenses and
disbursements of the Purchaser's counsel) shall have been paid to Purchaser (or
such counsel, as applicable).
5.7 No Event of Default. No Event of Default or Potential Default shall
have occurred and be continuing.
5.8 Representations and Warranties. All representations and warranties
contained in this Agreement and the Other Agreements shall be true and correct
on the Closing Date.
VI. AFFIRMATIVE COVENANTS
The Company covenants and agrees that, from the date hereof and until the
Senior Subordinated Obligations have been finally and irrevocably paid in full
in accordance with the terms hereof and thereof:
6.1 Financial Statements. The Company will furnish to Purchaser:
(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 Securities and Exchange 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 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 6.2(a); 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 6.1(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 sixty (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
approved by the Board of Directors of the Company, 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.
(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.
6.2 Certificates; Other Information. The Company will furnish to Purchaser
all of the following:
(a) Concurrently with the delivery of each of the financial statements
referred to in Section 6.1(a) and Section 6.1(b), a certificate of an authorized
officer of the Company in the form of the officer's certificate attached hereto
as Exhibit C (i) stating that no Potential Default or Event of Default has
occurred and is continuing or, if such officer has knowledge of a Potential
Default or Event of Default, the nature thereof and specifying the steps taken
or proposed to remedy such matter, (ii) showing in reasonable detail the
calculations showing compliance with Sections 7.9 and 7.10, (iii) 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, (iv) 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, (v)
(A) containing a schedule of the outstanding Indebtedness for borrowed money of
the Company and its Subsidiaries 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 (a)(i) above.
(b) 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 Securities and Exchange 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 to Collateral (as defined in the Senior Loan Agreement) and accounts
payable, unless otherwise requested by the Holders Representative).
(c) Promptly, such additional information concerning the Company as the
Holders Representative may reasonably request.
6.3 Books and Records; Accounting System. The Company shall keep (a) proper
books of record and account in which full, true and correct entries will be made
of all dealings or transactions of or in relation to its business and affairs;
(b) set up on its books accruals with respect to all taxes, assessments,
charges, levies and claims; and (c) on a reasonably current basis set up on its
books from its earnings allowances against doubtful receivables, advances and
investments and all other proper accruals (including, without limitation, by
reason of enumeration, accruals for premiums, if any, due on required payments
and accruals for depreciation, obsolescence, or amortization of properties),
which should be set aside from such earnings in connection with its business.
All determinations pursuant to this subsection shall be made in accordance with,
or as required by, GAAP consistently applied. Each of the Company and its
Subsidiaries will maintain, and cause each of their Subsidiaries to maintain, a
modern system of accounting established and administered in accordance with
sound business practices to permit preparation of consolidated financial
statements in conformity with GAAP.
6.4 Financial Disclosure. The Company hereby irrevocably authorizes and
directs all accountants and auditors employed by it at any time during the term
of this Agreement to exhibit and deliver to the Holders Representative copies of
any of the Company's financial statements, trial balances or other accounting
records of any sort in the accountant's or auditor's possession, and to disclose
to Purchaser any information they may have concerning the Company's financial
status and business operations. The Company hereby irrevocably authorizes all
federal, state and municipal authorities to furnish to Purchaser copies of
reports or examinations relating to the Company, whether made by the Company or
otherwise.
6.5 Disclosure of Material Matters. The Company will, immediately upon
learning thereof, report to the Holders Representative (a) all matters
materially affecting the value, enforceability or collectibility of any material
portion of its assets including, without limitation, changes to significant
contracts, schedules of equipment, changes of significant equipment or real
property, the reclamation or repossession of, or the return to the Company of, a
material amount of goods and material claims or disputes asserted by any
customer or other obligor, which matters could have a Material Adverse Effect,
and (b) any material adverse change in the relationship between the Company and
any of its suppliers or customers which could have a Material Adverse Effect.
6.6 Performance of Obligations. The Company will duly and punctually pay
and perform its obligations under this Agreement, the Senior Loan Documents and
the Other Agreements to which it is a party.
6.7 Preservation of Existence and Conduct of Business. The Company will
preserve and maintain its corporate existence and all of its leases, privileges,
franchises, qualifications and rights that are necessary or useful in the
ordinary conduct of its business, and conduct its business as presently
conducted in an orderly and efficient manner in accordance with good business
practices.
6.8 Maintenance of Properties. The Company will operate and maintain in
good condition and repair (ordinary wear and tear excepted) and replace as
necessary, all of its assets and properties which are necessary or useful in
accordance with sound business practices in the proper conduct of its business
so that the value and operating efficiency of its assets and properties are
maintained and preserved. The Company will at all times maintain the
Intellectual Property in full force and effect, and will defend and protect the
Intellectual Property against all adverse claims, except to the extent that the
failure to so maintain, defend or protect such Intellectual Property would not
have a Material Adverse Effect.
6.9 Payment of Taxes and Claims. The Company will pay or discharge, at or
before maturity or before becoming delinquent (a) all taxes, levies,
assessments, vault, water and sewer rents, rates, charges, levies, permits,
inspection and license fees and other governmental and quasi-governmental
charges and any penalties or interest for nonpayment thereof, heretofore or
hereafter imposed or which may become a Lien upon any property owned by the
Company or arising with respect to the occupancy, use, possession or leasing
thereof (collectively the "Impositions") and (b) all lawful claims for labor,
material, and supplies, which, if unpaid, might become a Lien upon any of its
property; provided, however, the Company will not be required to pay or
discharge any claim for labor, material, or supplies or any Imposition which is
being contested in good faith by appropriate actions or proceedings diligently
pursued, and for which adequate reserves in conformity with GAAP with respect
thereto have been established to the reasonable satisfaction of Purchaser.
6.10 Compliance with Laws. Except as otherwise permitted pursuant to the
last sentence of this section, the Company shall comply with all acts, rules,
regulations and orders of any legislative, administrative or judicial body or
official applicable to the operation of the Company's business if noncompliance
with such acts, rules, regulations or orders could have a Material Adverse
Effect; provided, however, the Company may contest or dispute any acts, rules,
regulations, orders and directions of those bodies or officials in any
reasonable manner, provided that adequate reserves with respect thereto are
established in accordance with GAAP.
6.11 Payment of Leasehold Obligations; Compliance with Material Agreements.
The Company shall at all times pay, when and as due, its rental obligations
under all material leases under which it is a tenant or lessee, and shall
otherwise comply, in all material respects, with all other terms of such leases
and keep them in full force and effect and, at the request of the Holders
Representative, will provide evidence of its having done so. The Company may,
however, contest or dispute its obligations under such material leases, provided
that adequate reserves with respect thereto are established in accordance with
GAAP. The Company shall also comply in all material respects with all material
provisions of all material agreements, indentures, mortgages, deeds of trust or
other agreements binding on it or affecting its properties or business (after
giving effect to applicable grace periods contained therein, if any) where the
failure to so comply would have a Material Adverse Effect.
6.12 Insurance. The Company will maintain, with financially sound,
reputable and solvent companies, insurance policies (a) insuring its assets and
business against loss by fire, explosion, theft, business interruption and other
risks and casualties as are customarily insured against by companies engaged in
the same or a similar business, (b) insuring it against liability for personal
injury and property damages relating to its assets, such policies to be in such
amounts and covering such risks as are usually insured against by companies
engaged in the same or a similar business and use reasonably satisfactory to the
Majority Holders. All general liability policies shall be endorsed in favor of
the Holders as an additional insured. The Company shall (i) deliver copies of
all such policies to the Holders Representative within 30 days after the Closing
Date, and from time to time thereafter upon request, (ii) pay, or cause to be
paid, all premiums for such insurance before such premiums become due, (iii)
furnish to the Holders Representative satisfactory proof of the timely making of
such payments, and (iv) cause such policies to require the insurer to give
notice to the Holders Representative of termination of any such policy at least
30 days before such termination is to be effective.
6.13 Inspection Rights. At any time and from time to time, the Company will
permit representatives of the Holders Representative to examine and make copies
of the books and records of, and visit and inspect the properties of, the
Company, and to discuss the business, operations, and financial condition of the
Company with its respective officers and employees and with its independent
certified public accountants. In accordance with the terms of Section 12.1
hereof, the Company will promptly reimburse the Holders for all expenses
incurred by representatives of the Holders in connection with such inspections.
6.14 Notices. The Company will promptly, but in any event within five (5)
days after first becoming aware thereof, notify the Holders Representative in
writing of:
(a) the commencement of any action, suit, or proceeding against the
Company that, in its reasonable judgment, if determined adversely to the
Company, would have a Material Adverse Effect;
(b) the occurrence of an Event of Default, or an event which with the
passage of time or giving of notice or both constitutes an Event of Default (as
defined in the Senior Loan Agreement) under any of the Senior Loan Documents or
under any instrument or agreement evidencing any other Indebtedness of the
Company, which notice shall specify the nature of such event, condition or
default and what action the Company has taken or is taking or proposes to take
with respect thereto; or
(c) any other matter that has had or, in the reasonable judgment of the
Company, is likely to have, a Material Adverse Effect; and
(d) The occurrence of a Potential Default or an Event of Default, which
notice shall specify the nature of such event, condition or default and what
action the Company has taken or is taking or proposes to take with respect
thereto.
