EXHIBIT 99.4
STOCKHOLDERS AGREEMENT
by and among
THE FORTRESS GROUP, INC.,
PROMETHEUS HOMEBUILDERS LLC
and
THE STOCKHOLDERS NAMED HEREIN
dated as of
________, 1997
TABLE OF CONTENTS
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PAGE
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ARTICLE I. DEFINITIONS....................................................... 1
Section 1.1. Defined Terms.................................................. 1
ARTICLE II. BOARD............................................................ 5
Section 2.1. Members of the Board........................................... 5
ARTICLE III. COVENANTS....................................................... 6
Section 3.1. Operating Statements; Public Company Status.................... 6
Section 3.2. Conduct of Business............................................ 7
ARTICLE IV. PARTICIPATION RIGHTS............................................. 11
Section 4.1................................................................. 11
ARTICLE V. TAG-ALONG RIGHTS.................................................. 13
Section 5.1. Tag-Along Rights............................................... 13
ARTICLE VI. MISCELLANEOUS.................................................... 15
Section 6.1. Counterparts................................................... 15
Section 6.2. Governing Law.................................................. 14
Section 6.3. Expenses....................................................... 14
Section 6.4. Notices........................................................ 14
Section 6.5. Successors and Assigns......................................... 15
Section 6.6. Headings....................................................... 16
Section 6.7. Amendments and Waivers......................................... 16
Section 6.8. Interpretation, Absence of Presumption......................... 16
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Section 6.9. Severability................................................ 16
Section 6.10. Further Assurances.......................................... 16
Section 6.11. Specific Performance........................................ 17
Section 6.12. Confidentiality............................................. 17
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THIS STOCKHOLDERS AGREEMENT (the "Agreement"), dated as of August ___,
1997, is made by and among Prometheus Homebuilders LLC (the "Purchaser"), The
Fortress Group, Inc., a Delaware corporation (the "Company") and the
stockholders named herein (the "Stockholders"). Capitalized terms not otherwise
defined herein have the meaning ascribed to them in the Stock Purchase Agreement
(as hereinafter defined).
RECITAL
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WHEREAS, the Company, and the Purchaser have entered into a Stock
Purchase Agreement, dated as of August, 1997 (the "Stock Purchase Agreement"),
pursuant to which the Company has agreed to sell, and the Purchaser has agreed
to purchase (i) up to an aggregate of 35,000 shares of the Class AA Convertible
Preferred Stock of the Company, $0.01 par value per share (the "Class AA
Preferred Stock"), (ii) up to an aggregate of 40,000 shares of Convertible
Redeemable Preferred Stock of the Company $0.01 par value per share divided into
Class ABI Convertible Redeemable Preferred Stock (the "Class ABI Preferred
Stock") and Class ABII Convertible Redeemable Preferred Stock (the "Class ABII
Preferred Stock" and, together with the Class AA Preferred Stock and the Class
ABI Preferred Stock, the "Preferred Stock"), together with up to an aggregate
of, initially, 1,000,000 Warrants (the "Warrants"), upon the terms and subject
to the conditions set forth therein;
WHEREAS, it is a condition to the transactions contemplated by the
Stock Purchase Agreement and the parties believe it to be in their best
interests that they enter into this Agreement and provide for certain rights and
restrictions with respect to the investment by the Purchaser in the Company and
the corporate governance of the Company; and
WHEREAS, the Company and the Purchaser believe that the combination in
a strategic partnership of the leadership, expertise and experience in the
operations of the Company and the investment and capital markets expertise and
access to capital of the Purchaser and its Affiliates will significantly enhance
the Company's ability to pursue its growth and operating strategies.
AGREEMENT
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NOW, THEREFORE, in consideration of the premises and the covenants and
agreements contained herein and for good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, and intending to be legally
bound hereby, the parties hereto hereby agree as follows:
ARTICLE I.
DEFINITIONS
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Section 1.1 Defined Terms. As used in this Agreement, the following
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terms shall have the following respective meanings:
"Additional Preferred Stock Directors" shall have the meaning set
forth in Section 2.1(a).
"Adverse Event" shall have the meaning set forth in Section 2.1(a).
"Affiliate" shall mean any entity controlling, controlled by or under
common control with the Company. For the purposes of this definition, "control"
shall have the meaning presently specified for that word in Rule 405 promulgated
by the Commission under the Securities Act.
"Agreement" shall have the meaning set forth in the first paragraph
hereof.
"Average Trading Price" shall have the meaning set forth in Section
2.1(a).
"Beneficially Own" shall mean, with respect to any security, having
direct or indirect (including through any Subsidiary or Affiliate) "beneficial
ownership" of such security, as determined pursuant to Rule 13d-3 under the
Exchange Act, including pursuant to any agreement, arrangement or understanding,
whether or not in writing; provided, however, that all of the shares of the
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Preferred Stock and the Warrants which the Purchaser has agreed to purchase
under the Stock Purchase Agreement but which have not yet been purchased shall
be deemed to be Beneficially Owned by the Purchaser until the Termination Event,
if any, and provided, further, that for the purposes of Section 5.1 the
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Purchaser shall be deemed to own that number of shares of Common Stock that it
actually Beneficially Owns at any given date plus the number of shares of Common
----
Stock into which the Preferred Stock is convertible, based on the Conversion
Price (as defined in the Preferred Stock Certificates of Designations) of such
Preferred Stock in effect on the relevant date.
"Board" shall mean the board of directors of the Company.
"Business Day" shall mean any day other than a Saturday, a Sunday or a
bank holiday in New York, New York.
