EXHIBIT 99.5
WARRANT AGREEMENT
BY AND BETWEEN
THE FORTRESS GROUP, INC.
and
PROMETHEUS HOMEBUILDERS LLC
Dated as of _________, ▇▇▇▇
▇▇▇▇▇▇▇ AGREEMENT, dated as of _____________, 1997, between The
Fortress Group, Inc., a Delaware corporation (the "Company") and Prometheus
Homebuilders LLC (the "Warrant Holder").
WHEREAS, the Company and the Warrant Holder have entered into that
certain Stock Purchase Agreement, dated of even date hereto (the "Stock Purchase
Agreement"), pursuant to which the Company proposes, in part, to issue to the
Warrant Holder, or its assignees, warrants (the "Warrants") to purchase up to an
aggregate of one million (1,000,000) shares of Common Stock, $0.01 par value per
share of the Company (the "Common Stock"), subject to adjustment as set forth
herein. The Common Stock issuable on exercise of the Warrants is referred to
herein as the "Warrant Shares". Certain capitalized terms used herein and not
elsewhere defined are defined in the Stock Purchase Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein set forth, the parties hereto agree as follows:
SECTION 1. Warrant Certificates. The certificates evidencing the
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Warrants (the "Warrant Certificates") to be delivered pursuant to this Warrant
Agreement shall be in registered form only and shall be substantially in the
form set forth in Exhibit A attached hereto.
SECTION 2. Execution of Warrant Certificates. Warrant Certificates
---------------------------------
shall be signed on behalf of the Company by its Chairman of the Board or its
President or a Vice President and by its Secretary or an Assistant Secretary
under its corporate seal. Each such signature upon the Warrant Certificates may
be in the form of a facsimile signature of the present or any future Chairman of
the Board, President, Vice President, Secretary or Assistant Secretary and may
be imprinted or otherwise reproduced on the Warrant Certificates and for that
purpose the Company may adopt and use the facsimile signature of any person who
shall have been Chairman of the Board, President, Vice President, Secretary or
Assistant Secretary, notwithstanding the fact that at the time the Warrant
Certificates shall be delivered or disposed of he shall have ceased to hold such
office. The seal of the Company may be in the form of a facsimile thereof and
may be impressed, affixed, imprinted or otherwise reproduced on the Warrant
Certificates.
In case any officer of the Company who shall have signed any of the
Warrant Certificates shall cease to be such officer before the Warrant
Certificates so signed shall have been disposed of by the Company, such Warrant
Certificates nevertheless may be delivered or disposed of as though such person
had not ceased to be such officer of the Company; and any Warrant Certificate
may be signed on behalf of the Company by any person who, at the actual date of
the execution of such Warrant Certificate, shall be a proper officer of the
Company to sign such Warrant Certificate, although at the date of the execution
of this Warrant Agreement any such person was not such officer.
SECTION 3. Registration. The Company shall number and register the
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Warrant Certificates in a register as they are issued. The Company may deem and
the registered holder(s) of the Warrant Certificates as the absolute owner(s)
thereof (notwithstanding any
notation of ownership or other writing thereon made by anyone) for all purposes,
and shall not be affected by any notice to the contrary.
SECTION 4. Registration of Transfers and Exchanges. The Company shall
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from time to time register the transfer of any outstanding Warrant Certificates
in a Warrant register to be maintained by the Company upon surrender thereof
accompanied by a written instrument or instruments of transfer in form
satisfactory to the Company, duly executed by the registered holder or holders
thereof or by the duly appointed legal representative thereof or by a duly
authorized attorney. Upon any such registration of transfer, a new Warrant
Certificate shall be issued to the transferee(s) and the surrendered Warrant
Certificate shall be canceled and disposed of by the Company.
SECTION 5. Warrants; Exercise of Warrants. Subject to the terms of
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this Agreement, each Warrant holder shall have the right, which may be exercised
during the period commencing on [Second Anniversary], until 12:00 midnight, New
York City time, on [Seventh Anniversary] (the "Exercise Period"), to receive
from the Company the number of fully paid and nonassessable Warrant Shares which
the holder may at the time be entitled to receive on exercise of such Warrants
and payment of the Exercise Price (as defined below) then in effect for such
Warrant Shares. In the alternative, each Warrant holder may exercise his right
to receive Warrant Shares on a net basis, such that, without the exchange of any
funds, the Warrant holder receives that number of Warrant Shares otherwise
issuable (or payable) upon exercise of his Warrants less that number of Warrant
Shares having an aggregate fair market value (as defined below) at the time of
exercise equal to the aggregate Exercise Price that would otherwise have been
paid by the holder of the Warrant Shares. For purposes of the foregoing
sentence, "fair market value" of the Warrant Shares will be determined in good
faith by a majority of the Non-Preferred Stock Directors of the Company, as of
the date of any such exercise. Such determination of the Non-Preferred Stock
Directors may be challenged in good faith by holders of a majority of the
Warrants, and any dispute shall be resolved at the Company's cost, by an
investment banking firm of recognized national standing selected by the Company
and acceptable to such Warrant holders and shall be made in good faith and be
conclusive absent manifest error; provided, however, that in the event that the
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determination by the majority of the Non-Preferred Stock Directors is more than
110% of the price determined by the investment banking firm, then the costs
incurred by such investment banking firm shall be borne by the Warrant holders
who challenged such price. Each Warrant not exercised prior to 12:00 midnight,
New York City time, on [Seventh Anniversary] shall become void and all rights
thereunder and all rights in respect thereof under this Agreement shall cease as
of such time. No adjustments as to dividends will be made upon exercise of the
Warrants.
For purposes hereof, "Non-Preferred Stock Directors" means directors
of the Company excluding any director elected to the Board of Directors by the
holders of the Preferred Stock voting as a separate class.
