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EXHIBIT 99.1
STOCK PURCHASE AGREEMENT
AVALON COMMUNITY SERVICES, INC.
THE "COMPANY"
AND
RSTW PARTNERS III, L.P.
THE "PURCHASER"
SEPTEMBER 16, 1998
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TABLE OF CONTENTS
Page
Article I Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Article II The Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.01 The Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.02 Legend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.03 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.04 Stock Register . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.05 Transfer and Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.06 Lost, Stolen, Mutilated, or
Destroyed Certificates . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.07 Adjustments to Number of Shares Purchasable . . . . . . . . . . . . . . . . . 9
Article III Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
3.01 Representations and Warranties of the
Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
3.02 Representations and Warranties of the
Purchaser . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Article IV Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
4.01 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
4.02 Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
4.03 Inspection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
4.04 Certain Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
4.05 Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
4.06 Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
4.07 Existence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
4.08 Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
4.09 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
4.10 Maintenance of Exchange Quotation . . . . . . . . . . . . . . . . . . . . . 20
4.11 Board of Directors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
4.12 Employment Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Article V Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
5.01 Opinion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
5.02 Note Agreement Conditions . . . . . . . . . . . . . . . . . . . . . . . . . 21
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5.03 Material Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
5.04 Shareholder Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
5.05 Representations and Agreements . . . . . . . . . . . . . . . . . . . . . . 21
5.06 Proceedings; Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
5.07 Closing Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Article VI Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
6.01 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
6.02 Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
6.03 Integration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
6.04 Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
6.05 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
6.06 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
6.07 Successors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
6.08 Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
6.09 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
6.10 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
6.11 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
6.12 Other Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
6.13 Choice of Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
6.14 Duties Among Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
ANNEX A Form of Shareholder Agreement
SCHEDULE I Capitalization
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STOCK PURCHASE AGREEMENT
This STOCK PURCHASE AGREEMENT (the "Agreement") dated as of September
16, 1998, is by and between AVALON COMMUNITY SERVICES, INC., a Nevada
corporation doing business as Avalon Correctional Services, Inc. (the
"Company"), and RSTW PARTNERS III, L.P., a Delaware limited partnership
("Purchaser").
W I T N E S S E T H:
WHEREAS, the Company, Southern Corrections Systems, Inc., an Oklahoma
corporation ("SCS"), and Purchaser have entered into a Note Purchase Agreement
(the "Note Agreement") dated of even date with this Agreement;
WHEREAS, the Company, certain shareholders of the Company and
Purchaser have entered into a Shareholder Agreement (the "Shareholder
Agreement") dated of even date with this Agreement; and
WHEREAS, Purchaser is willing to enter into and consummate the
transactions contemplated by the Note Agreement only if, among other things,
the Company and certain shareholders of the Company enter into, and perform
under, this Agreement and the Shareholder Agreement.
NOW, THEREFORE, in consideration of the foregoing, the mutual
covenants contained in this Agreement, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
Purchaser and the Company, intending to be legally bound, agree as follows:
ARTICLE I
DEFINITIONS
As used in this Agreement, the following terms have the meanings
indicated:
Additional RSTW Shares. This term is defined in Section 2.07(b).
Adjustment Fair Market Value. With respect to the issuance of any
Capital Stock by the Company, and as of any date of determination, the
lesser of (a) the Fair Market Value or (b) the purchase price in cash
that a Person not an Affiliate of the Company offers to the Company
for such Capital Stock (provided that the Company has received an
opinion from an independent investment banker acceptable to the
Holders that such purchase price is fair and reasonable under the
circumstances).
Affiliate. With respect to any Person, (a) a Person that, directly or
indirectly or through one or more intermediaries, controls, is
controlled by, or is under common control with,
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such Person; (b) any Person of which such Person or such Person's
spouse is an officer, director, security holder, partner, or, in the
case of a trust, the beneficiary or trustee, and (c) any Person that
is an officer, director, security holder, partner, or, in the case of
a trust, the beneficiary or trustee of such Person. The term
"control" as used with respect to any Person, means the possession,
directly or indirectly, of the power to direct or cause the direction
of the management or policies of such Person, whether through the
ownership of voting securities, by contract, or otherwise.
Agreement. This term is defined in the preamble.
Appraised Value. The value determined in accordance with the
following procedures. For a period of thirty (30) days after the date
of a Valuation Event (the "Negotiation Period"), each party to this
Agreement agrees to negotiate in good faith to reach agreement upon
the Appraised Value of the securities or property at issue, as of the
date of the Valuation Event, which will be the fair market value of
such securities or property, without premium for control or discount
for minority interests, illiquidity, or restrictions on transfer. In
the event that the parties are unable to agree upon the Appraised
Value of such securities or other property by the end of the
Negotiation Period, then the Appraised Value of such securities or
property will be determined for purposes of this Agreement by a
recognized appraisal or investment banking firm mutually agreeable to
the Holders and the Company (the "Appraiser"). If the Holders and the
Company cannot agree on an Appraiser within fifteen (15) days after
the end of the Negotiation Period, the Company, on the one hand, and
the Holders, on the other hand, shall each select an Appraiser within
twenty-one (21) days after the end of the Negotiation Period and those
two Appraisers shall select within twenty-five (25) days after the end
of the Negotiation Period an independent Appraiser to determine the
fair market value of such securities or property, without premium for
control or discount for minority interests. Such independent
Appraiser shall be directed to determine fair market value of such
securities or property as soon as practicable, but in no event later
than thirty (30) days from the date of its selection. The
determination by an Appraiser of the fair market value will be
conclusive and binding on all parties to this Agreement. Appraised
Value of each share of Common Stock at a time when (i) the Company is
not a reporting company under the Exchange Act and (ii) the Common
Stock is not traded in the organized securities markets, will, in all
cases, be calculated by determining the Appraised Value of the entire
Company taken as a whole and dividing that value by the sum of (x) the
number of shares of Common Stock then outstanding plus (y) the number
of shares of Common Stock Equivalents, without premium for control or
discount for minority interests, illiquidity, or restrictions on
transfer. The costs of the Appraiser will be borne by the Company.
In no event will the Appraised Value of the Common Stock or Other
Securities be less than the per share consideration received or
receivable with respect to the Common Stock or securities or property
of the same class as the Other Securities, as the case may be, in
connection with a pending transaction involving a sale, merger,
recapitalization, reorganization, consolidation, or share exchange,
dissolution of the Company, sale or transfer of all or a majority of
its assets or revenue or income generating capacity, or similar
transaction.
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The prevailing market prices for any security or property will not be
dispositive of the Appraised Value thereof.
Appraiser. This term is defined in the definition of Appraised Value.
Average Market Value. The average of the Closing Price for the
security in question for the thirty (30) trading days immediately
preceding the date of determination.
Buyer. This term is defined in Section 5.02(a)(ii) of the Shareholder
Agreement.
Capital Stock. As to any Person, its common stock and any other
capital stock of such Person authorized from time to time, and any
other shares, options, interests, participations, or other equivalents
(however designated) of or in such Person, whether voting or
nonvoting, including, without limitation, common stock, options,
warrants, preferred stock, phantom stock, stock appreciation rights,
preferred stock, convertible notes or debentures, stock purchase
rights, and all agreements, instruments, documents, and securities
convertible, exercisable, or exchangeable, in whole or in part, into
any one or more of the foregoing.
Change of Control. This term is defined in Section 11.1 of the Note
Agreement.
Closing Date. September 16, 1998.
Closing Price.
(a) If the primary market for the security in question is
a national securities exchange registered under the Exchange Act or
other market or quotation system in which last sale transactions are
reported on a contemporaneous basis, the last reported sales price,
regular way, of such security for such day, or, if there has not been
a sale on such trading day, the highest closing or last bid quotation
therefor on such trading day (excluding, in any case, any price that
is not the result of bona fide arm's length trading); or
(b) If the primary market for such security is not an
exchange or quotation system in which last sale transactions are
contemporaneously reported, the highest closing or last bona fide bid
quotation by disinterested Persons in the over-the-counter market on
such trading day as reported by the National Association of Securities
Dealers or such other generally accepted source of publicly reported
bid quotations as the Holders designate.