"Class AA Preferred Stock" shall have the meaning set forth in the
second paragraph hereof.
"Class AB Preferred Stock" shall mean the Class ABI Preferred Stock
and the Class ABII Preferred Stock.
"Class ABI Preferred Stock" shall have the meaning set forth in the
second paragraph hereof.
"Class ABII Preferred Stock" shall have the meaning set forth in the
second paragraph hereof.
"Common Stock" shall mean the common stock, par value $0.01 per share,
of the Company.
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"Company" shall have the meaning set forth in the first paragraph
hereof.
"Comparable Group" shall mean Pulte Corporation, The ▇▇▇▇▇▇ Group,
Inc., U.S. Home Corporation, NVR Inc., Hovnanian Enterprises, Inc., Toll
Brothers, Inc., Washington Homes, Inc., ▇▇▇▇▇▇ National Corporation, M/I
Schottenstein Homes, Inc., Continental Homes Holding Corp., ▇▇▇▇▇ Homes, Inc.,
▇▇▇▇▇▇▇▇ Communities, Beazer Homes USA, Inc. and ▇.▇. ▇▇▇▇▇▇, Inc.
"Conversion Event" shall have the meaning set forth in Section 2.1(d).
"Director" shall mean a member of the Board.
"EBT" shall mean earnings of the Company before interest, expenses,
income, taxes, and extraordinary or non-recurring items, all calculated in
accordance with generally accepted accounting principles.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Executive Committee" shall mean the five-member executive committee
of the Board which shall have the powers set forth in Section 3.2(b).
"Executive Equity Plan" shall have the meaning set forth in Section
3.2(e).
"Executive Shareholders" shall mean J. ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ and ▇▇▇▇▇ ▇.
▇▇▇▇▇▇▇, ▇▇..
"Exercise Notice" shall have the meaning set forth in Section 4.1(b).
"Governmental Entity" shall mean any court or tribunal in any
jurisdiction (domestic or foreign) or any public, governmental, or regulatory
body, agency, department, commission, board, bureau, or other authority or
instrumentality (domestic or foreign).
"Homebuilder Shareholders" shall mean all the Stockholders other than
the Executive Shareholders.
"Liquidation Preference" shall mean $1000.00 per share.
"Market Capitalization of the Company" shall mean the market value of
the Company's outstanding Common Stock as measured by the thirty (30) trading
days preceding any measurement date.
"Participation Notice" shall have the meaning set forth in Section
4.1(b).
"Person" shall mean any individual, corporation, partnership, limited
liability company, joint venture, trust, unincorporated organization, other form
of business or legal entity or Governmental Entity.
"Preferred Stock" shall have the meaning set forth in the second
paragraph hereof.
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"Preferred Stock Certificate of Designations" shall mean the
Certificate of Designations of the Class AA Preferred Stock, the Certificate of
Designations of the Class ABI Preferred Stock and the Certificate of
Designations of the Class ABII Preferred Stock.
"Preferred Stock Director" shall have the meaning set forth in Section
2.1(a).
"Purchaser" shall have the meaning set forth in the first paragraph
hereof.
"Purchaser Nominees" shall mean the designees to the Board by
Purchaser (or its assignee), with the number, committee representation and
subsidiary and affiliate representation of such Purchaser Nominees being equal
to the number of Preferred Stock Directors (as if such Preferred Stock remained
outstanding) that would be entitled to sit on the Board or on the board of any
subsidiary or affiliate of the Company and any committee of the Board pursuant
to Section 2.1(a).
"Quoted Price" The term "Quoted Price," with respect to the Common
Stock, shall mean the last reported sales price for Common Stock as reported by
the National Association of Securities Dealers, Inc. Automatic Quotations
System, National Market System, or, if the applicable security is listed or
admitted for trading on a securities exchange, the last reported sales price of
the applicable security on the principal exchange on which the applicable
security is listed or admitted for trading (which shall be for consolidated
trading if applicable to such exchange), or if neither so reported or listed or
admitted for trading, the last reported bid price of the applicable security in
the over-the-counter market. In the event that the Quoted Price cannot be
determined as aforesaid, the Board shall determine the Quoted Price on the basis
of such quotations as it in good faith considers appropriate. Such determination
may be challenged in good faith by a majority of holders of shares of Preferred
Stock, and any dispute shall be resolved at the Company's cost, by an investment
banking firm of recognized national standing selected by the Company and
acceptable to such holders of Preferred Stock and shall be made in good faith
and be conclusive absent manifest error.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Securities Filings" shall have the meaning set forth in Section
3.1(a)(iii).
"Selling Shareholder" shall mean the Executive Shareholders and the
Homebuilder Shareholders.
"Stockholders" shall have the meaning set forth in the first paragraph
hereof.
"Stock Purchase Agreement" shall have the meaning set forth in the
second paragraph hereof.
"Tag-Along Notice" shall have the meaning set forth in Section 5.1(a).
"Tag-Along Rights" shall have the meaning set forth in Section 5.1(a).
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"Termination Event" shall mean on and after all Closings under the
Stock Purchase Agreement have occurred, the date on which the aggregate
remaining investment or commitment to invest in the Company by Purchaser (or any
transferee or assignee of the Purchaser or group of transferees or assignees) is
less than the greater of $10,000,000 or ten percent (10%) of the Market
Capitalization of the Company, with the value of such investment to be based on
the sum of (x) the greater of the Liquidation Preference of the Preferred Stock
and the value of the Common Stock underlying such Preferred Stock (as measured
by the Conversion Price) then held by it, (y) the value of the Common Stock then
held by it, and (z) the value of the Warrants then held by it.