Any notification required by this Section 6.14 shall be accompanied by a
certificate of the Chief Executive Officer or Vice President of Finance setting
forth the details of the specified events and the action which the Company
proposes to take with respect thereto.
6.15 Additional Notices. Immediately upon receipt by the Company, the
Company shall provide the Holders Representative with copies of all notices
(including notices of default), statements and financial information, including
notices of default, received from the Senior Lender under the Senior Loan
Agreement and any other creditor or lessor with respect to the acceleration of
the maturity of any item of Indebtedness for borrowed money which, if not paid,
could give rise to an Event of Default under Section 8.1(b) or the repossession
of material property from the Company.
6.16 Senior Loan Document Amendments. The Company shall promptly provide
Purchaser with copies of all proposed amendments to the Senior Loan Documents
and of all other loan agreements to which the Company is a party.
6.17 Further Assurances. Each of the Company and the Holders shall execute
and deliver, from time to time, upon the reasonable request of the other party,
such supplemental agreements, statements, assignments and transfers, or
instructions on documents as may be necessary in order that the full intent of
the parties to this Agreement and the Other Agreements may be carried into
effect.
6.18 Compliance with ERISA and the Code. The Company will comply, and will
cause each other member of any Controlled Group to comply, with all minimum
funding requirements, and all other material requirements, of ERISA and the
Code, if applicable, to any Employee Benefit Plan it or they sponsor or
maintain, so as not to give rise to any liability thereunder. The Company will
pay and will cause each other member of any Controlled Group to pay when due any
amount payable by it to the Pension Benefit Guaranty Corporation. Promptly after
the filing thereof, the Company shall furnish to Purchaser with regard to each
Employee Benefit Plan, copies of each annual report required to be filed
pursuant to Section 104 of ERISA in connection with each such plan for each plan
year.
6.19 Compliance with Regulations G, U and X. Neither the Company nor any
Person acting on its behalf will take any action which might cause this
Agreement, the Senior Subordinated Note, the Securities Documents, the Senior
Loan Documents or any Other Agreements to violate, and the Company will take all
actions necessary to cause compliance with, Regulations G, U and X of the Board
of Governors of the Federal Reserve System and the Securities Exchange Act of
1934, in each case as now in effect or as the same may hereafter be in effect.
6.20 Fiscal Year. The Company will cause its fiscal year to be the twelve
month period ending on December 31 of each year.
6.21 Board Observation and Membership. 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, 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.
6.22 Environmental Costs.
(a) The Company hereby indemnifies and holds each Holder harmless from
and against any liability, loss, damage, suit, action or proceeding pertaining
to solid or hazardous waste materials or other waste-like or toxic substances,
including, but not limited to, claims of any federal, state or municipal
government or quasi-governmental agency or any third person, whether arising
under any federal, state or municipal law or regulation, or tort, contract or
common law that relates to the Company.
(b) To the extent the laws of the United States or any state in which
the Company leases or owns property provide that a lien upon the property of the
Company may be obtained for the removal of Polluting Substances which have been
released, no later than sixty (60) days after notice is given by Purchaser to
the Company, the Company shall deliver to Purchaser a report issued by a
qualified, third party environmental consultant selected by the Company and
approved by Purchaser certifying as to the existence of any Polluting Substances
located upon or beneath the specified property, leased or owned. To the extent
any such Polluting Substance is located therein or thereunder that either (i)
subjects the property to Lien or (ii) requires removal to safeguard the health
of any Person, the Company shall remove, or cause to be removed, such Lien and
such Polluting Substance at the Company's expense.
VII. NEGATIVE COVENANTS
The Company covenants and agrees that from the date hereof until the Senior
Subordinated Obligations have been finally and irrevocably paid in full in
accordance with the terms hereof and thereof:
7.1 Indebtedness. The Company will not create, incur, issue, assume,
guarantee or otherwise become liable for any Indebtedness except (a) Permitted
Indebtedness; (b) any extension, renewal or refinancing of any Permitted
Indebtedness (other than the Senior Loans) on such terms and conditions as are,
on the whole, no more onerous to the Company than the terms and conditions of
such Permitted Indebtedness on the date of such extension, renewal or
refinancing; and (c) any replacement or refinancing of the Senior Loans;
provided that (i) the interest rate on such refinancing shall be no greater than
the interest rate provided for in the Senior Loan Agreement, (ii) the
amortization of principal on such refinancing shall be for no shorter period,
and for no greater annual amounts, than the amortization provided for in the
Senior Loan Agreement (except that term loan principal that is so refinanced may
fully amortize on a straight-line basis during such permitted period), (iii) the
maximum principal amount outstanding under the Senior Loans as so replaced or
refinanced does not exceed the maximum principal amount permitted to be
outstanding under the Senior Loan Agreement on the date of such replacement or
refinancing [unless the Company on the date of such replacement or refinancing
shall have made a prepayment on the Senior Subordinated Note to the Holders in
an amount equal to such increased amount (the "Senior Loan Increase"), together
with any applicable Prepayment Fee and other amounts required under Section
2.3(a)], and (iv) the other terms and conditions of such replacement or
refinancing, taken as a whole, are not materially more onerous to Holders than
the terms of the Senior Loan Agreement as in effect on the Closing Date. Any
Permitted Indebtedness which is subordinated to the Senior Subordinated
Obligations shall continue to be subordinated to the Senior Subordinated
Obligations on terms and conditions satisfactory to the Holders.
7.2 Limitation on Liens. The Company will not incur, create, assume, or
permit to exist any Lien upon any of its property, assets, or revenues,
including, but not limited to, its shares of capital stock of each of its
Subsidiaries, whether now owned or hereafter acquired, except Permitted Liens.
7.3 Merger, Acquisition, Dissolution and Sale of Assets. The Company will
not become a party to a merger or consolidation or purchase or otherwise acquire
all or a substantial part of the assets of any Person or any shares or other
evidence of beneficial ownership of any Person (except for (i) Permitted
Acquisitions and (ii) a merger or consolidation involving only the Company and
any of its Subsidiaries where the Company is the surviving entity of such merger
or consolidation) or dissolve or liquidate. The Company will not form, acquire
or permit the existence of any Subsidiary or Subsidiaries of the Company other
than as described in Section 4.15. The Company will not, without the prior
written consent of the Holders, sell assign or transfer any of its assets or
properties (except 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 Company's business).
7.4 Restricted Payments. The Company will not at any time make or become
obligated to make, directly or indirectly, any (a) declaration of any dividend
(other than in-kind common stock dividends (to the extent required by the
Convertible Notes) and stock splits) on, or any other payment or distribution in
respect of, any shares of capital stock of the Company, (b) payment or
distribution on account of the purchase, repurchase, redemption, put, call or
other retirement of any shares of capital stock of the Company or of any
warrant, option or other right to acquire such shares (except pursuant to the
Securities Documents), or (c) payment or distribution on account of any
Indebtedness of the Company which is subordinate to the Senior Subordinated Note
(except pursuant to the subordination agreement related thereto).
7.5 Loans and Investments. Except for Permitted Investments, the Company
will not make any advance, loan, extension of credit, or capital contribution to
or investment in, or purchase any stock, bonds, notes, debentures, or other
securities of any Person.
7.6 Transactions with Affiliates. Except as contemplated by this Agreement
and the Other Agreements, the Company will not enter into any transaction with
any director, officer, employee, shareholder, or Affiliate of the Company, or
any Affiliate or relative of the foregoing, except transactions (including those
permitted by Section 7.5, if any) upon terms which are, in the judgment of the
Holders, fair and reasonable and 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. Upon the occurrence and
during the continuation of a Potential Default or Event of Default, the Company
shall not be permitted to make any payments with respect to any Affiliate
Transactions or any transactions otherwise permitted under this Section 7.6.
7.7 Nature of Business. The Company will not engage in any business other
than the businesses set forth on Schedule 4.24, or any business reasonably
related thereto.
7.8 Modification of Senior Loan Agreement. The Company will not agree or
consent to any modification, amendment or waiver of any of the terms or
provisions of the Senior Loan Documents in effect on the date hereof without
Purchaser's prior written consent, except as set forth in the Senior
Subordination Agreement and, in any event, without providing Purchaser with
written notice thereof.
7.9 Capital Expenditures. The Company will not make any Capital
Expenditures if, as a result thereof, the Capital Expenditures of the Company
would, in the aggregate, exceed (i) $650,000 during the Company's fiscal years
ending December 31, 1998 and 1999, respectively, (ii) $700,000 during the
Company's fiscal year ending December 31, 2000, (iii) $750,000 during the
Company's fiscal year ending December 31, 2001, (iv) $800,000 during the
Company's fiscal year ending December 31, 2002, (v) $850,000 during the
Company's fiscal year ending December 31, 2003, (vi) $900,000 during the
Company's fiscal year ending December 31, 2004, (vii) $950,000 during the
Company's fiscal year ending December 31, 2005, and (viii) $1,000,000 during the
Company's fiscal year ending December 31, 2006. In the event that the Company
enters into a capital lease with respect to fixed assets, for purposes of
calculating Capital Expenditures under this Section 7.9, the entire principal
amount of such capital lease shall be considered expended in full on the date
that the Company enters into such capital lease.