Common Stock. The common stock, par value $.001 per share, of the
Company.
Common Stock Equivalent. Any option, warrant, right, or similar
security exercisable into, exchangeable for, or convertible into
Common Stock.
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Commission. The Securities and Exchange Commission and any successor
federal agency having similar powers.
Company. Avalon Community Services, Inc., a Nevada corporation doing
business as Avalon Correctional Services, Inc., and any successor or
assign, and, unless the context requires otherwise, the term Company
includes any Subsidiary.
Convertible Note Agreement. The Debenture Purchase Agreement dated as
of August 26, 1997 by and between Company and the purchasers listed on
Schedule A thereto, as in effect on the Closing Date.
Convertible Notes. The Company's 7.5% Convertible Debentures due
August 26, 2007 and September 12, 2007, respectively, in the aggregate
principal amount of $4,150,000, issued pursuant to the Convertible
Note Agreement.
Co-Sell Shares. This term is defined in Section 5.02(c) of the
Shareholder Agreement.
Co-Sellers. This term is defined in Section 5.02(c) of the
Shareholder Agreement.
Dilution Fee. This term is defined in Article III of the Shareholder
Agreement.
Election Notice. This term is defined in Section 5.02(b) of the
Shareholder Agreement.
Employment Agreement. This term is defined in Section 11.1 of the
Note Agreement.
Exchange Act. The Securities Exchange Act of 1934, as amended, and
the rules and regulations thereunder.
Exchange Common Stock. This term is defined in Section 6.12 of the
Shareholder Agreement.
Exchange Company. This term is defined in Section 6.12 of the
Shareholder Agreement.
Exchange Notice. This term is defined in Section 6.12 of the
Shareholder Agreement.
Fair Market Value.
(a) As to securities regularly traded in the organized
securities markets, the Average Market Value; and
(b) as to all securities not regularly traded in the
securities markets and other property, the fair market value of such
securities or property as determined in good faith by the Board of
Directors of the Company at the time it authorizes the transaction (a
"Valuation Event") requiring a determination of Fair Market Value
under this Agreement;
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provided, however, that, at the election of the Holders, the Fair
Market Value of such securities and other property will be the
Appraised Value.
GAAP. The generally accepted accounting principles, applied on a
consistent basis, as set forth in Opinions of the Accounting
Principles Board of the American Institute of Certified Public
Accountants and/or in statements of the Financial Accounting Standards
Board and/or their respective successors and which are applicable in
the circumstances as of the date in question, provided, that the
Company may not change the use or application of any accounting
method, practice or principle without the prior written consent of
Purchaser, which consent may require that an adjustment be made to any
and all the financial covenants and the capital expenditure covenant
set forth herein. Accounting principles are applied on a "consistent
basis" when the accounting principles observed in a current period are
comparable in all material respects to those accounting principles
applied in a preceding period.
Holders. Purchaser and all Persons holding Registrable Securities,
except that neither the Company nor any Shareholder nor any Affiliate
of the Company or the Shareholder will at any time be a Holder.
Unless otherwise provided in this Agreement, in each instance that the
Holders are required to request or consent in concert to an action,
the Holders will be deemed to have requested or consented to such
action if the Holders of a majority-in-interest of the Registrable
Securities so request or consent.
Indebtedness. For any Person: (a) all indebtedness, whether or not
represented by bonds, debentures, notes, securities, or other
evidences of indebtedness, for the repayment of money borrowed, (b)
all indebtedness representing deferred payment of the purchase price
of property or assets, (c) all indebtedness under any lease which, in
conformity with GAAP, is required to be capitalized for balance sheet
purposes and leases of property or assets made as a part of any sale
and lease-back transaction if required to be capitalized, (d) all
indebtedness under guaranties, endorsements, assumptions, or other
contractual obligations, including any letters of credit, or the
obligations in respect of, or to purchase or otherwise acquire,
indebtedness of others, (e) all indebtedness secured by a Lien
existing on property owned, subject to such Lien, whether or not the
indebtedness secured thereby shall have been assumed by the owner
thereof, and (f) all amendments, renewals, extensions, modifications
and refundings of any indebtedness or obligations referred to in
clauses (a), (b), (c), (d) or (e).
Indemnified Party. This term is defined in Section 6.01 hereof and in
Section 10.01 of the Shareholder Agreement.
Initial Holders. Purchaser and any Affiliate of Purchaser to which
any of the Shares or any part of or interest in the Shares is
transferred or assigned.
Intellectual Property. This term is defined in Section 3.01(g).
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Lien. Any lien, mortgage, security interest, tax lien, pledge,
encumbrance, financing statement, or conditional sale or title
retention agreement, or any other interest in property designed to
secure the repayment of Indebtedness or any other obligation, whether
arising by agreement, operation of law, or otherwise.
Negotiation Period. This term is defined in the definition of
Appraised Value.
New Securities. Any Capital Stock other than (a) the Shares, (b) the
Permitted Stock, (c) Capital Stock issued by the Company to any Person
to pay all or part of the purchase price of any Permitted Acquisition,
and (d) Capital Stock issued in a Qualified Secondary Public Offering.
Note. All or any portion of any of the Senior Subordinated Note (as
defined in the Note Agreement) and any and all documents evidencing
the indebtedness under the Note and any refinancing, refunding, or
replacement of the Note.
Note Agreement. This term is defined in the preamble and includes the
Note Purchase Agreement of even date with this Agreement between the
Company and Purchaser and all documents evidencing indebtedness
thereunder or otherwise related to the Note Agreement as the same may
be amended from time to time, and any refinancing, refunding, or
replacements of the indebtedness under the Note Agreement.
Notice of Sale. This term is defined in Section 5.02(a) of the
Shareholder Agreement.
Other Securities. Any stock, other securities, property, or rights
that the Holders become entitled to receive as a result of owning the
Shares.
Permitted Acquisition. This term is defined in Section 11.1 of the
Note Agreement.
Permitted Stock. The Common Stock and/or options or warrants to
acquire Common Stock set forth on Schedule I attached hereto, issued
or reserved for issuance to the Persons set forth on Schedule I.
Person. This term will be interpreted broadly to include any
individual, sole proprietorship, partnership, joint venture, trust,
unincorporated organization, association, corporation, company,
institution, entity, party, or government (whether national, federal,
state, county, city, municipal, or otherwise, including, without
limitation, any instrumentality, division, agency, body, or department
of any of the foregoing).
Purchaser. This term is defined in the preamble.
Put Option. This term is defined in Section 4.01 of the Shareholder
Agreement.
Put Option Closing. This term is defined in Section 4.05 of the
Shareholder Agreement.
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Put Option Period. This term is defined in Section 4.01 of the
Shareholder Agreement.
Put Price. This term is defined in Section 4.02 of the Shareholder
Agreement.
Put Shares. The Shares plus any other shares of Capital Stock issued
to any Holder from time to time pursuant to Section 2.07 as a result
of owning the Shares.
Qualified Secondary Public Offering. A firm commitment underwritten
public offering of Common Stock to the general public pursuant to one
or more registration statements declared effective by the Commission
which results in gross cash proceeds of at least $25,000,000.
"Register," "registered," and "registration" refer to a registration
effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of
the effectiveness of such registration statement.
Registrable Securities. (a) The Shares and (b) the Other Securities.
Related Party. An entity wholly owned by a Selling Shareholder or one
or more Related Parties.
RSTW. RSTW Partners III, L.P., a Delaware limited partnership.
Selling Shareholder. This term is defined in Section 5.02 of the
Shareholder Agreement.
Securities Act. The Securities Act of 1933, as amended, and the rules
and regulations thereunder.