On or after [ ], 2001, and on or before [ ], 2003 (the
"Adjustment Period"), a holder of Warrants may elect to adjust up to five (5)
times per year (i) the Exercise Price of each
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Warrant and (ii) the number of shares of Common Stock into which each Warrant
held by such holder shall convert upon exercise of the Warrants ("Additional
Shares"), by reference to the Average of the Quoted Price of the Common Stock
for the [60 days] preceding such adjustment (the "Adjustment Price"). Upon such
election the Company will deliver a new Warrant Certificate to reflect the
revised Exercise Price and number of shares into which such Warrant is
convertible. Notwithstanding this, any such adjustments to the Exercise Prices
and Adjustment Prices shall take effect immediately upon any Warrant holder
electing any such adjustments.
Adjustment Price ($) Exercise Price ($) Additional Shares Per Warrant
-------------------- ------------------ -----------------------------
20.01 or greater 7.00 0.00
17.51 - 20.00 7.00 0.33
15.01 - 17.50 7.00 0.667
12.01 - 15.00 7.00 1.00
10.01 - 12.00 6.50 1.25
8.01 - 10.00 6.00 1.50
6.01 - 8.00 5.00 1.75
4.01 - 6.00 4.00 2.00
2.01 - 4.00 3.00 2.25
0.00 - 2.00 2.00 2.50
For purposes of illustration, if the Common Stock price is $9.00 per
share, the total number of Warrant Shares will be 2,500,000.
If any adjustment to the Exercise Price is made pursuant to Section 10
hereof, the Adjustment Prices shall be adjusted in like manner as set forth in
Section 10 hereof. The Exercise Prices set forth above are subject to the
adjustments set forth in Section 10 hereto. If during the Adjustment Period it
is possible for a holder of Warrants to adjust the Exercise Price and such
holder elects to do so, he must inform the Company in writing of such election.
The Company will then be obligated to notify such electing holder and all other
holders of Warrants in writing within three (3) Business Days of receipt of the
election by the holder of the new Exercise Price for such holder's Warrants
and/or the number of Additional Shares to which such holder is entitled. Such
new Exercise Price and such entitlement to Additional Shares shall remain the
Exercise Price and such entitlement to Additional Shares for such Warrants until
such time, if any, as the then holder elects to re-adjust the Exercise Price and
such entitlement to Additional Shares of the Warrants then held by such holder.
If any other holder of Warrants, upon receipt of a
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notice from the Company, wishes to adjust the Exercise Price in respect of the
Warrants held by him, he may do so by notifying the Company accordingly in
writing within fifteen (15) Business Days of the receipt of notice from the
Company. Upon such notification in writing, the Exercise Price of Warrants and
the number of Additional Shares for which such Warrants may be exercised shall
be adjusted by the Company with effect from the date of his receipt of
notification from the Company
Notwithstanding any provision in this Agreement to the contrary, in
the event that the Stock Purchase Agreement is terminated (other than as a
result of a default by the Purchaser of its obligations under the Stock Purchase
Agreement), the Exercise Price of each Warrant shall immediately be adjusted to
one cent ($0.01).
A Warrant may be exercised upon surrender to the Company at its office
designated for such purpose (the address of which is set forth in Section 14
hereof) of the certificate or certificates evidencing the Warrants to be
exercised with the form of election to purchase on the reverse thereof duly
filled in and signed, which signature shall be guaranteed by a bank or trust
company having an office or correspondent in the United States or a broker or
dealer which is a member of a registered securities exchange or the National
Association of Securities Dealers, Inc. (the "NASD"), and upon payment to the
Company of the exercise price (the "Exercise Price") which is set forth in the
form of Warrant Certificate attached hereto as Exhibit A as adjusted as herein
provided, for the number of Warrant Shares in respect of which such Warrants are
then exercised. Payment of the aggregate Exercise Price shall be made, at the
option of the Warrant holder (i) in cash or by certified or official bank check
payable to the order of the Company, (ii) through the surrender of debt or
preferred equity securities of the Company having a principal amount or
liquidation preference, as the case may be, equal to the aggregate Exercise
Price to be paid (the Company will pay the accrued interest or dividends on such
surrendered debt or preferred equity securities in cash at the time of surrender
notwithstanding the stated terms thereof), or (iii) in the manner provided in
the first paragraph of this Section 5.
Subject to the provisions of Section 6 hereof, upon such surrender of
Warrants and payment of the Exercise Price, the Company shall issue and cause to
be delivered with all reasonable dispatch to or upon the written order of the
holder and in such name or names as the Warrant holder may designate, a
certificate or certificates for the number of full Warrant Shares issuable upon
the exercise of such Warrants together with cash as provided in Section 11;
provided, however, that if any consolidation, merger or lease or sale of assets
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is proposed to be effected by the Company as described in Section 10(m) hereof,
or a tender offer or an exchange offer for shares of Common Stock of the Company
shall be made, upon such surrender of Warrants and payment of the Exercise Price
as aforesaid, the Company shall, as soon as possible, but in any event not later
than two business days thereafter, issue and cause to be delivered the full
number of Warrant Shares issuable upon the exercise of such Warrants in the
manner described in this sentence together with cash as provided in Section 11.
Such certificate or certificates shall be deemed to have been issued and any
person so designated to be named therein shall be deemed to have become a holder
of record of such Warrant Shares as of the date of the surrender of such
Warrants and payment of the Exercise Price.
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The Warrants shall be exercisable, at the election of the holders
thereof, either in full or from time to time in part and, in the event that a
certificate evidencing Warrants is exercised in respect of fewer than all of the
Warrant Shares issuable on such exercise at any time prior to the date of
expiration of the Warrants, a new certificate evidencing the remaining Warrant
or Warrants will be issued and delivered by the Company and at its expense
pursuant to the provisions of this Section and of Section 2 hereof.
All Warrant Certificates surrendered upon exercise of Warrants shall
be canceled and disposed of by the Company. The Company shall keep copies of
this Agreement and any notices given or received hereunder available for
inspection by the holders during normal business hours at its office.