"Test Date" shall have the meaning set forth in Section 2.1(a).
"Third Party" shall have the meaning set forth in Section 5.1(a).
"Third Party Terms" shall have the meaning set forth in Section
5.1(a).
"Transfer" shall mean sell, transfer, assign, pledge, hypothecate or
in any way alienate.
"Warrants" shall have the meaning set forth in the second paragraph
hereof.
ARTICLE II.
BOARD
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Section 2.1 Members of the Board. (a) Until a Termination Event, the
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Company and the Stockholders shall take all action necessary to cause: (i) the
number of Directors comprising the Board to be equal to fifteen (15) (subject to
increase in the case of an Adverse Event, as provided below), (ii) the holders
of Preferred Stock, voting separately as a single class, as set forth in the
Preferred Stock Certificates of Designations, to have the exclusive right to
elect a minimum of three (3) Directors (each such Director, a "Preferred Stock
Director"), (iii) any increases in the size of the Board to result in an
increase in the number of Preferred Stock Directors (rounded up to the next
whole number) such that Preferred Stock Directors represent at least 20 percent
(20%) of the votes exercisable by the Board, and (iv) at least a proportionate
number (rounded up to the next whole number) of Preferred Stock Directors to
serve on each committee of the Board (provided that with respect to the
Executive Committee, the Executive Committee shall consist of five members, of
which two members shall be Preferred Stock Directors), and at least one
Preferred Stock Director to serve on the board or other governing body of each
of the Company's subsidiaries and affiliates, other than operational home
building companies. In the event (an "Adverse Event") that on any date following
the Initial Issue Date that is 60 days after the end of a fiscal quarter of the
Company (a "Test Date") both (i) the Average Trading Price of the Common Stock
is below $5 per share (provided that such amount shall be adjusted for reverse
stock splits, recapitalizations and other similar events) and (ii) (x) the
percentage change in the EBT per share of the Company (of the Common Stock
issued and outstanding) for the most recent two fiscal quarters as measured
against the same two fiscal quarters from the prior fiscal year is less than (y)
the percentage change in the EBT per share (of the Common Stock issued and
outstanding) of the Comparable Group for the same period as
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compared against the EBT per share (calculated on the same basis) of the
Comparable Group during the same period in the prior fiscal year then the
Company and the Stockholders shall take all action necessary to cause: (i) the
holders of Class AA Preferred Stock and Class ABI Preferred Stock, voting
separately as a single class, to elect Preferred Stock Directors sufficient to
cause the Preferred Stock Directors to constitute a majority of the Board and
all committees of the Board, including the Executive Committee ("Additional
Preferred Stock Directors") and (ii) the size of the Board and all committees to
be automatically increased in order to effect any such additional Directors. The
right of the holders of Class A Preferred Stock and Class ABI Preferred Stock to
elect Additional Preferred Stock Directors shall continue until such time as
neither (i) nor (ii) above is true for two consecutive Test Dates. The "Average
Trading Price" shall mean, on any date of determination, the average of the
closing prices of the Common Stock over the 90 day period prior to such date.
(b) In the event that all the shares of the Preferred Stock shall
have been converted into Common Stock prior to the occurrence of a Termination
Event (a "Conversion Event"), the Company will support the nomination of and the
election of Purchaser Nominees, and each Stockholder shall vote all of its
shares to elect such Purchaser Nominees, such that Purchaser shall have the same
right to elect Directors as set forth in paragraph (a) above, including rights
to appoint Directors to committees and subsidiaries as set forth in paragraph
(a) above, as if Purchaser still owned all of the Preferred Stock, and the
Company and the Stockholders will exercise all authority under applicable law to
cause such Purchaser Nominees to be elected to the Board. Without limiting the
generality of the foregoing, with respect to each meeting of stockholders of the
Company at which Directors are to be elected, the Company shall use its best
efforts to solicit from the stockholders of the Company (other than the
Purchaser) eligible to vote in the election of Directors provided in favor of
each Purchaser Nominee.
(c) If a Director has been designated by Purchaser and Purchaser
requests that such Director be removed (with or without cause) then such
Director shall be removed with or without cause, and each Stockholder hereby
agrees to vote all shares of Common Stock owned or held of record to effect such
removal.
(d) Nothing in this Agreement shall prevent Purchaser or any of its
transferees or assignees from voting securities owned by them in their sole and
absolute discretion, including voting securities to elect additional directors
to the Board in excess of the Directors which Purchaser is entitled to elect
pursuant to the terms of this Agreement.
ARTICLE III.
COVENANTS
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Section 3.1 Operating Statements; Public Company Status.
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(a) From and after the date of this Agreement until the Termination
Event, if any, the Company will:
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(i) deliver to the Purchaser, as soon as practicable after the end
of each month or other reporting period, operating and financial statements and
management reports (x) of the Company, and (y) of each Subsidiary not
consolidated with the Company, each as, at and for the end of such month or
other reporting period, and such other statements or reports as are reasonably
requested by Purchaser, all in such form as shall reasonably be required by
Purchaser;
(ii) deliver to Purchaser copies of all other information
distributed by the Company to the Board;
(iii) deliver to the Purchaser, as promptly as practicable following
filing, a copy of each report, schedule or other document filed by the Company
pursuant to the requirements of any federal or state securities laws
(collectively, the "Securities Filings"); and
(iv) continue to comply in all material respects with the reporting
requirements of Section 13 or 15(d) of the Exchange Act.