Senior Lender. This term is defined in Section 11.1 of the Note
Agreement.
Senior Loan Agreement. This term is defined in Section 11.1 of the
Note Agreement.
Senior Loan Documents. This term is defined in Section 11.1 of the
Note Agreement.
Shareholder and Shareholders. This term is defined in the preamble of
the Shareholder Agreement.
Shareholder Agreement. This term is defined in the preamble and
includes the Shareholder Agreement dated as of the Closing Date
between the Company, certain shareholders of the Company and Purchaser
in substantially the form attached to this Agreement as Annex A and
incorporated in this Agreement by reference.
Shares. The 1,622,448 shares of Common Stock referred to in Section
2.01 issued to Initial Holders on the Closing Date, and all securities
issued upon the subdivision,
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combination or reclassification, or in respect of, or in substitution
for, such shares of Common Stock.
Subsidiary. Each Person of which or in which the Company or its other
Subsidiaries own directly or indirectly fifty-one percent (51%) or
more of (i) the combined voting power of all classes of stock having
general voting power under ordinary circumstances to elect a majority
of the board of directors or equivalent body of such Person, if it is
a corporation or similar person; (ii) the capital interest or profits
interest of such Person, if it is a partnership, joint venture, or
similar entity; or (iii) the beneficial interest of such Person, if it
is a trust, association, or other unincorporated organization.
Valuation Event. This term is defined in the definition of Fair
Market Value.
ARTICLE II
THE SHARES
2.01 The Shares. On the Closing Date, Purchaser agrees to purchase
from the Company for the purchase price set forth beneath the name of Purchaser
on the signature page of this Agreement, and the Company agrees to issue to
Purchaser, the Shares, all in accordance with the terms and conditions of this
Agreement.
2.02 Legend. The Company will deliver to Purchaser on the Closing
Date one or more certificates representing the Shares purchased by Purchaser in
such denominations as Purchaser requests. Such certificates will be issued in
Purchaser's name or in the name or names of its designee or designees, as the
case may be. It is understood and agreed that the certificates evidencing the
Shares will bear the following legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND NOT WITH A VIEW TO DISTRIBUTION OR FOR SALE. THE
SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS,
AND MAY NOT BE PLEDGED, SOLD, OFFERED FOR SALE, TRANSFERRED, OR
OTHERWISE DISPOSED OF IN THE ABSENCE OF REGISTRATION UNDER OR
EXEMPTION FROM SUCH ACT AND ALL APPLICABLE STATE SECURITIES LAWS."
"THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE TERMS
AND PROVISIONS OF A STOCK PURCHASE AGREEMENT AND A SHAREHOLDER
AGREEMENT, EACH DATED AS OF SEPTEMBER 16, 1998, BETWEEN AVALON
COMMUNITY SERVICES, INC. (THE "COMPANY") AND RSTW PARTNERS III, L.P.,
AMONG OTHERS (AS SUCH AGREEMENTS MAY BE SUPPLEMENTED, MODIFIED,
AMENDED, OR RESTATED FROM TIME TO TIME, THE "AGREEMENTS"). COPIES OF
THE AGREEMENTS ARE AVAILABLE AT THE EXECUTIVE OFFICES OF THE COMPANY."
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2.03 Taxes. The issuance of the Shares and any Other Securities
will be made without charge to any Holder for any tax, other than income taxes
assessed on such Holder, in respect of such issuance.
2.04 Stock Register. The Company will, at all times while any of
the Shares remain outstanding, keep and maintain at its principal office or
other location a register in which the registration, transfer, and exchange of
the Shares will be provided for. The Company will not at any time, except upon
the dissolution, liquidation, or winding up of the Company, close such register
so as to result in preventing or delaying the transfer of any Shares.
2.05 Transfer and Exchange. The Shares and all options and rights
under the Shares are transferable, as to all or any part of the Shares, by the
Holders of the Shares, in person or by duly authorized attorney, on the books
of the Company upon surrender of the certificates representing the Shares at
the principal offices of the Company, together with the form of transfer
authorization attached to the certificates representing the Shares duly
executed. Absent any such transfer and subject to the Shareholder Agreement,
the Company may deem and treat the registered Holders of the Shares at any time
as the absolute owners of the Shares for all purposes and will not be affected
by any notice to the contrary. If any of the Shares are transferred in part,
the Company will, at the time of surrender of the certificate representing such
Shares, issue to the transferee a certificate representing the Shares
transferred and to the transferor a certificate representing the Shares not
transferred.
2.06 Lost, Stolen, Mutilated, or Destroyed Certificates. If any
certificate representing the Shares is lost, stolen, mutilated, or destroyed,
the Company will issue a new certificate of like denomination, tenor, and date
as the certificate so lost, stolen, mutilated, or destroyed. Any such new
certificate will constitute a binding obligation of the Company, whether or not
the allegedly lost, stolen, mutilated, or destroyed certificate is at any time
enforceable by any Person.
2.07 Adjustments to Number of Shares.
(a) The number of shares of Common Stock constituting
Shares shall be adjusted, to the extent necessary, to give effect
(without duplication) to the following events:
(i) In case at any time or from time to time, the
holders of any class of Common Stock or Common Stock
Equivalent have received, or (on or after the record date
fixed for the determination of shareholders eligible to
receive) have become entitled to receive, without payment
therefor:
(A) consideration (other than cash) by
way of dividend or distribution; or
(B) consideration (including cash) by
way of spin-off, split-up, reclassification
(including any reclassification in connection with a
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consolidation or merger in which the Company is the
surviving corporation), recapitalization, combination
of shares into a smaller number of shares, or similar
corporate restructuring;
other than additional shares of Common Stock issued as a stock
dividend or in a stock-split (adjustments in respect of which
are provided for in Sections 2.07(a)(ii) and (iii)), then, and
in each such case, the Holders will be entitled to receive for
each Share, as of the record date fixed for such distribution,
the greatest per share amount of consideration received by any
holder of any class of Common Stock or Common Stock Equivalent
or to which such holder is entitled less the amount of any
Dilution Fee actually and irrevocably paid to such Holders.
All such consideration receivable with respect to such a
distribution will be deemed to be outstanding and owned by the
Holders for purposes of determining the amount of
consideration to which the Holders are entitled with respect
to any subsequent distribution.
(ii) If at any time there occurs any stock split,
stock dividend or distribution (including, without limitation,
any distribution of Common Stock to the holders of the
Convertible Notes in lieu of cash interest payments thereon),
reverse stock split, or other subdivision of the Common Stock,
then the number of Shares will be proportionately adjusted.
(iii) In case of any reclassification or change of
outstanding shares of any class of Common Stock or Common
Stock Equivalent (other than a change in par value, or from
par value to no par value, or from no par value to par value),
or in the case of any consolidation of the Company with, or
merger or share exchange of the Company with or into, another
Person, or in case of any sale of all or a majority of the
property, assets, business, income or revenue generating
capacity, or goodwill of the Company, the Company, or such
successor or other Person, as the case may be, will provide
that the Holders of the Shares will thereafter be entitled to
receive the highest per share kind and amount of consideration
received or receivable (including cash) upon such
reclassification, change, consolidation, merger, share
exchange, or sale by any holder of any class of Common Stock
or Common Stock Equivalent that the Shares entitle the Holders
to receive immediately prior to such reclassification, change,
consolidation, merger, share exchange, or sale (as adjusted
pursuant to Section 2.07(a)(i) and otherwise in this
Agreement). Any such successor Person, which thereafter will
be deemed to be the Company for purposes of the Shares, will
provide for adjustments that are as nearly equivalent as may
be possible to the adjustments provided for by this Section
2.07.