SECTION 6. Payment of Taxes. The Company will pay all documentary
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stamp taxes attributable to the initial issuance of Warrant Shares upon the
exercise of Warrants; provided, however, that the Company shall not be required
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to pay any tax or taxes which may be payable in respect of any transfer involved
in the of any Warrant Certificates or any certificates for Warrant Shares in a
name other than that of the registered holder of a Warrant Certificate
surrendered upon the exercise of a Warrant, and the Company shall not be
required to issue or deliver such Warrant Certificates unless or until the
person or persons requesting the issuance thereof shall have paid to the Company
the amount of such tax or shall have established to the satisfaction of the
Company that such tax has been paid.
SECTION 7. Mutilated or Missing Warrant Certificates. In case any of
-----------------------------------------
the Warrant Certificates shall be mutilated, lost, stolen or destroyed, the
Company may in its discretion issue, in exchange and substitution for and upon
cancellation of the mutilated Warrant Certificate, or in lieu of and
substitution for the Warrant Certificate lost, stolen or destroyed, a new
Warrant Certificate of like tenor and representing an equivalent number of
Warrants, but only upon receipt of evidence reasonably satisfactory to the
Company of such loss, theft or destruction of such Warrant Certificate and
indemnity, if requested, also reasonably satisfactory to it. Applicants for such
substitute Warrant Certificates shall also comply with such other reasonable
regulations and pay such other reasonable charges as the Company may prescribe.
SECTION 8. Reservation of Warrant Shares. The Company will at all
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times reserve and keep available, free from preemptive rights, out of the
aggregate of its authorized but unissued Common Stock or its authorized and
issued Common Stock held in its treasury, for the purpose of enabling it to
satisfy any obligation to issue Warrant Shares upon exercise of Warrants, the
maximum number of shares of Common Stock which may be deliverable upon the
exercise of all outstanding Warrants based on the conversion prices in effect at
such time.
The Company or, if appointed, the transfer agent for the Common Stock
(the "Transfer Agent") and every subsequent transfer agent for any shares of the
Company's capital stock issuable upon the exercise of any of the rights of
purchase aforesaid will be irrevocably authorized and directed at all times to
reserve such number of authorized shares as shall be required for such purpose.
The Company will keep a copy of this Agreement on file with the Transfer Agent
and with every subsequent transfer agent for any shares of the Company's capital
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stock issuable upon the exercise of the rights of purchase represented by the
Warrants. The Company will furnish such Transfer Agent a copy of all notices of
adjustments and certificates related thereto, transmitted to each holder
pursuant to Section 13 hereof.
The Company covenants that all Warrant Shares which may be issued upon
exercise of Warrants will, upon issue, be fully paid, nonassessable, free of
preemptive rights and free from all taxes, liens, charges and security interests
with respect to the issue thereof.
SECTION 9. Stock Exchange Listings. The Company will from time to
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time take all action, at its expense, which may be necessary so that the Warrant
Shares, immediately upon their issuance upon the exercise of Warrants, will be
listed and maintained on the principal securities exchanges and markets within
the United States of America, if any, on which other shares of Common Stock are
then listed and register under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), all shares of Common Stock from time to time issuable upon
exercise if and at the time that any existing shares of the Company's capital
stock are so registered.
SECTION 10. Adjustment of Exercise Price and Number of Warrant Shares
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Issuable. The Exercise Price and the number of Warrant Shares issuable upon
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the exercise of each Warrant are subject to adjustment from time to time upon
the occurrence of the events enumerated in this Section 10. For purposes of this
Section 10, "Common Stock" means shares now or hereafter authorized of any class
of common stock of the Company and any other stock of the Company, however
designated, that has the right (subject to any prior rights of any class or
series of preferred stock) to participate in any distribution of the assets or
earnings of the Company without limit as to per share amount.
(a) If the Company:
(i) pays a dividend or makes a distribution on its Common Stock
in shares of its Common Stock;
(ii) subdivides its outstanding shares of Common Stock into a
greater number of shares;
(iii) combines its outstanding shares of Common Stock into a
smaller number of shares; or
(iv) issues by reclassification of its Common Stock any shares
of its capital stock;
then the Exercise Price in effect immediately prior to such action shall be
adjusted so that each holder of a Warrant thereafter converted may receive the
number of shares of capital stock of the Company which he would have owned
immediately following such action if he had exercised such Warrant immediately
prior to such action. The adjustment shall become effective immediately after
the record date in the case of a dividend or distribution and immediately after
the effective date of a subdivision,
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combination or reclassification. Such adjustment shall be made successively
whenever any event listed above shall occur. If, after an adjustment referred to
in clauses (i) through (iv) above, a holder of a Warrant upon exercise of it may
receive shares of two or more classes of capital stock of the Company, the
Company shall determine the allocation of the adjusted Conversion Prices between
the classes of capital stock. After such allocation, the Exercise Price of each
class of capital stock shall thereafter be subject to adjustment on terms
comparable to those applicable to Common Stock in this Section 10(a).
(b) If the Company distributes any rights or warrants to all holders
of its Common Stock entitling them to purchase shares of Common Stock at a price
per share less than the current market price per share on the record date
mentioned below, the Exercise Price shall be adjusted in accordance with the
formula:
NxP
---
C'= C x O + M
-----
O + N
-----
where:
C' = the adjusted Exercise Price.
C = the then current Exercise Price.
O = the number of shares of Common Stock outstanding on the
record date.
N = the number of additional shares of Common Stock offered.
P = the offering price per share of the additional shares of
Common Stock.
M = the Current Market Price per share of Common Stock on the
record date.
The adjustment shall be made successively whenever any such rights or
warrants are issued and shall become effective immediately after the record date
for the determination of stockholders entitled to receive the rights or
warrants. If at the end of the period during which such rights or warrants are
exercisable, not all rights or warrants shall have been exercised, the Exercise
Price shall be immediately readjusted to what it would have been if "N" in the
above formula had been the number of shares actually issued.