(b) Until a Termination Event, the Company will afford the
Purchaser a reasonable opportunity to review any Securities Filing, any other
filing with a Governmental Entity and any press release or similar public
announcement to be issued, released or made by the Company or any of its
Affiliates (including, without limitation, any oral announcement) which refers
to, describes or mentions the Purchaser or any of its Affiliates at least three
(3) Business Days prior to the time that such filing is filed with or sent to
the applicable Governmental Entity or such release or announcement is
disseminated.
Section 3.2 Conduct of Business. (a) Notwithstanding the fact that a
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vote of the Board or the Executive Committee may not be required under
applicable law, the Company shall not, and shall not permit any of its
subsidiaries without either (A) the affirmative vote of over eighty-one percent
(81%) of the Directors ("Supermajority Director Approval") or (B) the
affirmative vote of over eighty-one percent (81%) of the members of the
Executive Committee ("Supermajority Executive Committee Approval") to:
(i) purchase, sell, license, assign, transfer, convey or
otherwise acquire or dispose of any assets, securities, or businesses,
unless such transaction is provided for in the annual budget or is in
the ordinary course of business and does not involve (i) the
acquisition or disposition of homebuilding operations or any
homebuilding company or entity or (ii) land acquisitions with a value
in excess of $100,000 for any transaction or group of related
transactions or with an aggregate value in excess of $5,000,000 in any
twelve (12) month period;
(ii) directly or indirectly incur, refinance, repay, prepay,
create, assume, guarantee or otherwise become liable with respect to
any liabilities with an aggregate face amount in excess of $1,000,000
in the aggregate, other than in accordance with existing credit
facilities and renewals thereof on substantially the same terms;
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(iii) enter into any transaction after the date hereof or
materially amend any transaction in effect on the date hereof, with
any Affiliate of the Company (other than between the Company and its
Subsidiaries or between its Subsidiaries);
(iv) split (including any reverse split), combine, or
reclassify any shares of its capital stock; adopt resolutions
authorizing a liquidation, dissolution, merger, consolidation,
restructuring, recapitalization, or other reorganization of the
capital structure of the Company or any of its subsidiaries; or make
any other material changes in its capital structure;
(v) engage in any new development or redevelopment of any
real property for an amount in excess of $100,000, whether in a single
transaction or a series of related transactions (provided that it is
contemplated that such authority will be delegated to the Company's
acquisitions committee on guidelines approved by the Executive
Committee);
(vi) incur any capital expenditure for an amount, outside of
the approved annual budget, in excess of $50,000 per occurrence or
$500,000 in the aggregate, whether in a single transaction or a series
of related transactions or waive, release, grant or transfer any
rights of value in respect thereof or enter into any agreement or
arrangement that could adversely affect the marketability of any real
estate of the Company or any of its subsidiaries;
(vii) enter into any employment agreement with any employee
involving payments in excess of $100,000 per annum or with any
director or executive officer of the Company or any of its
Subsidiaries or enter into or materially change any Benefit
Arrangement;
(viii) enter into any new line of business other than the
business engaged in by the Company and its Subsidiaries on the date
hereof, cease to be engaged in any material line of business engaged
in by the Company and its Subsidiaries on the date hereof or
materially change the nature of the business engaged in by any of them
on the date hereof;
(ix) approve the annual operating budget of the Company for
any year after 1997;
(x) amend or take actions materially inconsistent with the
approved annual operating budget for 1997 or any subsequent year;
(xi) make any general assignment for the benefit of
creditors;
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(xii) file any petition seeking relief, or consent to the
institution of any proceeding against itself seeking to adjudicate it
a bankrupt or insolvent, under any law relating to bankruptcy,
insolvency or reorganization or relief of debtors;
(xiii) institute, voluntarily dismiss, terminate or settle
any litigation or arbitration against any Person (A) involving
payments for damages and penalties in excess of $50,000 or (B)
otherwise material to the Company and its subsidiaries taken as a
whole;
(xiv) engage, retain, pay or agree to pay the fees or
expenses of any third party consultants or advisors (other than
advisors retained in the ordinary course of business), to the extent
that such fees and expenses exceed one hundred thousand dollars
($100,000) in the aggregate;
(xv) appoint, ratify or replace the independent
accountants, change any accounting policy or practice other than as
mandated by generally accepted accounting principles then in effect;
or change any significant tax methods, practices, procedures or
policies;
(xvi) enter into or amend any joint venture, partnership or
profit sharing agreement or arrangement;
(xvii) amend to the Company's or any Subsidiary's certificate
of incorporation or bylaws; or
(xviii) declare or pay any dividend or make any other
distribution with respect to its capital stock, other than dividends
paid by any subsidiary to the Company or another subsidiary in the
ordinary and usual course of business or to the holders of the
Preferred Stock and the Existing Preferred Stock as required pursuant
to the terms of the Preferred Stock and the Preferred Stock
Certificates of Designations;
(xix) issue, sell, (whether through the issuance or granting
of options, warrants, commitments, subscriptions, rights to purchase,
or otherwise) any of its capital stock (other than upon conversion of
the Preferred Stock or the Existing Preferred Stock or upon exercise
of the Warrants) or deliver or other securities other than as
contemplated herein or pursuant to stock options issued and
outstanding as of the date hereof or purchase or otherwise acquire any
of its capital stock, employee or director stock options or debt
securities; or
(xx) agree to do any of the foregoing.
(b) The Board will promptly establish an Executive Committee, which
shall be delegated the authority to the maximum extent permitted by law to
approve any matter
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permissible under law for authorization by an Executive Committee, including the
matters set forth in Section 3.2(a).