(iv) If at any time the Company issues or sells
any shares of any Common Stock or any Common Stock Equivalent,
other than Permitted Stock, at a per unit or share
consideration (which consideration will include the price paid
upon issuance plus the minimum amount of any exercise,
conversion, or similar
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payment made upon exercise or conversion of any Common Stock
Equivalent) less than the Adjustment Fair Market Value (which
determination shall exclude any underwriter commissions or
discounts payable in respect of any such issuance) per share
of Common Stock immediately prior to the time such Common
Stock or Common Stock Equivalent is issued or sold (the
"Additional Securities"), then the number of shares of Common
Stock issued to all Holders will equal the aggregate number of
Common Stock set forth beneath the name of each Purchaser on
the signature pages of this Agreement, as adjusted upwards by
taking the product of the Adjustment Fair Market Value of the
Shares multiplied by a fraction, the numerator of which is the
total Adjustment Fair Market Value of the Shares (i.e., the
number of shares of Common Stock held by such Holder
multiplied by the Adjustment Fair Market Value per share) plus
the total consideration paid to Company for the Additional
Securities (i.e., the number of Additional Securities
multiplied by the price per share paid to the Company), and
the denominator of which is the total number of shares of
Common Stock outstanding after the issuance of the Additional
Securities (for purposes of this Section 2.07(iv), the date as
of which the Adjustment Fair Market Value per share of Common
Stock will be computed will be the earlier of the date upon
which the Company (aa) enters into a firm contract for the
issuance of such shares, or (bb) issues such shares); and
(v) In case any event occurs as to which the
preceding Sections 2.07(a)(i) through (iv) are not strictly
applicable, but as to which the failure to make any adjustment
would not fairly protect the purchase rights represented by
the Shares in accordance with the essential intent and
principles of this Agreement, then, in each such case, the
Holders may appoint an independent investment bank or firm of
independent public accountants, which will give its opinion as
to the adjustment, if any, on a basis consistent with the
essential intent and principles established in this Agreement,
necessary to preserve the purchase rights represented by the
Shares. Upon receipt of such opinion, the Company will
promptly deliver a copy of such opinion to the Holders and
will make the adjustments described in such opinion. The fees
and expenses of such investment bank or independent public
accountants will be borne by the Company.
(b) At any time and from time to time that the Company
issues any shares of Common Stock to any holder of Permitted Stock
upon the exercise of any options or warrants constituting Permitted
Stock, the Company shall issue the Holders additional shares of Common
Stock of the Company (hereinafter "Additional RSTW Shares") in an
amount equal to 25% of the Common Stock of the Company so issued to
such holder of Permitted Stock (on a fully diluted basis), but only to
the extent the shares of Common Stock of the Company so issued to such
holder were not included in the fully diluted share calculation on the
Closing Date (for purposes of determining the number of Shares issued
to RSTW on the Closing Date). Each Additional RSTW Share shall be
issued by the Company to the Holders for a purchase price of $.001 per
share.
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(c) The Company will not by any action, including,
without limitation, amending, or permitting the amendment of, the
charter documents, bylaws, or similar instruments of the Company or
through any reorganization, reclassification, transfer of assets,
consolidation, merger, share exchange, dissolution, issue or sale of
securities, or any other similar voluntary action, avoid or seek to
avoid the observance or performance of any of the terms of this
Agreement or the Shares, but will at all times in good faith assist in
the carrying out of all such terms and in the taking of all such
actions as may be necessary or appropriate to protect the rights of
the Holders against impairment or dilution. Without limiting the
generality of the foregoing, the Company will (i) take all such action
as may be necessary or appropriate in order that the Company may
validly and legally issue fully paid and nonassessable shares of
Common Stock and Other Securities, free and clear of all liens,
encumbrances, equities, and claims and (ii) use its best efforts to
obtain all such authorizations, exemptions, or consents from any
public regulatory body having jurisdiction as may be necessary to
enable the Company to perform its obligations under the Shares.
Without limiting the generality of the foregoing, the Company
represents and warrants that the board of directors of the Company has
determined the purchase price for the Shares to be adequate and the
issuance of the Shares to be in the best interests of the Company.
(d) Any calculation under this Section 2.07 will be made
without rounding, using fractions expressed with a numerator and a
denominator. The number of Shares resulting from such calculations
will be expressed as such a fraction and the Company and any successor
will issue such fractional shares with respect to such shares and will
not issue scrip, cash, or property in lieu of fractional shares.
(e) Except for preferred stock issued by the Company for
Fair Market Value to any Person to pay all or part of the purchase
price of any Permitted Acquisition, the Company will not issue any
Capital Stock other than Common Stock and Common Stock Equivalents,
and will not permit any Subsidiary to issue any Capital Stock (other
than the shares of Capital Stock owned, directly or indirectly, by the
Company on the Closing Date).
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.01 Representations and Warranties of the Company. The Company
represents and warrants to Purchaser that:
(a) The Company is a corporation duly organized and
existing and in good standing under the laws of its state of
incorporation and is qualified or licensed to do business in all other
countries, states, and jurisdictions the laws of which require it to
be so qualified or licensed. The Company has no Subsidiaries or debt
or equity investment in any Person except as set forth on Schedule
4.15 to the Note Agreement. No Person has any rights, whether granted
by the Company or any other Person, to acquire any portion of the
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equity interest of the Company or the assets of the Company except as
set forth on Schedule 4.15 to the Note Agreement.
(b) The Company has, and at all times that this Agreement
is in force will have, the right and power, and is duly authorized, to
enter into, execute, deliver, and perform this Agreement and the
Shareholder Agreement, and the officers of Company executing and
delivering this Agreement and the Shareholder Agreement are duly
authorized to do so. This Agreement and the Shareholder Agreement
have been duly and validly executed, issued and delivered and
constitute the legal, valid and binding obligations of Company,
enforceable in accordance with their respective terms.
(c) The execution, delivery and performance of this
Agreement and the Shareholder Agreement will not, by the lapse of
time, the giving of notice, or otherwise, constitute a violation of
any applicable provision contained in the charter, bylaws, or
organizational documents of the Company or contained in any agreement,
instrument, or document to which the Company is a party or is bound.
(d) As of the Closing Date, the authorized capital stock
of the Company consists of (i) 20,000,000 shares of Common Stock, of
which 3,041,880 shares are issued and outstanding and owned of record
by the persons designated on Schedule I attached hereto, (ii)
4,000,000 shares of Series B common stock, no par value per share, of
which -0- shares are issued and outstanding, and (iii) 1,000,000
shares of preferred stock, $.001 par value per share, of which -0-
shares are issued and outstanding. All such issued and outstanding
shares have been duly authorized and validly issued, are fully paid
and nonassessable, and have been offered, issued, sold, and delivered
by Company free from preemptive rights, rights of first refusal, or
similar rights and in compliance with applicable federal and state
securities laws. Except pursuant to this Agreement and except for the
Permitted Stock, the Company is not obligated to issue or sell any
Capital Stock, and, except for this Agreement and the Shareholder
Agreement, neither the Company nor the Shareholder is party to, or
otherwise bound by, any agreement affecting the voting of any Capital
Stock. Except for the Shareholder Agreement, the Convertible Note
Agreement, existing warrant agreements, and underwriter warrant
agreements previously issued, the Company is not, nor will it be, a
party to, or otherwise bound by, any agreement obligating it to
register any of its Capital Stock.
(e) The Shares have been duly and validly authorized and,
when issued in accordance with the terms of this Agreement will be
validly issued, fully paid, and nonassessable and free of preemptive
rights, rights of first refusal, or similar rights.
(f) The Company has good, indefeasible, merchantable, and
marketable title to, and ownership of, all of its assets free and
clear of all liens, pledges, security interests, claims, or other
encumbrances except those in favor of (i) the Purchaser pursuant to
the Note Agreement or (ii) the Senior Lender pursuant to the Senior
Loan Documents.