7.10 Financial Covenants.
(a) EBITDA. The Company shall not permit its EBITDA for any twelve (12)
month period ending on the last day of any calendar quarter ending on any of the
dates set forth below to be less than the amount set forth below for such date:
Date Amount
September 30, 1998 $1,400,000.00
December 31, 1998 $1,550,000.00
March 31, 1999 $1,825,000.00
June 30, 1999 $2,100,000.00
September 30, 1999 $2,550,000.00
December 31, 1999 $2,800,000.00
March 31, 2000 $3,000,000.00
June 30, 2000 $3,200,000.00
September 30, 2000 $3,500,000.00
December 31, 2000 $4,000,000.00
March 31, 2001 $4,500,000.00
June 30, 2001 $4,500,000.00
September 30, 2001 $4,500,000.00
December 31, 2001 and the last day of $5,000,000.00
each calendar quarter thereafter
(b) Fixed Charge Coverage. The Company shall not permit its Fixed
Charge Coverage for any twelve (12) month period ending on the last day of any
calendar quarter ending on any of the dates set forth below to be less than the
ratio set forth below for such date:
Date Ratio
September 30, 1999 .85 to 1.00
December 31, 1999 .90 to 1.00
March 31, 2000 and the last day of each 1.00 to 1.00
calendar quarter thereafter
(c) Indebtedness to EBITDA. The Company shall not permit the ratio of
its (i) total Indebtedness calculated as of the last day of any calendar quarter
ending on any of the dates set forth below to (ii) EBITDA for the twelve (12)
month period ending on such date, to be greater than the ratio set forth below
for such date:
Date Ratio
September 30, 1999 9.00 to 1.00
December 31, 1999 8.50 to 1.00
March 31, 2000 7.50 to 1.00
June 30, 2000 6.50 to 1.00
September 30, 2000 6.00 to 1.00
December 31, 2000 5.50 to 1.00
March 31, 2001 and the last day of 5.00 to 1.00
each calendar quarter thereafter
7.11 Remuneration. The Company will not and will not permit any of its
Subsidiaries to (a) pay any management, consulting, or similar fees to any
shareholder, member or Affiliate of the Company or to any director, officer,
directors, employee or immediate family member of any such Affiliate,
shareholder or member, except as set forth in Schedule 7.11, or (b) pay any
compensation to the Persons identified on Schedule 7.11 in excess of the amounts
set forth Schedule 7.11 (other than pursuant to the Employment Agreements)
whether such compensation consists of salary, bonus, management, consulting or
other fees, capital distributions, or other benefits or otherwise, and
regardless of whether such compensation is paid by the Company and/or any
Subsidiary or Affiliate of the Company.
7.12 Modification of Convertible Notes. The Company will not agree to any
modification, amendment or waiver of any of the terms or provisions of the
Convertible Notes without the Holders' prior written consent.
7.13 Construction of New Facilities. The Company will not begin the
construction of any community correctional or juvenile facility without first
obtaining (i) a written contract regarding the construction of such community
correctional or juvenile facility from the Person intending to utilize such
facility (including but not limited to any proper governmental or
quasi-governmental body or authority, whether national, federal, state, county,
municipality, local or otherwise, and any instrumentality, division, agency,
body or department thereof) and (ii) the prior written consent of Purchaser.
VIII. EVENTS OF DEFAULT AND REMEDIES THEREFOR
8.1 Events of Default. The occurrence of any one or more of the following
events shall constitute an "Event of Default":
(a) The Company shall fail to pay when due (whether upon acceleration
or otherwise), any principal, interest, Prepayment Fee or other sums payable
under the Senior Subordinated Note, this Agreement or any of the Other
Agreements (including, without limitation, any Senior Subordinated Obligations
consisting of the Put Price under the Put Option);
(b) The Company shall fail to pay when due and after passage of any
applicable notice and cure periods (whether upon acceleration or otherwise), any
Indebtedness (other than the Senior Debt), individually or in the aggregate,
having an unpaid principal amount in excess of $100,000.00;
(c) (i) The Company shall fail to perform or observe any agreement,
covenant term or condition contained in the Senior Subordinated Note, the Other
Agreements or in Sections 6.1(a), (c), (d), (e) or (f), 6.2, 6.12, 6.13, 6.14 or
6.21 or Article VII of this Agreement; or (ii) the Company shall fail to perform
or observe any agreement, covenant, term or condition contained in Section
6.1(b) of this Agreement, and such failure continues for a period of five (5)
days following the earlier to occur of (x) the date on which the Company is
notified of such failure by any Holder or (y) the date upon which any member of
the management of the Company first became aware or, with the exercise of
reasonable diligence, should have become aware of the occurrence of such
failure; or (iii) the Company shall fail to perform or observe any agreement,
covenant, term or condition contained in this Agreement, the Senior Subordinated
Note or any Other Agreement (excluding the specific Sections and Article
referred to in Sections 8.1(c)(i) and (ii) above), and such failure continues
for a period of fifteen (15) days following the earlier to occur of (x) the date
on which the Company is notified of such failure by any Holder or (y) the date
upon which any member of the management of the Company first became aware or,
with the exercise of reasonable diligence, should have become aware of the
occurrence of such failure;
(d) The Company shall fail to comply, after passage of any applicable
notice and cure periods, with any other agreement, indenture, mortgage or deed
of trust (other than the Senior Loan Documents) binding on it or affecting its
properties or business;
(e) Any representation or warranty whatsoever made or provided by the
Company to any Holders in connection with this Agreement or any Other Agreement
was incorrect or misleading in any material respect, when made;
(f) The Company shall become subject to an Event of Bankruptcy;
(g) Any judgment or order for payment of money shall be rendered
against the Company which exceeds $250,000 (unless such judgment or order for
payment of money is fully covered by insurance and the applicable insurance
company has acknowledged coverage in writing) and either (i) enforcement
proceedings shall have been commenced by any creditor upon such judgment or
order, or (ii) there shall be a period of thirty (30) consecutive days during
which a stay of enforcement of such judgment or order, by reason of a pending
appeal or otherwise, shall not be in effect;
(h) The occurrence or existence of any event of default under the
Senior Loan Documents, except for such defaults as have been waived by the
Senior Lender; or
(i) The occurrence of a Change of Control.
8.2 Remedies of Holders upon Occurrence of Event of Default. When any Event
of Default described in Section 8.1 above, other than any Event of Default
described in clause (f) thereof, has occurred and is continuing, the Majority
Holders may, in addition to any other right, power or remedy permitted by law
declare the entire amount of the Senior Subordinated Obligations, including,
without limitation, the entire principal, premium (if any) and all interest
accrued then outstanding under the Senior Subordinated Note, to be, and the same
shall thereupon become, forthwith due and payable, together with a premium equal
to the product of the applicable Premium Percentage multiplied by the entire
principal amount then outstanding under the Senior Subordinated Note, without
any presentment, demand, protest, notice of default, notice of intention to
accelerate, notice of acceleration or other notice of any kind, all of which are
hereby expressly waived, and in such event the Company shall forthwith pay to
the Holders an amount equal to 100% of the amount thereof. When any Event of
Default described in subparagraph (f) of Section 8.1 above shall occur, all of
the Senior Subordinated Obligations, including, without limitation, the entire
principal, premium (if any), and all accrued interest then outstanding under the
Senior Subordinated Note, shall thereupon be forthwith due and payable, together
with a premium equal to the product of the applicable Premium Percentage
multiplied by the entire principal amount then outstanding under the Senior
Subordinated Note, without any presentment, demand, protest, notice of default,
notice of intention to accelerate, notice of acceleration or other notice of any
kind (including any notice by the Holders of the Senior Subordinated Note), all
of which are hereby expressly waived by the Company, and the Company will
(subject to the terms of the Senior Subordination Agreement) forthwith pay to
the Holders an amount equal to 100% of the amount thereof.
8.3 Annulment of Acceleration. The provisions of the foregoing Section 8.2
are subject to the condition that, if all or any part of the Senior Subordinated
Obligations have been declared or have otherwise become immediately due and
payable by reason of the occurrence of any Event of Default, the Majority
Holders may, by written instrument delivered to the Company (an "Annulment
Notice"), rescind and annul such declaration and the consequences thereof as to
the Senior Subordinated Note, provided that (a) at the time such Annulment
Notice is delivered no judgment or decree has been entered for the payment of
any moneys due pursuant to such Senior Subordinated Obligations in connection
therewith, and (b) all arrears of interest and all other sums payable on such
Senior Subordinated Obligations in connection therewith (except any principal,
interest or premium which has become due and payable solely by reason of such
declaration under Section 8.2 hereof) shall have been duly paid or deferred by
the Holders of the Senior Subordinated Obligations agreeing to such rescission
and annulment; and provided further, that no such rescission and annulment shall
extend to or affect any subsequent default or Event of Default or impair any
right consequent thereto, and shall not be deemed a waiver of the Event of
Default giving rise to the acceleration unless specifically waived in writing by
the Majority Holders.
8.4 Payment of Senior Subordinated Obligations. Subject to the terms of the
Senior Subordination Agreement, Purchaser shall have the right, which is
absolute and unconditional, to receive payment of the principal of and interest
on such Senior Subordinated Note and payment of all other Senior Subordinated
Obligations on the date when due and, upon the occurrence and continuance of an
Event of Default, to institute suit against the Company for the enforcement of
any such payment. Such rights shall not be impaired without Purchaser's prior
written consent.