(c) The bylaws of the Company shall provide that the number of
directors required to constitute a Supermajority Director Approval and a
Supermajority Executive Committee Approval shall constitute a quorum for the
Board and Executive Committee, respectively, and the Company and the
Stockholders shall take all action necessary to amend its Certificate of
Incorporation, and bylaws (and the bylaws, certificates of incorporation of its
subsidiaries) to give effect to terms and conditions of this Agreement, the
forms of such amendments to be reasonably satisfactory to Purchaser.
(d) Prior to a Termination Event, Purchaser may elect to terminate
all or a portion of the voting provisions of this Agreement, such that except as
otherwise required by law, actions requiring Supermajority Director Approval or
Supermajority Executive Committee Approval will require only majority approval,
and the Company and each Stockholder agree to take all such action as may be
necessary to give effect to such termination, including amending this Agreement
and the bylaws and certificates of incorporation of the Company and its
subsidiaries.
(e) Purchaser agrees to support, in principle, the adoption by the
Company of a stock option plan in a form reasonably acceptable to the Purchaser
pursuant to which the Company may issue options to purchase up to one million
(1,000,000) shares (inclusive of available options under the existing option
plan) of Common Stock to management of the Company (the "Executive Equity
Plan").
(f) Each of the Stockholders agree to take all such action as may be
necessary to effect a Certificate Amendment to increase the number of authorized
shares of Common Stock if required to satisfy the conversion/exercise rights of
the Securities purchased by Purchaser under the Stock Purchase Agreement.
(g) Each of the Stockholders hereby constitute and appoint ______,
[and each of them,] with full power of substitution, as the proxies of the
Stockholders and hereby authorizes each of them to represent and to vote all of
the shares of capital stock of the Company held by them in favor of the approval
of all transactions that are necessary to give effect to the terms of this
Agreement to the same extent and with the same effect as the Stockholder might
or could do under applicable law, rules and regulations. The proxy granted
pursuant to the immediately preceding sentence is given in consideration of the
agreements and covenants of the Company pursuant to this Agreement and as such
is coupled with an interest and shall be irrevocable unless and until a
Termination Event occurs. The Stockholder hereby revokes any and all previous
proxies granted with respect to any of the Shares and shall not hereafter,
unless and until a Termination Event occurs, purport to grant any other proxy or
power of attorney with respect to any of the Shares, deposit any of the Shares
into a voting trust or enter into any agreement (other than this Agreement),
arrangement or understanding with any Person, directly or indirectly, to vote or
grant any proxy or give instructions with respect to the voting of any of the
Shares.
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ARTICLE IV.
PARTICIPATION RIGHTS
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Section 4.1. (a) Right to Participate. From and after the date hereof
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until a Termination Event, if any, the Purchaser shall be entitled to a
participation to purchase or subscribe for up to that number of additional
shares of capital stock (including as "capital stock" for purposes of this
Section 4.1, any security, option, warrant, call, commitment, subscription,
right to purchase or other agreement of any character that is convertible into
or exchangeable or redeemable for shares of capital stock of the Company or any
Subsidiary (and all references in this Section 4.1 to capital stock shall, as
appropriate, be deemed to be references to any such securities), and also
including additional shares of capital stock to be issued pursuant to the
conversion, exchange or redemption of any security, option, warrant, call,
commitment, subscription, right to purchase or other agreement of any character
that is convertible into or exchangeable or redeemable for shares of capital
stock, as if the price at which such additional shares of capital stock is
issued pursuant to any such conversion, exchange or redemption were the market
price on the date of such issuance) to be issued or sold by the Company which
represents the same proportion of the total number of shares of capital stock to
be issued or sold by the Company (including the shares of capital stock to be
issued to the Purchaser upon exercise of its participation rights hereunder; it
being understood and agreed that the Company will accordingly be required to
either increase the number of shares of capital stock to be issued or sold so
that the Purchaser may purchase additional shares to maintain its proportionate
interest, or to reduce the number of shares of capital stock to be issued or
sold to Persons other than the Purchaser) as is represented by the number of
shares of Common Stock owned by the Purchaser or into which the Purchaser has
the right to convert prior to such sale or issuance at the conversion prices in
effect at the relevant time (and including for this purpose any shares of Common
Stock to be acquired pursuant to the Stock Purchase Agreement, but not yet
issued) relative to the number of shares of Common Stock outstanding prior to
such sale or issuance (and including for this purpose any shares of Common Stock
to be acquired pursuant to the Stock Purchase Agreement, but not yet issued);
provided, however, that the provisions of this Section 4.1 shall not apply to
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(i) the conversion of the Existing Preferred Stock, the Preferred Stock or the
exercise of Warrants, or the conversion, exchange or exercise of other
securities convertible into or exchangeable or exercisable for Common Stock
whose issuance was subject to an adjustment pursuant to the Preferred Stock
Certificates of Designations and (ii) Common Stock issued to the Corporation's
employees under to the Executive Equity Plan and other bona fide employee
benefit plans adopted by the Board and approved by the holders of Common Stock
when required by law (but only to the extent that the aggregate number of shares
excluded thereby and issued after the date hereof pursuant to such other benefit
plans shall not exceed 5% of the common stock outstanding at the time of any
such issuance).