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(g) The Company has the exclusive right to use all
patents, patent rights, patent applications, licenses, inventions,
trade secrets, know-how, proprietary techniques, including processes
and substances, trademarks, service marks, trade names, and copyrights
used in or necessary or desirable to its business as presently, or
presently proposed to be, conducted (the "Intellectual Property"), and
the use by the Company of the Intellectual Property does not infringe
the rights of any other Person. No other Person is infringing the
rights of the Company in any of the Intellectual Property. The
Company owes no royalties, honoraria, or fees to any Person by reason
of its use of any of Intellectual Property.
(h) There is not now, and at no time during the term of
this Agreement or the Shareholder Agreement will there be, any
agreement, arrangement, or understanding involving the Company or any
shareholder of the Company, other than this Agreement, the Shareholder
Agreement, and the documents contemplated hereby and thereby,
modifying, restricting, or in any way affecting the rights of any
security holder to vote securities of the Company.
(i) Each of the representations and warranties made by
the Company pursuant to the Note Agreement and the Shareholder
Agreement is true and correct.
(j) None of the documents, instruments, or other
information furnished to the Purchaser by the Company, contains any
untrue statement of a material fact or omits to state any material
fact necessary in order to make any statements made therein not
misleading. No representation, warranty, or statement made by the
Company in this Agreement, the Note Agreement, the Shareholder
Agreement or in any document, certificate, exhibit or schedule
attached hereto or thereto or delivered in connection herewith or
therewith, contains or will contain any untrue statement of a material
fact, or omits or will omit to state a material fact necessary to make
any statements made herein or therein not misleading. There is no
fact that materially and adversely affects the condition (financial or
otherwise), results of operations, business, properties, or prospects
of the Company or any of its Subsidiaries that has not been disclosed
in the documents provided to Purchaser.
(k) The Company has filed with the Commission all proxy
statements and periodic reports required to be filed by it under the
Exchange Act (collectively, the "SEC Reports"). The Company has
furnished or made available to the Purchaser copies of the SEC
Reports, each as filed with the Commission. Each SEC Report was in
compliance in all respects with the requirements of the Exchange Act
and the rules and regulations of the Commission thereunder and did not
on the date of its filing (and the SEC Reports as a whole will not on
the Closing Date, except as otherwise disclosed to the Purchaser in
writing), contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which
they were made, not misleading.
3.02 Representations and Warranties of Purchaser. Purchaser
represents and warrants to the Company:
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(a) It is a limited partnership duly organized and
existing and in good standing under the laws of the state of its
organization.
(b) It has the right and power and is duly authorized to
enter into, execute, deliver, and perform this Agreement and the
Shareholder Agreement, and its partners, officers or agents executing
and delivering this Agreement and the Shareholder Agreement are duly
authorized to do so. This Agreement and the Shareholder Agreement
have been duly and validly executed, issued, and delivered and
constitute the legal, valid, and binding obligation of Purchaser,
enforceable in accordance with its terms.
(c) It (i) is an "accredited investor," as that term is
defined in Regulation D under the Securities Act; and (ii) has such
knowledge, skill, and experience in business and financial matters,
based on actual participation, that it is capable of evaluating the
merits and risks of an investment in the Company and the suitability
thereof as an investment for Purchaser.
(d) Except as otherwise contemplated by this Agreement
and the Shareholder Agreement, Purchaser is acquiring the Shares for
investment for its own account and not with a view to any distribution
thereof in violation of applicable securities laws.
(e) It agrees that the certificates representing the
Shares will bear the legends referenced in this Agreement, and the
Shares, will not be offered, sold, or transferred in the absence of
registration or exemption under applicable securities laws.
ARTICLE IV
COVENANTS
The Company covenants and agrees as follows:
4.01 Financial Statements. The Company will keep books of account
and prepare financial statements and will cause to be furnished to Purchaser or
other Holder (all of the foregoing and following to be kept and prepared in
accordance with United States generally accepted accounting principles applied
on a consistent basis):
(a) As soon as available, and in any event within ninety
(90) days after the end of each fiscal year of the Company (unless the
Company has requested an extension from the Commission regarding the
date of filing of the Company's Form 10-K, in which case the ninety
(90) day period referenced above shall instead be one hundred-five
(105) days), beginning with the fiscal year ending December 31, 1998,
(i) a copy of the financial statements of the Company for such fiscal
year containing a balance sheet, statement of income, statement of
stockholders' equity, and statement of cash flow as at the end of such
fiscal year and for the fiscal year then ended, in each case setting
forth in comparative form the figures for the preceding fiscal year,
all in reasonable detail and audited by ▇▇▇▇▇ ▇▇▇▇▇▇▇▇, LLP or any
"Big Four" firm of independent certified public
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accountants (or any other firm of independent certified public
accountants of recognized national standing selected by the Company
and consented to by the Holders to the effect that such financial
statements have been prepared in accordance with GAAP; (ii) a letter
from such independent certified public accountants confirming the
calculations set forth in the officers' certificate delivered
simultaneously therewith in accordance with Section 4.01(g); and (iii)
the Company's unaudited comparison of the actual results during such
fiscal year to those originally budgeted by the Company prior to the
beginning of such fiscal year, along with management's discussion and
analysis of variances, as well as, variances between actual results
for such fiscal year and actual results for the previous fiscal year.
The annual audit report required hereby shall not be qualified on the
basis that the Company is not a going concern or otherwise qualified
or limited because of restricted or limited examination by the
accountant of any material portion of any of the records of the
Company.
(b) As soon as available, and in any event within thirty
(30) days after the end of each calendar month, a copy of an unaudited
financial report of the Company as of the end of such calendar month
and for the portion of the fiscal year then ended, containing balance
sheets, statements of income, and statements of cash flow, in each
case setting forth in comparative form the figures for the
corresponding period of the preceding fiscal year, along with
management's discussion and analysis all in reasonable detail,
including, without limitation, a comparison of the actual results for
such period to those originally budgeted by the Company prior to the
beginning of such fiscal period and for the fiscal year to date.
(c) Simultaneously with the delivery of financial information
pursuant to Section 4.01(b) in respect of any month which is the last
month of any fiscal quarter, management's discussion and analysis of
variances between the results for the portion of the current fiscal
year ended on the last day of such fiscal quarter and the
corresponding period of the preceding fiscal year.
(d) As soon as available, and in any event within 60 days
after the Closing Date, an unaudited balance sheet of the Company,
dated as of the Closing Date, which gives effect to the issuance of
the Senior Subordinated Note and the Securities Documents, and the
financing transactions contemplated by the Senior Loan Agreement as if
all commitments therein available to the Company as of the Closing
Date were fully utilized, certified by the Chief Executive Officer and
the Vice President of Finance of the Company as fairly presenting the
Company's financial position.
(e) On or before thirty (30) days prior to the beginning
of each fiscal year of the Company, an annual budget or business plan
for such fiscal year, including a projected consolidated and
consolidating balance sheet, income statement, and cash flow statement
for such year, and, promptly during each fiscal year, all revisions
thereto approved by the Board of Directors of the Company.
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(f) as soon as available, copies of all final reports or
letters submitted to the Company by its independent certified public
accountants in connection with each annual, interim or special audit
of the financial statements of the Company made by such accountants,
including, without limitation, any management report, and the Company
agrees to obtain such a report in connection with each of the annual
audits.
(g) Concurrently with the delivery of each of the
financial statements referred to in Section 4.01(a)and Section
4.01(b), a certificate of an authorized officer of the Company in the
form of the officer's certificate attached to the Note Agreement as
Exhibit C (i) stating that the financial statements attached have been
prepared in accordance with GAAP and fairly and accurately present
(subject to year-end audit adjustments, for the annual certificates)
the financial condition and results of operations of the Company at
the date and for the period indicated therein, (ii) containing
summaries of accounts payable (including a list of any payables that
are more than thirty (30) days past due), accounts receivable agings,
and inventory, (iii) (A) containing a schedule of the outstanding
Indebtedness for borrowed money of the Company describing in
reasonable detail each such debt issue or loan outstanding, the name,
address and telephone/fax numbers of each of the holders or lenders,
as the case may be, of such debt issue or loan outstanding, the
principal amount and amount of accrued and unpaid interest with
respect to each such debt issue or loan outstanding and (B) making a
statement in respect each thereof similar to statement required in
clause (g)(i) above.