8.5 Remedies. Subject to the terms of the Senior Subordination Agreement,
if any Event of Default shall occur and be continuing, the Majority Holders on
behalf of all Holders may exercise any right or remedy it has at law, in equity
or under this Agreement or any Other Agreement. No right or remedy conferred
upon or reserved to any Holder or Holders under this Agreement or any Other
Agreement is intended to be exclusive of any other right or remedy, and every
right and remedy shall be cumulative and in addition to every other right or
remedy given hereunder or now or hereafter existing under any applicable law.
Every right and remedy given by this Agreement or by applicable law to any
Holder or Holders may be exercised from time to time and as often as may be
deemed expedient by such Holder or Holders, as the case may be.
8.6 Conduct No Waiver. No course of dealing on the part of any Holder, nor
any delay or failure on the part of any Holder to exercise any of its rights,
shall operate as a waiver of such right or otherwise prejudice any Holder's
rights, powers and remedies. If the Company fails to pay when due (or in the
case of interest, within the Three Business Day period after the due date
thereof), the principal of, the premium (if any) or the interest on, the Senior
Subordinated Obligations, or fails to comply with any other provision of this
Agreement, the Company shall pay to the Holders, to the extent permitted by law,
on demand, such further amounts as shall be sufficient to cover the cost and
expenses, including, but not limited to, reasonable attorney's fees of one legal
counsel selected by Purchaser (or if Purchaser at such time is not a Holder,
then one legal counsel selected by the Majority Holders) incurred by the Holders
in collecting any sums due on the Senior Subordinated Obligations or in
otherwise enforcing any rights of the Holders.
IX. SUBORDINATION
Notwithstanding any provision in this Agreement to the contrary, the
Indebtedness evidenced by the Senior Subordinated Note shall be subordinate in
right of payment to all regularly scheduled payments of principal and interest
with respect to Senior Debt, and Purchaser's rights and remedies hereunder shall
be subordinate to the rights and remedies of the Senior Lender, in accordance
with the terms of the Senior Subordination Agreement. Nothing contained in this
Article IX or elsewhere in this Agreement, in the Senior Subordinated Note or
the Senior Subordination Agreement is intended to or shall impair, as between
the Company and Purchaser, the obligations of the Company, which are absolute
and unconditional, to pay to Purchaser the principal of, Prepayment Fee (if any)
and interest on the Senior Subordinated Note and all other Senior Subordinated
Obligations as and when the same shall become due and payable in accordance with
their terms, or is intended to or shall affect the relative rights of Purchaser
and creditors of the Company other than the holders of the Senior Debt, nor
shall anything herein or therein prevent Purchaser from exercising all remedies
otherwise permitted by applicable law upon an Event of Default under this
Agreement.
X. FORM OF SENIOR SUBORDINATED NOTE, REGISTRATION, TRANSFER AND REPLACEMENT
10.1 Form of Senior Subordinated Note. The Senior Subordinated Note
initially delivered under this Agreement will be a fully registered note in the
form attached hereto as Exhibit A. The Senior Subordinated Note is issuable only
in fully registered form in denominations of at least $100,000 (or the
then-remaining outstanding balance thereof, if less than $100,000).
10.2 Senior Subordinated Note Register. The Company shall cause to be kept
at the principal office a register for the registration and transfer of the
Senior Subordinated Note. The names and addresses of the Holder of the Senior
Subordinated Note, the transfer thereof and the name and address of the
transferee of the Senior Subordinated Note shall be recorded in such register.
10.3 Issuance of New Senior Subordinated Note upon Exchange or Transfer.
Upon surrender for exchange or registration of transfer of the Senior
Subordinated Note at the office of the Company designated for notices in
accordance with Section 12.3 hereof, the Company shall execute and deliver, at
its expense, one or more new Senior Subordinated Notes of any authorized
denomination requested by the Holder of the surrendered Senior Subordinated
Note, each dated the date to which interest has been paid on the Senior
Subordinated Note so surrendered (or, if no interest has been paid, the date of
the surrendered Senior Subordinated Note), but in the same aggregate unpaid
principal amount as the surrendered Senior Subordinated Note, and registered in
the name of such Person or Persons as shall be designated in writing by such
Holder. Every Senior Subordinated Note surrendered for registration of transfer
shall be duly endorsed, or be accompanied by a written instrument of transfer
duly executed, by the Holder of such Senior Subordinated Note or by his attorney
duly authorized in writing.
10.4 Replacement of Senior Subordinated Note. Upon receipt of evidence
satisfactory to the Company of the loss, theft, mutilation or destruction of the
Senior Subordinated Note and, in the case of any such loss, theft or
destruction, upon delivery of a bond of indemnity in such form and amount as
shall be reasonably satisfactory to the Company or, in the event of such
mutilation upon surrender and cancellation of the Senior Subordinated Note, the
Company, without charge to the Holder thereof, will make and deliver a new
Senior Subordinated Note of like tenor and the same series in lieu of such lost,
stolen, destroyed or mutilated Senior Subordinated Note. If any such lost,
stolen or destroyed Senior Subordinated Note is owned by RSTW or any other
Holder whose credit is satisfactory to the Company, then the affidavit of an
authorized officer of such owner setting forth the fact of loss, theft or
destruction and of its ownership of the Senior Subordinated Note at the time of
such loss, theft or destruction shall be accepted as satisfactory evidence
thereof, and no further indemnity shall be required as a condition to the
execution and delivery of a new Senior Subordinated Note, other than a written
agreement of such owner (in form reasonably satisfactory to the Company) to
indemnify the Company.
XI. INTERPRETATION OF AGREEMENT
11.1 Certain Terms Defined. When used in this Agreement, the terms set
forth below are defined as follows:
"Affiliate" means any Person directly or indirectly controlling, controlled
by, or under common control with, the Person in question. A Person shall be
deemed to control a corporation if such Person possesses, directly or
indirectly, the power to direct or cause the direction of the management
and policies of such corporation, whether through the ownership of voting
securities, by contract, or otherwise.
"Affiliate Transaction" is defined in Section 4.15.
"Agreement" means this Note Purchase Agreement, including all schedules and
exhibits hereto, as the same may be modified, supplemented, extended and/or
amended from time to time.
"Annulment Notice" is defined in Section 8.3.
"Business Day" means each day of the week except Saturdays, Sundays, and
days on which banking institutions are authorized by law to close in the
State of Texas.
"Capital Expenditures" means expenditures made and liabilities incurred for
the acquisition of any fixed assets or improvements, replacements,
substitutions or additions thereto which have a useful life of more than
one (1) year, including, but not limited to, the direct or indirect
acquisition of such assets or incurrence of such expenses by way of
increased product or service charges, offset items or otherwise and
payments with respect to capitalized lease obligations (excluding, however,
any expenditures made and liabilities incurred by the Company in connection
with the construction, reconstruction and/or expansion of community
correctional and juvenile facilities, to the extent permitted by Section
7.13).
"Casualty Event" means any of the following events: (a) the destruction of
any Property or other tangible assets of the Parent, the Company or any of
their respective Subsidiaries, or the occurrence of damage to such Property
or assets which renders the repair or replacement thereof uneconomic; (b)
the requisition of title to such Property or assets by any governmental
authority for a period of more than 6 months; (c) the constructive total
loss with respect to such Property or assets; or (d) the loss of quiet
title to any real property owned or leased by the Parent, the Company or
their respective Subsidiaries.
"Change of Control" 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 any Company or any
Subsidiary (excluding any acquisitions of securities arising from the
conversion of the Convertible Notes or the issuance or exercise of options,
warrants or securities constituting Permitted Stock (as defined in the
Securities Documents); or (b) Avalon ceases to own, free and clear of all
Liens other than Permitted Liens, all of the outstanding capital stock of
SCS; or (c) Donald E. Smith shall cease to directly own and control any
capital stock of Avalon 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.
"Closing Date" means the date on which all of the conditions stated in
Article V of this Agreement have been met to Purchaser's satisfaction and
the purchase price for the Senior Subordinated Note has been paid, but in
any event not later than September 30, 1998.
"Code" means the Internal Revenue Code of 1986, as amended and in effect
from time to time, and the regulations promulgated thereunder.
"Company" means Avalon Community Services, Inc., a Nevada corporation doing
business as Avalon Correctional Services, Inc., and, unless the context
requires otherwise, shall include its Subsidiaries, if any.
"Controlled Group" means any group of organizations within the meaning of
Section 414(b), (c), (m) or (o) of the Code of which the Company is a
member.
"Convertible Notes" means 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 that certain Debenture
Purchase Agreement dated as of August 26, 1997 by and between the Company
and the purchasers listed on Schedule A thereto.
"Dated Assets" is defined in Section 2.9.
"Dated Liabilities" is defined in Section 2.9.
"EBITDA" means, for any period of determination, (a) net income; plus, (b)
in each case, to the extent deducted in determining net income for such
period (i) interest expense, (ii) taxes, (iii) depreciation and
amortization and similar non-cash charges, (iv) extraordinary losses, (v)
losses arising from the sale of assets of the Company,and (vi) losses from
discontinued operations incurred during the Company's fiscal year ended
December 31, 1997; and minus (c) in each case, to the extent included in
determining net income for such period (i) extraordinary gains and (ii)
gains arising from the sale of assets of the Company, all calculated in
accordance with GAAP.