(c) If the Company distributes to all holders of shares of its Common
Stock (i) any shares of any class of capital stock of the Company other than its
Common Stock, (ii) any evidence of indebtedness or other securities of the
Company or any subsidiary of the Company, (iii) any other assets of the Company
or any subsidiary of the Company (other than cash), (iv)
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distributions in cash in excess of three percent (3%) of net earnings before
extraordinary items or (v) any rights, options or warrants to acquire any of the
foregoing (other than rights, options or warrants referred to in Section 10(b)
above), the Exercise Price shall be adjusted in accordance with the formula:
C'= C x M - F
-----
M
where:
C' = the adjusted Exercise Price.
C = the then current Exercise Price.
M = the Current Market Price per share of Common Stock on the
record date mentioned below.
F = the fair market value on the record date of the capital stock,
securities, indebtedness, assets, rights, options or warrants
applicable to one share of Common Stock or if the adjustment
pursuant to this Section 10(c) being made in respect of a cash
dividend, the total amount of cash to be distributed at such
time to holders of Common Stock. The Board of Directors of the
Company shall determine the fair market value.
The adjustment shall be made successively whenever any such
distribution is made and shall become effective immediately after the record
date for the determination of stockholders entitled to receive the distribution.
(d) If the Company issues shares of Common Stock for a consideration
per share less than the Current Market Price per share on the date the Company
fixes the offering price of such additional shares, the Exercise Price shall be
adjusted in accordance with the formula:
P
-
C'= C x O + M
-----
A
where:
C' = the adjusted Exercise Price.
C = the then current Exercise Price.
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O = the number of shares outstanding immediately prior to the
issuance of such additional shares.
P = the aggregate consideration received for the issuance of such
additional shares.
M = the Current Market Price per share on the date of issuance of
such additional shares.
A = the number of shares outstanding immediately after the
issuance of such additional shares.
The adjustment shall be made successively whenever any such issuance
is made, and shall become effective immediately after such issuance. This
Section 10(d) does not apply to (i) any transaction or issuance described in
Section 10(b) or Section 10(c) above or Section 10(e) below, (ii) the conversion
of Class AA Preferred Stock, Class AB Preferred Stock, Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock
or the conversion, exchange or exercise of other securities convertible into or
exchangeable or exercisable for Common Stock whose issuance was subject to an
adjustment pursuant to Section 10(b) or Section 10(c) above or Section 10(e)
below, (iii) Common Stock issued to the Company's employees under bona fide
employee benefit plans adopted by the Board of Directors of the Company and
approved by the holders of Common Stock when required by law, if such Common
Stock would otherwise be covered by this Section 10(d) (but only to the extent
that the aggregate number of shares excluded hereby (together with the aggregate
number of shares issuable upon conversion, exchange or exercise of the
securities excluded by clause (iii) of Section 10(e) below) and issued after the
Initial Issue Date shall not exceed 5% of the Common Stock outstanding at the
time of any such issuance), (iv) Common Stock issued to acquire, or in the
acquisition of, all or any portion of a business, in an arm's-length transaction
between the Company and an unaffiliated third party, whether such acquisition
shall be effected by purchase of assets, exchange of securities, merger,
consolidation or otherwise, or (v) Common Stock issued in a bona fide public
offering pursuant to a firm commitment underwriting.
(e) If the Company issues any options, warrants or other securities
convertible into or exchangeable or exercisable for Common Stock (other than
Class AA Preferred Stock, Class AB Preferred Stock, Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock
or securities issued in transactions described in Section 10(b) or Section 10(c)
above) and for a consideration per share of Common Stock initially deliverable
upon conversion, exchange or exercise of such securities less than the Current
Market Price per share on the date of issuance of such options, warrants or
other securities, the Exercise Price shall be adjusted in accordance with the
formula:
P
-
C'= C x O + M
-----
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O + D
where:
C' = the adjusted Exercise Price.
C = the then current Exercise Price.
O = the number of shares outstanding immediately prior to the
issuance of such securities.
P = the aggregate consideration received for the issuance of such
securities.
M = the Current Market Price per share on the date of issuance of
such securities.
D = the maximum number of shares deliverable upon conversion or in
exchange for or upon exercise of such securities at the
initial conversion, exchange or exercise rate.
The adjustment shall be made successively whenever any such issuance
is made, and shall become effective immediately after such issuance. If all of
the Common Stock deliverable upon conversion, exchange or exercise of such
securities has not been issued when such securities are no longer outstanding,
then the Exercise Price shall promptly be readjusted to the Exercise Price which
would then be in effect had the adjustment upon the issuance of such securities
been made on the basis of the actual number of shares of Common Stock issued
upon conversion, exchange or exercise of such securities. This Section 10(e)
does not apply to (i) the issuance of any such securities to acquire, or in the
acquisition of, all or any portion of a business, in an arm's-length transaction
between the Company and an unaffiliated third party, whether such acquisition
shall be effected by purchase of assets, exchange of securities, merger,
consolidation or otherwise, (ii) the issuance of any such securities in a bona
fide public offering pursuant to a firm commitment underwriting, or (iii) the
issuance of any such securities to the Company's employees under bona fide
employee benefit plans adopted by the Board of Directors of the Company and
approved by the holders of Common Stock when required by law, if such securities
would otherwise by covered by this Section 10(e) (but only to the extent that
the aggregate number of shares issuable upon the conversion, exchange or
exercise of the aggregate number of securities excluded hereby (together with
the aggregate number of shares excluded by clause (iii) of Section 10(d) above)
and issued after the Initial Issue Date shall not exceed 5% of the Common Stock
outstanding at the time of any such issuance).
The reduction shall become effective immediately prior to the opening of
business on the day following the Expiration Time.
(f) Current Market Price.
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In Sections 10(b)-(e) the current market price per share of Common
Stock on any date is the average of the Quoted Prices of the Common Stock for 30
consecutive Trading Days commencing 45 trading days before the date in question
(the "Current Market Price"). "Trading Day" means, with respect to any
security, any day on which any market in which the applicable security is then
traded and in which a Quoted Price may be ascertained is open for business. The
"Quoted Price" means, with respect to Common Stock, the last reported sales
price for Common Stock as reported by the NASD Automatic Quotations System,
National Market System, or, if the Common Stock is listed or admitted for
trading on a securities exchange, the last reported sales price of the Common
Stock on the principal exchange on which the Common Stock is listed or admitted
for trading (which shall be for consolidated trading if applicable to such
exchange), or if not so reported or listed or admitted for trading, the last
reported bid price of the applicable security in the over-the-counter market.