(b) Notice. In the event the Company proposes to issue or sell any
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shares of capital stock in a transaction giving rise to the participation rights
provided for in this Section, the Company shall send a written notice (the
"Participation Notice") to the Purchaser setting forth the number of shares of
such capital stock of the Company that the Company proposes to sell or issue,
the price (before any commission or discount) at which such shares are proposed
to be issued (or, in the case of an underwritten or privately placed offering in
which the price is not
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known at the time the Participation Notice is given, the method of determining
such price and an estimate thereof), and all other relevant information as to
such proposed transaction as may be necessary for the Purchaser to determine
whether or not to exercise the rights granted in this Section. At any time
within 20 days after its receipt of the Participation Notice, the Purchaser may
exercise its participation rights to purchase or subscribe for shares of such
shares of capital stock, as provided for in this Section, by so informing the
Company in writing (an "Exercise Notice"). Each Exercise Notice shall state the
percentage of the proposed sale or issuance that the Purchaser elects to
purchase.
(c) Terms of Sale. The purchase or subscription by the Purchaser or
-------------
an Affiliate thereof, as the case may be, pursuant to this Section shall be on
the same price and other terms and conditions, including the date of sale or
issuance, as are applicable to the purchasers or subscribers of the additional
shares of capital stock of the Company whose purchases or subscriptions give
rise to the participation rights (except that the price to Investor to make such
purchase or subscription shall be net of payment of any underwriting, placement
agent or similar fee associated with such purchase or subscription), which price
and other terms and conditions shall be substantially as stated in the relevant
Participation Notice (which standard shall be satisfied if the price, in the
case of a negotiated transaction, is not greater than 110% of the estimated
price set forth in the relevant Participation Notice or, in the case of an
underwritten or privately placed offering, is not greater than the greater of
(i) 110% of the estimated price set forth in the relevant Participation Notice,
and (ii) the most recent Quoted Price on or prior to the date of the pricing of
the offering); provided, however, that in the event the purchases or
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subscriptions giving rise to the participation rights are effected by an
offering of securities registered under the Securities Act and in which offering
it is not legally permissible for the securities to be purchased by the
Purchaser to be included, such securities to be purchased by Investor will be
purchased in a concurrent private placement.
(d) Timing of Sale. If, with respect to any Participation Notice, the
--------------
Purchaser fails to deliver an Exercise Notice within the requisite time period,
the Company shall have sixty (60) days after the expiration of the time in which
the Exercise Notice is required to be delivered in which to sell not more than
110% of the number of shares of capital stock of the Company described in the
Participation Notice (plus, in the event such shares are to be sold in an
underwritten public offering, an additional number of shares of capital stock of
the Company, not in excess of 15% of 110% of the number of shares of capital
stock of the Company described in the Participation Notice, in respect of any
underwriters overallotment option) and not less than 90% of the number of shares
of capital stock of the Company described in the Participation Notice at a price
of not less than 90% of the estimated price set forth in the Participation
Notice. If, at the end of sixty (60) days following the expiration of the time
in which the Exercise Notice is required to be delivered, the Company has not
completed the sale or issuance of capital stock of the Company in accordance the
terms described in the Participation Notice (or at a price which is at least 90%
of the estimated price set forth in the Participation Notice), or in the event
of any contemplated sale or issuance within such sixty (60)-day period but
outside such price parameters, the Company shall again be obligated to comply
with the provisions of this Section with respect to, and provide the opportunity
to participate in, any proposed sale or issuance of shares of capital stock of
the Company; provided, however, that notwithstanding the foregoing, if
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12
the price at which such capital stock is to be sold in an underwritten offering
is not at least 90% of the estimated price set forth in the Participation
Notice, the Company may inform Investor of such fact and Investor shall be
entitled to elect, by written notice delivered within three (3) Business Days
following such notice from the Company, to participate in such offering in
accordance with the provisions of this Section 4.1.
ARTICLE V.
TAG-ALONG RIGHTS
----------------
Section 5.1. Tag-Along Rights. (a) Each of the Executive Shareholders
----------------
agrees that (i) from the date hereof through the third anniversary of the date
hereof he shall not Transfer, whether in a single transaction or in a series of
linked transactions, more than ten percent (10%) per year, when aggregated with
all such other Transfers made by such shareholder in such year, of the Common
Stock Beneficially Owned by him on the date hereof and (ii) from the third
anniversary of the date hereof through the fourth anniversary of the date hereof
he shall not Transfer, whether in a single transaction or in a series of linked
transactions, more than five percent (5%), when aggregated with all such other
Transfers made by such shareholder during such period, of the Common Stock
Beneficially Owned by him on the date hereof, unless, the terms and conditions
of such Transfer shall include an offer to the Purchaser to include in the
transfer to the proposed transferee (the "Third Party"), at the Purchaser's
option and on the same price and on the same terms and conditions as apply to
the Executive Shareholder, an amount of Preferred Stock and Common Stock held by
the Purchaser determined in accordance with this Section 5.1. Each of the
Homebuilder Shareholders agrees that from and after the date hereof, he shall
not Transfer, whether in a single transaction or in a series of linked
transactions, more than fifty percent (50%), when aggregated with all such other
Transfers made by such shareholder, of the Common Stock then Beneficially Owned
by him, unless the terms and conditions of such Transfer shall include an offer
to the Purchaser to include in the transfer to the Third Party at the
Purchaser's Option and on the same price and on the same terms and conditions as
apply to the Homebuilder Shareholder, an amount of Preferred Stock and Common
Stock determined in accordance with this Section 5.1.