(h) As soon as available, (i) a copy of each financial
statement, report, notice or proxy statement sent by the Company to
its stockholders in their capacity as stockholders, (ii) a copy of
each regular, periodic or special report, registration statement, or
prospectus filed by the Company with any securities exchange or the
Commission or any successor agency, (iii) any material order issued by
any court, governmental authority, or arbitrator in any material
proceeding to which the Company is a party, (iv) copies of all press
releases and other statements made available generally by the Company
to the public generally concerning material developments in the
Company's business, and (v) a copy of all correspondence and reports
sent by the Company to the Senior Lender (except for ordinary loan
administration reporting pertaining any assets that serve as
collateral for the Senior Loans and accounts payable, unless otherwise
requested by the Holders).
(i) Promptly, such additional information concerning the
Company as any Holder may request, including, without limitation,
auditor management reports and audit "waive" lists.
4.02 Laws. The Company will comply with all applicable statutes,
regulations, and orders of the United States, domestic and foreign states, and
municipalities, agencies, and instrumentalities of the foregoing applicable to
the Company.
4.03 Inspection. The Company will permit any representative
designated by the Holders to (a) visit and inspect any of the properties of the
properties of the Company; (b) examine the corporate and
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financial records of the Company and make copies thereof or extracts therefrom;
and (c) discuss the affairs, finances, and accounts of the Company with the
directors, officers, key employees, and independent accountants of the Company.
4.04 Certain Actions. Without the prior written consent of the
Holders, which consent may be withheld in the sole discretion of the Holders,
the Company will not:
(a) permit to occur any amendment, alteration, or
modification of its Articles of Incorporation, Bylaws or other charter
or organizational documents of the Company, as constituted on the date
of this Agreement, the effect of which, in the sole judgment of the
Holders, would be to alter, impair, or affect adversely, either the
rights and benefits of the Holders or the duties and obligations of
Company under this Agreement or the Shareholder Agreement;
(b) declare or make any dividends or distributions of its
cash, stock, property or assets or redeem, retire, purchase or
otherwise acquire, directly or indirectly, any of the Capital Stock or
capital stock or securities of any Affiliate of the Company, or any
securities convertible or exchangeable into Capital Stock or capital
stock or securities of any Affiliate of the Company, except (i)
pursuant to this Agreement or the Shareholder Agreement or (ii) to the
extent permitted pursuant to Section 7.4 of the Note Agreement;
(c) effect any sale, lease, assignment, transfer, or
other conveyance of any portion of the assets or operations or the
revenue or income generating capacity of the Company (other than
inventory in the ordinary course of business and other assets
reasonably and in good faith determined by the Company to be obsolete
or no longer necessary to the business of the Company) or to take any
such action that has the effect of any of the foregoing;
(d) issue or sell, or otherwise dispose of any Capital
Stock or Capital Stock of any Subsidiary (except for Permitted Stock
or pursuant to this Agreement, the Shareholder Agreement or the
Convertible Note Agreement), or dissolve or liquidate, or effect any
consolidation or merger involving the Company or any Subsidiary or any
reclassification, corporate reorganization, stock split or reverse
stock split, or other change of any class of Capital Stock;
(e) enter into any business that the Company is not
conducting on the date of this Agreement or acquire any substantial
business operation or assets (through a stock or asset purchase or
otherwise);
(f) except for the issuance of Permitted Stock, enter
into any transaction or transactions with any director, officer,
employee, or shareholder of the Company, or any Affiliate or relative
of the foregoing except upon terms that, in the opinion of the
Holders, are fair and reasonable and that are, in any event, at least
as favorable as would result in a comparable arm's-length transaction
with a Person not a director, officer, employee, shareholder, or
Affiliate of the Company or any Affiliate or related party of the
foregoing,
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or advance any monies to any such Persons, except for travel advances
in the ordinary course of business;
(g) increase the amount of benefits payable under any
benefit plan in the aggregate, or increase beyond the amounts
permitted pursuant to the Note Agreement, the aggregate amount of
salary and any other direct and indirect remuneration (including, but
not limited to, employee benefits, professional, management, and
consulting fees and expenses, and bonuses under any plans) paid or
accrued by the Company during any fiscal year to or for the direct or
indirect benefit of any of its officers, directors, Affiliates or
security holders;
(h) except for Permitted Acquisitions, acquire any debt
or equity interest in any Person or establish or acquire a Subsidiary
or make any additional capital contribution or purchase any additional
equity in any Subsidiary or make any advances or loans to any
Subsidiary or transfer any technology or assets to any Subsidiary;
(i) modify, amend, terminate or waive any provision of
the Employment Agreements; or
(j) obligate itself or otherwise agree to take, permit or
enter into any of the events described in subsections (a) through (i)
above.
4.05 Records. The Company and each of its Subsidiaries will keep
books and records of account in which full, true, and correct entries will be
made of all dealings and transactions in relation to its business and affairs
in accordance with GAAP.
4.06 Accountants. The Company will retain independent public
accountants who will audit the consolidated financial statements of the Company
at the end of each fiscal year, and in the event that the services of the
independent public accountants so selected, or any firm of independent public
accounts hereafter employed by Company, are terminated, the Company will
promptly thereafter notify each Holder and upon the Holders' request, the
Company will request the firm of independent public accountants whose services
are terminated to deliver (without liability for such firm) to each Holder a
letter of such firm setting forth the reasons for the termination of their
services and in its notice to each Holder the Company will state whether the
change of accountants was recommended or approved by the board of directors of
the Company or any committee thereof.
4.07 Existence. The Company will maintain in full force and effect
its corporate existence, rights, and franchises and all licenses and other
rights to use Intellectual Property.
4.08 Notice.
(a) In the event of (i) any setting by the Company of a
record date with respect to the holders of any class of Capital Stock
for the purpose of determining which of such holders are entitled to
dividends, repurchases of securities or other distributions, or any
right
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to subscribe for, purchase or otherwise acquire any shares of Capital
Stock or other property or to receive any other right; or (ii) any
capital reorganization of the Company, or reclassification or
recapitalization of the Capital Stock or any transfer of all or a
majority of the assets, business, or revenue or income generating
capacity of the Company, or consolidation, merger, share exchange,
reorganization, or similar transaction involving the Company; or (iii)
any voluntary or involuntary dissolution, liquidation, or winding up
of the Company; or (iv) any proposed issue or grant by the Company of
any Capital Stock, or any right or option to subscribe for, purchase,
or otherwise acquire any Capital Stock, then, in each such event, the
Company will deliver or cause to be delivered to the Holders a notice
specifying, as the case may be, (A) the date on which any such record
is to be set for the purpose of such dividend, distribution, or right,
and stating the amount and character of such dividend, distribution,
or right; (B) the date as of which the holders of record will be
entitled to vote on any reorganization, reclassification,
recapitalization, transfer, consolidation, merger, share exchange,
conveyance, dissolution, liquidation, or winding-up; (C) the date on
which any such reorganization, reclassification, recapitalization,
transfer, consolidation, merger, share exchange, conveyance,
dissolution, liquidation, or winding-up is to take place and the time,
if any is to be fixed, as of which the holders of record of any class
of Capital Stock will be entitled to exchange their shares of Capital
Stock for securities or other property deliverable upon such event;
(D) the amount and character of any Capital Stock, property, or rights
proposed to be issued or granted, the consideration to be received
therefor, and, in the case of rights or options, the exercise price
thereof, and the date of such proposed issue or grant and the Persons
or class of Persons to whom such proposed issue or grant will be
offered or made; and (E) such other information as the Holders may
reasonably request. Any such notice will be deposited in the United
States mail, postage prepaid, at least thirty (30) days prior to the
date therein specified.