In the event that the Quoted Price cannot be determined as aforesaid, the Board
of Directors of the Company shall determine the Quoted Price on the basis of
such quotations as it in good faith considers appropriate. Such determination
may be challenged in good faith by a majority of holders of 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 Convertible Preferred Stock and shall be made in
good faith and be conclusive absent manifest error provided, however, if the
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Quoted Price as determined by the Board of Directors of the Company is more than
110% of the price determined by the investment banking firm, then the costs
incurred by such investment banking firm shall be borne by the Warrant holders
who challenged such price.
(g) Consideration Received.
----------------------
For purposes of any computation respecting consideration received
pursuant to Sections 10(d)-(e), the following shall apply:
(i) in the case of the issuance of shares of Common Stock for
cash, the consideration shall be the amount of such cash, provided
that in no case shall any deduction be made for any commissions,
discounts or other expenses incurred by the Company for any
underwriting of the issue or otherwise in connection therewith;
(ii) in the case of the issuance of shares of Common Stock for
a consideration in whole or in part other than cash, the consideration
other than cash shall be deemed to be the fair market value thereof as
determined in good faith by the Board of Directors, (irrespective of
the accounting treatment thereof);
(iii) in the case of the issuance of options, warrants or other
securities convertible into or exchangeable or exercisable for shares,
the aggregate consideration received therefor shall be deemed to be
the consideration received by the Company for the issuance of such
securities plus the additional minimum consideration, if any, to be
received by the Company upon the conversion,
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exchange or exercise thereof (the consideration in each case to be
determined in the same manner as provided in clauses (i) and (ii) of
this section)
(h) No adjustment in the Exercise Price need be made unless the
adjustment would require an increase or decrease of at least 1% in the Exercise
Price. Any adjustments that are not made shall be carried forward and taken into
account in any subsequent adjustment. All calculations under this Section shall
be made to the nearest cent or to the nearest 1/100th of a share, as the case
may be.
(i) To the extent the Warrants become convertible into cash, no
adjustment need be made thereafter as to the cash. Interest will not accrue on
the cash.
(j) Whenever the Exercise Price is adjusted, the Company shall
provide the notices required by Section 13 hereof.
(k) The Company from time to time may reduce the Exercise Price by
any amount for any period of time if the period is at least 20 Business Days and
if the reduction is irrevocable during the period but in no event may the
Exercise Price be less than the par value of a share of Common Stock. Whenever
the Exercise Price is reduced, the Company shall mail to Warrant holders a
notice of the reduction first class, postage prepaid. The Company shall mail the
notice at least 15 days before the date the reduced Exercise Price takes effect.
The notice shall state the reduced Exercise Price and the period it will be in
effect. A reduction of the Exercise Price does not change or adjust the Exercise
Price otherwise in effect for purposes of Sections 10(a)-(e).
(l) If:
(i) the Company takes any action that would require an
adjustment in the Exercise Price pursuant to Sections 10(a)-(e) and if
the Company does not arrange for Warrant holders to participate
pursuant to Section 10(g);
(ii) the Company takes any action that would require a
supplemental Warrant Agreement pursuant to Section 10(m); or
(iii) there is a liquidation or dissolution of the Company,
the Company shall mail to Warrant holders a notice stating the proposed record
date for a dividend or distribution or the proposed effective date of a
subdivision, combination, reclassification, consolidation, merger, transfer,
lease, liquidation or dissolution. The Company shall mail the notice at least 15
days before such date. Failure to mail the notice or any defect in it shall not
affect the validity of the transaction.
(m) If the Company consolidates or merges with or into, or transfers
or leases all or substantially all its assets to, any person, upon consummation
of such transaction the Warrants shall automatically become exercisable for the
kind and amount of securities, cash or
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other assets which the holder of a Warrant would have owned immediately after
the consolidation, merger, transfer or lease if the holder had exercised the
Warrant immediately before the effective date of the transaction. Concurrently
with the consummation of such transaction, the Company formed by or surviving
any such consolidation or merger if other than the Company, or the person to
which such sale or conveyance shall have been made, shall enter into a
supplemental Warrant Agreement so providing and further providing for
adjustments which shall be as nearly equivalent as may be practical to the
adjustments provided for in this Section. The successor Company shall mail to
Warrant holders a notice describing the supplemental Warrant Agreement.
If the issuer of securities deliverable upon exercise of Warrants
under the supplemental Warrant Agreement is an affiliate of the formed,
surviving, transferee or lessee Company, that issuer shall join in the
supplemental Warrant Agreement.
If this Section 10(m) applies, Sections 10(a)-(e) do not apply.
(n) In addition, in the event that any other transaction or event
occurs to which the foregoing Exercise Price adjustment provisions are not
strictly applicable but the failure to make any adjustment would adversely
affect the rights represented by the Warrants in accordance with the essential
intent and principles of such provisions, then, in each such case, the Company
shall appoint an investment banking firm of recognized national standing, or any
other financial expert that does not (or whose directors, officers, employees,
affiliates or stockholders do not) have a direct or material indirect financial
interest in the Company or any of its subsidiaries, who has not been, and, at
the time it is called upon to give independent financial advice to the Company,
is not (and none of its directors, officer, employees, affiliates or
stockholders are) a promoter, director or officer of the Company or any of its
subsidiaries, which will give their opinion upon the adjustment, if any, on a
basis consistent with the essential intent and principles established in the
foregoing Exercise Price adjustment provisions, necessary to preserve, without
dilution, the rights represented by the Warrants. Upon receipt of such opinion
or determination, the Company shall promptly mail a copy thereof to the Warrant
holders and will make the adjustments described therein.