"Employee Benefit Plan" means any employee benefit plan, as defined in
Section 3(3) of ERISA, which is, previously has been or will be established
or maintained by any member of a Controlled Group.
"Employment Agreements" means, collectively, the Employment Agreements, by
and between the Company and each of Donald E. Smith and Jerry M.
Sunderland, as in effect on the Closing Date.
"Environmental Laws" means all federal, state, or local laws, ordinances,
rules, regulations, interpretations and orders of courts or administrative
agencies or authorities relating to pollution or protection of the
environment (including, without limitation, ambient air, surface water,
ground water, land surface, and subsurface strata), and other laws relating
to (a) Polluting Substances or (b) the manufacture, processing,
distribution, use, treatment, handling, storage, disposal, or
transportation of Polluting Substances.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended and in effect from time to time, and the regulations promulgated
thereunder.
"Event of Bankruptcy" means any of (a) the filing by a Person of a
voluntary petition in bankruptcy under any provision of any bankruptcy law
or a petition to take advantage of any insolvency act, (b) the admission in
writing by the Company of its inability to pay its debts generally as they
become due, (c) the appointment of a receiver or receivers for all or a
material part of a Person's assets with the consent of such Person, (d) the
filing of any bankruptcy, arrangement or reorganization petition by or,
with the consent of a Person, against such Person under any provision of
any bankruptcy law, (e) a receiver, liquidator or trustee of a Person or a
substantial part of its assets shall be appointed pursuant to the Federal
Bankruptcy Code by the order of a court of competent jurisdiction which
shall not be dismissed or stayed within thirty (30) days, or (f) an
involuntary petition to reorganize or liquidate a Person pursuant to the
Federal Bankruptcy Code shall be filed against such Person and shall not be
dismissed or stayed within 30 days.
"Event of Default" is defined in Section 8.1.
"Excess Interest" is defined in Section 2.8.
"Existing Loan Documents" means those mortgage loan documents identified on
Schedule 11.1(1) hereto.
"Fixed Charge Coverage" means, for any period of determination, the ratio
of (i) EBITDA, to (ii) Fixed Charges.
"Fixed Charges" means, for any period of determination, the sum of (i) all
scheduled principal payments due in respect of Indebtedness during such
period, (ii) all interest expenses paid in cash during such period, (iii)
all Capital Expenditures incurred during such period and (iv) all taxes not
included in the determination of EBITDA that are paid in cash during such
period.
"GAAP" means 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" means the Person or Persons who, at the time of determination, is
the lawful owner of all or a portion of the Senior Subordinated Note or an
obligee of all or a portion of the Senior Subordinated Obligations. Unless
otherwise provided in this Agreement, in each instance that the consent or
request of the Holders to an action is required, the Holders will be deemed
to have consented to or requested such action, as the case may be, if the
Majority Holders so consent or request, as the case may be.
"Holders Representative" means at any date of determination (i) Purchaser,
at all times during which Purchaser is a Holder of Senior Subordinated
Notes having an aggregate principal amount equal to greater than 50% of the
then outstanding principal amount of all Senior Subordinated Notes and (ii)
the Person appointed in writing by the Majority Holders to act as their
representative from time to time for purposes herein, at all other times.
"Impositions" is defined in Section 6.9.
"Indebtedness" means 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).
"Intellectual Property" means 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.
"Lien" means 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.
"Majority Holders" means Holders which, as of the date of determination,
own Senior Subordinated Obligations having an aggregate principal amount
equal to 50% or more of the then outstanding principal amount of all Senior
Subordinated Obligations.
"Material Adverse Effect" means (a) a material adverse effect upon the
business, operations, properties, assets or condition (financial or
otherwise) of the Company or (b) the impairment of the ability of any party
to perform its obligations under this Agreement or any of the Other
Agreements to which it is a party or of Purchaser to enforce or collect any
of the Senior Subordinated Obligations. In determining whether any
individual event would result in a Material Adverse Effect, notwithstanding
that such event does not of itself have such effect, a Material Adverse
Effect shall be deemed to have occurred if the cumulative effect of such
event and all other then existing events would result in a Material Adverse
Effect.
"Maximum Rate" is defined in Section 2.8.
"Other Agreements" means the Senior Subordinated Note, the Securities
Documents and all other agreements, instruments and documents (including,
without limitation, notes, guarantees, powers of attorney, consents,
assignments, contracts, notices, subordination agreements and all other
written matter), and all renewals, modifications and extensions thereof,
whether heretofore, now or hereafter executed by or on behalf of the
Company and delivered to and for the benefit of Purchaser or any Person
participating with Purchaser in the Senior Subordinated Note with respect
to this Agreement or any of the transactions contemplated by this
Agreement.
"Pension Plan" means any employee pension benefit plan, as defined in
Section 3(2) of ERISA, which is, was or will be established or maintained
by any member of the Controlled Group.
"Permitted Acquisition" means the acquisition by the Company of any
community correctional or juvenile facility or operation (whether
accomplished as an asset acquisition or stock purchase) provided that (a)
the total purchase price of any such acquisition (including the amount of
any Indebtedness assumed in any connection therewith) does not exceed
$2,500,000, (b) the purchase price of such acquisition (including the
amount of any Indebtedness assumed in connection therewith), when combined
with the purchase price of all other Permitted Acquisitions consummated by
the Company from and after the Closing Date, does not exceed $15,000,000,
(c) no Potential Default or Event of Default exists at the time any such
acquisition is to be made or would exist after giving effect to the
consummation of such acquisition, (d) the total purchase price for any such
correctional or juvenile facility or operation does not exceed an amount
equal to the product of (x) the EBITDA of such correctional or juvenile
facility or operation for the twelve (12) month period ending immediately
prior to such acquisition (after adding back to actual EBITDA the amount of
any excess compensation paid to officers or employees of the correctional
or juvenile facility or operation to be acquired), multiplied by (y) five
(5), (e) the EBITDA of such correctional or juvenile facility or operation
for the twelve (12) month period ending immediately prior to such
acquisition (after adding back to actual EBITDA the amount of any excess
compensation paid to officers or employees of the correctional or juvenile
facility or operation to be acquired) is positive and (f) such acquisition
is permitted by the Senior Loan Documents.
"Permitted Indebtedness" means (a) any Indebtedness in favor of the Senior
Lender under the Senior Loan Agreement and created pursuant thereto, (b)
any Indebtedness in favor of Purchaser under this Agreement and/or the
Other Agreements and created pursuant thereto, (c) presently existing or
hereafter arising purchase money Indebtedness incurred by the Company to
finance the acquisition of capital assets by the Company, subject to the
limitations placed on Capital Expenditures in Section 7.9, and (d) the
Convertible Notes, and (e) the other Indebtedness set forth on Schedule
11.1(a) and approved by Purchaser.
"Permitted Investments" means the following:
(a) securities issued or directly and fully guaranteed or insured by
the United States Government or any agency or instrumentality thereof
(provided that the full faith and credit of the United States Government is
pledged in support thereof), having maturities of not more than twelve (12)
months from the date of acquisition;
(b) time deposits, certificates of deposit and interest rate
protection obligations owing from (i) any commercial bank incorporated in
the United States of recognized standing having capital and surplus in
excess of $100,000,000 with maturities of not more than twelve months from
the date of acquisition or (ii) which are fully insured by the Federal
Deposit Insurance Corporation with maturities of not more than twelve (12)
months from the date of acquisition;
(c) commercial paper issued by any Person incorporated in the United
States rated at least A-1 or the equivalent thereof by Standard & Poor's
Corporation or at least P-1 or the equivalent thereof by Moody's Investors
Service, Inc. and in each case maturing not more than twelve (12) months
after the date of acquisition;
(d) investments in money market funds substantially all of whose
assets are comprised of securities of the types described in clauses (a)
through (c) above; or
(e) the purchase of all or any part of the existing mortgage
indebtedness secured by the El Paso Intermediate Sanction Facility, 1650
Horizon Boulevard, El Paso, Texas.
"Permitted Liens" means (a) Liens in favor of the Senior Lender under the
Senior Loan Agreement in effect on the date hereof or created pursuant
thereto, (b) Liens securing purchase money Indebtedness incurred to finance
the acquisition of capital assets by the Company, subject to the
limitations placed on Capital Expenditures in Section 7.9 hereof, but only
so long as (i) such Lien attaches only to the asset so financed, (ii) the
Indebtedness secured by such Lien does not exceed 100% of the purchase
price, including installation and freight, of the asset so financed and
(iii) no Potential Default or Event of Default has occurred and is
continuing, (c) Liens for property taxes not yet due, (d) materialmen's,
mechanics', worker's, repairmen's, employees' or other like Liens arising
against the Company in the ordinary course of business, in each case which
are either not delinquent or are being contested in good faith and by
appropriate actions or proceedings conducted with due diligence and for the
payment of which adequate reserves in accordance with GAAP have been
established with respect thereto to the reasonable satisfaction of
Purchaser, (e) deposits to secure payment of worker's compensation,
unemployment insurance or other social security benefits and (f) Liens
disclosed on Schedule 11.1(b) and approved by Purchaser.