(b) If there is any adjustment as provided above in
Article II, or if any Other Securities become issuable in lieu of the
Shares, the Company will immediately cause written notice thereof to
be sent to each Holder, which notice will be accompanied by a
certificate of the Vice President of Finance of the Company setting
forth in reasonable detail the basis for the Holders' becoming
entitled to receive such Other Securities, the facts requiring any
such adjustment in the number of shares receivable after such
adjustment, or the kind and amount of any Other Securities that are
issuable in respect of the Shares, as the case may be. At the request
of any Holder and upon surrender of any certificate or certificates
representing its Shares, the Company will reissue one or more new
certificates to such Holder conforming to such adjustments.
4.09 Taxes. The Company will file all required tax returns,
reports, and requests for refunds on a timely basis and will pay on a timely
basis all taxes imposed on either of it or upon any of its assets, income, or
franchises.
4.10 Maintenance of Quotation. The Company covenants and agrees
that so long as any Shares are held by any Holder, the Company will cause the
Common Stock to continue to be quoted on the NASDAQ Stock Market, Inc., or
listed for trading on either the New York Stock Exchange or the American Stock
Exchange (unless the Company's Common Stock fails to be so
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quoted or listed solely as a result of the increase by any such exchange of the
minimum market capitalization requirements applicable to its listed companies).
4.11 Board of Directors. The Company will deliver to Purchaser and
the Holders Representative (i) a certified copy of all materials distributed at
or prior to all meetings of the Company's board of directors, certified as true
and accurate by the Secretary of the Company, promptly following each such
meeting and (ii) a certified copy of the minutes of each of the meetings of the
Company's board of directors, certified as true and accurate by the secretary
of the Company, as soon as available but in any event promptly following the
end of the next subsequent regular meeting of the Company's board of directors.
The Company (a) will permit Purchaser, at all times during which (i) RSTW is a
Holder of all or any portion of the Senior Subordinated Note or the RSTW Common
Stock or any stock, warrants or other equity interest in the Company issued to
it or received by it upon exercise, conversion or exchange thereof or as a
dividend or other distribution with respect thereto, to designate, by written
notice, one Person to serve as a member of the Company's board of directors and
(ii) RSTW is not a Holder of all or any portion of the Senior Subordinated Note
or the RSTW Common Stock or any stock, warrants or other equity interest in the
Company issued to it or received by it upon exercise, conversion or exchange
thereof or as a dividend or other distribution with respect thereto, to
designate, by written notice, one Person to serve as a member of the Company's
board of directors (but only if Purchaser then owns, directly or indirectly,
five percent (5%) or more of the fully diluted capital stock of the Company)
and (b) will permit the Majority Holders (as defined in the Note Agreement), at
all times during which all or any part of the Senior Subordinated Note remains
outstanding, to designate one Person in addition to the Person designated by
Purchaser under the immediately preceding clause (a) to attend and observe all
meetings of the Company's board of directors. The Company will (a) provide
such designee or designees, as the case may be, notice of all such meetings not
less than seven calendar days in advance, except that (x) if longer advance
notice is given to the members of the board of directors, the same advance
notice will be given to such designee or designees, as the case may be, and
(ii) if exceptional circumstances arise which make it prudent for a special
meeting of the board of directors to be called on less than seven calendar
days' notice, then such meeting may be called with such notice as may be
reasonable at the time and the same advance notice given to the members of the
board of directors will be given to such designee or designees, as the case may
be, and (b) provide to such designee or designees, as the case may be, a copy
of all materials distributed at such meetings. Such meetings shall be held in
person at least quarterly, and may be called at any time on two occasions per
calendar year on seven calendar days' actual notice to the Company by the
Person designated to serve as a member of the Company's board of directors by
Purchaser (unless no such Person has been designated to serve as a member of
the Company's board of directors by Purchaser, in which case any Person
designated to serve as an observer of the Company's board of directors by the
Majority Holders shall be permitted to call such meetings). The Purchaser may
change its designee by written notice to the Company. The Company shall
reimburse each such observer for all reasonable expenses incurred in traveling
to and from such meetings and attending such meetings.
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4.12 Employment Agreements. The Company will maintain the
Employment Agreements in full force and effect, and diligently enforce the
Employment Agreements against any parties thereto who violate or attempt to
violate such Employment Agreements.
ARTICLE V
CONDITIONS
The obligations of Purchaser to effect the transactions contemplated
by this Agreement are subject to the following conditions precedent:
5.01 Opinion. Purchaser will have received favorable opinions,
dated the Closing Date, from ▇▇▇▇▇▇▇▇▇ & ▇▇▇▇▇▇▇▇, Inc., counsel for the
Company covering matters raised by the Note Agreement, this Agreement, the
Shareholder Agreement and such other matters as Purchaser or its counsel may
request, and otherwise in form and substance satisfactory to Purchaser and its
counsel.
5.02 Note Agreement Conditions. All of the conditions precedent to
the obligations of Purchaser under the Note Agreement will have been satisfied
in full.
5.03 Material Change. There will have occurred no material adverse
change in the business, prospects, results, operations, or condition, financial
or otherwise, of the Company.
5.04 Shareholder Agreement. The Company and certain shareholders
of the Company will have entered into the Shareholder Agreement with Purchaser.
5.05 Representations and Agreements. Each representation and
warranty of the Company set forth in this Agreement will be true and correct
when made and as of the Closing Date, and the Company will have fully performed
all their covenants and agreements set forth in this Agreement.
5.06 Proceedings; Consents. All proceedings taken in connection
with the transactions contemplated by this Agreement, and all documents
necessary to the consummation of this Agreement, will be satisfactory in form
and substance to Purchaser and their counsel, and Purchaser and their counsel
will have received certificates of compliance and copies (executed or certified
as may be appropriate) of all documents, instruments, and agreements that
Purchaser or such counsel may request in connection with the consummation of
such transactions. All consents of any Person necessary to the consummation of
the transactions contemplated by this Agreement and the Shareholder Agreement
will have been received, be in full force and effect, and not be subject to any
onerous condition.
5.07 Closing Fee. The Company shall have paid to Purchaser a
closing fee of $100,000 (2.0% of the purchase price for the Shares), in
immediately available funds, which fee shall be deemed fully earned and
nonrefundable on the Closing Date. Purchaser may, at its option, deduct the
amount of the closing fee from the purchase price for the Shares.
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ARTICLE VI
MISCELLANEOUS
6.01 Indemnification. In addition to any other rights or remedies
to which Purchaser and the Holders may be entitled, the Company agrees to and
will indemnify and hold harmless Purchaser, the Holders, and their Affiliates
and their respective successors, assigns, officers, directors, employees,
attorneys, and agents (individually and collectively, an "Indemnified Party")
from and against any and all losses, claims, obligations, liabilities,
deficiencies, diminutions in value, penalties, causes of action, damages,
costs, and expenses (including, without limitation, costs of investigation and
defense, attorneys' fees, and expenses), including, without limitation, those
arising out of the sole or contributory negligence of any Indemnified Party,
that the Indemnified Party may suffer, incur, or be responsible for, arising or
resulting from any misrepresentation, breach of warranty, or nonfulfillment of
any covenant or agreement on the part of the Company under this Agreement, the
Shareholder Agreement, or under any other agreement to which the Company is a
party in connection with this transaction, or from any misrepresentation in or
omission from any certificate or other instrument furnished or to be furnished
to Purchaser or the Holders under this Agreement.