(o) Except as provided in the immediately following sentence, any
determination that the Company or its Board of Directors must make pursuant to
Section 10 shall be conclusive. Whenever the Company, its Board of Directors or
the Non-Preferred Stock Directors shall be required to make a determination
under this Section 10, such determination shall be made in good faith and may be
challenged in good faith by the holders of a majority of Warrants and any
dispute shall be resolved at the Company's expense, by an investment banking
firm of recognized national standing selected by the Company and
acceptable to such Warrant holders; provided, however, that in the event the
-------- -------
determination by the Board of Directors of the Company is more than 110% of the
price determined by the investment banking firm, then the costs incurred by such
investment banking firm shall be borne by the Warrant holders who challenged
such price.
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(p) In any case in which this Section 10 shall require that an
adjustment in the Exercise Price be made effective as of a record date for a
specified event, the Company may elect to defer until the occurrence of such
event (i) issuing to the holder of any Warrant exercised after such record date
the Warrant Shares and other capital stock of the Company, if any, issuable upon
such exercise over and above the Warrant Shares and other capital stock of the
Company, if any, issuable upon such exercise on the basis of the Exercise Price
and (ii) paying to such holder any amount in cash in lieu of a fractional share
pursuant to Section 11; provided, however, that the Company shall deliver to
-------- -------
such holder a due ▇▇▇▇ or other appropriate instrument evidencing such holder's
right to receive such additional Warrant Shares, other capital stock and cash
upon the occurrence of the event requiring such adjustment.
(q) Upon each adjustment of the Exercise Price pursuant to this
Section 10, each Warrant outstanding prior to the making of the adjustment in
the Exercise Price shall thereafter evidence the right to receive upon payment
of the adjusted Exercise Price that number of shares of Common Stock (calculated
to the nearest hundredth) obtained from the following formula:
N' = N x (E/E')
where:
N' = the adjusted number of Warrant Shares issuable upon exercise of a
Warrant by payment of the adjusted Exercise Price.
N = the number or Warrant Shares previously issuable upon exercise of a
Warrant by payment of the Exercise Price prior to adjustment.
E' = the adjusted Exercise Price.
E = the Exercise Price prior to adjustment.
(r) Irrespective of any adjustments in the Exercise Price or the
number or kind of shares purchasable upon the exercise of the Warrants, Warrants
therefore or thereafter issued may continue to express the same price and number
and kind of shares as are stated in the Warrants initially issuable pursuant to
this Agreement.
SECTION 11. Fractional Interests. The Company shall not be required to
--------------------
issue fractional Warrant Shares on the exercise of Warrants. If more than one
Warrant shall be presented for exercise in full at the same time by the same
holder, the number of full Warrant Shares which shall be issuable upon the
exercise thereof shall be computed on the basis of the aggregate number of
Warrant Shares purchasable on exercise of the Warrants so presented. If any
fraction of a Warrant Share would, except for the provisions of this Section 11,
be issuable on the exercise of any Warrants (or specified portion thereof), the
Company shall pay an amount in cash equal to the Exercise Price on the day
immediately preceding the date the Warrant is presented for exercise, multiplied
by such fraction.
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SECTION 12. Financial Statements.
--------------------
(a) Whether or not required by the rules and regulations of the
Securities and Exchange Commission (the "Commission"), so long as any of the
Warrants remain outstanding, the Company shall furnish to the Warrant Holder (i)
all quarterly and annual financial information that would be required to be
contained in a filing with the Commission on Forms 10-Q and 10-K if the Company
were required to file such Forms, including "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and, with respect to
the annual information only, a report thereon by the Company's certified
independent accountants and (ii) all current reports that would be required to
be filed with the Commission on Form 8-K if the Company were required to file
such reports. In addition, whether or not required by the rules and regulations
of the Commission, the Company shall file a copy of all such information and
reports with the Commission for public availability (unless the Commission will
not accept such a filing) and make such information available to securities
analysts and prospective investors upon request. In addition, for so long as any
Warrant remains outstanding, the Company shall furnish to the Warrant Holder and
to securities analysts and prospective investors, upon their request, the
information required to be delivered pursuant to Rule 144A(d)(4) under the
Securities Act.
(b) The Company shall, so long as any of the Warrants are
outstanding, deliver to the Warrant Holder, forthwith upon any Executive Officer
of the Company becoming aware of any default under this Agreement, an Officers'
Certificate specifying such default and what action the Company is taking or
proposes to take with respect thereto.
SECTION 13. Notices to Warrant Holder. Upon any adjustment of the
-------------------------
Exercise Price pursuant to Section 10, the Company shall promptly thereafter (i)
cause to be filed with the Company a certificate of a firm of independent public
accountants of recognized standing selected by the Board of Directors of the
Company (who may be the regular auditors of the Company) setting forth the
Exercise Price after such adjustment and setting forth in reasonable detail the
method of calculation and the facts upon which such calculations are based and
setting forth the number of Warrant Shares (or portion thereof) issuable after
such adjustment in the Exercise Price, upon exercise of a Warrant and payment of
the adjusted Exercise Price, which certificate shall be conclusive evidence of
the correctness of the matters set forth therein, and (ii) cause to be given to
each of the registered holders of the Warrant Certificates at his address
appearing on the Warrant register written notice of such adjustments by first-
class mail, postage prepaid. Where appropriate, such notice may be given in
advance and included as a part of the notice required to be mailed under the
other provisions of this Section 13.