The Third Party shall be required to purchase from the Purchaser, if
the Purchaser desires to participate in such transaction, the number of shares
of Common Stock Beneficially Owned by the Purchaser equaling the lesser of (x)
the number derived by multiplying (i) the total number of shares of Common Stock
which the Third Party proposes to purchase by (ii) a fraction, the numerator of
which shall be the number of shares of Common Stock Beneficially Owned by the
Purchaser and the denominator of which shall be the number of shares of Common
Stock Beneficially Owned by the Purchaser and the applicable Selling Shareholder
or (y) such lesser number of shares as the Purchaser shall designate in the Tag-
Along Notice (defined below). If the Tag-Along Right results in the Purchaser
including more shares of Common Stock Beneficially Owned by him in any Tag-Along
Notice, than will, on the date of transfer by the Purchaser to the Third Party,
have been converted into Common Stock, the Purchaser and the Company shall take
such steps as are reasonably required to convert to Common Stock any Preferred
Stock to be purchased by the Third Party (at the prevailing Conversion Price(s)
for the Preferred Stock being sold by the Selling Shareholder) which the
Purchaser desires to transfer immediately prior to such
13
transfer and contingent upon such transfer occurring, it being the parties'
intention that only Common Stock will be transferred to the Third Party pursuant
to this Section 5.1.
The Selling Shareholder shall notify the Company and the Purchaser of
any proposed Transfer to which the provisions of this Section 5.1 apply. Each
such notice shall set forth: (i) the name of the Third Party and the number of
shares of Common Stock proposed to be transferred, (ii) the address of the Third
Party, (iii) the proposed amount and form of consideration and terms and
conditions of payment offered by the Third Party, and any other material terms
pertaining to the Transfer (the "Third Party Terms") and (iv) that the Third
Party has been informed of the "Tag-Along Rights" provided for in this Section
5.1 and has agreed to purchase shares of Common Stock in accordance with the
terms hereof.
The Tag-Along Rights set forth above in this Section 5.1 may be
exercised by the Purchaser by delivery of a written notice to the Company and
the Selling Shareholder (the "Tag-Along Notice") within thirty (30) days
following receipt of the notice specified in the preceding paragraph. The Tag-
Along Notice shall state the number of shares of Common Stock that the Purchaser
wishes to include in such transfer to the Third Party.
Upon the giving of a Tag-Along Notice, the Purchaser shall be entitled
and obligated to sell the number of shares of Common Stock set forth in the Tag-
Along Notice to the Third Party on the Third Party Terms; provided, however,
-------- -------
that neither the Selling Shareholder nor the Purchaser shall consummate the sale
of any shares offered by it if the Third Party does not purchase all shares
which the Selling Shareholder and the Purchaser are entitled and desire to sell
pursuant hereto. After expiration of the thirty-day period referred to above,
if the provisions of this Section have been complied with in all respects, the
Selling Shareholder shall have the right for a sixty (60)-day period to transfer
the shares of Common Stock to the Third Party on the Third Party Terms (or on
other terms no more favorable to the Selling Shareholder) without further notice
to the Purchaser, but after such sixty (60)-day period no such transfer may be
made without again giving notice to the Purchaser of the proposed transfer and
complying with the requirements of this Section 5.1.
(b) At the closing of the transfer to any Third Party (of which the
Selling Shareholder shall give the Purchaser who has elected to exercise the
Tag-Along Right provided by this Section 5.1 at least five (5) Business Days'
prior written notice), the Third Party shall remit to the Purchaser the
consideration for the total sales price of the Common Stock of the Purchaser
sold pursuant thereto, against delivery by the Purchaser of certificates for
such Common Stock, duly endorsed or with duly executed stock powers and the
compliance by such Shareholder with any other conditions to closing generally
applicable to the Selling Shareholder and all Other Shareholders selling shares
in such transaction.
(c) Notwithstanding the foregoing, the Tag-Along Rights provided by
this Section 5.1 shall terminate upon a Termination Event.
14
ARTICLE VI.
MISCELLANEOUS
-------------
Section 6.1. Counterparts. This Agreement maybe executed in one or
------------
more counterparts, all of which shall be considered one and the same agreement,
and shall become effective when one or more counterparts have been signed by
each of the parties and delivered to the other party. Copies of executed
counterparts transmitted by telecopy, telefax or other electronic transmission
service shall be considered original executed counterparts for purposes of this
Section, provided receipt of copies of such counterparts is confirmed.
Section 6.2 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND
-------------
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE WITHOUT REFERENCE
TO THE CHOICE OF LAW PRINCIPLES THEREOF.
Section 6.3. Expenses. The Company shall pay all costs and expenses
--------
incurred by the Company and the Purchaser in connection with the transactions
contemplated by this Agreement.
Section 6.4. Notices. Unless otherwise provided herein, any notice,
-------
request, instruction or other document to be given hereunder by any party to the
other shall be in writing and delivered by hand-delivery, registered first-class
mail, telex, confirmed telecopy, or air courier guaranteeing overnight delivery,
as follows:
If to the Company:
The Fortress Group, Inc.
▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇, ▇▇▇▇▇ ▇▇▇
▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Telephone: (▇▇▇) ▇▇▇-▇▇▇▇
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
Attn: J. ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇
with a copy to: Secretary
With an additional copy to:
Arent Fox ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ & ▇▇▇▇
▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇
▇▇▇▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Telephone: (▇▇▇) ▇▇▇-▇▇▇▇
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
Attn: ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇
15
If to the Purchaser:
Prometheus Homebuilders LLC
c/o Lazard Freres Real Estate Investors, LLC
Thirty ▇▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇, ▇▇▇▇ ▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇ ▇▇▇▇▇
Telephone: (▇▇▇) ▇▇▇-▇▇▇▇
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
Attn: ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇
▇▇▇▇▇ ▇. ▇▇▇▇▇
With a copy to:
▇▇▇▇▇▇ & ▇▇▇▇▇▇▇
▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇ ▇▇▇▇▇
Telephone: (▇▇▇) ▇▇▇-▇▇▇▇
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
Attn: R. ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇
or to such other place and with such other copies as either party may designate
as to itself by written notice to the other.