"Person" means any individual, sole proprietorship, corporation, business
trust, unincorporated organization, association, company, partnership,
joint venture, governmental authority (whether a national, federal, state,
county, municipality or otherwise, and shall include without limitation any
instrumentality, division, agency, body or department thereof), or other
entity.
"Polluting Substances" means all pollutants, contaminants, chemicals, or
industrial, toxic or hazardous substances or wastes and shall include,
without limitation, any flammable explosives, radioactive materials, oil,
hazardous materials, hazardous or solid wastes, hazardous or toxic
substances or related materials defined in the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, the Superfund Amendments
and Reauthorization Act of 1986, the Resource Conservation and Recovery Act
of 1976, the Hazardous and Solid Waste Amendments of 1984, and the
Hazardous Materials Transportation Act, as any of the same are hereafter
amended, and in the regulations adopted and publications promulgated
thereto; provided, in the event any of the foregoing Environmental Laws is
amended so as to broaden the meaning of any term defined thereby, such
broader meaning shall apply subsequent to the effective date of such
amendment and, provided, further, to the extent that the applicable laws of
any state establish a meaning for "hazardous substance," "hazardous waste,"
"hazardous material," "solid waste," or "toxic substance" which is broader
than that specified in any of the foregoing Environmental Laws, such
broader meaning shall apply.
"Potential Default" means the occurrence of any condition or event which,
with the passage of time or giving of notice or both, would constitute an
Event of Default.
"Premium Percentage" means, with respect to any payment or prepayment made
or required of the Company under Section 2.2, Section 2.3, or Section 8.2,
the premium percentage set forth below which corresponds to the earliest
date set forth below upon which such payment or prepayment, as the case may
be, is made or required pursuant to such section of the Agreement:
Payment Date or Prepayment Date Premium Percentage
Closing Date through September 15, 6.0%
1999
September 16, 1999 through September 5.0%
15, 2000
September 16, 2000 through September 4.0%
15, 2001
September 16, 2001 through September 3.0%
15, 2002
September 16, 2002 through September 2.0%
15, 2003
September 16, 2003 through September 1.0%
15, 2004
September 16, 2004 and thereafter 0.0%
"Prepayment Fee" means and includes (a) the premium payable by the Company
to Purchaser under subclause (c) of the first sentence of Section 2.2 in
the event of a prepayment under Section 2.2, (b) the premium payable by the
Company to Purchaser under Section 2.3, as a result of the occurrence of an
event described in Section 2.3, and (c) the premium payable by the Company
to Purchaser under Section 8.2 under any of the circumstances which require
the payment of a premium by the Company to Purchaser under Section 8.2.
"Property" means all real property owned, leased or operated by the
Company.
"Purchaser" means RSTW, together with all of its transferees, successors
and assigns of all or any portion of the Senior Subordinated Note or the
Senior Subordinated Obligations and any nominees on whose behalf any of the
foregoing purchase or otherwise acquire any of such Indebtedness of the
Company, and shall include, but not be limited to, each and every "Holder"
as defined herein. With respect to any right or action to be taken by
Purchaser under this Agreement, the term Purchaser means (a) so long as
RSTW is a Holder, RSTW, and (b) if RSTW is no longer a Holder, Majority
Holders.
"Qualified Secondary Public Offering" means a firm commitment, underwritten
public offering of the Company's common stock to the general public
pursuant to one or more registration statements declared effective by the
United States Securities and Exchange Commission which results in gross
cash proceeds of at least $25,000,000.
"Reportable Event" means (i) any of the events set forth in Sections
4043(b) (other than a merger, consolidation or transfer of assets in which
no Pension Plan involved has any unfunded benefit liabilities), 4068(f) or
4063(a) of ERISA, (ii) any event requiring any member of the Controlled
Group to provide security under Section 401(a)(29) of the Code, or (iii)
any failure to make payments required by Section 412(m) of the Code.
"RSTW Common Stock" means the 1,622,488 shares of Avalon's common stock to
be issued by Avalon to RSTW on the Closing Date pursuant to the terms of
the Securities Documents.
"Securities Documents" means, collectively, (a) the RSTW Common Stock, (b)
the Stock Purchase Agreement dated as of the Closing Date executed by and
between Avalon and RSTW, with respect to the issuance to RSTW of the RSTW
Common Stock, and (c) the Shareholder Agreement.
"Senior Debt" means, at any given time, the Indebtedness (whether now
outstanding or hereafter incurred) of the Company in respect of the Senior
Loan Agreement, in a principal amount acceptable to Purchaser, in its sole
discretion, plus interest, fees, expenses, indemnities and all other
amounts payable under the Senior Loan Agreement and any notes, security
documents, guaranties or other loan documents referred to therein or
pursuant thereto.
"Senior Lender" means one or more financial institutions acceptable to
Purchaser, in its sole discretion, its/their respective successors and
assigns, and any Person who replaces or refinances the Senior Loans under
the terms set forth in Section 7.1(c).
"Senior Loan Agreement" means the loan agreement to be entered into after
the Closing Date by and between the Company and the Senior Lender, and all
documents and instruments delivered pursuant thereto in connection with the
loans and advances made thereunder, all of which shall be in form and
substance satisfactory to Purchaser, in its sole discretion.
"Senior Loan Documents" means the Senior Loan Agreement and the agreements,
documents and instruments executed in connection therewith or contemplated
thereby, and all amendments thereto.
"Senior Loans" means revolving credit loans in a maximum principal amount
acceptable to Purchaser, in its sole discretion, to be made to the Company
by the Senior Lender under the Senior Loan Agreement and any permitted
replacements and refinancings thereof.
"Senior Subordinated Note" means a term promissory note issued to a
Purchaser pursuant to this Agreement, together with all renewals,
modifications, extensions, substitutions and replacements thereof.
"Senior Subordinated Obligations" means and includes any and all
Indebtedness and/or liabilities of the Company to Purchaser of every kind,
nature and description, direct or indirect, secured or unsecured, joint,
several, joint and several, absolute or contingent, due or to become due,
now existing or hereafter arising, under this Agreement or any Other
Agreement (regardless of how such Indebtedness or liabilities arise or by
what agreement or instrument they may be evidenced or whether evidenced by
any agreement or instrument) and all obligations of the Company to
Purchaser to perform acts or refrain from taking any action under any of
the aforementioned documents, together with all renewals, modifications,
extensions, increases, substitutions or replacements of any of such
Indebtedness.
"Senior Subordination Agreement" means that certain Senior Subordination
Agreement to be entered into after the Closing Date by the Company, the
Senior Lender and Purchaser pursuant to which the relative priorities of
the Senior Lender and Purchaser with respect to the repayment of Senior
Debt and the Senior Subordinated Obligations are established, and all
amendments and modifications thereto.
"Shareholder Agreement" means the Shareholder Agreement dated as of the
Closing Date executed by RSTW, Avalon and each of Donald E. Smith and Jerry
M. Sunderland, as the same may be amended, modified or restated from time
to time.
"Subsidiary" means any Person of which or in which the Company and its
other Subsidiaries own directly or indirectly 50% or more of (a) the
combined voting power of all classes having general voting power under
ordinary circumstances to elect a majority of the board of directors or
equivalent body of such Persons, if it is a corporation, (b) the capital
interest or profits interest of such Person, if it is a partnership, joint
venture or similar entity, or (c) the beneficial interest of such Person if
it is a trust, association or other unincorporated organization.
"Termination Date" means the earliest to occur of (a) September 15, 2006,
(b) the date on which the Senior Subordinated Note is accelerated pursuant
to Article VIII, or (c) the date on which the Senior Subordinated
Obligations are paid in full.
"Termination Event" means (a) a Reportable Event, (b) the termination of a
Pension Plan which has unfunded benefit liabilities (including an
involuntary termination under Section 4042 of ERISA), (c) the filing of a
Notice of Intent to Terminate a Pension Plan, (d) the initiation of
proceedings to terminate a Pension Plan under Section 4042 of ERISA or (e)
the appointment of a trustee to administer a Pension Plan under Section
4042 of ERISA.
"Transfer" is defined in Section 12.5 hereof.
"Transferee" means any Person to whom a Transfer is made.
Terms which are defined in other Sections of this Agreement shall have the
meanings specified therein. All other terms contained in this Agreement shall
have, when the context so indicates, the meanings provided for by the Uniform
Commercial Code as adopted and in force in the State of Texas, as from time to
time in effect.
11.2 Accounting Terms and Definitions. Unless otherwise defined or
specified herein all accounting terms used in this Agreement shall be construed
in accordance with GAAP, applied on a basis consistent in all material respects
with the financial statements delivered by Company to RSTW on or before the
Closing Date. All accounting determinations for purposes of determining
compliance with the financial covenants contained in Section 6.21 shall be made
in accordance with GAAP as in effect on the Closing Date and applied on a basis
consistent in all material respects with the audited financial statements
delivered to RSTW by Company on or before the Closing Date. The financial
statements required to be delivered hereunder from and after the Closing Date,
and all financial records, shall be maintained in accordance with GAAP as in
effect at the time of deliverance of such financial statements. If GAAP shall
change from the basis used in preparing the audited financial statements
delivered to RSTW by Company on or before the Closing Date, the certificates
required to be delivered pursuant to Section 6.2 demonstrating compliance with
the covenants contained herein shall include, at the election of Company or upon
the request of RSTW, calculations setting forth the adjustments necessary to
demonstrate how Company is in compliance with the financial covenants based upon
GAAP as in effect on the Closing Date.