In case:
(a) the Company shall authorize the issuance to all holders of shares
of Common Stock of Rights to subscribe for or purchase shares of Common Stock or
of any other subscription rights or warrants; or
15
(b) the Company shall authorize the distribution to all holders of
shares of Common Stock of evidences of its indebtedness or assets (other than
cash dividends or cash distributions payable out of consolidated earnings or
earned surplus or dividends payable in shares of Common Stock or distributions
referred to in Section 10(a) hereof); or
(c) of any consolidation or merger to which the Company is a party
and for which approval of any shareholders of the Company is required, or of the
conveyance or transfer of the properties and assets of the Company substantially
as an entirety, or of any reclassification or change of Common Stock issuable
upon exercise of the Warrants (other than a change in par value, or from par
value to no par value, or from no par value to par value, or as a result of a
subdivision or combination), or a tender offer or exchange offer for shares of
Common Stock; or
(d) of the voluntary or involuntary dissolution, liquidation or
winding up of the Company; or
(e) the Company proposes to take any action (other than actions of
the character described in Section 10(a)) which would require an adjustment of
the Exercise Price pursuant to Section 10; then the Company shall cause to be
given to each of the registered holders of the Warrant Certificates at his
address appearing on the Warrant register, at least 20 days prior to the
applicable record date hereinafter specified, or promptly in the case of events
for which there is no record date, by first-class mail, postage prepaid, a
written notice stating (i) the date as of which the holders of record of shares
of Common Stock to be entitled to receive any such Rights or distribution are to
be determined, or (ii) the initial expiration date set forth in any tender offer
or exchange offer for shares of Common Stock, or (iii) the date on which any
such consolidation, merger, conveyance, transfer, dissolution, liquidation or
winding up is expected to become effective or consummated, and the date as of
which it is expected that holders of record of shares of Common Stock shall be
entitled to exchange such shares for securities or other property, if any,
deliverable upon such reclassification, consolidation, merger, conveyance,
transfer, dissolution, liquidation or winding up. The failure to give the notice
required by this Section 13 or any defect therein shall not affect the legality
or validity of any distribution, right, option, warrant, consolidation, merger,
conveyance, transfer, dissolution, liquidation or winding up, or the vote upon
any action.
Nothing contained in this Agreement or in any of the Warrant
Certificates shall be construed as conferring upon the holders thereof the right
to vote or to consent or to receive notice as shareholders in respect of the
meetings of shareholders or the election of Directors of the Company or any
other matter, or any rights whatsoever as shareholders of the Company.
SECTION 14. Notices to Company and Warrant Holder. Any notice or
-------------------------------------
demand authorized by this Agreement to be given or made by the registered holder
of any Warrant Certificate to or on the Company shall be sufficiently given or
made when and if deposited in the mail, first class or registered, postage
prepaid, addressed to the office of the Company expressly designated by the
Company at its office for purposes of this Agreement (until the Warrant holders
are otherwise notified in accordance with this Section by the Company), as
follows:
16
The Fortress Group, Inc.
▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇
Telephone (▇▇▇) ▇▇▇-▇▇▇▇
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
Attention: J. ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇
Any notice pursuant to this Agreement to be given by the Company to
the registered holder(s) of any Warrant Certificate shall be sufficiently given
when and if deposited in the mail, first-class or registered, postage prepaid,
addressed (until the Company is otherwise notified in accordance with this
Section by such holder) to such holder at the address appearing on the Warrant
register of the Company.
SECTION 15. Supplements and Amendments. The Company may from time to
--------------------------
time supplement or amend this Agreement without the approval of any holders of
Warrant Certificates in order to cure any ambiguity or to correct or supplement
any provision contained herein which may be defective or inconsistent with any
other provision herein, or to make any other provisions in regard to matters or
questions arising hereunder which the Company may deem necessary or desirable
and which shall not in any way adversely affect the interests of the holders of
Warrant Certificates.
SECTION 16. Successors. All the covenants and provisions of this
----------
Agreement by or for the benefit of the Company shall bind and inure to the
benefit of its respective successors and assigns hereunder.
SECTION 17. Termination. This Agreement shall terminate at 5:00 p.m.,
-----------
Eastern Standard Time on [Seventh Anniversary]. Notwithstanding the foregoing,
this Agreement will terminate on any earlier date if all Warrants have been
exercised.
SECTION 18. Governing Law. This Agreement and each Warrant Certificate
-------------
issued hereunder shall be deemed to be a contract made under the laws of the
State of New York and for all purposes shall be construed in accordance with the
internal laws of said State.
SECTION 19. Benefits of This Agreement. Nothing in this Agreement
--------------------------
shall be construed to give to any person or Company other than the Company and
the registered holders of the Warrant Certificates any legal or equitable right,
remedy or claim under this Agreement; but this Agreement shall be for the sole
and exclusive benefit of the Company and the registered holders of the Warrant
Certificates.
SECTION 20. HSR Act. Promptly (but in no event later than five days)
-------
after receipt of notice from any Warrant Holder of its intention to exercise any
Warrants, the Company shall make all filings required to be made under the ▇▇▇▇-
▇▇▇▇▇-▇▇▇▇▇▇ Improvements Act of ▇▇▇▇ (▇▇▇ "▇▇▇ ▇▇▇") in connection with such
exercise. The applicable waiting period, including any
17
extension thereof, under the HSR Act shall have expired or been terminated prior
to the issuance of any Warrant Shares upon exercise of Warrants.
SECTION 21. Counterparts. This Agreement may be executed in one or
------------
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
[Signature Page Follows]
18
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed, as of the day and year first above written.
THE FORTRESS GROUP, INC.
By: _____________________________
Name:________________________
Title:_______________________
PROMETHEUS HOMEBUILDERS LLC
By: Prometheus Homebuilders Funding Corp.
Managing Member
By: _____________________________
Name:________________________
Title:_______________________
19
EXHIBIT A
[FORM OF WARRANT CERTIFICATE]
EXERCISABLE ON OR BEFORE ________, 2001
No. _____ Warrants
Warrant Certificate
THE FORTRESS GROUP, INC.
This Warrant Certificate certifies that [ ] or registered
assigns, is the registered holder of Warrants expiring _________ (the
"Warrants") to purchase Common Stock, $0.01 par value (the "Common Stock"), of
The Fortress Group, Inc., a Delaware Company (the "Company"). Each Warrant
entitles the holder upon exercise to receive from the Company on or before 12:00
midnight, New York City time, on _________, one fully paid and nonassessable
share of Common Stock (a "Warrant Share") at the exercise price of $7.00 (the
"Exercise Price"), payable in lawful money of the United States of America upon
surrender of this Warrant Certificate and payment of the Exercise Price at the
office of the Company designated for such purpose, but only subject to the
conditions set forth herein and in the Warrant Agreement. The Exercise Price
and number of Warrant Shares issuable upon exercise of the Warrants are subject
to adjustment upon the occurrence of certain events set forth in the Warrant
Agreement.
No Warrant may be exercised after 12:00 midnight, New York City time,
on ___________, and to the extent not exercised by such time such Warrants shall
become void.
Reference is hereby made to the further provisions of this Warrant
Certificate set forth on the reverse hereof and such further provisions shall
for all purposes have the same effect as though fully set forth at this place.
This Warrant Certificate shall not be valid unless countersigned by
the Company, as such term is used in the Warrant Agreement.
1
IN WITNESS WHEREOF, ____________________________ has caused this
Warrant Certificate to be signed by its President and by its Secretary and has
caused its corporate seal to be affixed hereunto or imprinted hereon.
Dated:
THE FORTRESS GROUP, INC.
By ______________________
President
By ______________________
Secretary
2
[FORM OF WARRANT CERTIFICATE]
[REVERSE]
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants expiring ____________, entitling the holder on
exercise to receive shares of Common Stock, $0.01 par value, of the Company (the
"Common Stock"), and are issued or to be issued pursuant to a Warrant Agreement
dated as of _________, 1997 (the "Warrant Agreement"), duly executed and
delivered by the Company, which Warrant Agreement is hereby incorporated by
reference in and made a part of this instrument and is hereby referred to for a
description of the rights, limitation of rights, obligations, duties and
immunities thereunder of the Company and the holders (the words "holders" or
"holder" meaning the registered holders or registered holder) of the Warrants
(the "Warrant Holder"). A copy of the Warrant Agreement may be obtained by the
holder hereof upon written request to the Company.
Warrants may be exercised at any time on or before ____________. The
holder of Warrants evidenced by this Warrant Certificate may exercise them by
surrendering this Warrant Certificate, with the form of election to purchase set
forth hereon properly completed and executed, together with payment of the
Exercise Price in cash at the office of the Company designated for such purpose.
In the alternative, each Warrant Holder may exercise its right, during the
Exercise Period, as defined in the Warrant Agreement, to receive Warrant Shares
on a net basis, such that, without the exchange of any funds, the Warrant Holder
receives that number of Warrant Shares otherwise issuable (or payable) upon
exercise of its Warrants less that number of Warrant Shares having an aggregate
fair market value (as defined below) at the time of exercise equal to the
aggregate Exercise Price that would otherwise have been paid by the Warrant
Holder of the Warrant Shares. For purposes of the foregoing sentence, "fair
market value" of the Warrant Shares will be determined in good faith by the Non-
Preferred Stock Directors of the Company, as defined in the Warrant Agreement,
as of the date of any such exercise. In the event that upon any exercise of
Warrants evidenced hereby the number of Warrants exercised shall be less than
the total number of Warrants evidenced hereby, there shall be issued to the
holder hereof or his assignee a new Warrant Certificate evidencing the number of
Warrants not exercised. No adjustment shall be made for any dividends on any
Common Stock issuable upon exercise of this Warrant.
The Warrant Agreement provides that upon the occurrence of certain
events the Exercise Price set forth on the face hereof and the number of shares
of Common Stock issuable upon exercise of the Warrants may, subject to certain
conditions, be adjusted. If the Exercise Price is adjusted, the Warrant
Agreement provides that the number of shares of Common Stock issuable upon the
exercise of each Warrant shall be adjusted. No fractions of a share of Common
Stock will be issued upon the exercise of any Warrant, but the Company will pay
the cash value thereof determined as provided in the Warrant Agreement.
The holders of the Warrants are entitled to certain registration
rights with respect to the Common Stock purchasable upon exercise thereof. Said
registration rights are set forth in full in a Registration Rights Agreement
dated as of ______, 1997, between the Company and the
3
Warrant Holder. A copy of the Registration Rights may be obtained by the holder
hereof upon written request to the Company.
Warrant Certificates, when surrendered at the office of the Company by
the registered holder thereof in person or by legal representative or attorney
duly authorized in writing, may be exchanged, in the manner and subject to the
limitations provided in the Warrant Agreement, but without payment of any
service charge, for another Warrant Certificate or Warrant Certificates of like
tenor evidencing in the aggregate a like number of Warrants.
Upon due presentation for registration of transfer of this Warrant
Certificate at the office of the Company a new Warrant Certificate or Warrant
Certificates of like tenor and evidencing in the aggregate a like number of
Warrants shall be issued to the transferee(s) in exchange for this Warrant
Certificate, subject to the limitations provided in the Warrant Agreement,
without charge except for any tax or other governmental charge imposed in
connection therewith.
The Company may deem and treat the registered holder(s) thereof as the
absolute owner(s) of this Warrant Certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, of any distribution to the holder(s) hereof, and for all other
purposes, and the Company shall not be affected by any notice to the contrary.
Neither the Warrants nor this Warrant Certificate entitles any holder hereof to
any rights of a stockholder of the Company.
4
[FORM OF ELECTION TO PURCHASE]
(TO BE EXECUTED UPON EXERCISE OF WARRANT)
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to receive __________ shares of Common
Stock and herewith tenders payment for such shares to the order of The Governor
Group, Inc. in the amount of $______ or by delivery of ___ Warrants or in
accordance with the terms hereof. The undersigned requests that a certificate
for such shares be registered in the name of ________________, whose address is
_______________________________ and that such shares be delivered to
________________ whose address is ___________ ______________________. If said
number of shares is less than all of the shares of Common Stock purchasable
hereunder after giving effect to any delivery of Warrants in payment of the
Exercise Price, the undersigned requests that a new Warrant Certificate
representing the remaining balance of such shares be registered in the name of
______________, whose address is _________________________, and that such
Warrant Certificate be delivered to _________________, whose address is
__________________.
Signature:
Date:
Signature Guaranteed:
5