6.02 Default. It is agreed that a violation by any party of the
terms of this Agreement cannot be adequately measured or compensated in money
damages, and that any breach or threatened breach of this Agreement by a party
to this Agreement would do irreparable injury to the nondefaulting party. It
is, therefore, agreed that in the event of any breach or threatened breach by a
party to this Agreement of the terms and conditions set forth in this
Agreement, the nondefaulting party will be entitled, in addition to any and all
other rights and remedies that it may have in law or in equity, to apply for
and obtain injunctive relief requiring the defaulting party to be restrained
from any such breach or threatened breach or to refrain from a continuation of
any actual breach.
6.03 Integration. This Agreement and the Shareholder Agreement
constitute the entire agreement between the parties with respect to the subject
matter hereof and thereof and supersede all previous written, and all previous
or contemporaneous oral, negotiations, understandings, arrangements, and
agreements. This Agreement may not be amended or supplemented except by a
writing signed by Company and each Holder.
6.04 Headings. The headings in this Agreement are for convenience
and reference only and are not part of the substance of this Agreement.
References in this Agreement to Sections and Articles are references to the
Sections and Articles of this Agreement unless otherwise specified.
6.05 Severability. The parties to this Agreement expressly agree
that it is not the intention of any of them to violate any public policy,
statutory or common law rules, regulations, or decisions of any governmental or
regulatory body. If any provision of this Agreement is judicially or
administratively interpreted or construed as being in violation of any such
policy, rule, regulation, or decision, the provision, section, sentence, word,
clause, or combination thereof causing such violation will be inoperative (and
in lieu thereof there will be inserted such provision, sentence, word, clause,
or combination thereof as may be valid and consistent with the intent of the
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parties under this Agreement) and the remainder of this Agreement, as amended,
will remain binding upon the parties, unless the inoperative provision would
cause enforcement of the remainder of this Agreement to be inequitable under
the circumstances.
6.06 Notices. Whenever it is provided herein that any notice,
demand, request, consent, approval, declaration, or other communication be
given to or served upon any of the parties by another, such notice, demand,
request, consent, approval, declaration, or other communication will be in
writing and will be deemed to have been validly served, given or delivered (and
"the date of such notice" or words of similar effect will mean the date) five
(5) days after deposit in the United States mails, certified mail, return
receipt requested, with proper postage prepaid, or upon receipt thereof
(whether by non-certified mail, telecopy, telegram, express delivery, or
otherwise), whichever is earlier, and addressed to the party to be notified as
follows:
If to Purchaser, at: RSTW Partners III, L.P.
▇▇▇▇ ▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇▇
Attention: ▇▇▇▇▇ ▇. ▇▇▇▇▇▇
Fax: (▇▇▇) ▇▇▇-▇▇▇▇
with courtesy copies to: ▇▇▇▇▇▇ ▇▇▇▇▇ LLP
▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇ ▇▇▇
▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇▇
Attn: R. ▇▇▇▇▇▇▇ ▇▇▇▇, Esq.
Fax: (▇▇▇) ▇▇▇-▇▇▇▇
If to the Company, at ▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇
▇▇▇▇▇▇▇▇ ▇▇▇▇, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇
Attn: ▇▇▇▇▇▇ ▇. ▇▇▇▇▇
▇▇▇▇▇▇▇ ▇. ▇▇▇▇, Esq.
Fax: (▇▇▇) ▇▇▇-▇▇▇▇
with courtesy copies to: ▇▇▇▇▇▇▇▇▇ & ▇▇▇▇▇▇▇▇
▇▇▇▇ ▇.▇. ▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇
▇▇▇▇▇▇▇▇ ▇▇▇▇, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇
Attn: ▇▇▇▇ ▇▇▇▇▇▇▇▇▇, Esq.
Fax: (▇▇▇) ▇▇▇-▇▇▇▇
or to such other address as each party may designate for itself by like notice.
Notice to any Holder other than Purchaser will be delivered as set forth above
to the address shown on the stock transfer books of the Company unless such
Holder has advised the Company in writing of a different address to which
notices are to be sent under this Agreement. Failure or delay in delivering
courtesy copies of any notice, demand, request, consent, approval, declaration,
or other communication to the persons designated above to receive copies of the
actual notice will in no way
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adversely affect the effectiveness of such notice, demand, request, consent,
approval, declaration, or other communication. No notice, demand, request,
consent, approval, declaration or other communication will be deemed to have
been given or received unless and until it sets forth all items of information
required to be set forth therein pursuant to the terms of this Agreement.
6.07 Successors. This Agreement will be binding upon and inure to
the benefit of the parties and their respective successors and assigns.
6.08 Remedies. The failure of any party to enforce any right or
remedy under this Agreement, or promptly to enforce any such right or remedy,
will not constitute a waiver thereof, nor give rise to any estoppel against
such party, nor excuse any other party from its obligations under this
Agreement. Any waiver of any such right or remedy by any party must be in
writing and signed by the party against which such waiver is sought to be
enforced.
6.09 Survival. All warranties, representations, and covenants made
by any party in this Agreement or in any certificate or other instrument
delivered by such party or on its behalf under this Agreement will be
considered to have been relied upon by the party to which it is delivered and
will survive the Closing Date, regardless of any investigation made by such
party or on its behalf. All statements in any such certificate or other
instrument will constitute warranties and representations under this Agreement.
6.10 Fees. Any and all fees, costs, and expenses, of whatever kind
and nature, including attorneys' fees and expenses, incurred by the Holders in
connection with the defense or prosecution of any actions or proceedings
arising out of or in connection with this Agreement will be borne and paid by
the Company within ten (10) days of demand by the Holders.
6.11 Counterparts. This Agreement may be executed in any number of
counterparts, which will individually and collectively constitute one
agreement.
6.12 Other Business. It is understood and accepted that Purchaser,
the Holders, and their Affiliates have interests in other business ventures
that may be in conflict with the activities of the Company and that nothing in
this Agreement will limit the current or future business activities of such
parties whether or not such activities are competitive with those of the
Company. The Company and the Shareholder agree that all business opportunities
in any field substantially related to the business of the Company will be
pursued exclusively through the Company.
6.13 CHOICE OF LAW. THIS AGREEMENT HAS BEEN EXECUTED, DELIVERED,
AND ACCEPTED BY THE PARTIES IN THE STATE OF TEXAS WILL BE DEEMED TO HAVE BEEN
MADE IN THE STATE OF TEXAS, AND WILL BE INTERPRETED AND THE RIGHTS OF THE
PARTIES DETERMINED IN ACCORDANCE WITH THE LAWS OF THE UNITED STATES APPLICABLE
THERETO AND THE INTERNAL LAWS OF THE STATE OF TEXAS APPLICABLE TO AN AGREEMENT
EXECUTED, DELIVERED AND PERFORMED THEREIN WITHOUT GIVING EFFECT TO THE
CHOICE-OF-LAW RULES THEREOF OR ANY
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OTHER PRINCIPLE THAT COULD REQUIRE THE APPLICATION OF THE SUBSTANTIVE LAW OF
ANY OTHER JURISDICTION.
6.14 Duties Among Holders. Each Holder agrees that no other Holder
will by virtue of this Agreement be under any fiduciary or other duty to give
or withhold any consent or approval under this Agreement or to take any other
action or omit to take any action under this Agreement, and that each other
Holder may act or refrain from acting under this Agreement as such other Holder
may, in its discretion, elect.
[REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement as of the date first above written.
COMPANY:
AVALON COMMUNITY SERVICES, INC.
By: /s/ ▇▇▇▇▇▇ ▇. ▇▇▇▇▇
-------------------------------------
Name: ▇▇▇▇▇▇ ▇. ▇▇▇▇▇
Title: Chief Executive Officer
PURCHASER:
RSTW PARTNERS III, L.P.
By: RSTW Management, L.P.,
its general partner
By: Rice Mezzanine Corporation,
its general partner
By: /s/ ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇
-------------------------
Name: ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇
Title:
Number of Shares: 1,622,448
Purchase Price: $5,000,000
31
SCHEDULES OMITTED