11.3 Directly or Indirectly. Where any provision in this Agreement refers
to action to be taken by any Person, or which such Person is prohibited from
taking, such provision shall be applicable whether the action in question is
taken directly or indirectly by such Person.
XII. MISCELLANEOUS
12.1 Expenses. The Company agrees to pay (a) all out-of-pocket expenses of
Purchaser (including reasonable fees, expenses and disbursements of Purchaser's
counsel) in connection with the preparation, negotiation, enforcement, operation
and administration of this Agreement, the Senior Subordinated Note, the Other
Agreements, or any documents executed in connection therewith, or any waiver,
modification or amendment of any provision hereof or thereof; and (b) if an
Event of Default occurs, all court costs and costs of collection, including,
without limitation, reasonable fees, expenses and disbursements of counsel
employed in connection with any and all collection efforts. The attorneys' fees
arising from such services, including those of any appellate proceedings, and
all expenses, costs, charges and other fees incurred by such counsel or
Purchaser in any way or respect arising in connection with or relating to any of
the events or actions described in this Article XII shall be payable by the
Company to Purchaser, on demand, and shall be additional Senior Subordinated
Obligations. Without limiting the generality of the foregoing, such expenses,
costs, charges and fees may include: recording costs, appraisal costs, paralegal
fees, costs and expenses; accountants' fees, costs and expenses; court costs and
expenses; photocopying and duplicating expenses; court reporter fees, costs and
expenses; long distance telephone charges; air express charges, telegram
charges; facsimile charges; secretarial overtime charges; and expenses for
travel, lodging and food paid or incurred in connection with the performance of
such legal services. The Company agrees to indemnify Purchaser from and hold it
harmless against any documentary taxes, assessments or charges made by any
governmental authority by reason of the execution and delivery by the Company or
any other Person of this Agreement, the Other Agreements, and any documents
executed in connection therewith.
12.2 Indemnification. IN ADDITION TO AND NOT IN LIMITATION OF THE OTHER
INDEMNITIES PROVIDED FOR HEREIN OR IN ANY OTHER AGREEMENTS, THE COMPANY HEREBY
INDEMNIFIES AND HOLDS HARMLESS PURCHASER AND ANY OTHER HOLDERS, AND EVERY
AFFILIATE OF ANY OF THE FOREGOING, AND THEIR RESPECTIVE OFFICERS, DIRECTORS,
EMPLOYEES AND AGENTS, FROM ANY CLAIMS, ACTIONS, DAMAGES, COSTS, ATTORNEYS' FEES
AND EXPENSES (INCLUDING ANY OF THE SAME ARISING OUT OF THE SOLE OR CONTRIBUTORY
NEGLIGENCE OF THE PERSON TO BE INDEMNIFIED) TO WHICH ANY OF THEM MAY BECOME
SUBJECT, INSOFAR AS SUCH LOSSES, LIABILITIES, CLAIMS, ACTIONS, DAMAGES, COSTS
AND EXPENSES ARISE FROM OR RELATE TO THIS AGREEMENT OR THE OTHER AGREEMENTS, OR
ANY OF THE TRANSACTIONS CONTEMPLATED THEREBY, OR FROM ANY INVESTIGATION,
LITIGATION, OR OTHER PROCEEDING, INCLUDING, WITHOUT LIMITATION, ANY THREATENED
INVESTIGATION, LITIGATION OR OTHER PROCEEDING RELATING TO ANY OF THE FOREGOING,
OR FROM ANY VIOLATION OR CLAIM OF VIOLATION OF ANY APPLICABLE ENVIRONMENTAL LAWS
WITH RESPECT TO ANY REAL OR PERSONAL PROPERTY, OR FROM ANY GOVERNMENTAL OR
JUDICIAL CLAIM, ORDER OR JUDGMENT WITH RESPECT TO ANY REAL OR PERSONAL PROPERTY
OF THE COMPANY, OR FROM ANY BREACH OF THE WARRANTIES, REPRESENTATIONS OR
COVENANTS CONTAINED IN THIS AGREEMENT OR THE OTHER AGREEMENTS. THE FOREGOING
INDEMNIFICATION INCLUDES ANY SUCH CLAIMS, ACTIONS, DAMAGES, COSTS, AND EXPENSES
INCURRED BY REASON OF THE SOLE OR CONTRIBUTORY NEGLIGENCE OF THE PERSON TO BE
INDEMNIFIED, BUT EXCLUDES ANY OF THE SAME INCURRED BY REASON OF SUCH PERSON'S
GROSS NEGLIGENCE OR WILLFUL MISCONDUCT.
12.3 Notices. Except as otherwise expressly provided herein, all
communications provided for hereunder shall be in writing and delivered or
mailed by the United States mails, certified mail, return receipt requested, (a)
if to Purchaser, addressed to Purchaser at the address specified on Annex I
hereto or to such other address as Purchaser may in writing designate, (b) if to
any other Holder, addressed to such Holder at such address as such Holder may in
writing designate, and (c) if to the Company, addressed to the Company at the
address set forth next to its name on the signature pages hereto or to such
other address as the Company may in writing designate. Notices shall be deemed
to have been validly served, given or delivered (and "the date of such notice"
or words of similar effect shall mean the date) five (5) days after deposit in
the United States mails, certified mail, return receipt requested, with proper
postage prepaid, or upon actual receipt thereof (whether by noncertified mail,
telecopy, telegram, facsimile, express delivery or otherwise), whichever is
earlier.
12.4 Reproduction of Documents. This Agreement and all documents relating
hereto, including, without limitation (a) consents, waivers and modifications
which may hereafter be executed, (b) documents received by Purchaser at the
closing of the purchase of the Senior Subordinated Note, and (c) financial
statements, certificates and other information previously or hereafter furnished
to Purchaser, may be reproduced by Purchaser by any photographic, photostatic,
microfilm, microcard, miniature photographic or other similar process and
Purchaser may destroy any original document so reproduced. The Company agrees
and stipulates that any such reproduction which is legible shall be admissible
in evidence as the original itself in any judicial or administrative proceeding
(whether or not the original is in existence and whether or not such
reproduction was made by you in the regular course of business) and that any
enlargement, facsimile or further reproduction of such reproduction shall
likewise be admissible in evidence; provided that nothing herein contained shall
preclude the Company from objecting to the admission of any reproduction on the
basis that such reproduction is not accurate, has been altered, is otherwise
incomplete or is otherwise inadmissible.
12.5 Assignment, Sale of Interest. The Company may not sell, assign or
transfer this Agreement, or the Other Agreements or any portion thereof,
including, without limitation, the Company's rights, title, interests, remedies,
powers and/or duties hereunder or thereunder. The Company hereby consents to
Purchaser's participation, sale, assignment, transfer or other disposition
(collectively, a "Transfer"), at any time or times hereafter, of this Agreement,
or the Other Agreements to which the Company is a party, or of any portion
hereof or thereof, including, without limitation, Purchaser's rights, title,
interests, remedies, powers and/or duties hereunder or thereunder. In connection
with any Transfer, the Company agrees to cooperate fully with Purchaser and any
potential Transferee. Such cooperation shall include, but is not limited to,
cooperating with any audits or other due diligence investigation undertaken by
any potential Transferee (provided that the cost of any such audits or other due
diligence investigations shall be borne by the potential Transferee and not by
the Company). Unless an Event of Default has occurred and is continuing
hereunder, Purchaser shall not sell, assign or transfer all or any part of this
Agreement or the Other Agreements to any Person that is in direct competition
with the Company.
12.6 Successors and Assigns. This Agreement will inure to the benefit of
and be binding upon the parties hereto and their respective successors and
assigns.
12.7 Headings. The headings of the sections and subsections of this
Agreement are inserted for convenience only and do not constitute a part of this
Agreement.
12.8 Counterparts. This Agreement may be executed simultaneously in two or
more counterparts, each of which shall be deemed an original, and it shall not
be necessary in making proof of this Agreement to produce or account for more
than one such counterpart or reproduction thereof permitted by Section 12.3.
12.9 Reliance on and Survival Provisions. All covenants, representations
and warranties made by the Company herein and in any certificates delivered
pursuant hereto, whether or not in connection with a closing, (a) shall be
deemed to be material and to have been relied upon by Purchaser, notwithstanding
any investigation heretofore or hereafter made by Purchaser or on Purchaser's
behalf, and (b) shall survive the delivery of this Agreement and the Senior
Subordinated Note until all obligations of the Company under this Agreement
shall have been satisfied.
12.10 Integration and Severability. This Agreement embodies the entire
agreement and understanding between Purchaser and the Company, and supersedes
all prior agreements and understandings relating to the subject matter hereof.
In case any one or more of the provisions contained in this Agreement or in any
Senior Subordinated Notes, or any application thereof, shall be invalid, illegal
or unenforceable in any respect, the validity, legality and enforceability of
the remaining provisions contained herein and therein, and any other application
thereof, shall not in any way be affected or impaired thereby.