All such notices, requests, instructions or other documents shall be
deemed to have been duly given; at the time delivered by hand, if personally
delivered; four (4) Business Days after being deposited in the mail, postage
prepaid, if mailed; when answered back, if telexed; when receipt acknowledged by
addressee, if by telecopier transmission; and on the next Business Day if timely
delivered to an air courier guaranteeing overnight delivery.
Section 6.5 Successors and Assigns. This Agreement shall be binding
----------------------
upon and inure to the benefit of the parties hereto and their respective
successors. Neither party shall be permitted to assign any of its rights
hereunder to any third party, except that the Purchaser shall be permitted to
assign its rights hereunder any transferee or assignee or group of transferees
or assignees of any of the Preferred Stock provided that such person agrees to
be bound by this Agreement.
Section 6.6. Headings. The Section, Article and other headings
--------
contained in this Agreement are inserted for convenience of reference only and
will not affect the meaning or interpretation of this Agreement. All references
to Sections or Articles contained herein mean Sections or Articles of this
Agreement unless otherwise stated.
Section 6.7. Amendments and Waivers. This Agreement may not be
----------------------
modified or amended except by an instrument or instruments in writing signed by
the party against whom enforcement of any such modification or amendment is
sought. Any party hereto may, only by an instrument in writing, waive compliance
by another party hereto with any term or provision hereof on the part of such
other party hereto to be performed or complied with. The waiver by any party
16
hereto of a breach of any term or provision hereof shall not be construed as a
waiver of any subsequent breach.
Section 6.8. Interpretation, Absence of Presumption. (a) For the
--------------------------------------
purposes hereof, (i) words in the singular shall be held to include the plural
and vice versa and words of one gender shall be held to include the other gender
as the context requires, (ii) the terms "hereof, "herein", and "herewith" and
words of similar import shall, unless otherwise stated, be construed to refer to
this Agreement as a whole (including all of the Schedules and Exhibits hereto)
and not to any particular provision of this Agreement, and Article, Section and
paragraph, references are to the Articles, Sections and paragraphs to this
Agreement unless otherwise specified, (iii) the word "including" and words of
similar import when used in this Agreement shall mean "including, without
limitation," unless the context otherwise requires or unless otherwise
specified, (iv) the word "or" shall not be exclusive, and (v) provisions shall
apply, when appropriate, to successive events and transactions.
(b) This Agreement shall be construed without regard to any
presumption or rule requiring construction or interpretation against the party
drafting or causing any instrument to be drafted.
Section 6.9. Severability. Any provision hereof which is invalid or
------------
unenforceable shall be ineffective to the extent of such invalidity or
unenforceability, without affecting in any way the remaining provisions hereof.
Section 6.10. Further Assurances. The Company and the Purchaser agree
------------------
that, from time to time, each of them will, and will cause their respective
Affiliates to, execute and deliver such further instruments and take such other
action as may be necessary to carry out the purposes and intents hereof.
Section 6.11. Specific Performance. The Company and the Purchaser each
--------------------
acknowledge that, in view of the uniqueness of arrangements contemplated by this
Agreement, the parties hereto would not have an adequate remedy at law for money
damages in the event that this Agreement were not performed in accordance with
its terms, and therefore agree that the parties hereto shall be entitled to
specific enforcement of the terms hereof in addition to any other remedy to
which the parties hereto may be entitled at law or in equity.
Section 6.12. Confidentiality. The Purchaser and the Company agrees
---------------
that all information provided to each other or any of their respective
representatives pursuant to this Agreement shall be kept confidential, and such
parties shall not (x) disclose such information to any persons other than the
directors, officers, employees, financial advisors, legal advisors, accountants,
consultants and affiliates of such parties who reasonably need to have access to
the confidential information and who are advised of the confidential nature of
such information or (y) use such information in a manner which would be
detrimental to the Company or the Purchaser; provided, however, the foregoing
-------- -------
obligation of such parties shall not (a) relate to any information that (i) is
or becomes generally available other than as a result of unauthorized disclosure
by such parties or by persons to whom such parties have made such information
available, (ii) is or becomes available to such parties on a non-confidential
basis from a third party
17
that is not, to such parties' knowledge, bound by any other confidentiality
agreement with the other party, or (b) prohibit disclosure of any information if
required by law, rule, regulation, court order or other legal or governmental
process.
[Signature Page Follows]
18
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
THE FORTRESS GROUP, INC.
By:______________________________________
Name:____________________________________
Title:___________________________________
PROMETHEUS HOMEBUILDERS LLC
By: Prometheus Homebuilders Funding Corp.
Managing Member
STOCKHOLDERS
_________________________________________
Name: J. ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇
_________________________________________
Name: ▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇, ▇▇.
_________________________________________
Name: ▇▇▇▇▇▇ ▇▇▇▇▇
_________________________________________
Name: J. ▇▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇
_________________________________________
Name: ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇
_________________________________________
Name: ▇▇▇▇▇▇▇▇ ▇▇▇▇▇
_________________________________________
Name: ▇▇▇ ▇▇▇▇▇▇▇▇▇▇▇
_________________________________________
Name: Lanold ▇▇▇▇▇▇▇▇
_________________________________________
Name: ▇▇▇▇▇ ▇▇▇▇▇▇▇
19