12.11 Law Governing. THIS AGREEMENT HAS BEEN SUBSTANTIALLY NEGOTIATED AND
IS BEING EXECUTED, DELIVERED, AND ACCEPTED, AND IS INTENDED TO BE PERFORMED, IN
PART IN THE STATE OF TEXAS. ALL OBLIGATIONS, RIGHTS AND REMEDIES HEREUNDER,
SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS
OF THE STATE OF TEXAS. THE SENIOR SUBORDINATED NOTE SHALL BE GOVERNED BY AND
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE SPECIFIED
THEREIN. PURCHASER RETAINS ALL RIGHTS UNDER THE LAWS OF THE UNITED STATES OF
AMERICA, INCLUDING THOSE RELATING TO THE CHARGING OF INTEREST.
12.12 Waivers; Modification. NO PROVISION OF THIS AGREEMENT MAY BE WAIVED,
CHANGED, AMENDED OR MODIFIED, OR THE DISCHARGE THEREOF ACKNOWLEDGED, ORALLY, BUT
ONLY BY AN AGREEMENT IN WRITING SIGNED BY THE COMPANY AND THE MAJORITY HOLDERS,
AND SUCH WAIVER, CHANGE, AMENDMENT OR MODIFICATION SHALL BE EFFECTIVE ONLY IN
THE SPECIFIC INSTANCE AND FOR THE SPECIFIC PURPOSE FOR WHICH IT IS GIVEN;
PROVIDED, HOWEVER, THAT ANY CHANGE, AMENDMENT OR MODIFICATION OF, OR WAIVER OF
COMPLIANCE WITH ANY OF THE PROVISIONS OF THIS SECTION 12.12, THE DEFINITION OF
MAJORITY HOLDERS OR ANY TERMS AFFECTING THE MATURITY OF OR ANY OTHER DATES FOR
PAYMENT SHALL REQUIRE THE WRITTEN AGREEMENT OF EACH HOLDER.
12.13 Waiver of Jury Trial. TO THE FULLEST EXTENT PERMITTED BY APPLICABLE
LAW, THE COMPANY AND PURCHASER HEREBY IRREVOCABLY AND EXPRESSLY WAIVE ALL RIGHT
TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED UPON
CONTRACT, TORT, OR OTHERWISE) ARISING OUT OF OR RELATING TO THIS AGREEMENT, THE
SENIOR SUBORDINATED NOTE OR ANY DOCUMENTS ENTERED INTO IN CONNECTION THEREWITH
OR THE TRANSACTIONS CONTEMPLATED THEREBY OR THE ACTIONS OF PURCHASER IN THE
NEGOTIATION, ADMINISTRATION, OR ENFORCEMENT THEREOF.
12.14 Confidentiality. The Purchaser and each of the Holders agrees not to
disclose to any Person (other than (x) Persons in a confidential relationship
with Purchaser or such Holder which have been informed that such disclosure is
confidential or (y) persons that have agreed in writing to maintain such
information as confidential), any confidential written or oral information (a)
provided to it by or on behalf of the Company pursuant to or in connection with
this Agreement or the Other Agreements and not from any other source or (b)
obtained by Purchaser or such Holder in connection with a review of the books
and records of the Company, attendance at meetings of the board of directors of
the Company or discussions with the Company's independent certified public
accountants, officers, directors or Affiliates and not from any other source;
provided, however, that nothing herein shall prevent Purchaser or any Holder
from disclosing any such information (i) which is required to be made in a
judicial, administrative or governmental proceeding, (ii) required by any
applicable law or regulation, (iii) made to any governmental agency or
regulatory body having or claiming authority over any aspect of the Purchaser's
or such Holder's (or any Affiliate of either of the foregoing) businesses in
connection with the exercise of such authority or claimed authority, (iv) which
is required pursuant to a subpoena, (v) made on a confidential basis as the
Purchaser or such Holder deems reasonably necessary or appropriate to any of its
investors, any bank or financial institution and/or counsel to or other
representatives of such investors, bank or financial institution or (vi) in
connection with the exercise of any remedy hereunder. The Purchaser and each
Holder severally agrees that, upon being notified that disclosure of such
confidential information is sought from it under circumstances described in
clause (i) or clause (iv) of the immediately preceding sentence, it shall
endeavor to provide notice of the same to the Company prior to making such
disclosure, but in no event shall it be liable for failure to provide such
notice.
12.15 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 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.
IN WITNESS WHEREOF, the Company and Purchaser have caused this Agreement to
be executed and delivered by their respective officers thereunto duly
authorized.
COMPANY:
AVALON COMMUNITY SERVICES, INC.
By: \Donald E. Smith
Donald E. Smith, Chief Executive Officer
SOUTHERN CORRECTIONS SYSTEMS, INC.
By: \Donald E. Smith
Donald E. Smith, Chief Executive Officer
Company's Address for Notices:
13401 Railway Drive
Oklahoma City, Oklahoma 73114
Attn: Donald E. Smith
Randall J. Wood, Esq.
Facsimile: (405) 752-8852
with a copy to:
Robertson & Williams
3033 N.W. 63rd Street, Suite 160
Oklahoma City, Oklahoma 73116
Attn: Mark Robertson, Esq.
Facsimile: (405) 843-6707
PURCHASER:
RSTW PARTNERS III, L.P.
By: RSTW Management, L.P., its
general partner
By: Rice Mezzanine Corporation,
its general partner
By: \Philip Davidson
Name: Philip A. Davidson
Title:
Annex I
to
Note Purchase Agreement
Information Concerning Purchaser
RSTW: RSTW Partners III, L.P.
Principal Amount of
Senior Subordinated Note: $10,000,000
Address for notices: RSTW Partners III, L.P.
c/o RSTW Management, L.P.
5847 San Felipe, Suite 4350
Houston, Texas 77057
Attn: James P. Wilson
Facsimile: (713) 783-9750
and with a copy to:
Patton Boggs LLP
2200 Ross Avenue, Suite 900
Dallas, Texas 75201
Attn: R. Jeffery Cole, Esq.
Facsimile: (214) 871-2688
Payments to be made
by wire transfer to: Southwest Bank of Texas, N.A.
Houston, Texas
ABA Routing #113011258
Accounting #9048545
For the Account of:
RSTW Partners III, L.P.
Money Market Account [#9020012]
re: Avalon Correctional Services, Inc.
Schedule 4.2(a)
to
Note Purchase Agreement
Financial Statements
Schedule 4.2(b)
to
Note Purchase Agreement
Financial Projections
Schedule 4.4
to
Note Purchase Agreement
Authorizations, Approvals, Consents and Filings
Schedule 4.5
to
Note Purchase Agreement
Environmental Condition of Property
Schedule 4.7
to
Note Purchase Agreement
Litigation and Judgments
Schedule 4.10
to
Note Purchase Agreement
Indebtedness to Affiliates
Schedule 4.15
to
Note Purchase Agreement
Subsidiaries and Capitalization
Schedule 4.16
to
Note Purchase Agreement
Current Locations
Schedule 4.22
to
Note Purchase Agreement
Brokers
Schedule 4.24
to
Note Purchase Agreement
Conduct of Business
Schedule 7.11
to
Note Purchase Agreement
Remuneration
Schedule 11.1(a)
to
Note Purchase Agreement
Other Indebtedness
Schedule 11.1(b)
to
Note Purchase Agreement
Other Liens
Exhibit A
to
Note Purchase Agreement
Form of Senior Subordinated Note
Exhibit B
to
Note Purchase Agreement
Form of Legal Opinion
Exhibit C
to
Note Purchase Agreement
Form of Officer's Compliance Certificate
Exhibit 2
STOCK PURCHASE AGREEMENT
AVALON COMMUNITY SERVICES, INC.
the "Company"
and
RSTW PARTNERS III, L.P.
the "Purchaser"
September 16, 1998
STOCK PURCHASE AGREEMENT
This STOCK PURCHASE AGREEMENT (the "Agreement") dated as of September 11,
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:
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, 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 imilar transaction. 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 11, 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.
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; 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).
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.
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, 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."
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 Purchasable.
(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 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 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) 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.
(c) 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.
(d) 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 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 owned of record by the persons designated on Schedule I
attached hereto, and (iii) 1,000,000 shares of preferred stock, $.001 par
value per share, of which -0- shares are issued and outstanding and owned
of record by the persons designated on Schedule I attached hereto. 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 and 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.
(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:
(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
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.
(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 Company; (b)
examine the corporate and 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, 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 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 issed 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 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.
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.
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
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 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 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.
IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
as of the date first above written.
COMPANY:
AVALON COMMUNITY SERVICES, INC.
By: \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: \Philip Davidson
Name: Philip A. Davidson
Title:
Number of Shares: 1,622,448
Purchase Price: $5,000,000
Exhibit 3
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
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 22.3% 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
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 (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 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 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 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 sale for payment of
related tax liabilities resulting from such transfer, (iv) the sale by Jerry
Sunderland of any shares 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 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 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), (v) or 5.03 of this Agreement.
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 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 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 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 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.
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.
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 6.20 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 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 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 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
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 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 (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.
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: \Donald E. Smith
Name: Donald E. Smith
Its: Chief Executive Officer
THE SHAREHOLDER:
\Donald E. Smith
DONALD E. SMITH
\Jerry M. Sunderland
JERRY M. SUNDERLAND
PURCHASER:
RSTW PARTNERS III, L.P.
By: RSTW Management, L.P.,
its general partner
By: Rice Mezzanine Corporation,
its general partner
By: \Philip Davidson
Name: Philip A. Davidson
Title:
